What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-28 compared with 2022-03-25 · 119 added, 133 removed, 215 unchanged (54% of the section changed)

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The following discussion should be read in conjunction with our audited financial statements and notes thereto included in Part IV, Item 15.Exhibits and Financial Statement Schedules.

This Annual Report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company’s strategic initiatives.

This Annual Report on Form 10-K contains or may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company’s strategic initiatives and results of operations, including adjusted net income (loss) per diluted share.

Forward-looking statements typically are identified by use of terms such as “may,” “will,” “should,” “plan,” “project,” “expect,” “anticipate,” “estimate,” and similar words, although some forward-looking statements are expressed differently.

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Risk Factors of this Annual Report on Form 10-K for the fiscal year ended January 28, 2023.

Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company’s business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions, the risks related to the COVID-19 pandemic, including the impact of the COVID-19 pandemic on our business or the economy in general (including decreased customer traffic, schools adopting remote and hybrid learning models, closures of businesses and other activities causing decreased demand for our products and negative impacts on our customers’ spending patterns due to decreased income or actual or perceived wealth, and the impact of the CARES Act and other legislation related to the COVID-19 pandemic, and any changes to the CARES Act or such other legislation), the risk that the Company’s strategic initiatives to increase sales and margin are delayed or do not result in anticipated improvements, the risk of delays, interruptions and disruptions in the Company’s global supply chain, including resulting from the COVID-19 pandemic or other disease outbreaks, or foreign sources of supply in less developed countries or more politically unstable countries, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, various types of litigation, including class action litigations brought under consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, and the uncertainty of weather patterns.

Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company’s business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions (including inflation), the risks related to the COVID-19 pandemic, including the impact of the COVID-19 pandemic on our business or the economy in general, the risk that the Company’s strategic initiatives to increase sales and margin are delayed or do not result in anticipated improvements, the risk of delays, interruptions, disruptions and higher costs in the Company’s global supply chain, including resulting from COVID-19 or other disease outbreaks, foreign sources of supply in less developed countries, more politically unstable countries, or countries where vendors fail to comply with industry standards or ethical business practices, including the use of forced, indentured or child labor, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases in inputs through value engineering or price increases, various types of litigation, including class action litigations brought under consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, and the uncertainty of weather patterns.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made.

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• Fiscal 2021 — The fifty-two weeks ended January 29, 2022

• Fiscal 2019 — The fifty-two weeks ended February 1, 2020

• Fiscal 2022 — Our next fiscal year representing the fifty-two weeks ending January 28, 2023

• Fiscal 2020 — The fifty-two weeks ended January 30, 2021

• Fiscal 2023 — Our next fiscal year representing the fifty-three weeks ending February 3, 2024

Securities and Exchange Commission

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A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred.

However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is

re-opened for a full fiscal month.

However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is re-opened for a full fiscal month.

Comparable Retail Sales do not exclude any temporarily closed stores impacted by the COVID-19 pandemic.

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We are the largest pure-play children’s specialty apparel retailer in North America.

We design, contract to manufacture, sell at retail and wholesale, and license to sell trend right, high quality merchandise predominantly at value prices, primarily under our proprietary “The Children’s Place”, “Place”, “Baby Place”, “Gymboree”, and “Sugar & Jade” brand names.

As of January 29, 2022, we had 672 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com , and www.sugarandjade.com, and had 211 international points of distribution with our seven franchise partners in 16 countries.

We design, contract to manufacture, sell at retail and wholesale, and license to sell, trend right, high quality merchandise predominantly at value prices, primarily under our proprietary “The Children’s Place”, “Place”, “Baby Place”, “Gymboree”, “Sugar & Jade”, and “PJ Place” brand names.

As of January 28, 2023, we had 613 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com , www.sugarandjade.com, and www.pjplace.com, and had 220 international points of distribution with our five franchise partners in 15 countries.

Segment Reporting

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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 .

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.

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COVID-19 Pandemic

The COVID-19 pandemic continues to significantly impact regions all around the world, including the United States and Canada.

This has resulted in continuing restrictions of businesses and other activities implemented by national, state, and local authorities and private entities, leading to significant adverse economic conditions and business and lifestyle disruptions, as well as significant volatility in global financial and retail markets.

Federal, state, and local governments and health officials worldwide continue to impose varying degrees of preventative and protective actions, such as travel bans, restrictions on public gatherings, forced closures of businesses and other activities, social distancing, and the adoption of remote or hybrid learning models for schools, all in an effort to reduce the spread of the virus.

In addition, certain U.S.

and Canadian mall owners continue to restrict hours of operation and the number of people permitted in stores.

Such factors, among others, have resulted in a significant decline in retail traffic and consumer spending on discretionary items.

As a result of the impact of the COVID-19 pandemic, we continue to experience business disruption with many of our retail stores across the U.S.

As of January 29, 2022, all of our stores were open to the public in the U.S., Canada, and Puerto Rico.

Our distribution centers have remained open and operating during the pandemic to support our retail stores and e-commerce business.

We have experienced, and will likely continue to experience, disruptions in our global supply chain, which have caused delays in the production and transportation of our products, which we are mitigating through shifting production schedules.

As a result of the impact of the COVID-19 pandemic, we continue to experience disruptions in our business and we have experienced, and will likely continue to experience, disruptions in our global supply chain, which have caused delays in the production and transportation of our products, which we are mitigating through shifting production schedules.

Recent Developments

Recent macroeconomic events have increased the cost of goods necessary to produce and distribute our products, including cotton and other materials used in production, as well as labor, fuel and energy.

We expect these product input costs to continue to increase in 2022, which is planned to be partially mitigated by higher price realization.

On November 16, 2021, we completed the refinancing of our previous $360.0 million asset-based revolving credit facility (the “Previous ABL Credit Facility”) and our 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 our Credit Agreement, dated as of May 9, 2019, with the lenders party thereto (the “Fourth Amendment”).

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”), both with five year maturities, lower interest rates, reduced reporting requirements, and increased flexibility under the covenants.

The ABL Credit Facility is secured by a first-priority lien on substantially all of our U.S.

and Canadian assets other than intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock;

and a second-priority lien on our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock.

Interest on borrowings is payable monthly and is based on the amount of our average excess availability under the facility, at (a) the prime rate plus 0.375% or 0.625%, or (b) LIBOR plus 1.125% or 1.375%.

The ABL Credit Facility has an unused line fee of 0.20%.

The Term Loan is secured by a first-priority lien on our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock, and a second-priority lien on the assets securing the ABL Credit Facility on a first-priority basis.

Interest is payable monthly at (a) LIBOR 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 does not require amortization if certain conditions are met and is pre-payable at any time without penalty.

Concurrently, we repaid our then outstanding principal of $78.0 million on the Previous Term Loan with SLR Credit Solutions (formerly known as Crystal Financial LLC).

The description of the Fourth Amendment set forth herein is qualified in its entirety by reference to the full text thereof, a copy of which was filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the third quarter of Fiscal 2021.

Recent macroeconomic conditions have increased the cost of goods and services necessary to produce, import, and distribute our products, including cotton and other materials used in production, as well as labor, transportation, fuel and energy.

The same inflationary pressures have adversely affected our core customer, resulting in a decrease in discretionary apparel purchases during Fiscal 2022.

We expect these increased product input costs, transportation costs and inflationary pressures to continue to impact Fiscal 2023.

Operating Highlights

Net sales increased $392.8 million, or 25.8%, to $1.915 billion during Fiscal 2021 from $1.523 billion during Fiscal 2020.

The increase in net sales was driven primarily by strong customer response to our product assortment, strategic pricing and promotion changes, and the unprecedented level of stimulus and enhanced child tax credit payments to our customers resulting from the government pandemic relief legislation.

During Fiscal 2021, we opened one new store and closed 78 stores.

Gross profit increased $461.4 million, or 138.4%, to $794.7 million during Fiscal 2021 from $333.3 million during Fiscal 2020.

Gross margin increased 1,960 basis points to 41.5% during Fiscal 2021 from 21.9% during Fiscal 2020.

The increase in gross margin resulted primarily from the leverage of fixed expenses resulting from the increase in net sales, higher merchandise margins in both our digital and stores channels due to strategic pricing and promotion changes, lower occupancy expenses due to rent abatements of $12.1 million, favorable lease negotiations, permanent store closures, and lower e-commerce fulfillment costs, resulting from our continuing cost optimization initiatives.

Selling, general, and administrative expenses (“SG&A”) increased $31.0 million, or 7.2%, to $459.2 million during Fiscal 2021 from $428.2 million during Fiscal 2020, driven by higher incentive compensation expense and higher marketing spend.

As a percentage of net sales, SG&A decreased 410 basis points to 24.0% during Fiscal 2021 from 28.1% during Fiscal 2020, primarily as a result of the leverage of fixed expenses resulting from the increase in net sales.

Interest expense was $18.6 million during Fiscal 2021, compared to $11.8 million during Fiscal 2020.

The increase in interest expense was driven by a higher average debt balance and the higher interest rate associated with the Previous ABL Credit Facility and Previous Term Loan for the first nine months of Fiscal 2021.

In addition, interest expense for Fiscal 2021 included a charge of $3.7 million related to the refinancing of our Previous ABL Credit Facility and Previous Term Loan.

Provision for income taxes was $69.9 million during Fiscal 2021, compared to a benefit of $71.4 million during Fiscal 2020.

Our effective tax rate was an expense of 27.2% and a benefit of 33.7% during Fiscal 2021 and Fiscal 2020, respectively.

The decrease in our effective tax rate was primarily driven by tax benefits from the CARES Act in Fiscal 2020.

Net income increased $327.6 million to $187.2 million, or $12.59 per diluted share, during Fiscal 2021, compared to a net loss of $140.4 million, or $9.59 per share, during Fiscal 2020, due to the factors discussed above.

Although we are facing a period of uncertainty regarding the future impact of the COVID-19 pandemic, we continue to focus on our key strategic growth initiatives — superior product, digital transformation, and fleet optimization.

Focus on product remains our top priority.

We reintroduced the Gymboree brand in February 2020 on an enhanced Gymboree website and in certain co-branded locations in Company stores in the U.S.

and Canada, and in November 2021, we introduced our new brand, Sugar & Jade, which is targeted at the girls’ “tween” market and is offered exclusively online.

The transformation of our digital capabilities continues to expand given a completely redesigned responsive site and mobile application, providing a rich online shopping experience geared toward the needs of our “on-the-go” mobile customers, expanded customer personalization, which delivers unique, relevant content to drive sales, loyalty and retention, and the ability to have our entire store fleet equipped with ship-from-store capabilities.

Also, in response to increased digital demand, including as a result of the COVID-19 pandemic, we have increased and will continue to increase the utilization of our third-party logistics provider to further support both our U.S.

and Canadian e-commerce operations.

As a result of the heightened demand for online purchasing, including due to the COVID-19 pandemic, we accelerated our planned store closures under our fleet optimization initiative and have closed 256 stores, against our original target of 300 stores, over the past two fiscal years, including the 78 stores closed during Fiscal 2021.

We have closed 527 stores since the announcement of this initiative in 2013.

We are targeting 40 retail store closures in Fiscal 2022, which would bring our total store closures since the fleet optimization initiative began to 567 stores.

Net sales decreased $206.9 million, or 10.8%, to $1.708 billion during Fiscal 2022 from $1.915 billion during Fiscal 2021.

The decrease in net sales was primarily due to lapping the COVID-19 stimulus relief program and enhanced child tax credits last year, the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector and the impact of permanent store closures.

During Fiscal 2022, we closed 59 stores and did not open any new stores.

Gross profit decreased $280.5 million, or 35.3%, to $514.2 million during Fiscal 2022 from $794.7 million during Fiscal 2021.

Gross margin decreased 1,140 basis points to 30.1% during Fiscal 2022 from 41.5% during Fiscal 2021.

The decrease in gross margin resulted primarily from higher cotton and inbound supply chain costs, lower merchandise margins due to a highly promotional environment, higher distribution expenses, increased shipping costs due to rate increases and higher levels of split customer shipments, and the deleverage of fixed expenses resulting from the decline in net sales.

Operating income (loss) decreased $277.1 million to a loss of $1.5 million during Fiscal 2022 from income of $275.6 million during Fiscal 2021.

Operating margin deleveraged 1,450 basis points to (0.1)% of net sales.

Net income (loss) decreased $188.3 million to a loss of $1.1 million, or $(0.09) per diluted share, during Fiscal 2022, compared to income of $187.2 million, or $12.59 per share, during Fiscal 2021.

While we continue to face a challenging macroeconomic environment, including increases in the cost of goods and services necessary to produce, import, and distribute our products, including cotton and other inputs, as well as labor, transportation, fuel and energy and continuing uncertainty regarding the future impact of the COVID-19 pandemic, we continue to focus on our key strategic growth initiatives – superior product, digital transformation, alternative channels of distribution, and fleet optimization.

Digital remains our top priority and we continue to expand our digital capabilities.

We have migrated to a new responsive site and mobile application, and we have expanded our partnerships with our outside providers to help us monitor and reallocate our marketing budgets in a more efficient and timely manner to drive acquisition, retention and reactivation.

Starting in the second half of Fiscal 2022, the results from our new marketing strategies have been very encouraging and we are positioning marketing as a key growth lever in Fiscal 2023 and beyond.

As our digital business continues to expand, we continue to strengthen our partnership with our third party logistics providers in an effort to provide our customer with a best-in-class digital experience.

We continue to evaluate our store fleet through our fleet optimization initiative.

We have closed 586 stores since the announcement of our fleet optimization initiative in 2013, including 59 during Fiscal 2022.

With over 75% of our store fleet coming up for lease action in the next 24 months, we continue to maintain meaningful financial flexibility in our lease portfolio.

In March 2018, our Board of Directors authorized a $250.0 million share repurchase program (the “2018 Share Repurchase Program”).

In November 2021, our Board of Directors approved another $250.0 million share repurchase program, which added to the remaining availability under the 2018 Share Repurchase Program.

In November 2021, our 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.

During Fiscal 2022, we repurchased approximately 2.0 million shares of our common stock for $92.9 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards and shares acquired in the open market.

As of January 29, 2022, there was $257.3 million remaining under these programs.

As of January 28, 2023, the 2018 Share Repurchase Program was exhausted, and there was $164.4 million remaining under the 2021 Share Repurchase Program.

We have subsidiaries whose operating results are based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S.

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2023 January 29,

2021 February 1,

2022 January 30,

Average Translation Rates (1)

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We periodically review our long-lived assets for impairment when events indicate that their carrying value may not be recoverable.

Such events include a historical or projected trend of cash flow losses or a future expectation that we will sell or dispose of an asset significantly before the end of its previously estimated useful life.

Such events include a historical or projected trend of cash flow losses or a future expectation that we will sell or

dispose of an asset significantly before the end of its previously estimated useful life.

In reviewing for impairment, we group our long-lived assets at the lowest possible level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

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The assumptions used to assess impairment consider external and internal factors.

External factors comprise the local environment

in which the store resides, including mall traffic, competition, and their effect on sales trends, as well as macroeconomic factors, such as the global pandemic.

External factors comprise the local environment in which the store resides, including mall traffic, competition, and their effect on sales trends, as well as macroeconomic factors, such as the global pandemic.

Internal factors include our ability to gauge the fashion taste of our customers, control over variable costs such as cost of sales and payroll, and in certain cases, our ability to renegotiate lease costs.

In addition, the Company utilizes market-corroborated inputs, including sales per square foot and cost of occupancy rates, in its calculation of the fair value of its ROU assets and any necessary discounting required for rent rates based on macroeconomic conditions or local mall conditions.

If external factors should change unfavorably, if actual sales should differ from our projections, or if our ability to control costs is insufficient to sustain the necessary cash flows, changes in these estimates can have a significant impact on the assessment of fair market value, which could result in material impairment charges.

Impairment of Indefinite-Lived Intangible Assets

Intangible assets with indefinite lives consist primarily of trademarks and acquired tradenames, which are tested for impairment annually at the end of December or whenever circumstances indicate that a decline in value may have occurred.

We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method.

Estimating the fair value of indefinite-lived intangible assets using the relief-from-royalty method requires management to estimate future revenues, royalty rates, discount rates, long-term growth rates, and other factors in order to project future cash flows.

If macroeconomic conditions deteriorate, if interest rates increase, or if actual sales should differ from our projections, changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment charges.

We performed our annual impairment assessment of the Gymboree tradename as of December 31, 2022 and determined there was no impairment to the tradename.

Based on the impairment assessment, the fair value of the Gymboree tradename exceeded the carrying value by approximately $10.0 million.

The discount rate used in our annual impairment testing was 12.0%, which was developed with the assistance of an independent third-party valuation specialist.

Unfavorable changes in certain of our key assumptions may affect future testing results.

For example, keeping all other assumptions constant, a 100-basis point increase in the discount rate would cause the estimated fair value of the Gymboree tradename to decrease by approximately $8.0 million.

In addition, keeping all other assumptions constant, a 10% reduction in revenue growth rates across the discrete forecast period would cause the estimated fair value of our Gymboree tradename to decrease by approximately $8.0 million.

In each of the examples above, the estimated fair value of the Gymboree tradename would approximate its carrying value.

We utilize the liability method of accounting for income taxes as set forth in FASB ASC 740— Income Taxes .

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Actual operating results in future years could differ from our current assumptions, judgments and estimates.

If, in the future, we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would decrease earnings in the period in which such determination is made.

If, in the future, we determine that we would not be able to

realize our recorded deferred tax assets, an increase in the valuation allowance would decrease earnings in the period in which such determination is made.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances, and information available at the reporting date.

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With the approval of the Human Capital & Compensation Committee, we may settle vested Deferred Awards and Performance Awards in shares, in a cash amount equal to the market value of such shares at the time all requirements for delivery of the award have been met, or in part shares and cash.

For Performance Awards granted in Fiscal 2021, employees may earn from 0% to 300% of their Target Shares and for Performance Awards granted in Fiscal 2020 and Fiscal 2019, employees may earn from 0% to 250% of their Target Shares, based on the terms of the award and our achievement of certain performance goals established at the beginning of the applicable service period.

For Performance Awards granted in Fiscal 2022, employees may earn from 0% to 200% of their Target Shares, for Performance Awards granted in Fiscal 2021, employees earn from 0% to 300% of their Target Shares, and for Performance Awards granted in Fiscal 2020, employees may earn from 0% to 250% of their Target Shares, based on the terms of the award and our achievement of certain performance goals established at the beginning of the applicable service period.

Performance Awards cliff vest, if earned, after completion of the applicable service period, which is generally three years.

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The estimated market value of inventory is determined based on an analysis of historical sales trends of our individual product categories, the impact of market trends and economic conditions, and a forecast of future demand, as well as plans to sell through inventory.

Estimates may differ from actual results due to the quantity, quality, and mix of products in inventory,

consumer and retailer preferences, and market conditions such as those resulting from disease pandemics and other catastrophic events.

Estimates may differ from actual results due to the quantity, quality, and mix of products in inventory, consumer and retailer preferences, and market conditions such as those resulting from disease pandemics and other catastrophic events.

Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of net sales.

We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory.

Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales.

The following table sets forth, for the periods indicated, selected data from Statements of Operations expressed as a percentage of net sales.

We primarily evaluate the results of our operations as a percentage of net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of net sales (i.e., “basis points”).

For example, SG&A decreased approximately 410 basis points to 24.0% of net sales during Fiscal 2021 from 28.1% during Fiscal 2020.

For example, SG&A increased approximately 300 basis points to 27.0% of net sales during Fiscal 2022 from 24.0% during Fiscal 2021.

Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e., “leveraging”), the more efficiently we have utilized the investments we have made in our business.

Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., “de-leveraging”), we have less efficiently utilized the investments we have made in our business.

Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., “deleveraging”), we have less efficiently utilized the investments we have made in our business.

Fiscal Years Ended

2023 January 29,

2021 February 1,

2022 January 30,

Net sales 100.0 % 100.0 % 100.0 %

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2023 January 29,

2021 February 1,

2022 January 30,

(in thousands)

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Fiscal 2022 Compared to Fiscal 2021

Net sales increased $392.8 million, or 25.8%, to $1.915 billion during Fiscal 2021 from $1.523 billion during Fiscal 2020.

We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory.

Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales.

Net sales decreased $206.9 million, or 10.8%, to $1.708 billion during Fiscal 2022 from $1.915 billion during Fiscal 2021.

The decrease was primarily due to lapping the COVID-19 stimulus relief program and enhanced child tax credits last year, the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, an increase in promotional activity across the sector and the impact of permanent store closures.

The Children’s Place U.S.

net sales increased $351.8 million, or 25.6%, to $1.724 billion during Fiscal 2021, compared to $1.372 billion during Fiscal 2020.

The Children’s Place International net sales increased $41.0 million, or 27.2%, to $191.5 million during Fiscal 2021, compared to $150.5 million during Fiscal 2020.

The increase in net sales was driven primarily by the strong customer response to our product assortment and strategic pricing and promotion changes.

Total e-commerce sales, which include postage and handling, were 44.8% of net sales during Fiscal 2021, compared to 52.7% during Fiscal 2020.

Gross profit increased $461.4 million, or 138.4%, to $794.7 million during Fiscal 2021 from $333.3 million during Fiscal 2020.

Gross margin increased 1,960 basis points to 41.5% during Fiscal 2021 from 21.9% during Fiscal 2020.

Fiscal 2021 results included incremental expenses, including personal protective equipment and incentive pay for our associates of $1.4 million.

Fiscal 2020 results included an inventory provision of $63.2 million related to the adverse business disruption resulting from the COVID-19 pandemic, including store closures and incremental expenses, personal protective equipment and incentive pay for our associates of $11.6 million, and fleet optimization costs of $0.6 million.

Excluding the impact of these charges, gross margin leveraged 1,472 basis points to 41.6% of net sales, primarily from the leverage of fixed expenses resulting from the increase in net sales, higher merchandise margins resulting from significant AUR increases in both our digital and stores channels due to strategic pricing and promotion changes, lower occupancy expenses due to rent abatements of $12.1 million, favorable lease negotiations, permanent store closures, and lower e-commerce fulfillment costs, resulting from our continuing cost optimization initiatives.

net sales decreased $190.0 million, or 11.0%, to $1.534 billion during Fiscal 2022, compared to $1.724 billion during Fiscal 2021.

The Children’s Place International net sales decreased $17.0 million, or 8.9%, to $174.5 million during Fiscal 2022, compared to $191.5 million during Fiscal 2021.

The decrease was primarily driven by the impact of unprecedented inflation on our customer and permanent store closures.

Total e-commerce sales, which include postage and handling, wer e 47.7% of net retail sales and 44.0% of net sales during Fiscal 2022, compared to 46.6% and 44.8%, respectively, during Fiscal 2021.

Gross profit decreased $280.5 million, or 35.3%, to $514.2 million during Fiscal 2022 from $794.7 million during Fiscal 2021.

Gross margin decreased 1,140 basis points to 30.1% during Fiscal 2022 from 41.5% during Fiscal 2021.

Fiscal 2022 results included a one-time reversal of expense due to fleet optimization of $0.6 million.

Fiscal 2021 included incremental expenses, including personal protective equipment and incentive pay for our associates of $1.4 million.

Excluding the impact of

these charges, gross margin deleveraged 1,150 basis points to 30.1% of net sales, primarily due to higher cotton and inbound supply chain costs, lower merchandise margins due to a highly promotional environment, higher distribution expenses, increased shipping costs due to rate increases and higher levels of split customer shipments, and the deleverage of fixed expenses resulting from the decline in net sales.

Gross profit as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, changes in foreign currency exchange rates, and fluctuations in material costs.

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Selling, general, and administrative expenses increased $1.8 million, or 0.4%, to $461.0 million during Fiscal 2022 from $459.2 million during Fiscal 2021.

As a percentage of net sales, SG&A decreased 410 basis points to 24.0% during Fiscal 2021 from 28.1% during Fiscal 2020.

As a percentage of net sales, SG&A increased 300 basis points to 27.0% during Fiscal 2022 from 24.0% during Fiscal 2021.

Fiscal 2022 results included incremental expenses, including restructuring costs of $1.9 million, fleet optimization costs of $1.8 million, professional and consulting fees of $0.7 million, a provision for foreign settlement of $0.4 million, and a provision for legal settlement of $0.4 million.

Fiscal 2021 results included incremental expenses, including personal protective equipment and incentive pay for our associates of $1.6 million, restructuring costs, primarily related to severance costs for corporate and store associates, of $2.3 million, fleet optimization costs of $2.4 million, and contract termination costs of $0.8 million.

Fiscal 2020 results included incremental operating expenses, including personal protective equipment and incentive pay for our associates, of $10.9 million, restructuring costs, primarily related to severance costs for corporate and store associates, of $10.5 million, the write-off of certain accounts receivable of $1.1 million, fleet optimization costs of $2.8 million, Gymboree integration costs of $0.6 million, and legal reserves of $0.3 million.

Excluding the impact of these charges, SG&A expenses leveraged 281 basis points to 23.6% of net sales, primarily as a result of the leverage of fixed expenses resulting from the increase in net sales.

Asset impairment charges were $1.5 million during Fiscal 2021, inclusive of ROU assets, primarily related to two stores.

Asset impairment charges during Fiscal 2020 were $38.5 million, inclusive of ROU assets, primarily related to 419 stores.

Excluding the impact of these charges, SG&A expenses deleveraged 310 basis points to 26.7% of net sales, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales as well as inflationary pressures and higher planned marketing spend, partially offset by lower incentive compensation.

Asset impairment charges were $3.3 million during Fiscal 2022, inclusive of ROU assets, compared to $1.5 million during Fiscal 2021.

These charges were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net sales and cash flow projections.

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This decrease was primarily driven by reduced depreciation of capitalized software, the permanent closure of 59 stores during Fiscal 2022, and a decrease in net book value as a result of the impairment charges recorded in Fiscal 2022.

Operating income (loss) increased to $275.6 million, or 14.4% of net sales for Fiscal 2021, from an operating loss of $199.9 million, or 13.1% of net sales for Fiscal 2020, reflecting the factors discussed above.

Operating income (loss) decreased $277.1 million to a loss of $1.5 million during Fiscal 2022 from income of $275.6 million during Fiscal 2021.

Operating margin deleveraged 1,450 basis points to (0.1%) of net sales in Fiscal 2022.

Fiscal 2022 and Fiscal 2021 results included incremental operating expenses of $8.6 million and $12.9 million, respectively, as described above, and included all asset impairment charges recorded.

Excluding the impact of these incremental charges, operating margin deleveraged 1,470 basis points to 0.4% of net sales.

Interest expense, net was $13.2 million during Fiscal 2022, compared to $18.6 million during Fiscal 2021.

In addition, interest expense for Fiscal 2021 included a charge of $3.7 million related to the refinancing of our Previous ABL Credit Facility and Previous Term Loan.

Provision (benefit) for income taxes was an expense of $69.9 million during Fiscal 2021, compared to a benefit of $71.4 million during Fiscal 2020.

Our effective tax rate was an expense of 27.2% and a benefit of 33.7% during Fiscal 2021 and Fiscal 2020, respectively.

The decrease in our effective tax rate was primarily driven by tax benefits from the CARES Act in Fiscal 2020.

Net income (loss) increased to $187.2 million, or $12.59 per diluted share, during Fiscal 2021, compared to a net loss of $140.4 million, or $9.59 per share, during Fiscal 2020, due to the impact of COVID-19 pandemic in Fiscal 2020 and the other factors discussed above.

The decrease in interest expense was driven by the combination of the elimination of fees and lower average interest rates associated with the refinancing of the revolving credit facility and term loan in the prior year, partially offset by increases in the floating interest rate on the Company’s revolving credit facility in Fiscal 2022 and higher average borrowings.

Provision (benefit) for income taxes was a benefit of $13.6 million during Fiscal 2022, compared to an expense of $69.9 million during Fiscal 2021.

Our effective tax rate was a benefit of 92.3% and an expense of 27.2% during Fiscal 2022 and Fiscal 2021, respectively.

The change in the effective tax rate for Fiscal 2022 compared to Fiscal 2021 resulted from a favorable mix of earnings compared to prior year and the release of a reserve for unrecognized tax benefits as a result of a settlement with a taxing authority in the first quarter of Fiscal 2022.

Net income (loss) decreased to a loss of $1.1 million, or $(0.09) per diluted share, during Fiscal 2022, compared to income of $187.2 million, or $12.59 per share, during Fiscal 2021, due to the factors discussed above.

Fiscal 2021 Compared to Fiscal 2020

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Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases.

Our primary uses of cash are for working capital requirements, which are principally inventory purchases, the financing of capital projects, including investments in new systems, and for the capital return program (other than payment of dividends, which continue to be temporarily suspended due to the COVID-19 pandemic).

On November 16, 2021, we completed the refinancing of the Previous ABL Credit Facility and Previous Term Loan with a new lending group led by an affiliate of Wells Fargo by entering into the Fourth Amendment to our Credit Agreement with the lenders party thereto.

The new debt consists of a revolving credit facility with $350.0 million of availability and a $50.0 million term loan.

(See “Revolving Credit Facility and Term Loan” below for further information).

Our working capital deficit improved $161.1 million to a deficit of $10.3 million at January 29, 2022, compared to a deficit of $171.4 million at January 30, 2021, primarily reflecting operating results over the past twelve months, as well as lower current lease liabilities resulting from favorable lease negotiations.

On November 16, 2021, we completed the refinancing of the previous $360.0 million asset-based revolving credit facility (the “Previous ABL Credit Facility”) and our previous $80.0 million term loan (the “Previous Term Loan”) with a new lending group led by an affiliate of Wells Fargo by entering into the Fourth Amendment to our Credit Agreement with the lenders party thereto.

The new debt consists of a $350.0 million asset-based revolving credit facility (the “ABL Credit Facility”) and a $50.0 million term loan (the “Term Loan”).

See “ABL Credit Facility and Term Loan” below for further information.

Our working capital deficit increased $76.1 million to $86.4 million at January 28, 2023, compared to $10.3 million at January 29, 2022, primarily reflecting higher outstanding borrowings under our ABL Credit Facility and a decrease in our cash balance, partially offset by higher receivables and lower payables balances, and a higher inventory balance, reflecting higher average unit costs, higher inbound transportation costs, and amounts on hand to support growth initiatives.

During Fiscal 2022, we repurchased approximately 2.0 million shares for $92.9 million.

During Fiscal 2020, prior to the suspension of our capital return program, we repurchased approximately 0.3 million shares for $15.5 million.

At January 29, 2022, we had $175.3 million of outstanding borrowings and $97.0 million available for borrowing under our ABL Credit Facility.

During Fiscal 2021, we repurchased approximately 1.0 million shares for $85.6 million.

At January 28, 2023, we had $287.0 million of outstanding borrowings under our $350.0 million asset-based revolving credit facility.

As of January 28, 2023, we had total liquidity of $37.3 million, including $20.6 million of availability under our ABL Credit Facility (after factoring in our excess availability requirement), and $16.7 million of cash on hand.

In addition, at January 28, 2023, we had $7.4 million of outstanding letters of credit with an additional $42.6 million available for issuing letters of credit under our ABL Credit Facility.

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(ii) the London InterBank Offered Rate, or “LIBOR”, for an interest period of one, three, or six months, as selected by us, plus a margin of 1.125% or 1.375% based on the amount of our average excess availability under the facility.

For Fiscal 2022, Fiscal 2021, and Fiscal 2020, we recognized $10.2 million, $7.0 million, and $8.2 million, respectively, in interest expense related to the ABL Credit Facility and Previous ABL Credit Facility.

We are charged an unused line fee of 0.20% on the unused portion of the commitments.

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Letter of credit fees are determined based on the amount of our average excess availability under the facility.

The amount available for loans and letters of credit under the Credit Agreement 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.

material indebtedness, and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods.

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.

We are 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 ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments, and a fixed-charge coverage ratio covenant, which only becomes effective in the event that borrowings exceed $315.0 million.

These covenants also limit our ability to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions, or to change the nature of our business.

Credit extended under the ABL Credit Facility is secured by a first priority security interest in substantially all of our 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 our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock.

The table below presents the components of our ABL Credit Facility and Previous ABL Credit Facility:

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(1) Lower of the credit facility maximum or the total borrowing base collateral.

(2) The sublimit availability for letters of credit was $42.6 million and $41.8 million at January 29, 2022 and January 30, 2021, respectively.

(2) The sub-limit availability for the letters of credit was $42.6 million at January 28, 2023 and January 29, 2022.

(3) The ABL Credit Facility contains an excess availability requirement which would effectively reduce this amount to $20.6 million.

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 Fiscal 2021, we recognized $5.9 million in interest expense related to the Term Loan and the Previous 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 guarantee the ABL Credit Facility and shares 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 other covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization.

For Fiscal 2022, Fiscal 2021, and Fiscal 2020, we recognized $2.3 million, $5.9 million and $2.6 million, respectively, in interest expense related to the Term Loan and the Previous Term Loan.

The Term Loan is secured by a first priority security interest in our 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 our 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.

As of January 28, 2023 and January 29, 2022, unamortized deferred financing costs amounted to $2.3 million and $2.9 million, respectively, of which $2.0 million and $2.6 million, respectively, related to our asset-based revolving credit facility.

Cash Flows and Capital Expenditures

Cash provided by operating activities was $133.3 million during Fiscal 2021, compared to $35.7 million of cash used by operating activities of during Fiscal 2020.

Cash provided by operating activities during Fiscal 2021 was primarily the result of earnings generated during the period, partially offset by planned changes in working capital, which brought our vendor

payables in line with historical payment terms.

Cash used in operating activities during Fiscal 2020 was primarily the result of the net loss in the year due to the impact of the COVID-19 pandemic disruption, resulting in the acceleration of permanent store closures and extensive government mandated temporary store closures, partially offset by the impact of strategic working capital management and the extension of vendor payment terms.

Cash used in operating activities was $8.2 million during Fiscal 2022, compared to $133.3 million of cash generated from operating activities during Fiscal 2021.

Cash used in operating activities during Fiscal 2022 was primarily the result of a higher inventory balance, reflecting higher average unit costs, higher inbound transportation costs, and amounts on hand to support growth initiatives, as well as other planned changes in working capital, partially offset by the receipt of a net income tax

refund of $15.0 million.

Cash generated from operating activities during Fiscal 2021 was primarily the result of earnings generated during the period, partially offset by planned changes in working capital, which brought our vendor payables in line with historical payment terms.

Cash used in investing activities was $45.9 million during Fiscal 2022, compared to $29.3 million during Fiscal 2021.

This change was primarily driven by the timing of capital expenditures.

Cash used in financing activities was $112.7 million during Fiscal 2021, compared to cash provided by financing activities of $60.9 million during Fiscal 2020.

The decrease primarily resulted from net proceeds received from the issuance of long-term debt during Fiscal 2020, compared to the use of cash in Fiscal 2021 to repay long-term debt, and increased repurchases of our common stock during Fiscal 2021, compared to Fiscal 2020.

The increase was driven by capital expenditures primarily related to digital and supply chain fulfillment initiatives.

Cash provided by financing activities was $17.1 million during Fiscal 2022, compared to cash used in financing activities of $112.7 million during Fiscal 2021.

Cash provided by financing activities during Fiscal 2022 primarily resulted from additional net borrowings under our ABL Credit Facility, partially offset by increased repurchases of our common stock during Fiscal 2022 compared to Fiscal 2021.

Our ability to continue to meet our capital requirements in Fiscal 2023 depends on our cash on hand, our ability to generate cash flows from operations, and available borrowings under our ABL Credit Facility.

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Asset impairment charges — 1,379 — 1,877

Operating income 65,907 37,849 113,810 58,082

Income before provision for income taxes 61,496 33,153 109,851 52,530

Provision for income taxes 16,291 9,058 30,983 13,527

Net income $ 45,205 $ 24,095 $ 78,868 $ 39,003

Diluted earnings per share $ 3.01 $ 1.60 $ 5.30 $ 2.68

Diluted weighted average common

shares outstanding 15,002 15,062 14,873 14,543

Operating income (loss) 19,254 (13,829) 57,837 (64,792)

Income (loss) before provision (benefit) for income taxes 17,549 (16,418) 54,051 (69,943)

Provision (benefit) for income taxes (2,282) (3,120) 11,196 (19,419)

Net income (loss) $ 19,831 $ (13,298) $ 42,855 $ (50,525)

Diluted earnings (loss) per share $ 1.43 $ (1.01) $ 3.26 $ (4.10)

Diluted weighted average common shares outstanding 13,841 13,147 13,162 12,332

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis