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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 November 1, 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
incorporation or organization) identification 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 December 1,
2003: 26,713,899 shares.
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED NOVEMBER 1, 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....................... 11
Item 4. Controls and Procedures........................................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 12
Item 6. Exhibits and Reports on Form 8-K.................................................. 12
Signatures................................................................................. 13
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)
NOVEMBER 1, 2003 FEBRUARY 1, 2003 NOVEMBER 2, 2002
---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 44,182 $ 36,645 $ 14,446
Accounts receivable .......................................... 12,747 13,571 17,047
Inventories .................................................. 95,893 75,417 84,343
Prepaid expenses and other current assets .................... 20,772 19,277 20,297
Deferred income taxes ........................................ 293 293 4,552
--------- --------- ---------
Total current assets ...................................... 173,887 145,203 140,685
Property and equipment, net ...................................... 149,354 155,000 161,537
Other assets ..................................................... 9,200 9,125 6,129
--------- --------- ---------
Total assets .............................................. $ 332,441 $ 309,328 $ 308,351
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable ............................................. $ 34,152 $ 30,805 $ 32,500
Income taxes payable ......................................... 2,986 198 504
Accrued expenses, interest and other current liabilities ..... 41,022 34,926 36,443
--------- --------- ---------
Total current liabilities ................................. 78,160 65,929 69,447
Other long-term liabilities ...................................... 15,815 14,391 13,405
--------- --------- ---------
Total liabilities ......................................... 93,975 80,320 82,852
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; 100,000,000 shares authorized;
26,664,294 shares, 26,569,864 shares and 26,557,279 shares
issued and outstanding, at November 1, 2003, February 1, 2003
and November 2, 2002, respectively ........................... 2,666 2,657 2,656
Additional paid-in capital ....................................... 99,747 98,765 97,913
Accumulated other comprehensive income (loss) .................... 938 253 (114)
Retained earnings ................................................ 135,115 127,333 125,044
--------- --------- ---------
Total stockholders' equity ................................ 238,466 229,008 225,499
--------- --------- ---------
Total liabilities and stockholders' equity ................ $ 332,441 $ 309,328 $ 308,351
========= ========= =========
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 THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 1, 2003 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net sales ........................................ $ 223,277 $ 173,403 $ 563,369 $ 474,745
Cost of sales .................................... 131,987 111,663 351,719 297,492
--------- --------- --------- ---------
Gross profit ..................................... 91,290 61,740 211,650 177,253
Selling, general and administrative expenses ..... 62,083 49,949 169,462 140,919
Depreciation and amortization .................... 10,154 9,300 29,557 26,011
--------- --------- --------- ---------
Operating income ................................. 19,053 2,491 12,631 10,323
Interest expense (income) net .................... 17 (118) (128) (483)
--------- --------- --------- ---------
Income before income taxes ....................... 19,036 2,609 12,759 10,806
Provision for income taxes ....................... 7,424 1,005 4,977 4,161
--------- --------- --------- ---------
Net income ....................................... $ 11,612 $ 1,604 $ 7,782 $ 6,645
========= ========= ========= =========
Basic net income per common share ................ $ 0.44 $ 0.06 $ 0.29 $ 0.25
Basic weighted average common shares outstanding . 26,640 26,523 26,620 26,481
Diluted net income per common share .............. $ 0.43 $ 0.06 $ 0.29 $ 0.25
Diluted weighted average common shares outstanding 27,153 26,756 26,961 27,064
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)
THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 7,782 $ 6,645
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 29,557 26,011
Deferred financing fee amortization .................... 45 41
Loss on disposals of property and equipment ............ 314 401
Deferred taxes ......................................... (64) (688)
Deferred rent .......................................... 1,788 2,416
Changes in operating assets and liabilities:
Accounts receivable .................................... 1,158 (5,152)
Inventories ............................................ (19,610) (25,248)
Prepaid expenses and other current assets .............. (1,394) (8,300)
Other assets ........................................... 58 (3)
Accounts payable ....................................... 3,062 10,323
Accrued expenses, interest and other current liabilities 9,579 1,469
-------- --------
Total adjustments ................................... 24,493 1,270
-------- --------
Net cash provided by operating activities ..................... 32,275 7,915
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases and lease acquisition ........ (25,642) (40,490)
-------- --------
Net cash used in investing activities ......................... (25,642) (40,490)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee stock purchases ........ 991 1,932
Deferred financing costs ...................................... (175) 0
Borrowings under revolving credit facility .................... 62,337 30,933
Repayments under revolving credit facility .................... (62,337) (30,933)
-------- --------
Net cash provided by financing activities ..................... 816 1,932
-------- --------
Effect of exchange rate changes on cash ....................... 88 (102)
-------- --------
Net increase (decrease) in cash and cash equivalents ... 7,537 (30,745)
Cash and cash equivalents, beginning of period ......... 36,645 45,191
-------- --------
Cash and cash equivalents, end of period ...................... $ 44,182 $ 14,446
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest ...................... $ 237 $ 115
Cash paid during the period for income taxes .................. 1,337 14,749
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 thirty-nine weeks ended November 1,
2003 and November 2, 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 THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 1, 2003 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net income (in thousands) ...... $ 11,612 $ 1,604 $ 7,782 $ 6,645
=========== =========== =========== ===========
Basic shares ................... 26,640,052 26,523,025 26,619,629 26,480,926
Dilutive effect of stock options 513,155 232,487 341,688 583,476
----------- ----------- ----------- -----------
Dilutive shares ................ 27,153,207 26,755,512 26,961,317 27,064,402
=========== =========== =========== ===========
Antidilutive options ........... 747,497 1,472,581 1,052,252 690,843
Antidilutive options consist of the weighted average of stock options
for the respective periods ended November 1, 2003 and November 2, 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 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 and thirty-nine weeks ended November 1, 2003 and November 2, 2002
had been determined based on the fair value method of accounting, in accordance
with SFAS 123, the Company's net income would have been
4
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. STOCK BASED COMPENSATION (CONTINUED)
adjusted to the pro forma amounts indicated below for the thirteen weeks and
thirty-nine weeks ended November 1, 2003 and November 2, 2002, respectively:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 1, 2003 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net income - (in thousands)
As reported ............................. $ 11,612 $ 1,604 $ 7,782 $ 6,645
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of
related tax effects ..................... 1,107 1,038 3,230 3,053
---------- ---------- ---------- ----------
Pro forma ............................... $ 10,505 $ 566 $ 4,552 $ 3,592
========== ========== ========== ==========
Earnings per share -
Basic - as reported ..................... $ 0.44 $ 0.06 $ 0.29 $ 0.25
Basic - pro forma ....................... $ 0.39 $ 0.02 $ 0.17 $ 0.14
Diluted - as reported ................... $ 0.43 $ 0.06 $ 0.29 $ 0.25
Diluted - pro forma ..................... $ 0.39 $ 0.02 $ 0.17 $ 0.13
4. COMPREHENSIVE INCOME
The following table presents the Company's comprehensive income (in
thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 1, 2003 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net income ............. $11,612 $ 1,604 $ 7,782 $ 6,645
Translation adjustments. 334 167 685 (102)
------- ------- ------- -------
Comprehensive income ... $11,946 $ 1,771 $ 8,467 $ 6,543
======= ======= ======= =======
5. CREDIT FACILITIES
In April 2003, the Company amended, restated and extended its principal
working capital facility for a term of three years to April 2006 with one year
renewal options. 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") currently provides for borrowings up to $85 million
(including a sublimit for letters of credit of $80 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 3.00%, depending on the Company's level of
availability from time to time. 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. As of November 1, 2003, the
Company was in compliance with all of its covenants under the Wells Fargo Credit
Facility. 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.
As of November 1, 2003, we had no borrowings under our Wells Fargo
Credit Facility and had outstanding letters of credit of $45.5 million.
Availability under the Wells Fargo Credit Facility was $39.5 million. The
maximum outstanding letter of credit usage under our working capital facility
during the thirty-nine weeks ended November 1, 2003 was $54.0 million. As of
November 1, 2003, we were in compliance with all of our covenants under the
Wells Fargo Credit Facility.
5
THE CHILDREN'S PLACE RETAIL STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CREDIT FACILITIES (CONTINUED)
To support our Canadian operations, we have also entered into a $7.5
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 $1.8 million in borrowings. As of November 1, 2003, we had no borrowings
under our Canadian facility and had no outstanding letters of credit. The
maximum outstanding usage under our Canadian credit facility was $1.8 million
during the thirty-nine weeks ended November 1, 2003.
6. INSURANCE PROCEEDS
During the thirty-nine weeks ended November 1, 2003, the Company
received approximately $1.5 million in a partial settlement of its business
interruption claim for its World Trade Center store. During the thirty-nine
weeks ended November 2, 2002, the Company received approximately $1.4 million in
insurance proceeds, which included approximately $1.1 million for the settlement
of a property claim for one of our distribution centers. 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. Pursuant to SFAS 150, such freestanding financial instruments (i.e.,
those entered into separately from an entity's other financial instruments or
equity transactions or that are legally detachable and separately exercisable)
must be classified as liabilities or, in some cases, assets. In addition, SFAS
150 requires that financial instruments containing obligations to repurchase the
issuing entity's equity shares and, under certain circumstances, obligations
that are settled by delivery of the issuer's shares be classified as
liabilities. SFAS 150 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. The adoption of SFAS 150 is
not expected to have a material impact on the Company's results of operations,
financial position or cash flows, as the Company does not have financial
instruments that have the characteristics of both liabilities and equity.
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 via the internet, net of anticipated returns. 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. 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.
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 THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 1, 2003 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 59.1 64.4 62.4 62.7
----- ----- ----- -----
Gross profit ............................... 40.9 35.6 37.6 37.3
Selling, general and administrative expenses 27.8 28.8 30.1 29.7
Depreciation and amortization .............. 4.6 5.4 5.2 5.4
----- ----- ----- -----
Operating income ........................... 8.5 1.4 2.3 2.2
Interest expense (income) net .............. -- (0.1) -- (0.1)
----- ----- ----- -----
Income before income taxes ................. 8.5 1.5 2.3 2.3
Provision for income taxes ................. 3.3 0.6 0.9 0.9
----- ----- ----- -----
Net income ................................. 5.2% 0.9% 1.4% 1.4%
===== ===== ===== =====
Number of stores, end of period ............ 689 629 689 629
THIRTEEN WEEKS ENDED NOVEMBER 1, 2003 (THE "THIRD QUARTER 2003") COMPARED TO
THIRTEEN WEEKS ENDED NOVEMBER 2, 2002 (THE "THIRD QUARTER 2002")
Net sales increased by $49.9 million, or 29%, to $223.3 million during
the Third Quarter 2003 from $173.4 million during the Third Quarter 2002. During
the Third Quarter 2003, we opened 11 new stores and closed 1 store. Net sales
for the 11 new stores, as well as other stores that did not qualify as
comparable stores, increased our net sales by $28.9 million. Our comparable
store sales increased 14% and contributed $21.0 million of our net sales
increase in the Third Quarter 2003. Comparable store sales decreased 21% during
the Third Quarter 2002.
During the Third Quarter 2003, our comparable store sales increase
reflected the impact of strategic initiatives we commenced in fiscal 2002 to
improve our sales performance. These initiatives included a more focused product
offering with a greater concentration of basic merchandise, as well as improved
garment quality and the reduction of our prices to an everyday value pricing
strategy. During the Third Quarter 2003, our comparable store sales increase was
primarily the result of increases in the number of comparable store sales
transactions, partially offset by a lower average dollar transaction size.
During the four weeks ended November 29, 2003, we experienced a 14%
comparable store sales increase, as compared to an 18% comparable store sales
decline in the four weeks ended November 30, 2002. We believe our November
comparable store sales increase was favorably impacted by the implementation of
our strategic initiatives, as discussed above.
Gross profit increased by $29.6 million to $91.3 million during the
Third Quarter 2003 from $61.7 million during the Third Quarter 2002. As a
percentage of net sales, gross profit increased to 40.9% during the Third
Quarter 2003 from 35.6% during the Third Quarter 2002. The increase in gross
profit, as a percentage of net sales, was principally due to lower markdowns and
the leveraging of occupancy costs over a larger sales base, partially offset by
a lower initial markup due to our strategic decision to lower prices.
Selling, general and administrative expenses increased $12.2 million to
$62.1 million during the Third Quarter 2003 from $49.9 million during the Third
Quarter 2002. Selling, general and administrative expenses decreased to 27.8% of
net sales during the Third Quarter 2003 from 28.8% of net sales during the Third
Quarter 2002. Selling, general and administrative expenses decreased, as a
percentage of net sales, due to the leveraging of our corporate and store
payroll and lower pre-opening costs. During the Third Quarter 2003, we recorded
lower pre-opening costs as a result of opening 11 new stores, as compared to 30
new stores opened in the Third Quarter 2002. These decreases, as a percentage of
net sales, were partially offset by increased marketing costs to promote brand
awareness of The Children's Place.
8
Depreciation and amortization amounted to $10.2 million, or 4.6% of net
sales, during the Third Quarter 2003, as compared to $9.3 million, or 5.4% of
net sales, during the Third Quarter 2002. The increase in depreciation and
amortization primarily was a result of increases to our store base. Depreciation
and amortization decreased, as a percentage of net sales, as a result of the
leveraging over a larger sales base.
Our provision for income taxes increased to $7.4 million in the Third
Quarter 2003 from a $1.0 million provision in the Third Quarter 2002 as a result
of our increased profitability. Our effective tax rate was 39.0% and 38.5%
during the Third Quarter 2003 and the Third Quarter 2002, respectively.
Our net income in the Third Quarter 2003 increased to $11.6 million
from $1.6 million during the Third Quarter 2002, due to the factors discussed
above.
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 2003 COMPARED TO THIRTY-NINE WEEKS ENDED
NOVEMBER 2, 2002
Net sales increased $88.7 million, or 19%, to $563.4 million during the
thirty-nine weeks ended November 1, 2003 from $474.7 million during the
thirty-nine weeks ended November 2, 2002. During the thirty-nine weeks ended
November 1, 2003, we opened 49 stores and closed 3 stores. Net sales for the 49
stores opened during the thirty-nine weeks ended November 1, 2003, as well as
other stores that did not qualify as comparable stores, contributed $83.9
million of the net sales increase. Our comparable store sales increased 1%
during the thirty-nine weeks ended November 1, 2003, which increased our net
sales by $4.8 million. Comparable store sales declined 15% during the
thirty-nine weeks ended November 2, 2002. During the thirty-nine weeks ended
November 1, 2003, our comparable store sales increase primarily was the result
of increases in the number of comparable store sales transactions, partially
offset by decreases in our average dollar transaction size.
Gross profit increased by $34.4 million during the thirty-nine weeks
ended November 1, 2003 to $211.7 million from $177.3 million during the
thirty-nine weeks ended November 2, 2002. As a percentage of net sales, gross
profit increased to 37.6% during the thirty-nine weeks ended November 1, 2003
from 37.3% during the thirty-nine weeks ended November 2, 2002. The increase in
gross profit, as a percentage of net sales, was principally due to lower
markdowns, partially offset by lower initial markups associated with our
strategic decision to lower prices.
Selling, general and administrative expenses increased $28.6 million to
$169.5 million during the thirty-nine weeks ended November 1, 2003 from $140.9
million during the thirty-nine weeks ended November 2, 2002. Selling, general
and administrative expenses were 30.1% of net sales during the thirty-nine weeks
ended November 1, 2003 as compared with 29.7% of net sales during the
thirty-nine weeks ended November 2, 2002. As a percentage of net sales, selling,
general and administrative expenses increased due to higher store payroll and
higher marketing costs, partially offset by lower pre-opening costs and the
leveraging of corporate administrative payroll. Store payroll, as a percentage
of net sales, was unfavorably impacted by an increase in store payroll hours to
improve customer service.
Depreciation and amortization amounted to $29.6 million, or 5.2% of net
sales, during the thirty-nine weeks ended November 1, 2003, as compared to $26.0
million, or 5.4% of net sales, during the thirty-nine weeks ended November 2,
2002. The increase in depreciation and amortization primarily was a result of a
larger store base. Depreciation and amortization decreased, as a percentage of
net sales, as a result of the leveraging over a larger sales base.
Our provision for income taxes for the thirty-nine weeks ended November
1, 2003 and the thirty-nine weeks ended November 2, 2002 was $5.0 million and
$4.2 million, respectively. Our effective tax rate was 39.0% and 38.5% during
the thirty-nine weeks ended November 1, 2003 and the thirty-nine weeks ended
November 2, 2002, respectively.
Due to the factors discussed above, we recorded net income of $7.8
million during the thirty-nine weeks ended November 1, 2003 as compared to net
income of $6.6 million during the thirty-nine weeks ended November 2, 2002.
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 November 1, 2003, we had no long-term debt obligations
or short-term borrowings.
9
In April 2003, we amended, restated and extended our principal working
capital facility for a term of three years to April 2006 with one year renewal
options. 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") currently provides for borrowings up to $85 million (including a
sublimit for letters of credit of $80 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
3.00%, depending on our level of availability from time to time. 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 November 1, 2003, we had no borrowings under our Wells Fargo
Credit Facility and had outstanding letters of credit of $45.5 million.
Availability under the Wells Fargo Credit Facility was $39.5 million. The
maximum outstanding letter of credit usage under our working capital facility
during the thirty-nine weeks ended November 1, 2003 was $54.0 million. As of
November 1, 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 $7.5
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 $1.8 million in borrowings. As of November 1, 2003, we had no borrowings
under our Canadian facility and had no outstanding letters of credit. The
maximum outstanding usage under our Canadian credit facility was $1.8 million
during the thirty-nine weeks ended November 1, 2003.
CASH FLOWS/CAPITAL EXPENDITURES
During the thirty-nine weeks ended November 1, 2003 and the thirty-nine
weeks ended November 2, 2002, operating activities provided $32.3 million and
$7.9 million in cash flow, respectively. During the thirty-nine weeks ended
November 1, 2003, cash flows provided by operating activities increased
primarily as a result of more efficient utilization of our current assets and
higher operating earnings as compared to the thirty-nine weeks ended November 2,
2002.
Cash flows used in investing activities were $25.6 million and $40.5
million in the thirty-nine weeks ended November 1, 2003 and the thirty-nine
weeks ended November 2, 2002, respectively. Cash flows used in investing
activities primarily represented capital expenditures for new store openings and
remodelings. The reduction in cash flows used in investing activities reflects
the opening of 49 stores in the thirty-nine weeks ended November 1, 2003, as
compared to 110 stores in the thirty-nine weeks ended November 2, 2002. During
the thirty-nine weeks ended November 1, 2003, we completed 11 store remodels, as
compared with seven store remodels during the thirty-nine weeks ended November
2, 2002. 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 $30 million. We plan to fund these
capital expenditures primarily with cash on hand and cash flows from operations.
In October 2003, we entered into a 10 year lease, with two five-year
renewal option periods, for an approximately 95,000 square foot distribution
center in Mississauga, Ontario to replace our existing Canadian distribution
center, which is about 30,000 square feet. The new facility is being built by
our current landlord, who has agreed to release us from our obligations under
the existing lease once the new facility is available for use, which we
anticipate will be in the second quarter of fiscal 2004. Annual rent for this
facility approximates $0.4 per million. We expect to make a cash outlay of
approximately $3.0 million to equip this facility, which will include automated
warehouse handling equipment. We expect the cash outlay will approximate $1.8
million in fiscal 2003, with the remainder during the first half of fiscal 2004.
Cash flows provided by financing activities were $0.8 million during
the thirty-nine weeks ended November 1, 2003 as compared to $1.9 million
provided by financing activities in the thirty-nine weeks ended November 2,
2002. During the thirty-nine weeks ended November 1, 2003, cash flows provided
by financing activities reflected funds received from the exercise of employee
stock options and employee stock purchases, partially offset by deferred
financing fees. During the thirty-nine weeks ended November 2, 2002, cash flow
provided by financing activities reflected funds received from the exercise of
employee stock options and employee stock purchases.
During the thirty-nine weeks ended November 1 2003, we opened 49 stores
and closed 3 stores. As of November 13, 2003, we have opened 53 stores and have
completed our store openings for fiscal 2003. We plan to end fiscal 2003 with
691 stores after closing an additional 2 stores in the fourth quarter of fiscal
2003. 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.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
None.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the Company's
most recently completed fiscal quarter covered by this report, the Company
carried out an evaluation, with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures pursuant
to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required by the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
(b) Changes in internal controls over financial reporting. There have
been no changes in the Company's internal controls over financial reporting that
occurred during the Company's last fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
11
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) EXHIBITS
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
10.2 Lease Agreement as of August 12, 2003
between Orlando Corporation and The
Children's Place (Canada), LP. Together
with, Indemnity Agreement as of August 12,
2003 between the Company and Orlando
Corporation. Together with, Surrender of
Lease as of August 12, 2003 between the
Company and Orlando Corporation and Orion
Properties Ltd.
31 Section 302 Certifications
32 Section 906 Certifications
(B) REPORTS ON FORM 8-K
July 2003 Sales Release, dated August 7, 2003.
Second Quarter 2003 Earnings Release, dated August 14, 2003.
October 2003 Sales Release, dated November 6, 2003.
Third Quarter 2003 Earnings Release, dated November 13, 2003.
12
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: December 8, 2003
By: /s/ Ezra Dabah
-----------------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 8, 2003 By: /s/ Seth L. Udasin
-----------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
13