Childrens Place, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) April 29, 2023 January 28, 2023 April 30, 2022 (in thousands, except par value) ASSETS Current assets: Cash and cash equivalents $ 18,242 $ 16,689 $ 58,494 Accounts receivable 25,659 49,584 28,812 Inventories 504,194 447,795 549,167 Prepaid expenses and other current assets 58,504 47,875 50,990 Total current assets 606,599 561,943 687,463 Long-term assets: Property and equipment, net 146,315 149,874 157,033 Right-of-use assets 144,781 155,481 191,559 Tradenames, net 70,691 70,891 71,492 Deferred income taxes 36,432 36,616 24,568 Other assets 10,052 11,476 12,911 Total assets $ 1,014,870 $ 986,281 $ 1,145,026 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Revolving loan $ 300,835 $ 286,990 $ 249,544 Accounts payable 223,244 177,147 260,634 Current portion of operating lease liabilities 74,741 78,576 89,566 Income taxes payable 3,534 6,014 6,001 Accrued expenses and other current liabilities 116,933 99,658 111,926 Total current liabilities 719,287 648,385 717,671 Long-term liabilities: Long-term debt 49,768 49,752 49,702 Long-term portion of operating lease liabilities 87,905 96,482 129,111 Income taxes payable 17,199 17,199 18,929 Other tax liabilities 2,885 2,757 2,316 Other long-term liabilities 12,005 13,228 13,613 Total liabilities 889,049 827,803 931,342 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; 12,473 , 12,292 , and 13,422 issued; 12,405 , 12,225 , and 13,360 outstanding 1,247 1,229 1,342 Additional paid-in capital 150,846 150,956 155,097 Treasury stock, at cost ( 68 , 67 , and 62 shares) ( 3,810 ) ( 3,736 ) ( 3,512 ) Deferred compensation 3,810 3,736 3,512 Accumulated other comprehensive loss ( 17,065 ) ( 16,247 ) ( 14,668 ) Retained earnings (deficit) ( 9,207 ) 22,540 71,913 Total stockholders’ equity 125,821 158,478 213,684 Total liabilities and stockholders’ equity $ 1,014,870 $ 986,281 $ 1,145,026 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 April 29, 2023 April 30, 2022 (in thousands, except earnings (loss) per common share) Net sales $ 321,640 $ 362,350 Cost of sales (exclusive of depreciation and amortization) 225,178 220,445 Gross profit 96,462 141,905 Selling, general, and administrative expenses 112,931 109,036 Depreciation and amortization 11,848 13,615 Asset impairment charges 1,750 — Operating income (loss) ( 30,067 ) 19,254 Interest expense ( 5,937 ) ( 1,710 ) Interest income 34 5 Income (loss) before benefit for income taxes ( 35,970 ) 17,549 Benefit for income taxes ( 7,136 ) ( 2,282 ) Net income (loss) $ ( 28,834 ) $ 19,831 Earnings (loss) per common share Basic $ ( 2.33 ) $ 1.46 Diluted $ ( 2.33 ) $ 1.43 Weighted average common shares outstanding Basic 12,374 13,621 Diluted 12,374 13,841 See accompanying notes to these consolidated financial statements. 2 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) Net income (loss) $ ( 28,834 ) $ 19,831 Other comprehensive loss: Foreign currency translation adjustment ( 818 ) ( 482 ) Total comprehensive income (loss) $ ( 29,652 ) $ 19,349 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 April 29, 2023 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 28, 2023 12,292 $ 1,229 $ 150,956 $ 3,736 $ 22,540 $ ( 16,247 ) ( 67 ) $ ( 3,736 ) $ 158,478 Vesting of stock awards 336 34 ( 34 ) — Stock-based compensation expense 3,083 3,083 Purchase and retirement of common stock ( 155 ) ( 16 ) ( 3,159 ) ( 2,913 ) ( 6,088 ) Other comprehensive loss ( 818 ) ( 818 ) Deferral of common stock into deferred compensation plan 74 ( 1 ) ( 74 ) — Net loss ( 28,834 ) ( 28,834 ) Balance, April 29, 2023 12,473 $ 1,247 $ 150,846 $ 3,810 $ ( 9,207 ) $ ( 17,065 ) ( 68 ) $ ( 3,810 ) $ 125,821 Thirteen Weeks Ended April 30, 2022 Accumulated Additional Other Total Common Stock Paid-In Deferred Retained Comprehensive Treasury Stock Stockholders’ (in thousands) Shares Amount Capital Compensation Earnings Loss Shares Amount Equity Balance, January 29, 2022 13,964 $ 1,396 $ 160,348 $ 3,443 $ 77,914 $ ( 14,186 ) ( 61 ) $ ( 3,443 ) $ 225,472 Vesting of stock awards 123 12 ( 12 ) — Stock-based compensation expense 7,562 7,562 Purchase and retirement of common stock ( 665 ) ( 66 ) ( 12,801 ) ( 25,832 ) ( 38,699 ) Other comprehensive income ( 482 ) ( 482 ) Deferral of common stock into deferred compensation plan 69 ( 1 ) ( 69 ) — Net income 19,831 19,831 Balance, April 30, 2022 13,422 $ 1,342 $ 155,097 $ 3,512 $ 71,913 $ ( 14,668 ) ( 62 ) $ ( 3,512 ) $ 213,684 See accompanying notes to these consolidated financial statements. 4 Table of Contents THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 28,834 ) $ 19,831 Reconciliation of net income (loss) to net cash provided by (used in) operating activities: Non-cash portion of operating lease expense 18,441 19,247 Depreciation and amortization 11,848 13,615 Non-cash stock-based compensation expense 3,083 7,562 Asset impairment charges 1,750 — Deferred income tax provision (benefit) 112 ( 1,583 ) Other non-cash charges, net 149 467 Changes in operating assets and liabilities: Inventories ( 57,085 ) ( 120,806 ) Accounts receivable and other assets 25,239 ( 8,460 ) Prepaid expenses and other current assets 641 ( 210 ) Income taxes payable, net of prepayments ( 9,697 ) 20,840 Accounts payable and other current liabilities 61,598 52,961 Lease liabilities ( 20,874 ) ( 23,822 ) Other long-term liabilities ( 1,237 ) 1,521 Net cash provided by (used in) operating activities 5,134 ( 18,837 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 10,982 ) ( 10,723 ) Change in deferred compensation plan ( 55 ) ( 260 ) Net cash used in investing activities ( 11,037 ) ( 10,983 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit facility 135,583 222,776 Repayments under revolving credit facility ( 121,738 ) ( 148,550 ) Purchase and retirement of common stock, including shares surrendered for tax withholdings and transaction costs ( 6,088 ) ( 40,370 ) Net cash provided by financing activities 7,757 33,856 Effect of exchange rate changes on cash and cash equivalents ( 301 ) ( 329 ) Net increase in cash and cash equivalents 1,553 3,707 Cash and cash equivalents, beginning of period 16,689 54,787 Cash and cash equivalents, end of period $ 18,242 $ 58,494 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net cash paid (received) for income taxes $ 2,293 $ ( 21,645 ) Cash paid for interest 5,784 1,713 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Purchases of property and equipment not yet paid 7,151 13,507 See accompanying notes to these consolidated financial statements. 5 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: • First Quarter 2023 — The thirteen weeks ended April 29, 2023 • First Quarter 2022 — The thirteen weeks ended April 30, 2022 • Fiscal 2022 – The fifty-two weeks ended January 28, 2023 • 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 April 29, 2023, January 28, 2023 and April 30, 2022, 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 normal recurring adjustments necessary for a fair statement of its consolidated financial position of the Company as of April 29, 2023 and April 30, 2022, the results of its consolidated operations, consolidated comprehensive income (loss), consolidated changes in stockholders’ equity, and consolidated cash flows for the thirteen weeks ended April 29, 2023 and April 30, 2022. The consolidated balance sheet as of January 28, 2023 was derived from audited financial statements. Due to the seasonal nature of the Company’s business, the results of operations for the thirteen weeks ended April 29, 2023 and April 30, 2022 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 28, 2023. Certain prior period financial statement disclosures have been conformed to the current period presentation. 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. 6 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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, impairment of indefinite-lived intangible 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’s consolidated financial statements. 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 April 29, 2023 April 30, 2022 (in thousands) Net sales: South $ 119,918 $ 136,372 Northeast 64,532 75,396 West 42,603 50,132 Midwest 38,809 43,613 International and other (1) 55,778 56,837 Total net sales $ 321,640 $ 362,350 ____________________________________________ (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 $ 5.9 million, $ 2.9 million, and $ 5.3 million within Accrued expenses and other current liabilities as of April 29, 2023, January 28, 2023, and April 30, 2022, 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 its wholesale business, the Company recognizes revenue, including shipping and handling fees billed to customers, when title of the goods passes to the customer, net of commissions, discounts, operational chargebacks, and cooperative advertising. The reserve for wholesale revenue included within Accounts receivable was $ 5.5 million, $ 5.0 million, and $ 2.7 million as of April 29, 2023, January 28, 2023, and April 30, 2022, respectively. 7 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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 $ 1.8 million, $ 1.0 million, and $ 1.7 million as of April 29, 2023, January 28, 2023, and April 30, 2022, respectively. 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 and an additional bonus to extend the term of the agreement. These bonuses are 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 term of the agreement. 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 recognized quarterly within an annual period when it can be estimated reliably. The additional bonuses are amortized over the contract term based on anticipated progress against future targets and level of risk associated with achieving the targets. The Company has a points-based customer loyalty program in which customers earn points based on purchases and other promotional activities. These points can be redeemed for coupons to discount future purchases. A contract liability is estimated based on the standalone selling price of benefits earned by customers through the program and the related redemption experience under the program. The value of each point earned is recorded as deferred revenue and is included within Accrued expenses and other current liabilities. The total contract liabilities related to this program were $ 3.8 million, $ 2.6 million, and $ 1.8 million as of April 29, 2023, January 28, 2023, and April 30, 2022, 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 April 29, 2023, January 28, 2023, and April 30, 2022 was $ 10.5 million, $ 11.1 million, and $ 13.3 million, respectively. During the First Quarter 2023, the Company recognized Net sales of $ 2.0 million related to the gift card liability balance that existed at January 28, 2023. 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 recognizes revenue 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. 8 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. INTANGIBLE ASSETS The Company’s intangible assets were as follows: April 29, 2023 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 ( 3,262 ) 738 Total intangible assets $ 73,953 $ ( 3,262 ) $ 70,691 January 28, 2023 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 ( 3,062 ) 938 Customer databases (2) 3 years 3,000 ( 3,000 ) — Total intangible assets $ 76,953 $ ( 6,062 ) $ 70,891 April 30, 2022 Useful Life Gross Amount Accumulated Amortization Net Amount (in thousands) Gymboree tradename (1) Indefinite $ 69,953 $ — $ 69,953 Crazy 8 tradename (1) 5 years 4,000 ( 2,461 ) 1,539 Customer databases (2) 3 years 3,000 ( 3,000 ) — Total intangible assets $ 76,953 $ ( 5,461 ) $ 71,492 ____________________________________________ (1) Included within Tradenames, net on the Consolidated Balance Sheets. (2) Included within Other assets on the Consolidated Balance Sheets. 9 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: April 29, 2023 January 28, 2023 April 30, 2022 (in thousands) Property and equipment: Land and land improvements $ 3,403 $ 3,403 $ 3,403 Building and improvements 36,187 36,187 36,188 Material handling equipment 71,404 71,404 64,179 Leasehold improvements 179,949 196,302 196,055 Store fixtures and equipment 200,040 210,413 213,039 Capitalized software 343,132 336,336 325,163 Construction in progress 24,145 23,959 16,199 858,260 878,004 854,226 Less accumulated depreciation and amortization ( 711,945 ) ( 728,130 ) ( 697,193 ) Property and equipment, net $ 146,315 $ 149,874 $ 157,033 At April 29, 2023 and April 30, 2022, the Company reviewed its store related long-lived assets for indicators of impairment, and performed a recoverability test if indicators were identified. Based on the results of the analyses performed, the Company recorded asset impairment charges in the First Quarter 2023 of $ 1.8 million, inclusive of right-of-use (“ROU”) assets. The Company did not record asset impairment charges in the First Quarter 2022. 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 April 29, 2023 April 30, 2022 (in thousands) Fixed operating lease cost $ 20,906 $ 22,970 Variable operating lease cost (1) 14,697 15,118 Total operating lease cost $ 35,603 $ 38,088 ____________________________________________ (1) Includes short term leases with lease periods of less than 12 months. As of April 29, 2023, the weighted-average remaining operating lease term was 3.6 years, and the weighted-average discount rate for operating leases was 5.1 %. Cash paid for amounts included in the measurement of operating lease liabilities during the First Quarter 2023 was $ 20.9 million. ROU assets obtained in exchange for new operating lease liabilities were $ 10.6 million during the First Quarter 2023. 10 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) As of April 29, 2023, the maturities of operating lease liabilities were as follows: April 29, 2023 (in thousands) Remainder of 2023 $ 69,063 2024 42,943 2025 19,283 2026 15,183 2027 13,052 Thereafter 17,932 Total operating lease payments 177,456 Less: imputed interest ( 14,810 ) Present value of operating lease liabilities $ 162,646 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 (as amended from time to time, the “Credit Agreement”). The refinanced 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”). 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. For the First Quarter 2023 and First Quarter 2022, the Company recognized $ 4.7 million and $ 1.6 million, respectively, in interest expense related to the ABL Credit 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 range 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. 11 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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, and a fixed-charge coverage ratio covenant, which only becomes effective in the event that borrowings and other uses of credit exceed $ 315.0 million. 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: April 29, 2023 January 28, 2023 April 30, 2022 (in millions) Total borrowing base availability $ 408.9 $ 404.2 $ 420.0 Credit facility maximum 350.0 350.0 350.0 Maximum borrowing availability (1) 350.0 350.0 350.0 Outstanding borrowings 300.8 287.0 249.5 Letters of credit outstanding—standby 7.4 7.4 7.4 Utilization of credit facility at end of period 308.2 294.4 256.9 Availability (2) (3) $ 41.8 $ 55.6 $ 93.1 Interest rate at end of period 6.5 % 5.9 % 2.0 % First Quarter 2023 Fiscal 2022 First Quarter 2022 (in millions) Average end of day loan balance during the period $ 297.1 $ 274.9 $ 251.2 Highest end of day loan balance during the period $ 305.9 $ 297.7 $ 308.6 Average interest rate 5.9 % 3.7 % 2.0 % ____________________________________________ (1) Lower of the credit facility maximum or the total borrowing base availability. (2) The sub-limit availability for letters of credit was $ 42.6 million at April 29, 2023, January 28, 2023, and April 30, 2022. (3) The ABL Credit Facility contains an excess availability requirement which would effectively reduce this amount to $ 6.8 million as of April 29, 2023. 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 First Quarter 2023 and First Quarter 2022, the Company recognized $ 0.9 million, and $ 0.4 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. 12 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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 April 29, 2023, unamortized deferred financing costs amounted to $ 2.2 million, of which $ 1.9 million related to our ABL Credit Facility. On June 5, 2023, the Company entered into a fifth amendment to its Credit Agreement, dated as of May 9, 2019, with the lenders party thereto (the “Fifth Amendment”), pursuant to which, among other things, (i) PNC Bank, National Association (“PNC Bank”) was added as a new lender, (ii) the ABL Credit Facility was increased to $ 445.0 million, (iii) LIBOR was replaced by the Secured Overnight Financing Rate (“SOFR”) as the interest rate benchmark, and (iv) the pricing grid for applicable margins on borrowings was updated. All other material terms and conditions of the Credit Agreement remained unchanged. (See Note 13 - Subsequent Events for further information.) 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. 8. STOCKHOLDERS’ EQUITY Share Repurchase Program In November 2021, the Board of Directors authorized a $ 250.0 million share repurchase program (the “Share Repurchase Program”). Under this program, 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 the 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 program at any time and may thereafter reinstitute purchases, all without prior announcement. As of April 29, 2023, there was $ 158.3 million remaining availability under the Share Repurchase Program. 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. 13 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The following table summarizes the Company’s share repurchases: Thirteen Weeks Ended April 29, 2023 April 30, 2022 Shares Amount Shares Amount (in thousands) Share repurchases related to: Share repurchase program 155 $ 6,088 665 $ 38,699 Shares acquired and held in treasury 1 $ 74 1 $ 69 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 (deficit). The portion charged against Additional paid-in capital is determined using a pro-rata allocation based on total shares outstanding. For all shares retired in the First Quarter 2023 and First Quarter 2022, $ 2.9 million and $ 25.8 million was charged to Retained earnings (deficit), respectively. Dividends 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. 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 April 29, 2023 April 30, 2022 (in thousands) Deferred Awards $ 2,500 $ 3,425 Performance Awards 583 4,137 Total stock-based compensation expense (1) $ 3,083 $ 7,562 ____________________________________________ (1) Stock-based compensation expense recorded within Cost of sales (exclusive of depreciation and amortization) amounted to $ 0.4 million and $ 0.6 million in the First Quarter 2023 and First Quarter 2022, respectively. All other stock-based compensation expense is included in Selling, general, and administrative expenses. 14 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 10. EARNINGS (LOSS) PER COMMON SHARE The following table reconciles net income (loss) and share amounts utilized to calculate basic and diluted earnings (loss) per common share: Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) Net income (loss) $ ( 28,834 ) $ 19,831 Basic weighted average common shares outstanding 12,374 13,621 Dilutive effect of stock awards — 220 Diluted weighted average common shares outstanding 12,374 13,841 Anti-dilutive shares excluded from diluted earnings (loss) per common share calculation 228 — 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. The Company’s effective income tax rate for the First Quarter 2023 was a benefit of 19.8 %, or $ 7.1 million, compared to 13.0 %, or $ 2.3 million, during the First Quarter 2022. The increase in the effective income tax rate for the First Quarter 2023 compared to the First Quarter 2022 was primarily driven by the release of a reserve in the First Quarter 2022 of $ 6.4 million for unrecognized tax benefits as a result of a settlement with a taxing authority which was nonrecurring and the First Quarter 2023 pretax loss as compared to pretax income in the First Quarter 2022. 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. The remaining balance of $ 19.1 million as of April 29, 2023 is included within Prepaid expenses and other current assets on the Consolidated Balance Sheets. The Company accrues interest and penalties related to unrecognized tax benefits as part of the provision for income taxes. The total amount of unrecognized tax benefits was $ 3.8 million, $ 3.6 million, and $ 2.3 million as of April 29, 2023, January 28, 2023, and April 30, 2022, respectively, and is included within long-term liabilities. Additional interest expense recognized in the First Quarter 2023 and First Quarter 2022 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. 15 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 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 April 29, 2023, The Children’s Place U.S. had 528 stores and The Children’s Place International had 71 stores. As of April 30, 2022, The Children’s Place U.S. had 583 stores and The Children’s Place International had 82 stores. The following table provides segment level financial information: Thirteen Weeks Ended April 29, 2023 April 30, 2022 (in thousands) Net sales: The Children’s Place U.S. $ 293,486 $ 327,961 The Children’s Place International (1) 28,154 34,389 Total net sales $ 321,640 $ 362,350 Operating income (loss): The Children’s Place U.S. $ ( 28,027 ) $ 16,869 The Children’s Place International ( 2,040 ) 2,385 Total operating income (loss) $ ( 30,067 ) $ 19,254 Operating income (loss) as a percentage of net sales: The Children’s Place U.S. ( 9.5 %) 5.1 % The Children’s Place International ( 7.2 %) 6.9 % Total operating income (loss) as a percentage of net sales ( 9.3 %) 5.3 % Depreciation and amortization: The Children’s Place U.S. $ 10,905 $ 12,587 The Children’s Place International 943 1,028 Total depreciation and amortization $ 11,848 $ 13,615 Capital expenditures: The Children’s Place U.S. $ 10,972 $ 10,357 The Children’s Place International 10 366 Total capital expenditures $ 10,982 $ 10,723 ____________________________________________ (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. 16 THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 13. SUBSEQUENT EVENTS Termination of corporate office building lease On May 26, 2023, the Company proactively issued a voluntary termination notice for its corporate office building lease, to accelerate the termination date to June 1, 2024, and paid a termination fee of approximately $ 4 million. This termination was executed in order to capitalize on the prevailing tenant-favorable market conditions, as compared to the existing lease escalations contained in the Company’s agreement which was signed in 2009. The lease termination will reduce the Company’s ROU assets and operating lease liabilities balance by approximately $ 17 million. Amendment of ABL Credit Facility and Term Loan On June 5, 2023, the Company entered into the Fifth Amendment to its Credit Agreement, dated as of May 9, 2019, with the lenders party thereto, pursuant to which, among other things, (i) PNC Bank was added as a new lender, (ii) the ABL Credit Facility was increased to $ 445.0 million, (iii) LIBOR was replaced by SOFR as the interest rate benchmark, and (iv) the pricing grid for applicable margins on borrowings was updated. As a result of the amendment, our liquidity increased by approximately $ 85 million (after factoring in our excess availability requirement), based upon our borrowing base availability as of June 5, 2023. Under the amended ABL Credit Facility, based on the amount of the Company’s average daily excess availability under the facility, borrowings outstanding bear interest, at the Company’s option, at: (i) the prime rate per annum, plus a margin of 1.25 % or 1.50 %; or (ii) the SOFR rate per annum, plus a margin of 2.00 % or 2.25 %. Letter of credit fees range from 1.000 % to 1.125 % for commercial letters of credit and range from 1.500 % to 1.750 % for standby letters of credit. Letter of credit fees are determined based on the amount of the Company’s average daily excess availability under the facility. Once the Company achieves a consolidated EBITDA of at least $ 200.0 million across four consecutive fiscal quarters, and based on the amount of the Company’s average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility would bear interest, at the Company’s option, at: (i) the prime rate per annum, plus a margin of 0.625 % or 0.875 %; or (ii) the SOFR rate per annum, plus a margin of 1.375 % or 1.625 %. Letter of credit fees would range from 0.688 % to 0.813 % for commercial letters of credit and would range from 0.875 % to 1.125 % for standby letters of credit. Letter of credit fees are determined based on the amount of the Company’s average daily excess availability under the facility. The Term Loan bears interest, payable monthly, at (a) the SOFR rate per annum plus 2.75 % for any portion that is a SOFR loan, or (b) the base rate per annum plus 2.00 % for any portion that is a base rate loan. All other material terms and conditions of the Credit Agreement remain unchanged . 17