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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 May 4, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-23071
THE CHILDREN'S PLACE RETAIL STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1241495
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
915 SECAUCUS ROAD
SECAUCUS, NEW JERSEY 07094
(Address of Principal Executive Offices) (Zip Code)
(201) 558-2400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $0.10 per share, outstanding at May 28, 2002:
26,468,031 shares.
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THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MAY 4, 2002
TABLE OF CONTENTS
<Table>
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........................................................................ 5
Item 3. Quantitative and Qualitative Disclosures about Market Risks....................... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 8
Item 6. Exhibits and Reports on Form 8-K ................................................. 8
Signatures................................................................................. 9
</Table>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
MAY 4, 2002 FEBRUARY 2, 2002
----------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 66,204 $ 45,191
Accounts receivable ................................................... 14,439 11,895
Inventories ........................................................... 49,772 59,095
Prepaid expenses and other current assets ............................. 14,448 11,997
Deferred income taxes ................................................. 3,847 3,847
--------- ---------
Total current assets ............................................... 148,710 132,025
Property and equipment, net ............................................... 149,889 144,657
Deferred income taxes ..................................................... 5,332 5,332
Other assets .............................................................. 813 835
--------- ---------
Total assets ....................................................... $ 304,744 $ 282,849
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility ............................................. $ 0 $ 0
Accounts payable ...................................................... 22,072 22,177
Taxes payable ......................................................... 9,231 6,195
Accrued expenses, interest and other current liabilities .............. 28,613 26,311
--------- ---------
Total current liabilities .......................................... 59,916 54,683
Other long-term liabilities ............................................... 11,512 11,160
--------- ---------
Total liabilities .................................................. 71,428 65,843
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; 100,000,000 shares authorized; 26,447,921
shares and 26,372,144 shares issued and outstanding, at May 4, 2002 and
February 2, 2002, respectively ........................................ 2,645 2,637
Additional paid-in capital ................................................ 97,076 95,982
Translation adjustments ................................................... (12) (12)
Retained earnings ......................................................... 133,607 118,399
--------- ---------
Total stockholders' equity ......................................... 233,316 217,006
--------- ---------
Total liabilities and stockholders' equity ......................... $ 304,744 $ 282,849
========= =========
</Table>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
1
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THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THIRTEEN WEEKS ENDED
--------------------------
MAY 4, 2002 MAY 5, 2001
----------- -----------
Net sales ........................................ $ 173,047 $ 160,461
Cost of sales .................................... 93,919 92,299
--------- ---------
Gross profit ..................................... 79,128 68,162
Selling, general and administrative expenses ..... 46,373 41,252
Depreciation and amortization .................... 8,270 5,869
--------- ---------
Operating income ................................. 24,485 21,041
Interest (income) expense, net ................... (246) 31
--------- ---------
Income before income taxes ....................... 24,731 21,010
Provision for income taxes ....................... 9,523 8,192
--------- ---------
Net income ....................................... $ 15,208 $ 12,818
========= =========
Basic net income per common share ................ $ 0.58 $ 0.49
Basic weighted average common shares outstanding . 26,427 26,161
Diluted net income per common share .............. $ 0.56 $ 0.48
Diluted weighted average common shares outstanding 27,348 26,844
</Table>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
2
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THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
THIRTEEN WEEKS ENDED
--------------------------
MAY 4, 2002 MAY 5, 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 15,208 $ 12,818
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 8,270 5,869
Deferred financing fee amortization .................... 15 16
Loss on disposals of property and equipment ............ 174 223
Deferred taxes ......................................... 0 129
Deferred rent .......................................... 568 452
Changes in operating assets and liabilities:
Accounts receivable .................................... (2,544) (4,047)
Inventories ............................................ 9,323 19,701
Prepaid expenses and other current assets .............. (2,451) (920)
Other assets ........................................... 7 299
Accounts payable ....................................... (105) (8,470)
Accrued expenses, interest and other current liabilities 3,813 8,607
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Total adjustments ................................... 17,070 21,859
--------- ---------
Net cash provided by operating activities ..................... 32,278 34,677
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases .............................. (12,368) (15,946)
--------- ---------
Net cash used in investing activities ......................... (12,368) (15,946)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee stock purchases ........ 1,103 647
Borrowings under revolving credit facility .................... 5,617 164,544
Repayments under revolving credit facility .................... (5,617) (167,868)
--------- ---------
Net cash provided by (used by) financing activities ........... 1,103 (2,677)
--------- ---------
Effect of exchange rate on cash ............................... 0 (2)
--------- ---------
Net increase in cash and cash equivalents .............. 21,013 16,052
Cash and cash equivalents, beginning of period ......... 45,191 8,141
--------- ---------
Cash and cash equivalents, end of period ...................... $ 66,204 $ 24,193
========= =========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest ...................... $ 21 $ 236
Cash paid during the period for income taxes .................. 6,726 2,790
</Table>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
3
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THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information. Certain information
and footnote disclosures required by GAAP for complete financial statements have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited financial statements contain all material adjustments,
consisting of normal recurring accruals, necessary to present fairly the
Company's financial position, results of operations and cash flow for the
periods indicated, and have been prepared in a manner consistent with the
audited financial statements as of February 2, 2002. These financial statements
should be read in conjunction with the audited financial statements and
footnotes for the fiscal year ended February 2, 2002 included in the Company's
Annual Report on Form 10-K for the year ended February 2, 2002 filed with the
Securities and Exchange Commission. Due to the seasonal nature of the Company's
business, the results of operations for the thirteen weeks ended May 4, 2002 and
May 5, 2001 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.
<Table>
<Caption>
THIRTEEN WEEKS ENDED
---------------------------
MAY 4, 2002 MAY 5, 2001
----------- -----------
Net income (in thousands) ...... $ 15,208 $ 12,818
=========== ===========
Basic shares ................... 26,427,284 26,160,956
Dilutive effect of stock options 921,034 683,352
----------- -----------
Dilutive shares ................ 27,348,318 26,844,308
=========== ===========
Antidilutive options ........... 134,477 258,733
</Table>
Antidilutive options consist of the weighted average of stock options
for the respective periods ended May 4, 2002 and May 5, 2001 that had an
exercise price greater than the average market price during the period. Such
options are therefore excluded from the computation of diluted shares.
3. 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.
4. CANADIAN ACQUISITION
On May 1, 2002, the Company acquired the leases for 23 stores and other
assets from Au Coin des Petits/Young Canada, the children's division of Comark,
Inc. The Company successfully negotiated to extend the terms of all the acquired
leases to provide for full lease terms of approximately 10 years. The stores are
based in regional malls located in the provinces of Ontario and Quebec. The
Company will convert the acquired locations into The Children's Place stores and
plans to reopen these stores in the third quarter of fiscal 2002. To facilitate
this expansion, the Company has leased an approximately 30,000 square foot
distribution center in Mississauga, Ontario. The Company also put in place a $10
million (Canadian Dollar) demand facility with Toronto Dominion Bank for its
Canadian subsidiary that is secured by a standby letter of credit.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF FEDERAL SECURITIES LAWS, WHICH ARE INTENDED TO BE COVERED
BY THE SAFE HARBORS CREATED THEREBY. THOSE STATEMENTS INCLUDE, BUT MAY NOT BE
LIMITED TO, THE DISCUSSIONS OF THE COMPANY'S OPERATING AND GROWTH STRATEGY.
INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH UNDER THE CAPTION
"RISK FACTORS" IN THE BUSINESS SECTION OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED FEBRUARY 2, 2002. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THE ASSUMPTIONS COULD PROVE TO BE INACCURATE, AND THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
QUARTERLY REPORT ON FORM 10-Q WILL PROVE TO BE ACCURATE. IN LIGHT OF THE
SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS
OF THE COMPANY WILL BE ACHIEVED. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY RELEASE ANY REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN TO REFLECT EVENTS AND CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS QUARTERLY REPORT ON FORM 10-Q AND THE ANNUAL AUDITED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED FEBRUARY 2, 2002 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
income statement data expressed as a percentage of net sales:
<Table>
<Caption>
THIRTEEN WEEKS ENDED
-----------------------
MAY 4, 2002 MAY 5, 2001
----------- ----------
Net sales .................................. 100.0% 100.0%
Cost of sales .............................. 54.3 57.5
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Gross profit ............................... 45.7 42.5
Selling, general and administrative expenses 26.8 25.7
Depreciation and amortization .............. 4.8 3.7
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Operating income ........................... 14.1 13.1
Interest (income) expense, net ............. (0.2) --
------- -------
Income before income taxes ................. 14.3 13.1
Provision for income taxes ................. 5.5 5.1
------- -------
Net income ................................. 8.8% 8.0%
======= =======
Number of stores, end of period ............ 554 437
</Table>
THIRTEEN WEEKS ENDED MAY 4, 2002 (THE "FIRST QUARTER 2002") COMPARED TO THIRTEEN
WEEKS ENDED MAY 5, 2001 (THE "FIRST QUARTER 2001")
Net sales increased by $12.5 million, or 8%, to $173.0 million during
the First Quarter 2002 from $160.5 million during the First Quarter 2001. During
the First Quarter 2002, we opened 34 new stores. Net sales for the 34 new
stores, as well as the other stores that did not qualify as comparable stores,
contributed $28.8 million of our net sales increase. This net sales increase was
partially offset by an 11% comparable store sales decline in the First Quarter
2002, which decreased our net sales by $16.3 million. Comparable store sales
decreased 2% during the First Quarter 2001.
During the First Quarter 2002, our comparable store sales decline was
primarily attributable to a slowdown in store traffic that was caused in part by
the difficult economic climate. We believe that our comparable store sales
decline was also unfavorably impacted by low inventory levels and a merchandise
mix that was too heavily skewed to fashion merchandise.
Gross profit increased by $10.9 million to $79.1 million during the
First Quarter 2002 from $68.2 million during the First Quarter 2001. As a
percentage of net sales, gross profit increased 3.2% to 45.7% during the First
Quarter 2002 from 42.5% during the First Quarter 2001. The increase in gross
profit, as a percentage of net sales, was principally due to higher initial
markups achieved
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through lower product costs from our manufacturers, partially offset by higher
occupancy costs. Occupancy costs were higher, as a percentage of net sales, due
to our comparable store sales decline and increased occupancy costs from new
stores that have not been open long enough to leverage their rent through an
established sales base.
Selling, general and administrative expenses increased $5.1 million to
$46.4 million during the First Quarter 2002 from $41.3 million during the First
Quarter 2001. Selling, general and administrative expenses were 26.8% of net
sales during the First Quarter 2002, as compared with 25.7% during the First
Quarter 2002. The increase, as a percentage of net sales, was primarily due to
higher store payroll, marketing and medical benefit costs, partially offset by
lower incentive payouts and pre-opening expenses. Store payroll, as a percentage
of net sales, was unfavorably impacted by our comparable store sales decline.
Marketing costs, as a percentage of net sales, were higher due to increased
efforts to promote The Children's Place brand and generate sales.
Depreciation and amortization amounted to $8.3 million, or 4.8% of net
sales, during the First Quarter 2002, as compared to $5.9 million, or 3.7% of
net sales, during the First Quarter 2001. The increase in depreciation and
amortization primarily was a result of increases to our store base, depreciation
on our E-commerce assets and increased software amortization. During the First
Quarter 2001, no depreciation expense was recorded on our E-commerce assets as
our website was temporarily closed to improve its operational efficiency.
During the First Quarter 2002, we recorded net interest income of $0.2
million, or 0.2% of net sales, due to our net cash investment position. During
the First Quarter 2002, we had no borrowings under our working capital facility
other than letters of credit.
Our provision for income taxes for the First Quarter 2002 increased to
$9.5 million, from an $8.2 million provision for income taxes during the First
Quarter 2001, due to our increased profitability. Our effective tax rate was
38.5% and 39.0% during the First Quarter 2002 and the First Quarter 2001,
respectively.
We recorded net income of $15.2 million and $12.8 million during the
First Quarter 2002 and the First Quarter 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
DEBT SERVICE/LIQUIDITY
Our primary uses of cash are financing new store openings and providing
for working capital, which principally represents the purchase of inventory. Our
working capital needs follow a seasonal pattern, peaking during the second and
third quarters when inventory is purchased for the back to school and holiday
seasons. We have been able to meet our cash needs principally by using cash
flows from operations and seasonal borrowings under our working capital
facility. As of May 4, 2002, we had no long-term debt obligations.
Our working capital facility provides for borrowings up to $75 million
(including a sublimit for letters of credit of $60 million). As of May 4, 2002,
we had no borrowings under our working capital facility and had outstanding
letters of credit of $12.4 million. Availability under our working capital
facility was $46.4 million. During the First Quarter 2002, we had no borrowings
under our working capital facility other than letters of credit. The maximum
outstanding letter of credit usage under our working capital facility during the
thirteen weeks ended May 4, 2002 was $13.5 million. As of May 4, 2002, we were
in compliance with all of our covenants under our working capital facility.
We are in the process of amending our working capital facility to
provide for direct borrowings of our Canadian subsidiary. We have also put in
place a $10 million (Canadian dollar) demand facility with Toronto Dominion
Bank for our Canadian subsidiary that is secured by a stand by letter of
credit.
CASH FLOWS/CAPITAL EXPENDITURES
During the thirteen weeks ended May 4, 2002, operating activities
provided $32.3 million in cash flow as compared to $34.7 million in cash flow
provided by operating activities during the thirteen weeks ended May 5, 2001.
During the thirteen weeks ended May 4, 2002, cash flows provided by operating
activities decreased primarily as a result of a smaller seasonal reduction in
inventory resulting from management initiatives to increase store inventory
levels, partially offset by increased cash generated from operations and
increases in our current liabilities. During the Second Quarter of 2002, we plan
to increase our store inventory levels to better support our sales plan.
Cash flows used in investing activities were $12.4 million and $15.9
million in the thirteen weeks ended May 4, 2002 and the thirteen weeks ended May
5, 2001, respectively. During the thirteen weeks ended May 4, 2002 and the
thirteen weeks ended May 5, 2001, cash flows used in investing activities
primarily represented capital expenditures for new store openings and
remodelings. The decrease in
6
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cash flows used in investing activities during the thirteen weeks ended May 4,
2002, was primarily due to the timing of capital expenditures made for our new
store openings, remodelings and various equipment needs.
In the thirteen weeks ended May 4, 2002 and the thirteen weeks ended
May 5, 2001, we opened 34 and 37 stores, respectively. In the thirteen weeks
ended May 4, 2002 and the thirteen weeks ended May 5, 2001, we remodeled 1 and 6
stores, respectively. During fiscal 2002, we plan to open a total of
approximately 130 stores, remodel 6 stores and convert 7 stores to our combo
format. Capital expenditures will also include hardware and software to support
our information systems initiatives, along with ongoing store, office and
distribution equipment needs. In addition, we have leased an approximately
30,000 square foot distribution center in Mississauga, Ontario to support our
Canadian operations. We anticipate that total capital expenditures during fiscal
2002 will approximate $50 to $60 million, including our expansion into Canada.
We plan to fund these capital expenditures primarily with cash flows from
operations.
Cash flows provided by financing activities were $1.1 million during
the thirteen weeks ended May 4, 2002 as compared to $2.7 million used by
financing activities in the thirteen weeks ended May 5, 2001. During the
thirteen weeks ended May 4, 2002, cash flows provided by financing activities
reflected funds received from the exercise of employee stock options and
employee stock purchases. During the thirteen weeks ended May 5, 2001, cash flow
used by financing activities reflected net repayments under our working capital
facility, partially offset by funds received from the exercise of employee stock
options and employee stock purchases.
We believe that cash on hand, cash generated from operations and funds
available under our working capital facility will be sufficient to fund our
capital and other cash flow requirements for at least the next 12 months. In
addition, as we continue our store expansion program we will consider additional
sources of financing to fund our long-term growth.
Our ability to meet our capital requirements will depend on our ability
to generate cash from operations and successfully implement our store expansion
plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
(Not applicable).
7
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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
-------- --------------------------------------------------
10.1 Agreement as of May 23, 2002 between the Company
and Toronto-Dominion Bank for a Demand Facility.
(b) REPORTS ON FORM 8-K
None.
8
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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: May 31, 2002
By: /s/ Ezra Dabah
--------------------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 31, 2002 By: /s/ Seth L. Udasin
--------------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
9