Childrens Place, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 30, 2022 January 29, 2022 July 31, 2021 (unaudited) (unaudited) (in thousands, except par value) ASSETS Current assets: Cash and cash equivalents $ 28,193 $ 54,787 $ 63,982 Accounts receivable 44,445 21,863 38,864 Inventories 616,436 428,813 461,391 Prepaid expenses and other current assets 59,383 76,075 45,011 Total current assets 748,457 581,538 609,248 Long-term assets: Property and equipment, net 154,738 155,006 165,558 Right-of-use assets 167,619 194,653 235,208 Tradenames, net 71,292 71,692 72,092 Deferred income taxes 20,013 23,109 36,362 Other assets 12,339 11,462 9,980 Total assets $ 1,174,458 $ 1,037,460 $ 1,128,448 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Revolving loan $ 283,931 $ 175,318 $ 199,837 Accounts payable 303,776 183,758 227,579 Current portion of operating lease liabilities 78,989 91,097 109,991 Income taxes payable 2,482 10,984 4,536 Accrued expenses and other current liabilities 123,919 130,669 130,452 Total current liabilities 793,097 591,826 672,395 Long-term liabilities: Long-term debt 49,718 49,685 74,209 Long-term portion of operating lease liabilities 112,386 134,761 174,718 Income taxes payable 18,925 14,939 14,939 Other tax liabilities 2,337 8,689 6,350 Other long-term liabilities 13,814 12,088 17,652 Total liabilities 990,277 811,988 960,263 Commitments and contingencies (see Note 7) Stockholders' equity: Preferred stock, $ 1.00 par value, 1,000 shares authorized, 0 shares issued and outstanding — — — Common stock, $ 0.10 par value, 100,000 shares authorized; 13,087 , 13,964 , and 14,831 issued; 13,023 , 13,903 , and 14,772 outstanding 1,309 1,396 1,483 Additional paid-in capital 151,954 160,348 164,290 Treasury stock, at cost ( 64 , 61 , and 59 shares) ( 3,587 ) ( 3,443 ) ( 3,304 ) Deferred compensation 3,587 3,443 3,304 Accumulated other comprehensive loss ( 14,614 ) ( 14,186 ) ( 13,285 ) Retained earnings 45,532 77,914 15,697 Total stockholders’ equity 184,181 225,472 168,185 Total liabilities and stockholders’ equity $ 1,174,458 $ 1,037,460 $ 1,128,448 See accompanying notes to these consolidated financial statements. 1 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Thirteen Weeks Ended Twenty-six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 (in thousands, except earnings (loss) per common share) Net sales $ 380,885 $ 413,855 $ 743,235 $ 849,336 Cost of sales (exclusive of depreciation and amortization) 265,422 245,994 485,867 493,269 Gross profit 115,463 167,861 257,368 356,067 Selling, general, and administrative expenses 114,672 115,620 223,708 222,358 Depreciation and amortization 13,241 14,392 26,856 29,953 Asset impairment charges 1,379 — 1,379 — Operating income (loss) ( 13,829 ) 37,849 5,425 103,756 Interest expense ( 2,603 ) ( 4,700 ) ( 4,313 ) ( 9,114 ) Interest income 14 4 19 7 Income (loss) before provision (benefit) for income taxes ( 16,418 ) 33,153 1,131 94,649 Provision (benefit) for income taxes ( 3,120 ) 9,058 ( 5,402 ) 25,349 Net income (loss) $ ( 13,298 ) $ 24,095 $ 6,533 $ 69,300 Earnings (loss) per common share Basic $ ( 1.01 ) $ 1.63 $ 0.49 $ 4.71 Diluted $ ( 1.01 ) $ 1.60 $ 0.48 $ 4.61 Weighted average common shares outstanding Basic 13,147 14,780 13,384 14,725 Diluted 13,147 15,062 13,532 15,032 See accompanying notes to these consolidated financial statements. 2 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Thirteen Weeks Ended Twenty-six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 (in thousands) Net income (loss) $ ( 13,298 ) $ 24,095 $ 6,533 $ 69,300 Other comprehensive income (loss): Foreign currency translation adjustment 54 ( 355 ) ( 428 ) 531 Total comprehensive income (loss) $ ( 13,244 ) $ 23,740 $ 6,105 $ 69,831 See accompanying notes to these consolidated financial statements. 3 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) Thirteen Weeks Ended July 30, 2022 Accumulated Additional Other Total Common Stock Paid-In Deferred Retained Comprehensive Treasury Stock Stockholders’ (in thousands) Shares Amount Capital Compensation Earnings Loss Shares Amount Equity Balance, April 30, 2022 13,422 $ 1,342 $ 155,097 $ 3,512 $ 71,913 $ ( 14,668 ) ( 62 ) $ ( 3,512 ) $ 213,684 Vesting of stock awards 147 15 ( 15 ) — Stock-based compensation expense 6,272 6,272 Purchase and retirement of common stock ( 482 ) ( 48 ) ( 9,400 ) ( 13,083 ) ( 22,531 ) Other comprehensive income 54 54 Deferral of common stock into deferred compensation plan 75 ( 2 ) ( 75 ) — Net loss ( 13,298 ) ( 13,298 ) Balance, July 30, 2022 13,087 $ 1,309 $ 151,954 $ 3,587 $ 45,532 $ ( 14,614 ) ( 64 ) $ ( 3,587 ) $ 184,181 Twenty-six Weeks Ended July 30, 2022 Accumulated Additional Other Total Common Stock Paid-In Deferred Retained Comprehensive Treasury Stock Stockholders’ (in thousands) Shares Amount Capital Compensation Earnings Loss Shares Amount Equity Balance, January 29, 2022 13,964 $ 1,396 $ 160,348 $ 3,443 $ 77,914 $ ( 14,186 ) ( 61 ) $ ( 3,443 ) $ 225,472 Vesting of stock awards 270 27 ( 27 ) — Stock-based compensation expense 13,834 13,834 Purchase and retirement of common stock ( 1,147 ) ( 114 ) ( 22,201 ) ( 38,915 ) ( 61,230 ) Other comprehensive loss ( 428 ) ( 428 ) Deferral of common stock into deferred compensation plan 144 ( 3 ) ( 144 ) — Net income 6,533 6,533 Balance, July 30, 2022 13,087 $ 1,309 $ 151,954 $ 3,587 $ 45,532 $ ( 14,614 ) ( 64 ) $ ( 3,587 ) $ 184,181 See accompanying notes to these consolidated financial statements. 4 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued) (Unaudited) Thirteen Weeks Ended July 31, 2021 Accumulated Additional Other Total Common Stock Paid-In Deferred Retained Comprehensive Treasury Stock Stockholders’ (in thousands) Shares Amount Capital Compensation Earnings Loss Shares Amount Equity Balance, May 1, 2021 14,693 $ 1,469 $ 155,908 $ 3,234 $ 563 $ ( 12,930 ) ( 58 ) $ ( 3,234 ) $ 145,010 Vesting of stock awards 255 26 ( 26 ) — Stock-based compensation expense 10,526 10,526 Purchase and retirement of common stock ( 117 ) ( 12 ) ( 2,118 ) ( 8,961 ) ( 11,091 ) Other comprehensive loss ( 355 ) ( 355 ) Deferral of common stock into deferred compensation plan 70 ( 1 ) ( 70 ) — Net income 24,095 24,095 Balance, July 31, 2021 14,831 $ 1,483 $ 164,290 $ 3,304 $ 15,697 $ ( 13,285 ) ( 59 ) $ ( 3,304 ) $ 168,185 Twenty-six Weeks Ended July 31, 2021 Accumulated Additional Retained Other Total Common Stock Paid-In Deferred Earnings Comprehensive Treasury Stock Stockholders’ (in thousands) Shares Amount Capital Compensation (Deficit) Loss Shares Amount Equity Balance, January 30, 2021 14,641 $ 1,464 $ 148,519 $ 3,165 $ ( 42,790 ) $ ( 13,816 ) ( 57 ) $ ( 3,165 ) $ 93,377 Vesting of stock awards 336 34 ( 34 ) — Stock-based compensation expense 18,442 18,442 Purchase and retirement of common stock ( 146 ) ( 15 ) ( 2,637 ) ( 10,813 ) ( 13,465 ) Other comprehensive income 531 531 Deferral of common stock into deferred compensation plan 139 ( 2 ) ( 139 ) — Net income 69,300 69,300 Balance, July 31, 2021 14,831 $ 1,483 $ 164,290 $ 3,304 $ 15,697 $ ( 13,285 ) ( 59 ) $ ( 3,304 ) $ 168,185 See accompanying notes to these consolidated financial statements. 5 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Twenty-six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,533 $ 69,300 Reconciliation of net income to net cash used in operating activities: Non-cash portion of operating lease expense 40,075 52,075 Depreciation and amortization 26,856 29,953 Non-cash stock-based compensation expense 13,834 18,442 Deferred income tax provision 2,768 9,390 Asset impairment charges 1,379 — Other non-cash items, net ( 521 ) 743 Changes in operating assets and liabilities: Inventories ( 187,762 ) ( 74,406 ) Accounts receivable and other assets ( 23,542 ) 520 Prepaid expenses and other current assets 554 ( 847 ) Income taxes payable, net of prepayments 8,008 12,056 Accounts payable and other current liabilities 105,228 ( 13,090 ) Lease liabilities ( 47,928 ) ( 107,572 ) Other long-term liabilities 1,729 139 Net cash used in operating activities ( 52,789 ) ( 3,297 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 18,766 ) ( 13,496 ) Change in deferred compensation plan ( 357 ) 31 Net cash used in investing activities ( 19,123 ) ( 13,465 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit facility 379,364 386,343 Repayments under revolving credit facility ( 270,750 ) ( 356,284 ) Purchase and retirement of common stock, including shares surrendered for tax withholdings and transaction costs ( 62,900 ) ( 13,465 ) Payment of debt issuance costs — ( 358 ) Net cash provided by financing activities 45,714 16,236 Effect of exchange rate changes on cash and cash equivalents ( 396 ) 960 Net increase (decrease) in cash and cash equivalents ( 26,594 ) 434 Cash and cash equivalents, beginning of period 54,787 63,548 Cash and cash equivalents, end of period $ 28,193 $ 63,982 See accompanying notes to these consolidated financial statements. 6 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Twenty-six Weeks Ended July 30, 2022 July 31, 2021 (in thousands) OTHER CASH FLOW INFORMATION: Net cash paid (received) for income taxes $ ( 16,425 ) $ 3,793 Cash paid for interest 4,014 4,645 Increase (decrease) in accrued capital expenditures 7,406 ( 1,145 ) See accompanying notes to these consolidated financial statements. 7 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION Description of Business The Children’s Place, Inc. and subsidiaries (collectively, the “Company”) is the largest pure-play children’s specialty apparel retailer in North America. The Company provides apparel, footwear, accessories, and other items for children and ‘tweens.’ The Company designs, contracts to manufacture, sells at retail and wholesale, and licenses to sell trend right, high-quality merchandise predominantly at value prices, primarily under the Company’s proprietary “The Children’s Place”, “Place”, “Baby Place”, “Gymboree”, and “Sugar & Jade” brand names. The Company classifies its business into two segments: The Children’s Place U.S. and The Children’s Place International. Included in The Children’s Place U.S. segment are the Company’s U.S. and Puerto Rico-based stores and revenue from its U.S.-based wholesale business. Included in The Children’s Place International segment are its Canadian-based stores, revenue from the Company’s Canadian-based wholesale business, as well as revenue from international franchisees. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com . Terms that are commonly used in the notes to the Company’s consolidated financial statements are defined as follows: • Second Quarter 2022 — The thirteen weeks ended July 30, 2022 • Second Quarter 2021 — The thirteen weeks ended July 31, 2021 • First Quarter 2022 — The thirteen weeks ended April 30, 2022 • Year-To-Date 2022 — The twenty-six weeks ended July 30, 2022 • Year-To-Date 2021 — The twenty-six weeks ended July 31, 2021 • Fiscal 2022 – The fifty-two weeks ending January 28, 2023 • Fiscal 2021 – The fifty-two weeks ended January 29, 2022 • SEC — U.S. Securities and Exchange Commission • U.S. GAAP — Generally Accepted Accounting Principles in the United States • FASB — Financial Accounting Standards Board • FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants Basis of Presentation The unaudited consolidated financial statements and accompanying notes to consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated. As of July 30, 2022, January 29, 2022, and July 31, 2021, the Company did not have any investments in unconsolidated affiliates. FASB ASC 810— Consolidation is considered when determining whether an entity is subject to consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of July 30, 2022 and July 31, 2021, the results of its consolidated operations, consolidated comprehensive income (loss), and consolidated changes in stockholders’ equity for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021, and consolidated cash flows for the twenty-six weeks ended July 30, 2022 and July 31, 2021. The consolidated balance sheet as of January 29, 2022 was derived from audited financial statements. Due to the seasonal nature of the Company’s business, the results of operations for the thirteen and twenty-six weeks ended July 30, 2022 and July 31, 2021 are not necessarily indicative of operating results for a full fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022. 8 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Fiscal Year The Company’s fiscal year is a fifty-two week or fifty-three week period ending on the Saturday on or nearest to January 31. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and amounts of revenues and expenses reported during the period. Actual results could differ from the assumptions used and estimates made by management, which could have a material impact on the Company’s financial position or results of operations. Critical accounting estimates inherent in the preparation of the consolidated financial statements include impairment of long-lived assets, income taxes, stock-based compensation, and inventory valuation. Recent Accounting Standards Updates There are no pending accounting standards updates that are currently expected to have a material impact on the Company. 2. REVENUES Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The following table presents the Company’s revenues disaggregated by geography: Thirteen Weeks Ended Twenty-six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 (in thousands) Net sales: South $ 146,368 $ 164,630 $ 282,740 $ 330,368 Northeast 72,113 84,954 147,509 179,976 West 52,411 59,854 102,543 122,077 Midwest 39,218 48,088 82,831 108,892 International and other (1) 70,775 56,329 127,612 108,023 Total net sales $ 380,885 $ 413,855 $ 743,235 $ 849,336 ____________________________________________ (1) Includes retail and e-commerce sales in Canada and Puerto Rico, wholesale and franchisee sales, and certain amounts earned under the Company’s private label credit card program. The Company recognizes revenue, including shipping and handling fees billed to customers, upon purchase at the Company’s retail stores or when received by the customer if the product was purchased via e-commerce, net of coupon redemptions and anticipated sales returns. The Company deferred sales of $ 12.6 million, $ 3.6 million, and $ 9.5 million within Accrued expenses and other current liabilities as of July 30, 2022, January 29, 2022, and July 31, 2021, respectively, based upon estimated time of delivery, at which point control passes to the customer. Sales tax collected from customers is excluded from revenue. For the sale of goods with a right of return, the Company recognizes revenue for the consideration it expects to be entitled to and calculates an allowance for estimated sales returns based upon the Company’s sales return experience. Adjustments to the allowance for estimated sales returns in subsequent periods have not been material based on historical data, thereby reducing the uncertainty inherent in such estimates. The allowance for estimated sales returns, which is recorded in Accrued expenses and other current liabilities, was $ 2.3 million, $ 1.0 million, and $ 3.1 million as of July 30, 2022, January 29, 2022, and July 31, 2021, respectively. 9 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The Company’s private label credit card is issued to customers for use exclusively at The Children’s Place stores and online at www.childrensplace.com, www.gymboree.com , and www.sugarandjade.com, and credit is extended to such customers by a third-party financial institution on a non-recourse basis to the Company. The private label credit card includes multiple performance obligations for the Company, including marketing and promoting the program on behalf of the bank and the operation of the loyalty rewards program. Included in the agreement with the third-party financial institution was an upfront bonus paid to the Company. The upfront bonus is recognized as revenue and allocated between brand and reward obligations. As the license of the Company’s brand is the predominant item in the performance obligation, the amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur. In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration, such as additional bonuses, including profit-sharing, over the life of the private label credit card program. Similar to the upfront bonus, the usage-based royalties and bonuses are recognized as revenue and allocated between the brand and reward obligations. The amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur. In addition, the annual profit-sharing amount is estimated and recognized quarterly within an annual period when earned. The additional bonuses are amortized over the contract term based on anticipated progress against future targets and level of risk associated with achieving the targets. The Company has a points-based customer loyalty program in which customers earn points based on purchases and other promotional activities. These points can be redeemed for coupons to discount future purchases. A contract liability is estimated based on the standalone selling price of benefits earned by customers through the program and the related redemption experience under the program. The value of each point earned is recorded as deferred revenue and is included within Accrued expenses and other current liabilities. The total contract liabilities related to this program were $ 3.9 million, $ 5.0 million, and $ 7.1 million as of July 30, 2022, January 29, 2022, and July 31, 2021, respectively. The Company’s policy with respect to gift cards is to record revenue as and when the gift cards are redeemed for merchandise. The Company recognizes gift card breakage income in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Gift card breakage is recorded within Net sales. Prior to their redemption, gift cards are recorded as a liability within Accrued expenses and other current liabilities. The liability is estimated based on expected breakage that considers historical patterns of redemption. The gift card liability balance as of July 30, 2022, January 29, 2022, and July 31, 2021 was $ 11.7 million, $ 12.1 million, and $ 12.8 million, respectively. During Year-To-Date 2022, the Company recognized Net sales of $ 3.6 million related to the gift card liability balance that existed at January 29, 2022. The Company has an international program of territorial agreements with franchisees. The Company generates revenues from the franchisees from the sale of product and, in certain cases, sales royalties. The Company records net sales and cost of goods sold on the sale of product to franchisees when the franchisee takes ownership of the product. The Company records net sales for royalties when the applicable franchisee sells the product to their customers. Under certain agreements, the Company receives a fee from each franchisee for exclusive territorial rights and based on the opening of new stores. The Company records these territorial fees as deferred revenue and amortizes the fee into net sales over the life of the territorial agreement. 3. INTANGIBLE ASSETS The Company’s intangible assets were as follows: July 30, 2022 Useful Life Gross Amount Accumulated Amortization Net Amount (in thousands) Gymboree tradename (1) Indefinite $ 69,953 $ — $ 69,953 Crazy 8 tradename (1) 5 years 4,000 ( 2,661 ) 1,339 Customer databases (2) 3 years 3,000 ( 3,000 ) — Total intangibles $ 76,953 $ ( 5,661 ) $ 71,292 10 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) January 29, 2022 Useful Life Gross Amount Accumulated Amortization Net Amount (in thousands) Gymboree tradename (1) Indefinite $ 69,953 $ — $ 69,953 Crazy 8 tradename (1) 5 years 4,000 ( 2,261 ) 1,739 Customer databases (2) 3 years 3,000 ( 2,827 ) 173 Total intangibles $ 76,953 $ ( 5,088 ) $ 71,865 July 31, 2021 Useful Life Gross Amount Accumulated Amortization Net Amount (in thousands) Gymboree tradename (1) Indefinite $ 69,953 $ — $ 69,953 Crazy 8 tradename (1) 5 years 4,000 ( 1,861 ) 2,139 Customer databases (2) 3 years 3,000 ( 2,328 ) 672 Total intangibles $ 76,953 $ ( 4,189 ) $ 72,764 ____________________________________________ (1) Included within Tradenames, net on the Consolidated Balance Sheets. (2) Included within Other assets on the Consolidated Balance Sheets. 4. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: July 30, 2022 January 29, 2022 July 31, 2021 (in thousands) Property and equipment: Land and land improvements $ 3,403 $ 3,403 $ 3,403 Building and improvements 36,187 36,045 36,045 Material handling equipment 68,450 64,989 61,649 Leasehold improvements 195,342 197,436 214,229 Store fixtures and equipment 205,961 212,613 224,238 Capitalized software 333,967 320,716 313,371 Construction in progress 16,913 8,170 5,339 860,223 843,372 858,274 Less accumulated depreciation and amortization ( 705,485 ) ( 688,366 ) ( 692,716 ) Property and equipment, net $ 154,738 $ 155,006 $ 165,558 At July 30, 2022, January 29, 2022, and July 31, 2021, the Company reviewed its store related long-lived assets for indicators of impairment, and performed a recoverability test if indicators were identified. Based on the results of the analyses performed, the Company recorded asset impairment charges in the Second Quarter 2022 and Year-To-Date 2022 of $ 1.4 million, inclusive of right-of-use (“ROU”) assets. The Company did no t record asset impairment charges in the Second Quarter 2021 or Year-To-Date 2021. 11 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. LEASES The Company has operating leases for retail stores, corporate offices, distribution facilities, and certain equipment. The Company’s leases have remaining lease terms ranging from less than one year up to ten years , some of which include options to extend the leases for up to five years , and some of which include options to terminate the lease early. The Company records all occupancy costs in Cost of sales, except costs for administrative office buildings, which are recorded in Selling, general, and administrative expenses. As of the periods presented, the Company’s finance leases were not material to the Consolidated Balance Sheets, Consolidated Statements of Operations, or Consolidated Statements of Cash Flows. The following components of operating lease expense were recognized in the Company’s Consolidated Statements of Operations: Thirteen Weeks Ended Twenty-six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 (in thousands) Fixed operating lease cost $ 24,070 $ 24,272 $ 47,040 $ 50,030 Variable operating lease cost (1) 12,573 10,847 27,691 14,221 Total operating lease cost $ 36,643 $ 35,119 $ 74,731 $ 64,251 ____________________________________________ (1) Includes short term leases with lease periods of less than 12 months as well as lease abatements accounted for as reductions to variable lease costs under the COVID-19 expedient of $ 0.1 million and $ 2.3 million during the Second Quarter 2022 and Second Quarter 2021, and $ 0.9 million and $ 10.3 million during Year-To-Date 2022 and Year-To-Date 2021 , respectively. As of July 30, 2022, the weighted-average remaining operating lease term was 4.3 years, and the weighted-average discount rate for operating leases was 4.9 %. Cash paid for amounts included in the measurement of operating lease liabilities during Year-To-Date 2022 was $ 47.9 million. ROU assets obtained in exchange for new operating lease liabilities were $ 22.6 million during Year-To-Date 2022. As of July 30, 2022, the maturities of operating lease liabilities were as follows: July 30, 2022 (in thousands) Remainder of 2022 $ 54,762 2023 61,015 2024 30,536 2025 18,021 2026 15,205 Thereafter 30,664 Total operating lease payments 210,203 Less: imputed interest ( 18,828 ) Present value of operating lease liabilities $ 191,375 6. DEBT On November 16, 2021, the Company completed the refinancing of its previous $ 360.0 million asset-based revolving credit facility (the “Previous ABL Credit Facility”) and previous $ 80.0 million term loan (the “Previous Term Loan”) with a new lending group led by an affiliate of Wells Fargo Bank, National Association (“Wells Fargo”) by entering into a fourth amendment to its Credit Agreement, dated as of May 9, 2019, with the lenders party thereto. The new debt consists of a revolving credit facility with $ 350.0 million of availability (the “ABL Credit Facility”) and a $ 50.0 million term loan (the “Term Loan”). 12 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) ABL Credit Facility and Term Loan The Company and certain of its subsidiaries maintain the $ 350 million ABL Credit Facility and the $ 50 million Term Loan with Wells Fargo, Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., and JPMorgan Chase Bank, N.A., as lenders (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent, Swing Line Lender and Term Agent. Both the ABL Credit Facility and the Term Loan mature in November 2026, and both of these debt facilities have lower interest rates, reduced reporting requirements, and increased flexibility under the covenants compared to the Previous ABL Credit Facility and Previous Term Loan. The ABL Credit Facility includes a $ 25 million Canadian sublimit and a $ 50 million sublimit for standby and documentary letters of credit. Borrowings outstanding under the ABL Credit Facility bear interest, at the Company’s option, at: (i) the prime rate, plus a margin of 0.375 % or 0.625 % based on the amount of the Company’s average excess availability under the facility; or (ii) the London InterBank Offered Rate, or “LIBOR”, for an interest period of one, three, or six months, as selected by the Company, plus a margin of 1.125 % or 1.375 % based on the amount of the Company’s average excess availability under the facility. The Company is charged a fee of 0.20 % on the unused portion of the commitments. Letter of credit fees range from 0.563 % to 0.683 % for commercial letters of credit and from 0.625 % to 0.875 % for standby letters of credit. Letter of credit fees are determined based on the amount of the Company’s average excess availability under the facility. The amount available for loans and letters of credit under the ABL Credit Facility is determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves. The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness, and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods. The Company is not subject to any early termination fees. The ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments. These covenants also limit the ability of the Company and its subsidiaries to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions or to change the nature of its business. Credit extended under the ABL Credit Facility is secured by a first priority security interest in substantially all of the Company’s U.S. and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the Company’s intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock. The table below presents the components of the Company’s ABL Credit Facility and Previous ABL Credit Facility: July 30, 2022 January 29, 2022 July 31, 2021 (in millions) Credit facility maximum $ 350.0 $ 350.0 $ 360.0 Borrowing base (1) 350.0 279.7 354.0 Outstanding borrowings 283.9 175.3 199.8 Letters of credit outstanding—standby 7.4 7.4 7.4 Utilization of credit facility at end of period 291.3 182.7 207.2 Availability (2) $ 58.7 $ 97.0 $ 146.8 Interest rate at end of period 3.4 % 1.6 % 3.8 % 13 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Year-To-Date 2022 Fiscal 2021 Year-To-Date 2021 (in millions) Average end of day loan balance during the period $ 268.2 $ 187.0 $ 213.5 Highest end of day loan balance during the period $ 297.6 $ 269.7 $ 269.7 Average interest rate 2.4 % 3.6 % 3.9 % ____________________________________________ (1) Lower of the credit facility maximum or the total borrowing base collateral. (2) The sub-limit availability for letters of credit was $ 42.6 million at July 30, 2022, January 29, 2022, and July 31, 2021. The Term Loan bears interest, payable monthly, at (a) the LIBOR Rate plus 2.50 % for any portion that is a LIBOR loan, or (b) the base rate plus 1.75 % for any portion that is a base rate loan. The Term Loan is pre-payable at any time without penalty, and does not require amortization. For the Second Quarter 2022 and Year-To-Date 2022, the Company recognized $ 0.5 million and $ 0.8 million in interest expense related to the Term Loan. The Term Loan is secured by a first priority security interest in the Company’s intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second priority security interest in the collateral securing the ABL Credit Facility on a first-priority basis. The Term Loan is guaranteed by each of the Company’s subsidiaries that guarantees the ABL Credit Facility and contains substantially the same covenants as provided in the ABL Credit Facility. Both the ABL Credit Facility and the Term Loan contain customary events of default, which include (subject in certain cases to customary grace and cure periods), nonpayment of principal or interest, breach of covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization. 7. COMMITMENTS AND CONTINGENCIES The Company is a defendant in Rael v. The Children’s Place, Inc. , a purported class action, pending in the U.S. District Court, Southern District of California. In the initial complaint filed in February 2016, the plaintiff alleged that the Company falsely advertised discount prices in violation of California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act. The plaintiff filed an amended complaint in April 2016, adding allegations of violations of other state consumer protection laws. In August 2016, the plaintiff filed a second amended complaint, adding an additional plaintiff and removing the other state law claims. The plaintiffs’ second amended complaint sought to represent a class of California purchasers and sought, among other items, injunctive relief, damages, and attorneys’ fees and costs. The Company engaged in mediation proceedings with the plaintiffs in December 2016 and April 2017. The parties reached an agreement in principle in April 2017, and signed a definitive settlement agreement in November 2017, to settle the matter on a class basis with all individuals in the U.S. who made a qualifying purchase at The Children’s Place from February 11, 2012 through January 28, 2020, the date of preliminary approval by the court of the settlement. The Company submitted its memorandum in support of final approval of the class settlement on March 2, 2021. On March 29, 2021, the court granted final approval of the class settlement and denied plaintiff’s motion for attorney’s fees, with the amount of attorney’s fees to be decided after the class recovery amount has been determined. The settlement provides merchandise vouchers for qualified class members who submit valid claims, as well as payment of legal fees and expenses and claims administration expenses. Vouchers were distributed to class members on November 15, 2021 and they will be eligible for redemption in multiple rounds through November 2023. In connection with the settlement, the Company recorded a reserve for $ 5.0 million in its consolidated financial statements in the first quarter of 2017. The Company is also involved in various legal proceedings arising in the normal course of business. In the opinion of management, any ultimate liability arising out of these proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. 14 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. STOCKHOLDERS’ EQUITY Share Repurchase Programs In March 2018, the Board of Directors authorized a $ 250.0 million share repurchase program (the “2018 Share Repurchase Program”). In November 2021, the Board of Directors approved another $ 250.0 million share repurchase program (the “2021 Share Repurchase Program”), which added to the then remaining availability under the 2018 Share Repurchase Program. Under these programs, the Company may repurchase shares on the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under a program will depend on a variety of factors, including price, corporate and regulatory requirements, and other market and business conditions. The Company may suspend or discontinue the programs at any time and may thereafter reinstitute purchases, all without prior announcement. As of July 30, 2022, there was $ 196.1 million remaining under the 2021 Share Repurchase Program. From March 2020 through July 2021, the Company suspended share repurchases, other than to satisfy withholding tax requirements of equity award recipients, due to the COVID-19 pandemic. Pursuant to the Company’s practice, including due to restrictions imposed by the Company’s insider trading policy during black-out periods, the Company withholds and repurchases shares of vesting stock awards and makes payments to taxing authorities as required by law to satisfy the withholding tax requirements of all equity award recipients. The Company’s payment of the withholding taxes in exchange for the surrendered shares constitutes a repurchase of its common stock. The Company also acquires shares of its common stock in conjunction with liabilities owed under the Company’s deferred compensation plan, which are held in treasury. The following table summarizes the Company’s share repurchases: Twenty-six Weeks Ended July 30, 2022 July 31, 2021 Shares Amount Shares Amount (in thousands) Share repurchases related to: Share repurchase program 1,147 $ 61,230 147 $ 13,465 Shares acquired and held in treasury 3 $ 144 2 $ 139 In accordance with the FASB ASC 505— Equity , the par value of the shares retired is charged against Common stock and the remaining purchase price is allocated between Additional paid-in capital and Retained earnings. The portion charged against Additional paid-in capital is determined using a pro-rata allocation based on total shares outstanding. For all shares retired during Year-To-Date 2022 and Year-To-Date 2021, $ 38.9 million and $ 10.8 million was charged to Retained earnings, respectively. Dividends In March 2020, the Company announced it had temporarily suspended its dividend payments due to the COVID-19 pandemic. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by the Company’s Board of Directors based on a number of factors, including business and market conditions, the Company’s financial performance, and other investment priorities. 15 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 9. STOCK-BASED COMPENSATION The Company generally grants time-vesting stock awards (“Deferred Awards”) and performance-based stock awards (“Performance Awards”) to employees at management levels. The Company also grants Deferred Awards to its non-employee directors. The following table summarizes the Company’s stock-based compensation expense: Thirteen Weeks Ended Twenty-six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 (in thousands) Deferred Awards $ 2,171 $ 3,188 $ 5,596 $ 6,766 Performance Awards 4,101 7,338 8,238 11,676 Total stock-based compensation expense (1) $ 6,272 $ 10,526 $ 13,834 $ 18,442 ____________________________________________ (1) Stock-based compensation expense recorded within Cost of sales (exclusive of depreciation and amortization) amounted to $ 0.3 million and $ 0.8 million in the Second Quarter 2022 and Second Quarter 2021, respectively, and $ 0.9 million and $ 1.7 million in the Year-To-Date 2022 and Year-To-Date 2021, respectively. All other stock-based compensation expense is included in Selling, general, and administrative expenses. 10. EARNINGS (LOSS) PER COMMON SHARE The following table reconciles net income (loss) and share amounts utilized to calculate basic and diluted earnings (loss) per common share: Thirteen Weeks Ended Twenty-six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 (in thousands) Net income (loss) $ ( 13,298 ) $ 24,095 $ 6,533 $ 69,300 Basic weighted average common shares outstanding 13,147 14,780 13,384 14,725 Dilutive effect of stock awards (1) — 282 148 307 Diluted weighted average common shares outstanding 13,147 15,062 13,532 15,032 ____________________________________________ (1) Because the Company incurred a net loss in the Second Quarter 2022, unvested stock awards are anti-dilutive and are therefore excluded from the calculation of diluted loss per common share for such period. 11. INCOME TAXES The Company computes income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between the financial statement and income tax basis of assets and liabilities. The Company’s deferred tax assets and liabilities are comprised largely of differences relating to depreciation and amortization, rent expense, inventory, stock-based compensation, net operating loss carryforwards, tax credits, and various accruals and reserves. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act allows net operating losses (“NOLs”) incurred in taxable years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to offset 100% of taxable income and to generate a refund of previously paid income taxes. Pursuant to the CARES Act, the Company carried back the taxable year 2020 tax loss of approximately $ 150.0 million to prior years. During the First Quarter 2022, the Company received $ 22.0 million of this 16 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) income tax refund and the remaining balance of $ 19.1 million as of July 30, 2022, is included within Prepaid expenses and other current assets on the Consolidated Balance Sheets. The Company’s effective income tax rate for the Second Quarter 2022 was a benefit of 19.0 %, or $ 3.1 million, compared to a provision of 27.3 %, or $ 9.1 million, during the Second Quarter 2021. The decrease in the effective income tax rate for the Second Quarter 2022 compared to the Second Quarter 2021 was primarily driven by a decrease in the forecasted effective income tax rate resulting from a favorable mix of income on forecasted earnings compared to the prior year and the impact of discrete items recognized in the Second Quarter 2022. The Company’s effective income tax rate for Year-To-Date 2022 was a benefit of 477.6 %, or $ 5.4 million, compared to a provision of 26.8 %, or $ 25.3 million, for Year-To-Date 2021. The effective income tax rate for Year-To-Date 2022 reflected the release of a reserve of $ 6.4 million for unrecognized tax benefits as a result of a settlement with a taxing authority in the First Quarter 2022. The Company accrues interest and penalties related to unrecognized tax benefits as part of the provision for income taxes. The total amount of unrecognized tax benefits was $ 2.3 million, $ 8.7 million, and $ 8.0 million as of July 30, 2022, January 29, 2022, and July 31, 2021, respectively, and is included within long-term liabilities. Additional interest expense recognized during Year-To-Date 2022 and Year-To-Date 2021 related to unrecognized tax benefits was not significant. The Company is subject to tax in the United States and foreign jurisdictions, including Canada and Hong Kong. The Company files a consolidated U.S. income tax return for federal income tax purposes. The Company is no longer subject to income tax examinations by U.S. federal, state and local or foreign tax authorities for tax years 2016 and prior. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues arise as a result of a tax audit, and are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. 12. SEGMENT INFORMATION In accordance with FASB ASC 280— Segment Reporting , the Company reports segment data based on geography: The Children’s Place U.S. and The Children’s Place International. Each segment includes an e-commerce business located at www.childrensplace.com, www.gymboree.com, and www.sugarandjade.com . Included in The Children’s Place U.S. segment are the Company’s U.S. and Puerto Rico-based stores and revenue from the Company’s U.S.-based wholesale business. Included in The Children’s Place International segment are the Company’s Canadian-based stores, revenue from the Company’s Canadian-based wholesale business, and revenue from international franchisees. The Company measures its segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions, such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children’s Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales. The assets related to these functions are not allocated. The Company periodically reviews these allocations and adjusts them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and the Company has no customers that individually account for more than 10% of its net sales. As of July 30, 2022, The Children’s Place U.S. had 577 stores and The Children’s Place International had 81 stores. As of July 31, 2021, The Children’s Place U.S. had 615 stores and The Children’s Place International had 93 stores. 17 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The following tables provide segment level financial information: Thirteen Weeks Ended Twenty-six Weeks Ended July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 (in thousands) Net sales: The Children’s Place U.S. $ 341,223 $ 372,319 $ 669,184 $ 771,978 The Children’s Place International (1) 39,662 41,536 74,051 77,358 Total net sales $ 380,885 $ 413,855 $ 743,235 $ 849,336 Operating income (loss): The Children’s Place U.S. $ ( 13,943 ) $ 34,355 $ 2,926 $ 98,267 The Children’s Place International 114 3,494 2,499 5,489 Total operating income (loss) $ ( 13,829 ) $ 37,849 $ 5,425 $ 103,756 Operating income (loss) as a percentage of net sales: The Children’s Place U.S. ( 4.1 %) 9.2 % 0.4 % 12.7 % The Children’s Place International 0.3 % 8.4 % 3.4 % 7.1 % Total operating income (loss) as a percentage of net sales ( 3.6 %) 9.1 % 0.7 % 12.2 % Depreciation and amortization: The Children’s Place U.S. $ 12,261 $ 13,303 $ 24,848 $ 27,614 The Children’s Place International 980 1,089 2,008 2,339 Total depreciation and amortization $ 13,241 $ 14,392 $ 26,856 $ 29,953 Capital expenditures: The Children’s Place U.S. $ 7,612 $ 6,385 $ 17,969 $ 12,872 The Children’s Place International 431 385 797 624 Total capital expenditures $ 8,043 $ 6,770 $ 18,766 $ 13,496 ____________________________________________ (1) Net sales from The Children’s Place International are primarily derived from Canadian operations. The Company’s foreign subsidiaries, primarily in Canada, have operating results based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S. dollars. 18