Back to GetFilings.com
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 May 3, 2003
/ / 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 by check mark whether the registrant is an accelerated filer.
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 June 10, 2003:
26,616,477 shares.
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MAY 3, 2003
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 .................................................................. . 7
Item 3. Quantitative and Qualitative Disclosures about Market Risks....................... 10
Item 4. Controls and Procedures........................................................... 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 11
Item 6. Exhibits and Reports on Form 8-K.................................................. 11
Signatures................................................................................. 12
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MAY 3, 2003 FEBRUARY 1, 2003 MAY 4, 2002
----------- ---------------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 47,359 $ 36,645 $ 66,204
Accounts receivable................................................... 14,973 13,571 14,439
Inventories........................................................... 70,374 75,417 49,772
Prepaid expenses and other current assets............................. 18,169 19,277 14,448
Deferred income taxes................................................. 293 293 3,847
---------- ---------- ----------
Total current assets............................................... 151,168 145,203 148,710
Property and equipment, net............................................... 156,846 155,000 149,889
Other assets.............................................................. 9,308 9,125 6,145
---------- ---------- ----------
Total assets....................................................... $ 317,322 $309,328 $304,744
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility............................................. $ 442 $ 0 $ 0
Accounts payable...................................................... 29,020 30,805 22,072
Taxes payable......................................................... 635 198 9,231
Accrued expenses, interest and other current liabilities.............. 37,149 34,926 28,613
---------- ---------- ----------
Total current liabilities.......................................... 67,246 65,929 59,916
Other long-term liabilities............................................... 15,047 14,391 11,512
---------- ---------- ----------
Total liabilities.................................................. 82,293 80,320 71,428
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; 100,000,000 shares authorized; 26,605,405
shares, 26,569,864 shares and 26,447,921 shares issued and outstanding,
at May 3, 2003, February 1, 2003 and May 4, 2002, respectively........ 2,661 2,657 2,645
Additional paid-in capital................................................ 98,942 98,765 97,076
Accumulated other comprehensive income.................................... 567 253 (12)
Retained earnings......................................................... 132,859 127,333 133,607
---------- --------- ----------
Total stockholders' equity......................................... 235,029 229,008 233,316
---------- --------- ----------
Total liabilities and stockholders' equity......................... $ 317,322 $ 309,328 $ 304,744
========== ========= ==========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
1
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED
--------------------
MAY 3, 2003 MAY 4, 2002
----------- ----------
Net sales....................................................... $ 181,010 $ 173,047
Cost of sales................................................... 111,120 93,919
----------- ----------
Gross profit.................................................... 69,890 79,128
Selling, general and administrative expenses.................... 51,391 46,373
Depreciation and amortization................................... 9,528 8,270
----------- ----------
Operating income................................................ 8,971 24,485
Interest income, net............................................ 93 246
----------- ----------
Income before income taxes...................................... 9,064 24,731
Provision for income taxes...................................... 3,535 9,523
----------- ----------
Net income...................................................... $ 5,529 $ 15,208
=========== ==========
Basic net income per common share............................... $ 0.21 $ 0.58
Basic weighted average common shares outstanding................ 26,599 26,427
Diluted net income per common share ............................ $ 0.21 $ 0.56
Diluted weighted average common shares outstanding ............. 26,739 27,348
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
2
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THIRTEEN WEEKS ENDED
--------------------
MAY 3, 2003 MAY 4, 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 5,529 $ 15,208
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 9,528 8,270
Deferred financing fee amortization .................................... 17 15
Loss on disposals of property and equipment ............................ 43 174
Deferred rent .......................................................... 637 568
Changes in operating assets and liabilities:
Accounts receivable .................................................... (1,244) (2,544)
Inventories ............................................................ 5,453 9,323
Prepaid expenses and other current assets .............................. 1,156 (2,451)
Other assets ........................................................... (49) 7
Accounts payable ....................................................... (1,920) (105)
Accrued expenses, interest and other current liabilities ............... 1,340 3,813
-------- --------
Total adjustments ................................................... 14,961 17,070
-------- --------
Net cash provided by operating activities ..................................... 20,490 32,278
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases and lease acquisition ........................ (10,321) (12,368)
-------- --------
Net cash used in investing activities ......................................... (10,321) (12,368)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee stock purchases ........................ 175 1,103
Deferred financing costs ...................................................... (150) 0
Borrowings under revolving credit facility .................................... 17,187 5,617
Repayments under revolving credit facility .................................... (16,745) (5,617)
-------- --------
Net cash provided by financing activities ..................................... 467 1,103
-------- --------
Effect of exchange rate changes on cash ....................................... 78 0
-------- --------
Net increase in cash and cash equivalents .............................. 10,714 21,013
Cash and cash equivalents, beginning of period ......................... 36,645 45,191
-------- --------
Cash and cash equivalents, end of period ...................................... $ 47,359 $ 66,204
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest ...................................... $ 61 $ 21
Cash paid during the period for income taxes .................................. 151 6,726
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
3
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
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 1, 2003. These financial statements
should be read in conjunction with the audited financial statements and
footnotes for the fiscal year ended February 1, 2003 included in the Company's
Annual Report on Form 10-K for the year ended February 1, 2003 filed with the
Securities and Exchange Commission. Due to the seasonal nature of the Company's
business, the results of operations for the thirteen weeks ended May 3, 2003 and
May 4, 2002 are not necessarily indicative of operating results for a full
fiscal year.
2. NET INCOME PER COMMON SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," the following table reconciles net income and share
amounts utilized to calculate basic and diluted net income per common share.
THIRTEEN WEEKS ENDED
--------------------
MAY 3, 2003 MAY 4, 2002
----------- -----------
Net income (in thousands)................................... $ 5,529 $ 15,208
============= ============
Basic shares................................................ 26,599,185 26,427,284
Dilutive effect of stock options............................ 139,323 921,034
------------- ------------
Dilutive shares............................................. 26,738,508 27,348,318
============= ============
Antidilutive options........................................ 1,447,185 134,477
Antidilutive options consist of the weighted average of stock options for
the respective periods ended May 3, 2003 and May 4, 2002 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. STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure ("SFAS 148"). SFAS 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
provisions of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS 148 does not amend SFAS 123 to require companies to account for their
employee stock-based awards using the fair value method. However, the disclosure
provisions are required for all companies with stock-based employee
compensation, regardless of whether they utilize the fair value method of
accounting described in SFAS 123 or the intrinsic value method described in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25").
The Company accounts for its stock option plans and its employee stock
purchase plan under the intrinsic value method described in APB 25. Accordingly,
no compensation expense has been recognized for stock-based compensation, since
the options 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 and employee stock purchases issued during the thirteen weeks
ended May 3, 2003 and May 4, 2002 had been determined based on the fair value
method of accounting, in accordance with SFAS
4
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. STOCK BASED COMPENSATION (CONTINUED)
123, the Company's net income would have been reduced to the pro forma amounts
indicated below for the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively:
THIRTEEN WEEKS ENDED
--------------------
MAY 3, 2003 MAY 4, 2002
----------- -----------
Net income - (in thousands)
As reported ................................................................ $ 5,529 $ 15,208
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of related
tax effects ................................................................ 1,104 981
--------- --------
Pro forma .................................................................. $ 4,425 $ 14,227
========= ========
Earnings per share -
Basic - as reported ........................................................ $ 0.21 $ 0.58
Basic - pro forma .......................................................... $ 0.17 $ 0.54
Diluted - as reported ...................................................... $ 0.21 $ 0.56
Diluted - pro forma ........................................................ $ 0.17 $ 0.52
4. COMPREHENSIVE INCOME
The following table presents the Company's comprehensive income (in
thousands):
THIRTEEN WEEKS ENDED
--------------------
MAY 3, 2003 MAY 4, 2002
----------- -----------
Net income....................................................... $ 5,529 $ 15,208
Translation adjustments.......................................... 314 0
--------- ---------
Comprehensive income............................................. $ 5,843 $ 15,208
========= =========
5. WELLS FARGO CREDIT FACILITY
In April 2003, the Company amended, restated and extended its principal
working capital facility. Previously, Foothill Capital Corporation had assigned
its rights under this facility to Wells Fargo Retail Finance LLC ("Wells
Fargo"). The amended and restated working capital facility with Wells Fargo (the
"Wells Fargo Credit Facility") provides for borrowings up to $75 million
(including a sublimit for letters of credit of $75 million). The Wells Fargo
Credit Facility also contains provisions to increase borrowings up to $120
million (including a sublimit for letters of credit of $100 million), subject to
sufficient collateralization and the syndication of the incremental line of
borrowing. The amount that may be borrowed under the Wells Fargo Credit Facility
depends on the Company's levels of inventory and accounts receivable. Amounts
outstanding under the 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 1.50% to 2.75%, depending on the Company's level of
collateral from time to time. Borrowings mature in April 2006 and provide for
one year renewal options. The Wells Fargo Credit Facility contains covenants,
including, among others, certain limitations on the Company's annual capital
expenditures, and maintenance of certain levels of excess collateral, as well as
a prohibition on the payment of dividends. Credit extended under the Wells Fargo
Credit Facility is secured by a first priority security interest in all the
assets of the Company, except for its assets in Canada.
5
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. BUSINESS INTERRUPTION PROCEEDS
During the thirteen weeks ended May 3, 2003, the Company received
approximately $1.5 million in a partial settlement of its business interruption
claim for its World Trade Center store. These proceeds reduced selling, general
and administrative expenses on the Company's consolidated statement of income.
7. 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.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133. The adoption of SFAS 149 is not expected to have
a material impact on the financial position or results of operations as the
Company does not engage in derivative activity.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how a company classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Although we are still in the
process of reviewing SFAS 150, we believe this pronouncement will not have a
material impact on the Company's results of operations, financial position or
cash flows.
6
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 1, 2003. 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 1, 2003, filed with the Securities and Exchange Commission.
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. Our 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. Revenue is deferred for our
private label credit card promotions that provide a future discount on purchases
once a minimum customer purchase threshold is satisfied. Actual merchandise
return rates have historically been within our expectations and the allowance
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.
Impairment of Assets - We continually evaluate each store's performance and
measure the carrying value of each location's fixed assets, principally
leasehold improvements and fixtures, versus its projected cash flows. An
impairment loss is recorded if the projected future cash flows are insufficient
to recapture the net book value of their assets. To the extent our estimates of
future cash flows are incorrect, additional impairment charges may be recorded
in future periods.
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.
Stock Options - We record no compensation expense on our financial
statements for stock-based compensation, since we grant stock options at prices
that equal or exceed fair market value at the date of the grant. If the Company
elects or is required to adopt fair value accounting for its stock-based
compensation, the related compensation charge will adversely impact net income.
In addition, increases to our stock price would result in more diluted shares
outstanding and reduce our diluted net income per common share.
7
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
--------------------
MAY 3, 2003 MAY 4, 2002
----------- -----------
Net sales................................................... 100.0% 100.0%
Cost of sales............................................... 61.4 54.3
--------- ---------
Gross profit................................................ 38.6 45.7
Selling, general and administrative expenses................ 28.4 26.8
Depreciation and amortization............................... 5.3 4.8
---------- ----------
Operating income............................................ 4.9 14.1
Interest income, net....................................... 0.1 0.2
---------- ----------
Income before income taxes.................................. 5.0 14.3
Provision for income taxes.................................. 1.9 5.5
---------- ----------
Net income.................................................. 3.1% 8.8%
========== ==========
Number of stores, end of period............................. 662 554
THIRTEEN WEEKS ENDED MAY 3, 2003 (THE "FIRST QUARTER 2003") COMPARED TO THIRTEEN
WEEKS ENDED MAY 4, 2002 (THE "FIRST QUARTER 2002")
Net sales increased by $8.0 million, or 5%, to $181.0 million during the
First Quarter 2003 from $173.0 million during the First Quarter 2002. During the
First Quarter 2003, we opened 19 new stores, including three stores in Canada.
Net sales for the 19 new stores, as well as other stores that did not qualify as
comparable stores, increased our net sales by $27.9 million, which was partially
offset by a 13% comparable store sales decline in the First Quarter 2003, which
decreased our net sales by $19.9 million. Comparable store sales decreased 11%
during the First Quarter 2002.
During the First Quarter 2003, our sales results began to reflect the
impact of strategic initiatives we commenced in fiscal 2002 to improve our
negative comparable store sales trend. We reduced both the number of styles and
number of items offered in our stores, to present our customers with a more
focused product offering. In addition, we offered our customers a greater
percentage of basic merchandise, to create a better balance between fashion and
basic merchandise. We also improved the quality of our garments while we reduced
our prices to an everyday value pricing strategy. During the First Quarter 2003,
our comparable store sales decline was primarily the result of a decrease in our
average dollar transaction size, due largely to our strategic decision to lower
our prices. Our lower dollar transaction size was partially offset by increases
in both the number of comparable store transactions and the number of units per
transaction.
During the First Quarter 2003, we reported monthly comparable store sales
declines of 24%, 11% and 3% during February, March and April 2003, respectively.
We believe that our sales results for February 2003 and March 2003 were
adversely impacted by continued weak consumer confidence, severe winter weather,
uncertainty surrounding the war in Iraq and the timing of the Easter holiday,
which shifted the timing of our customers' purchasing patterns to later in the
First Quarter 2003 as compared to the First Quarter 2002. During the four weeks
ended May 31, 2003, we experienced flat comparable store sales, as compared to a
9% comparable store sales decline in the four weeks ended June 1, 2002. We
believe our recent monthly comparable store sales trends were favorably impacted
by the implementation of our strategic initiatives, as discussed above.
Gross profit decreased by $9.2 million to $69.9 million during the First
Quarter 2003 from $79.1 million during the First Quarter 2002. As a percentage
of net sales, gross profit decreased 7.1% to 38.6% during the First Quarter 2003
from 45.7% during the First Quarter 2002. The decrease in gross profit, as a
percentage of net sales, was principally due to higher markdowns, higher
occupancy costs and a lower initial markup due to our strategic decision to
lower prices. 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.
8
Selling, general and administrative expenses increased $5.0 million to
$51.4 million during the First Quarter 2003 from $46.4 million during the First
Quarter 2002. Selling, general and administrative expenses were 28.4% of net
sales during the First Quarter 2003, as compared with 26.8% during the First
Quarter 2002. This increase, as a percentage of net sales, was primarily due to
higher store payroll costs and other store expenses, partially offset by
insurance proceeds. Store payroll, as a percentage of net sales, was unfavorably
impacted by our comparable store sales decline, as well as our decision to
invest more store payroll dollars in customer service initiatives and store
associate education. During the First Quarter 2003, insurance proceeds
approximated $1.5 million, or 0.8% of net sales, for a portion of our business
interruption claim from our World Trade Center store. During the First Quarter
2002, we received insurance proceeds of approximately $0.3 million for property
damage claims from a store and one of our distribution centers.
Depreciation and amortization amounted to $9.5 million, or 5.3% of net
sales, during the First Quarter 2003, as compared to $8.3 million, or 4.8% of
net sales, during the First Quarter 2002. The increase in depreciation and
amortization primarily was a result of increases to our store base and increased
software amortization.
Our provision for income taxes for the First Quarter 2003 was $3.5 million,
as compared to a $9.5 million provision in the First Quarter 2002. Our effective
tax rate was 39.0% and 38.5% during the First Quarter 2003 and the First Quarter
2002, respectively.
Net income in the First Quarter 2003 decreased to $5.5 million from $15.2
million during the First Quarter 2002, due to the factors discussed above.
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 on
hand, cash flows from operations and seasonal borrowings under our working
capital facilities. As of May 3, 2003, we had no long-term debt obligations.
In April 2003, we amended, restated and extended our principal working
capital facility. Previously, Foothill Capital Corporation had assigned its
rights under this facility to Wells Fargo Retail Finance LLC ("Wells Fargo").
The amended and restated working capital facility with Wells Fargo (the "Wells
Fargo Credit Facility") provides for borrowings up to $75 million (including a
sublimit for letters of credit of $75 million). The Wells Fargo Credit Facility
also contains provisions to increase borrowings up to $120 million (including a
sublimit for letters of credit of $100 million), subject to sufficient
collateralization and the syndication of the incremental line of borrowing. The
amount that may be borrowed under the Wells Fargo Credit Facility depends on 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 1.50% to
2.75%, depending on our level of collateral from time to time. Borrowings mature
in April 2006 and provide for one year renewal options. The Wells Fargo Credit
Facility contains covenants, including, among others, certain limitations on our
annual capital expenditures, and maintenance of certain levels of excess
collateral, as well as a prohibition on the payment of dividends. Credit
extended under the Wells Fargo Credit Facility is secured by a first priority
security interest in all our assets, except for our assets in Canada.
As of May 3, 2003, we had no borrowings under our Wells Fargo Credit
Facility and had outstanding letters of credit of $36.3 million. Availability
under the Wells Fargo Credit Facility was $38.7 million. The maximum outstanding
letter of credit usage under our working capital facility during the thirteen
weeks ended May 3, 2003 was $36.3 million. As of May 3, 2003, we were in
compliance with all of our covenants under the Wells Fargo Credit Facility.
To support our Canadian operations, we have also entered into a $7.0
million facility with Toronto Dominion Bank that is secured by a standby letter
of credit. Our Canadian credit facility is currently collateralized to provide
for $3.5 million in borrowings. As of May 3, 2003, we had $0.4 million in
borrowings under our Canadian facility and had outstanding letters of credit of
$0.1 million. The maximum outstanding usage under our Canadian credit facility
was $1.8 million during the thirteen weeks ended May 3, 2003. Interest rates
charged under the Canadian credit facility were 5.0% as of May 3, 2003.
9
CASH FLOWS/CAPITAL EXPENDITURES
During the thirteen weeks ended May 3, 2003 and the thirteen weeks ended
May 4, 2002, operating activities provided $20.5 million and $32.3 million in
cash flow, respectively. During the thirteen weeks ended May 3, 2003, cash flows
provided by operating activities decreased primarily as a result of lower
operating earnings. In addition, during the thirteen weeks ended May 3, 2003, we
have increased our inventory levels to support our sales. During the thirteen
weeks ended May 4, 2002, we believe our comparable store sales decline was
unfavorably impacted by low inventory levels.
Cash flows used in investing activities were $10.3 million and $12.4
million in the thirteen weeks ended May 3, 2003 and the thirteen weeks ended May
4, 2002, respectively. Cash flows used in investing activities primarily
represented capital expenditures for new store openings and remodelings.
In the thirteen weeks ended May 3, 2003 and the thirteen weeks ended May 4,
2002, we opened 19 and 34 stores and remodeled 3 and 1 stores, respectively.
Capital expenditures also include hardware and software to support our
information systems initiatives, along with ongoing store, office and
distribution equipment needs. We anticipate that total capital expenditures
during fiscal 2003 will be approximately $25 million to $30 million. We plan to
fund these capital expenditures primarily with cash on hand and cash flows from
operations.
Cash flows provided by financing activities were $0.5 million during the
thirteen weeks ended May 3, 2003 as compared to $1.1 million provided by
financing activities in the thirteen weeks ended May 4, 2002. During the
thirteen weeks ended May 3, 2003, cash flows provided by financing activities
reflected borrowings under our Canadian credit facility and funds received from
the exercise of employee stock options and employee stock purchases, partially
offset by deferred financing fees. During the thirteen weeks ended May 4, 2002,
cash flow provided by financing activities reflected funds received from the
exercise of employee stock options and employee stock purchases.
During fiscal 2003, we anticipate opening approximately 50 stores and
closing approximately 5 stores. We believe that cash on hand, cash generated
from operations and funds available under our working capital facilities will be
sufficient to fund our capital and other cash flow requirements for at least the
next 12 months. In addition, we will consider additional sources of financing to
fund our long-term growth, as necessary.
Our ability to meet our capital requirements will depend on our ability to
generate cash from operations and successfully implement our strategic
initiatives.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
None.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing of this report, management,
including the Company's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon that evaluation, and as of the
date of that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective, in all material respects, to ensure that information
required to be disclosed in the reports the Company files under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported as and when
required. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
10
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NONE.
(b) REPORTS ON FORM 8-K
First Quarter 2003 Earnings Release, dated May 15, 2003.
11
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: June 13, 2003
By: /s/ Ezra Dabah
---------------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 13, 2003 By: /s/ Seth L. Udasin
---------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
12
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
By: /s/ Ezra Dabah
-----------------------------
Chairman of the Board and
Chief Executive Officer
13
CERTIFICATIONS
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
By: /s/ Seth L. Udasin
------------------------------
Vice President and
Chief Financial Officer
14
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 May
3, 2003 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 13th day of June,
2003.
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 May
3, 2003 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 13th day of June,
2003.
By: /s/ Seth L. Udasin
------------------------------
Vice President and
Chief Financial Officer
15