Childrens Place, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS October 29, 2022 January 29, 2022 October 30, 2021 (unaudited) (unaudited) (in thousands, except par value) ASSETS Current assets: Cash and cash equivalents $ 19,244 $ 54,787 $ 67,062 Accounts receivable 48,820 21,863 38,758 Inventories 548,719 428,813 441,817 Prepaid expenses and other current assets 48,012 76,075 59,628 Total current assets 664,795 581,538 607,265 Long-term assets: Property and equipment, net 154,975 155,006 159,243 Right-of-use assets 160,041 194,653 209,430 Tradenames, net 71,091 71,692 71,892 Deferred income taxes 20,916 23,109 27,801 Other assets 12,799 11,462 12,735 Total assets $ 1,084,617 $ 1,037,460 $ 1,088,366 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Revolving loan $ 265,000 $ 175,318 $ 174,384 Current portion of long-term debt — — 28,270 Accounts payable 221,432 183,758 173,055 Current portion of operating lease liabilities 77,070 91,097 94,122 Income taxes payable 506 10,984 10,701 Accrued expenses and other current liabilities 119,660 130,669 143,866 Total current liabilities 683,668 591,826 624,398 Long-term liabilities: Long-term debt 49,735 49,685 48,892 Long-term portion of operating lease liabilities 104,073 134,761 154,325 Income taxes payable 18,925 14,939 14,939 Other tax liabilities 2,347 8,689 6,285 Other long-term liabilities 13,693 12,088 17,279 Total liabilities 872,441 811,988 866,118 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; 12,662 , 13,964 , and 14,468 issued; 12,597 , 13,903 , and 14,408 outstanding 1,266 1,396 1,447 Additional paid-in capital 148,546 160,348 164,010 Treasury stock, at cost ( 65 , 61 , and 60 shares) ( 3,661 ) ( 3,443 ) ( 3,373 ) Deferred compensation 3,661 3,443 3,373 Accumulated other comprehensive loss ( 17,011 ) ( 14,186 ) ( 12,962 ) Retained earnings 79,375 77,914 69,753 Total stockholders’ equity 212,176 225,472 222,248 Total liabilities and stockholders’ equity $ 1,084,617 $ 1,037,460 $ 1,088,366 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 Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands, except earnings per common share) Net sales $ 509,120 $ 558,225 $ 1,252,355 $ 1,407,561 Cost of sales (exclusive of depreciation and amortization) 332,189 313,394 817,915 806,663 Gross profit 176,931 244,831 434,440 600,898 Selling, general, and administrative expenses 106,631 115,563 330,480 337,921 Depreciation and amortization 12,463 14,204 39,320 44,157 Asset impairment charges — 1,254 1,379 1,254 Operating income 57,837 113,810 63,261 217,566 Interest expense ( 3,810 ) ( 3,963 ) ( 8,123 ) ( 13,077 ) Interest income 24 4 43 11 Income before provision for income taxes 54,051 109,851 55,181 204,500 Provision for income taxes 11,196 30,983 5,794 56,332 Net income $ 42,855 $ 78,868 $ 49,387 $ 148,168 Earnings per common share Basic $ 3.28 $ 5.38 $ 3.72 $ 10.08 Diluted $ 3.26 $ 5.30 $ 3.68 $ 9.89 Weighted average common shares outstanding Basic 13,064 14,668 13,277 14,706 Diluted 13,162 14,873 13,409 14,979 See accompanying notes to these consolidated financial statements. 2 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Thirteen Weeks Ended Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Net income $ 42,855 $ 78,868 $ 49,387 $ 148,168 Other comprehensive income (loss): Foreign currency translation adjustment ( 2,397 ) 323 ( 2,825 ) 854 Total comprehensive income $ 40,458 $ 79,191 $ 46,562 $ 149,022 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 October 29, 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, July 30, 2022 13,087 $ 1,309 $ 151,954 $ 3,587 $ 45,532 $ ( 14,614 ) ( 64 ) $ ( 3,587 ) $ 184,181 Vesting of stock awards 9 1 ( 1 ) — Stock-based compensation expense 5,221 5,221 Purchase and retirement of common stock ( 434 ) ( 44 ) ( 8,628 ) ( 9,012 ) ( 17,684 ) Other comprehensive loss ( 2,397 ) ( 2,397 ) Deferral of common stock into deferred compensation plan 74 ( 1 ) ( 74 ) — Net income 42,855 42,855 Balance, October 29, 2022 12,662 $ 1,266 $ 148,546 $ 3,661 $ 79,375 $ ( 17,011 ) ( 65 ) $ ( 3,661 ) $ 212,176 Thirty-nine Weeks Ended October 29, 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 279 28 ( 28 ) — Stock-based compensation expense 19,055 19,055 Purchase and retirement of common stock ( 1,581 ) ( 158 ) ( 30,829 ) ( 47,926 ) ( 78,913 ) Other comprehensive loss ( 2,825 ) ( 2,825 ) Deferral of common stock into deferred compensation plan 218 ( 4 ) ( 218 ) — Net income 49,387 49,387 Balance, October 29, 2022 12,662 $ 1,266 $ 148,546 $ 3,661 $ 79,375 $ ( 17,011 ) ( 65 ) $ ( 3,661 ) $ 212,176 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 October 30, 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, July 31, 2021 14,831 $ 1,483 $ 164,290 $ 3,304 $ 15,697 $ ( 13,285 ) ( 59 ) $ ( 3,304 ) $ 168,185 Vesting of stock awards 9 1 ( 1 ) — Stock-based compensation expense 6,594 6,594 Purchase and retirement of common stock ( 372 ) ( 37 ) ( 6,873 ) ( 24,812 ) ( 31,722 ) Other comprehensive income 323 323 Deferral of common stock into deferred compensation plan 69 ( 1 ) ( 69 ) — Net income 78,868 78,868 Balance, October 30, 2021 14,468 $ 1,447 $ 164,010 $ 3,373 $ 69,753 $ ( 12,962 ) ( 60 ) $ ( 3,373 ) $ 222,248 Thirty-nine Weeks Ended October 30, 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 345 35 ( 35 ) — Stock-based compensation expense 25,036 25,036 Purchase and retirement of common stock ( 518 ) ( 52 ) ( 9,510 ) ( 35,625 ) ( 45,187 ) Other comprehensive income 854 854 Deferral of common stock into deferred compensation plan 208 ( 3 ) ( 208 ) — Net income 148,168 148,168 Balance, October 30, 2021 14,468 $ 1,447 $ 164,010 $ 3,373 $ 69,753 $ ( 12,962 ) ( 60 ) $ ( 3,373 ) $ 222,248 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) Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 49,387 $ 148,168 Reconciliation of net income to net cash provided by (used in) operating activities: Non-cash portion of operating lease expense 65,046 76,418 Depreciation and amortization 39,320 44,157 Non-cash stock-based compensation expense 19,055 25,036 Deferred income tax provision 2,186 17,974 Asset impairment charges 1,379 1,254 Other non-cash items, net 58 1,101 Changes in operating assets and liabilities: Inventories ( 123,012 ) ( 55,183 ) Accounts receivable and other assets ( 28,427 ) ( 2,121 ) Prepaid expenses and other current assets 1,680 ( 4,995 ) Income taxes payable, net of prepayments 18,896 6,437 Accounts payable and other current liabilities 11,764 ( 47,980 ) Lease liabilities ( 75,767 ) ( 142,574 ) Other long-term liabilities 1,470 ( 244 ) Net cash provided by (used in) operating activities ( 16,965 ) 67,448 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 31,193 ) ( 22,000 ) Change in deferred compensation plan ( 421 ) 48 Net cash used in investing activities ( 31,614 ) ( 21,952 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit facility 555,383 557,034 Repayments under revolving credit facility ( 465,701 ) ( 552,429 ) Repayment of term loan — ( 1,000 ) Purchase and retirement of common stock, including shares surrendered for tax withholdings and transaction costs ( 75,672 ) ( 45,187 ) Payment of debt issuance costs — ( 366 ) Net cash provided by (used in) financing activities 14,010 ( 41,948 ) Effect of exchange rate changes on cash and cash equivalents ( 974 ) ( 34 ) Net increase (decrease) in cash and cash equivalents ( 35,543 ) 3,514 Cash and cash equivalents, beginning of period 54,787 63,548 Cash and cash equivalents, end of period $ 19,244 $ 67,062 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) Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 (in thousands) OTHER CASH FLOW INFORMATION: Net cash paid (received) for income taxes $ ( 15,680 ) $ 31,718 Cash paid for interest 7,545 11,870 Increase (decrease) in accrued capital expenditures 7,795 ( 135 ) 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”, “Sugar & Jade”, and “PJ Place” 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, www.sugarandjade.com, and www.pjplace.com . Terms that are commonly used in the notes to the Company’s consolidated financial statements are defined as follows: • Third Quarter 2022 — The thirteen weeks ended October 29, 2022 • Third Quarter 2021 — The thirteen weeks ended October 30, 2021 • First Quarter 2022 — The thirteen weeks ended April 30, 2022 • Year-To-Date 2022 — The thirty-nine weeks ended October 29, 2022 • Year-To-Date 2021 — The thirty-nine weeks ended October 30, 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 October 29, 2022, January 29, 2022, and October 30, 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 October 29, 2022 and October 30, 2021, the results of its consolidated operations, consolidated comprehensive income, and consolidated changes in stockholders’ equity for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021, and consolidated cash flows for the thirty-nine weeks ended October 29, 2022 and October 30, 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 thirty-nine weeks ended October 29, 2022 and October 30, 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 Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Net sales: South $ 183,536 $ 194,081 $ 466,276 $ 524,449 Northeast 108,404 129,308 255,913 309,284 West 61,101 80,103 163,644 202,180 Midwest 62,337 71,482 145,168 180,375 International and other (1) 93,742 83,251 221,354 191,273 Total net sales $ 509,120 $ 558,225 $ 1,252,355 $ 1,407,561 ____________________________________________ (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 $ 8.9 million, $ 3.6 million, and $ 8.8 million within Accrued expenses and other current liabilities as of October 29, 2022, January 29, 2022, and October 30, 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 $ 2.2 million, $ 1.0 million, and $ 2.9 million as of October 29, 2022, January 29, 2022, and October 30, 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 , www.sugarandjade.com , and www.pjplace.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 $ 2.0 million, $ 5.0 million, and $ 6.0 million as of October 29, 2022, January 29, 2022, and October 30, 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 October 29, 2022, January 29, 2022, and October 30, 2021 was $ 11.2 million, $ 12.1 million, and $ 12.4 million, respectively. During Year-To-Date 2022, the Company recognized Net sales of $ 4.5 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: October 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 ( 2,862 ) 1,138 Customer databases (2) 3 years 3,000 ( 3,000 ) — Total intangibles $ 76,953 $ ( 5,862 ) $ 71,091 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 October 30, 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 ( 2,061 ) 1,939 Customer databases (2) 3 years 3,000 ( 2,578 ) 422 Total intangibles $ 76,953 $ ( 4,639 ) $ 72,314 ____________________________________________ (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: October 29, 2022 January 29, 2022 October 30, 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 69,897 64,989 61,717 Leasehold improvements 196,189 197,436 211,420 Store fixtures and equipment 205,406 212,613 221,104 Capitalized software 336,557 320,716 316,440 Construction in progress 24,676 8,170 8,822 872,315 843,372 858,951 Less accumulated depreciation and amortization ( 717,340 ) ( 688,366 ) ( 699,708 ) Property and equipment, net $ 154,975 $ 155,006 $ 159,243 At October 29, 2022, January 29, 2022, and October 30, 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, no impairment charge was recorded in the Third Quarter 2022. The Company recorded asset impairment charges during Year-To-Date 2022 of $ 1.4 million, inclusive of right-of-use (“ROU”) assets. The Company recorded asset impairment charges of $ 1.3 million, inclusive of ROU assets, in the Third Quarter 2021 and 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 Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Fixed operating lease cost $ 26,437 $ 28,378 $ 73,477 $ 78,408 Variable operating lease cost (1) 12,477 15,459 40,168 29,680 Total operating lease cost $ 38,914 $ 43,837 $ 113,645 $ 108,088 ____________________________________________ (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 $ 0.7 million during the Third Quarter 2022 and Third Quarter 2021, respectively, and $ 1.0 million and $ 11.0 million during Year-To-Date 2022 and Year-To-Date 2021 , respectively. As of October 29, 2022, the weighted-average remaining operating lease term was 3.9 years, and the weighted-average discount rate for operating leases was 5.0 %. Cash paid for amounts included in the measurement of operating lease liabilities during Year-To-Date 2022 was $ 75.8 million. ROU assets obtained in exchange for new operating lease liabilities were $ 38.8 million during Year-To-Date 2022. As of October 29, 2022, the maturities of operating lease liabilities were as follows: October 29, 2022 (in thousands) Remainder of 2022 $ 29,891 2023 71,349 2024 33,130 2025 18,374 2026 15,188 Thereafter 30,621 Total operating lease payments 198,553 Less: imputed interest ( 17,410 ) Present value of operating lease liabilities $ 181,143 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 $ 350.0 million ABL Credit Facility and the $ 50.0 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 $ 25.0 million Canadian sublimit and a $ 50.0 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: October 29, 2022 January 29, 2022 October 30, 2021 (in millions) Credit facility maximum $ 350.0 $ 350.0 $ 360.0 Borrowing base (1) 350.0 279.7 360.0 Outstanding borrowings 265.0 175.3 174.4 Letters of credit outstanding—standby 7.4 7.4 7.4 Utilization of credit facility at end of period 272.4 182.7 181.8 Availability (2) $ 77.6 $ 97.0 $ 178.2 Interest rate at end of period 4.8 % 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 $ 273.1 $ 187.0 $ 195.0 Highest end of day loan balance during the period $ 297.6 $ 269.7 $ 269.7 Average interest rate 3.0 % 3.6 % 3.8 % ____________________________________________ (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 October 29, 2022, January 29, 2022, and October 30, 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 Third Quarter 2022 and Year-To-Date 2022, the Company recognized $ 0.6 million and $ 1.5 million, respectively, 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 October 29, 2022, there was $ 178.4 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: Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 Shares Amount Shares Amount (in thousands) Share repurchases related to: Share repurchase program 1,581 $ 78,913 518 $ 45,187 Shares acquired and held in treasury 4 $ 218 3 $ 208 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, $ 47.9 million and $ 35.6 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 Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Deferred Awards $ 1,885 $ 2,956 $ 7,481 $ 9,722 Performance Awards 3,336 3,638 11,574 15,314 Total stock-based compensation expense (1) $ 5,221 $ 6,594 $ 19,055 $ 25,036 ____________________________________________ (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 Third Quarter 2022 and Third Quarter 2021, respectively, and $ 1.2 million and $ 2.5 million in 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 PER COMMON SHARE The following table reconciles net income and share amounts utilized to calculate basic and diluted earnings per common share: Thirteen Weeks Ended Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Net income $ 42,855 $ 78,868 $ 49,387 $ 148,168 Basic weighted average common shares outstanding 13,064 14,668 13,277 14,706 Dilutive effect of stock awards 98 205 132 273 Diluted weighted average common shares outstanding 13,162 14,873 13,409 14,979 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 the related income tax refund and the remaining balance of $ 19.1 million as of October 29, 2022, is included within Prepaid expenses and other current assets on the Consolidated Balance Sheets. The Company’s effective income tax rate was a provision of 20.7 %, or $ 11.2 million for the Third Quarter 2022, compared to 28.2 %, or $ 31.0 million, for the Third Quarter 2021 and a provision of 10.5 %, or $ 5.8 million for Year-To-Date 16 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 2022, compared to 27.5 %, or $ 56.3 million, for Year-To-Date 2021. The decrease in the effective income tax rate for the Third Quarter 2022, compared to the Third Quarter 2021 and Year-To-Date 2022, compared to Year-To-Date 2021 reflected a decrease in the forecasted effective income tax rate resulting from a favorable mix of income on forecasted earnings compared to the prior year. The effective income tax rate for Year-To-Date 2022 also 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 amount of unrecognized tax benefits was $ 2.3 million, $ 8.7 million, and $ 8.0 million as of October 29, 2022, January 29, 2022, and October 30, 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 , www.sugarandjade.com , and www.pjplace.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 October 29, 2022, The Children’s Place U.S. had 577 stores and The Children’s Place International had 81 stores. As of October 30, 2021, The Children’s Place U.S. had 611 stores and The Children’s Place International had 92 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 Thirty-nine Weeks Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Net sales: The Children’s Place U.S. $ 457,508 $ 498,836 $ 1,126,692 $ 1,269,196 The Children’s Place International (1) 51,612 59,389 125,663 138,365 Total net sales $ 509,120 $ 558,225 $ 1,252,355 $ 1,407,561 Operating income: The Children’s Place U.S. $ 51,460 $ 100,456 $ 54,385 $ 196,262 The Children’s Place International 6,377 13,354 8,876 21,304 Total operating income $ 57,837 $ 113,810 $ 63,261 $ 217,566 Operating income as a percentage of net sales: The Children’s Place U.S. 11.2 % 20.1 % 4.8 % 15.5 % The Children’s Place International 12.4 % 22.5 % 7.1 % 15.4 % Total operating income as a percentage of net sales 11.4 % 20.4 % 5.1 % 15.5 % Depreciation and amortization: The Children’s Place U.S. $ 11,592 $ 13,153 $ 36,441 $ 40,767 The Children’s Place International 871 1,051 2,879 3,390 Total depreciation and amortization $ 12,463 $ 14,204 $ 39,320 $ 44,157 Capital expenditures: The Children’s Place U.S. $ 12,342 $ 8,432 $ 30,311 $ 21,304 The Children’s Place International 86 72 882 696 Total capital expenditures $ 12,428 $ 8,504 $ 31,193 $ 22,000 ____________________________________________ (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