What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-06-13 compared with 2023-12-04 · 164 added, 191 removed, 114 unchanged (76% of the section changed)

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Some of these risks and uncertainties are described in the Company ’ s filings with the Securities and Exchange Commission, including in Part I, Item 1A.

Risk Factors of its 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 (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 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.

Risk Factors of its annual report on Form 10-K for the fiscal year ended February 3, 2024.

Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unable to achieve operating results at levels sufficient to fund and/or finance the Company ’ s current level of operations and repayment of indebtedness, 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 risk that changes in the Company ’ s plans and strategies with respect to pricing, capital allocation, capital structure, investor communications and/or operations may have a negative effect on the Company ’ s business, the risk that the Company ’ s strategic initiatives to increase sales and margin, improve operational efficiencies, enhance operating controls, decentralize operational authority and reshape the Company ’ s culture 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 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 through value engineering or price increases, various types of litigation, including class action litigations brought under securities, 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, risks related to the existence of a controlling shareholder, 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.

The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with the Company’s unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 28, 2023.

The following discussion should be read in conjunction with the Company ’ s unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the annual audited financial statements and notes thereto included in the Company ’ s Annual Report on Form 10-K for the year ended February 3, 2024.

Terms that are commonly used in our Management’s Discussion and Analysis of Financial Condition and Results of Operations are defined as follows:

• Third Quarter 2023 — The thirteen weeks ended October 28, 2023

• Third Quarter 2022 — The thirteen weeks ended October 29, 2022

• Year-To-Date 2023 — The thirty-nine weeks ended October 28, 2023

• Year-To-Date 2022 — The thirty-nine weeks ended October 29, 2022

• Fiscal 2023 – The fifty-three weeks ending February 3, 2024

• Fiscal 2022 – The fifty-two weeks ended January 28, 2023

• First Quarter 2024 — The thirteen weeks ended May 4, 2024

• First Quarter 2023 — The thirteen weeks ended April 29, 2023

• Fiscal 2024 — The fifty-two weeks ending February 1, 2025

• Fiscal 2023 — The fifty-three weeks ended February 3, 2024

Securities and Exchange Commission

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“The Children’s Place”, “Gymboree”, “Sugar & Jade”, and “PJ Place”.

As of October 28, 2023, we had 591 stores across North America, our e-commerce business at www.childrensplace.com, www.gymboree.com , www.sugarandjade.com, and www.pjplace.com , social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest, and 226 international points of distribution with our six franchise partners in 16 countries.

As of May 4, 2024, we had 518 stores across North America, our e-commerce business at www.childrensplace.com and www.gymboree.com , social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest, and 214 international points of distribution with our six franchise partners in 16 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, www.sugarandjade.com and www.pjplace.com .

Each segment includes an e-commerce business located at www.childrensplace.com and www.gymboree.com.

Included in The Children’s Place U.S.

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We periodically review these allocations and adjust them based upon changes in business circumstances.

Net sales to external customers are derived from merchandise sales, and we have one U.S.

wholesale customer that individually accounted for more than 10% of our net sales, amounting to $54.5 million and $116.0 million for the Third Quarter 2023 and Year-To-Date 2023, respectively, and accounts for a majority of our accounts receivable.

COVID-19 Pandemic

As a result of the impact of the COVID-19 pandemic, we continue to experience disruptions in our business, including 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.

Net sales to external customers are derived from merchandise sales, and we have no customer that individually accounted for more than 10% of our net sales.

Recent Developments

Recent macroeconomic conditions have increased the cost of goods and services necessary to produce, import, and distribute our products, including increases in wage rates.

Inflationary pressures have also adversely affected our core customer, resulting in a decrease in discretionary apparel purchases during Year-To-Date 2023.

We expect these macroeconomic conditions, including but not limited to increased product input costs, transportation costs, distribution costs, and inflationary pressures, to continue to impact Fiscal 2023.

As previously disclosed in our Form 8-K dated October 30, 2023, we became aware of an inadvertent calculation error contained in the June, July and August 2023 borrowing base certificates provided to the lenders under our credit agreement, all of which have since been remedied.

While the lenders determined the calculation error resulted in certain technical defaults under the credit agreement (including us not being in compliance with certain debt covenants), we and the lenders entered into a Waiver and Amendment Agreement (the “Waiver Agreement”) on October 24, 2023, pursuant to which the lenders waived all of the defaults and we agreed to certain temporary enhanced reporting requirements and temporary restrictions on certain payments.

These enhanced reporting requirements and restrictions will cease once we achieve certain excess availability thresholds.

At no time prior to or following entering into the Waiver Agreement were we prevented from borrowing under the Credit Agreement in the ordinary course.

In addition, the lease for our distribution center in Toronto, Canada (“TODC”) expires in April 2024.

We expect to move these operations to the United States to our current distribution center in Alabama, which will result in a further headcount reduction at the TODC.

The transition out of the TODC is expected to be substantially completed by the end of the first quarter of 2024.

Macroeconomic conditions, including inflationary pressures, higher interest rates, and other domestic and geo-political factors, continue to adversely affect our core customer, resulting in a decrease in discretionary apparel purchases during the First Quarter 2024.

These macroeconomic conditions are expected to continue to have an adverse impact during the remainder of Fiscal 2024.

On May 20, 2024 our Board of Directors (the “Board”) appointed Muhammad Umair, who is currently a Board member, as President and Interim Chief Executive Officer of the Company.

Umair succeeded Jane Elfers, who departed as our President and Chief Executive Officer and as a member of the Board pursuant to a mutual agreement with the Company, effective as of May 20, 2024.

Operating Highlights

Net sales decreased $28.9 million, or 5.7%, to $480.2 million during the Third Quarter 2023 from $509.1 million during the Third Quarter 2022, primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

Comparable retail sales decreased 7.3% for the Third Quarter 2023.

Gross profit decreased $14.8 million to $162.1 million or 33.7% of net sales during the Third Quarter 2023 from $176.9 million or 34.8% of net sales during the Third Quarter 2022.

The 110 basis point decrease reflects the largely unplanned but addressable impact of higher distribution and fulfillment expenses stemming from incremental shipping and processing costs, partially offset by decreases in supply chain and cotton costs.

The increases in distribution costs were driven by higher e-commerce volumes than anticipated, which resulted in higher compensation expense to fulfill orders as we incurred significant overtime premiums to process orders, increased wage rates to retain talent and added incentives to attract new associates.

In addition, we also increased the utilization of our third-party fulfillment partner which operates at higher rates.

We also experienced an outsized increase in the number of packages shipped due to decreases in average order size, given the significant macroeconomic pressures our customers continue to face, and a highly promotional retail environment, which resulted in increased freight costs and deleveraging of freight expense.

In addition to the distribution costs, our margin rate was negatively impacted by the growth of our wholesale business, which operates at a lower gross margin but also operates at a lower SG&A and is accretive to our operating margin.

Operatin g income decreased $12.8 million to $45.0 million during the Third Quarter 2023 compared to $57.8 million during the Third Quarter 2022.

Operating income deleveraged 200 basis points to 9.4% of net sales.

Net income decreased $4.4 million to $38.5 million, or $3.05 per diluted share, during the Third Quarter 2023 compared to $42.9 million, or $3.26 per diluted share, during the Third Quarter 2022, due to the factors discussed above.

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, we continue to focus on our key strategic growth initiatives – superior product, digital transformation, alternative channels of distribution, and fleet optimization.

Net sales decreased $53.7 million, or 16.7%, to $267.9 million during the First Quarter 2024 from $321.6 million during the First Quarter 2023, primarily due to reductions in retail sales due to lower store count and traffic declines to stores, declines in e-commerce demand due to reductions in marketing results from liquidity challenges early in the quarter and decreases in wholesale revenue.

During the First Quarter 2024, we closed five stores and did not open any new stores.

Comparable retail sales decreased 11.7% for the First Quarter 2024.

Gross profit decreased $3.8 million to $92.7 million or 34.6% of net sales during the First Quarter 2024 from $96.5 million or 30.0% of net sales during the First Quarter 2023.

The 460 basis point increase was primarily due to reductions in product input costs, including cotton and supply chain costs, which negatively impacted margins in the prior year coupled with improvements in the leverage of e-commerce freight costs due to our new shipping threshold for free shipping.

These improvements were partially offset by margin pressure due to aggressive promotions, as we sought to maximize revenue during the quarter and due to increases in freight cost resulting from split shipments.

Operatin g loss decreased $2.1 million to $(28.0) million during the First Quarter 2024 compared to a loss of $(30.1) million during the First Quarter 2023.

Operating margin deleveraged 110 basis points to (10.4)% of net sales.

Net loss increased $9.0 million to $(37.8) million, or $(2.99) per diluted share, during the First Quarter 2024 compared to $(28.8) million, or $(2.33) per diluted share, during the First Quarter 2023, due to the factors discussed above, in addition to higher interest expense due to higher average interest rates associated with our revolving credit facility due to the impact of refinancings and continued market-based rate increases.

While we continue to face a challenging macroeconomic environment, including inflationary pressures, higher interest rates, and other domestic and geo-political concerns, 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 encouraging and we continue to position marketing as a key growth lever in Fiscal 2023 and beyond.

As our digital business continues to expand, we also 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 608 stores, including five stores closed during the Third Quarter 2023, since the announcement of our fleet optimization initiative in 2013.

We now plan to close an additional 64 stores during the fourth quarter of 2023, bringing our total closures for Fiscal 2023 to 86 stores, which will leave us with approximately 530 stores entering fiscal 2024.

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.

We continue to position marketing as a key growth lever in Fiscal 2024 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 customers with a best-in-class digital experience.

We have closed 681 stores since the announcement of our fleet optimization initiative in 2013, including five during the First Quarter 2024.

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.

The average unexpired lease term for our stores is approximately 1.7 years in the United States, Puerto Rico, and Canada.

In November 2021, our Board of Directors authorized a $250.0 million share repurchase program (the “Share Repurchase Program”).

Currently, pursuant to the Waiver Agreement described above, we are temporarily restricted from repurchasing any shares.

As of October 28, 2023, there was $157.3 million remaining availability under the Share Repurchase Program.

In November 2021, our Board authorized a $250.0 million share repurchase program (the “Share Repurchase Program”).

Currently, given the terms of our credit agreement, dated as of May 9, 2019 (as amended from time to time, the “Credit Agreement”), by and among the Company and certain of its subsidiaries, and the lenders party thereto (collectively, the “Credit Agreement Lenders”), as amended by the seventh amendment to the Credit Agreement (the “Seventh Amendment”), we are not expecting to repurchase any shares in Fiscal 2024, except pursuant to our practice as a result of our insider trading policy.

As of May 4, 2024, there was $156.9 million remaining availability under the 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.

The table below summarizes the average translation rates that most significantly impact our operating results:

Thirteen Weeks Ended Thirty-nine Weeks Ended

2023 October 29,

2022 October 28,

2023 October 29,

Thirteen Weeks Ended

2024 April 29,

Average Translation Rates (1)

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We describe our significant accounting policies in “Note 1.

Basis of Preparation and Summary of Significant Accounting Policies” of the notes to consolidated financial statements included in our most recent Annual Report on Form 10-K for the fiscal year ended January 28, 2023.

Basis of Preparation and Summary of Significant Accounting Policies” of the Consolidated Financial Statements included in our most recent Annual Report on Form 10-K for the fiscal year ended February 3, 2024.

There have been no significant changes in our accounting policies from those described in our most recent Annual Report on Form 10-K.

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Consequently, actual results could differ materially from our estimates.

Our critical accounting estimates are described under the heading “Critical Accounting Estimates” in Item 7 of our most recent Annual Report on Form 10-K for the fiscal year ended January 28, 2023.

Our critical accounting estimates include impairment of long-lived assets, impairment of indefinite-lived intangible assets, income taxes, stock-based compensation, and inventory valuation.

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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.

Refer to “Note 1.

Basis of Presentation” of the accompanying consolidated financial statements for discussion regarding the impact of recently issued accounting standards on our consolidated financial statements.

RESULTS OF OPERATIONS

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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 increased 90 basis points to 21.8% of Net sales during the Third Quarter 2023 from 20.9% during the Third Quarter 2022.

For example, SG&A decreased 560 basis points to 40.7% of Net sales during the First Quarter 2024 from 35.1% during the First Quarter 2023.

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., “deleveraging”), we have less efficiently utilized the investments we have made in our business.

Thirteen Weeks Ended Thirty-nine Weeks Ended

2023 October 29,

2022 October 28,

2023 October 29,

Thirteen Weeks Ended

2024 April 29,

Net sales 100.0 % 100.0 %

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Asset impairment charges — 0.5

Operating income (loss) 9.4 11.4 (1.9) 5.1

Operating loss (10.4) (9.3)

Interest expense, net (2.9) (1.9)

Income (loss) before provision (benefit) for income taxes 7.7 10.6 (3.8) 4.4

Loss before provision (benefit) for income taxes (13.3) (11.2)

Provision (benefit) for income taxes 0.8 (2.2)

Net income (loss) 8.0 % 8.4 % (2.2) % 3.9 %

Net loss (14.1) % (9.0) %

Number of Company stores, end of period 518 599

The following table sets forth net sales by segment, for the periods indicated:

Thirteen Weeks Ended Thirty-nine Weeks Ended

2023 October 29,

2022 October 28,

2023 October 29,

Thirteen Weeks Ended

2024 April 29,

(in thousands)

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Total net sales $ 267,878 $ 321,640

Third Quarter 2023 Compared to Third Quarter 2022

Net sales decreased $28.9 million or 5.7%, to $480.2 million during the Third Quarter 2023 from $509.1 million during the Third Quarter 2022, primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

First Quarter 2024 Compared to First Quarter 2023

Net sales decreased $53.7 million or 16.7%, to $267.9 million during the First Quarter 2024 from $321.6 million during the First Quarter 2023, primarily due to reductions in retail sales due to lower store count, traffic declines to stores, declines in e-commerce demand due to reductions in marketing results from liquidity challenges early in the quarter and decreases in wholesale revenue.

Comparable retail sales decreased 11.7% for the quarter.

The Children’s Place U.S.

net sales decreased $15.6 million or 3.4%, to $441.9 million in the Third Quarter 2023, compared to $457.5 million in the Third Quarter 2022.

This decrease was primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

The Children’s Place International net sales decreased $13.2 million or 25.7%, to $38.4 million in the Third Quarter 2023, compared to $51.6 million in the Third Quarter 2022.

This decrease was primarily due to the impact of the continued slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from geo-political concerns weighing on consumer confidence, and an increase in promotional activity across the sector.

Total e-commerce sales, which include postage and handling, were 57.0% of net retail sales and 50.0% of net sales during the Third Quarter 2023, compared to 50.2% and 46.0%, respectively, during the Third Quarter 2022.

Gross profit decreased $14.8 million to $162.1 million in the Third Quarter 2023, compared to $176.9 million in the Third Quarter 2022.

Gross margin deleveraged 110 basis points to 33.7% of net sales in the Third Quarter 2023.

In addition, we also increased the utilization of our third-party fulfillment partner which operates at higher rates.

We also experienced an outsized increase in the number of packages shipped due to decreases in average order size, given the significant macro pressures our customers continue to face, and a highly promotional retail environment, which resulted in increased freight costs and deleveraging of freight expense.

net sales decreased $47.3 million or 16.1%, to $246.2 million in the First Quarter 2024, compared to $293.5 million in the First Quarter 2023.

This decrease was primarily due to reductions in retail sales due to lower store count, traffic declines to stores, declines in e-commerce demand due to reductions in marketing results from liquidity challenges early in the quarter and decreases in wholesale revenue.

The Children’s Place International net sales decreased $6.5 million or 23.0%, to $21.7 million in the First Quarter 2024, compared to $28.2 million in the First Quarter 2023.

This decrease was primarily due to reductions in retail sales due to lower store count and traffic declines to stores.

Total e-commerce sales, which include postage and handling, were 53.4% of net retail sales and 49.2% of net sales during the First Quarter 2024, compared to 46.4% and 42.4%, respectively, during the First Quarter 2023.

Gross profit decreased $3.8 million to $92.7 million in the First Quarter 2024, compared to $96.5 million in the First Quarter 2023.

Gross margin increased 460 basis points to 34.6% of net sales in the First Quarter 2024.

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, foreign currency exchange rates, and fluctuations in shipping and material costs.

These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period.

Selling, general, and administrative expenses decreased $1.8 million to $104.8 million during the Third Quarter 2023 from $106.6 million during the Third Quarter 2022.

SG&A deleveraged 90 basis points to 21.8% of net sales in the Third Quarter 2023.

The Third Quarter 2023 results included incremental operating expenses, including restructuring costs of $0.8 million, credit agreement amendment costs of $0.8 million, and fleet optimization costs of $0.4 million.

The Third Quarter 2022 results included incremental operating expenses, including restructuring costs of $1.0 million, fleet optimization costs of $0.2 million, and professional and consulting fees of $0.1 million.

Excluding the impact of these incremental charges, SG&A deleveraged 70 basis points to 21.4% of net sales, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales and higher planned marketing spend, partially offset by permanent reductions in store expenses and home office payroll, and adjustments to variable profitability-based equity compensation, amounting to a benefit of $4.8 million in the Third Quarter 2023, compared to an expense of $4.9 million in the Third Quarter 2022.

Depreciation and amortization was $11.7 million during the Third Quarter 2023, compared to $12.5 million during the Third Quarter 2022.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 67 stores during the past twelve months, partially offset by the accelerated depreciation related to the voluntary early termination of the corporate office lease.

Asset impairment charges were $0.6 million during the Third Quarter 2023, inclusive of ROU assets.

Selling, general, and administrative expenses decreased $3.8 million to $109.1 million during the First Quarter 2024 from $112.9 million during the First Quarter 2023.

SG &A deleveraged 560 basis points to 40.7% of net sales in the First Quarter 2024.

The First Quarter 2024 results included incremental operating expenses of $20.4 million, including costs associated with the change of control of the Company of $13.7 million and financing related charges of $6.7 million, partially offset by the reversal of a legal settlement accrual of $2.3 million.

Th e First Quarter 2023 results included incremental operating expenses of $3.8 million, including contract termination co sts of $2.4 million and fleet optimization costs of $1.1 million.

Excluding the impact of these incremental charges, SG&A leveraged 80 basis points to 33.1% of net sales, primarily as a result of significant reductions in store payroll and home office payroll, and reductions in marketing costs.

Depreciation and amortization was $11.6 million during the First Quarter 2024, compared to $11.8 million during the First Quarter 2023.

The decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 81 stores during the past twelve months, partially offset by accelerated depreciation related to the closure of our distribution center in Canada.

Asset impairment charges were $1.8 million during the First Quarter 2023 , inclusive of ROU assets.

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

No impairment charge was recorded in the Third Quarter 2022.

Operating income decreased $12.8 million to $45.0 million during the Third Quarter 2023, compared to $57.8 million during the Third Quarter 2022.

Operating income deleveraged 200 basis points to 9.4% of net sales in the Third Quarter 2023.

The Third Quarter 2023 results included incremental operating expenses of $2.9 million, as described above, and included all asset impairment charges recorded, compared to $1.3 million in the Third Quarter 2022.

Excluding the impact of these incremental charges, operating income deleveraged 160 basis points to 10.0% of net sales.

Net interest expense was $7.9 million during the Third Quarter 2023, compared to $3.8 million during the Third Quarter 2022.

The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the our revolving credit facility and term loan due to continued market-based rate increases.

Provision (benefit) for income taxes was a benefit of $(1.5) million during the Third Quarter 2023, compared to a provision of $11.2 million during the Third Quarter 2022.

Our effective tax rate was a benefit of (3.9)% and a provision of 20.7% in the Third Quarter 2023 and Third Quarter 2022, respectively.

The change in our effective tax rate and income tax benefit for the Third Quarter 2023 compared to the Third Quarter 2022 was primarily driven by the utilization of the discrete tax provision methodology discussed in “Note 12.

Income Taxes” to the accompanying consolidated financial statements, and the impact of certain non-deductible executive compensation.

Net income decreased $4.4 million to $38.5 million, or $3.05 per diluted share during the Third Quarter 2023, compared to $42.9 million, or $3.26 per diluted share during the Third Quarter 2022, due to the factors discussed above .

Year-To-Date 2023 Compared to Year-To-Date 2022

Net sales decreased $104.9 million or 8.4%, to $1.147 billion during Year-To-Date 2023 from $1.252 billion during Year-To-Date 2022, primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

Comparable retail sales decreased 8.1% during Year-To-Date 2023.

The Children’s Place U.S.

net sales decreased $78.1 million or 6.9%, to $1.049 billion during Year-To-Date 2023, compared to $1.127 billion during Year-To-Date 2022.

This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from other domestic and geo-political concerns weighing on consumer confidence, an increase in promotional activity across the sector, and the impact of permanent store closures, partially offset by an increase in wholesale revenue.

The Children’ s Place International net sales decreased $26.8 million or 21.3%, to $98.9 million during Year-To-Date 2023, compared to $125.7 million during Year-To-Date 2022.

This decrease was primarily due to the impact of a slowdown in consumer demand resulting from the unprecedented inflation impacting our customer, and from geo-political concerns weighing on consumer confidence, and an increase in promotional activity across the sector.

Total e-commerce sales, which include postage and handling, were 52.1% of net retail sales and 46.2% of net sales during Year-To-Date 2023, compared to 47.5% and 44.0%, respectively, during Year-To-Date 2022.

Gross profit decreased $88.0 million to $346.4 million during Year-To-Date 2023, compared to $434.4 million during Year-To-Date 2022.

Gross margin deleveraged 450 basis points to 30.2% of net sales during Year-To-Date 2023.

The Year-To-Date 2022 results included a net credit of $0.6 million primarily related to the write-off of the lease liability and related right-of-use of a closed store.

Excluding the impact of these charges, gross margin deleveraged 440 basis points to 30.2% of net sales.

The decrease was primarily the result of lower merchandise margins due to the accelerated liquidation of seasonal inventory, the impact of a significantly larger wholesale business which operates at a lower gross margin rate but is accretive to operating margin, higher input and supply chain costs, higher than planned distribution and fulfillment costs, and the deleverage of fixed expenses resulting from the decline in net sales.

These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period.

Selling, general, and administrative expenses decreased $0.7 million to $329.8 million during Year-To-Date 2023 from $330.5 million during Year-To-Date 2022.

SG&A deleveraged 230 basis points to 28.7% of net sales during Year-To-Date 2023.

The Year-To-Date 2023 results included incremental operating expenses, including restructuring costs of $10.7 million, contract termination fees of $3.0 million, fleet optimization costs of $1.5 million, and credit agreement amendment costs of $0.8 million.

The Year-To-Date 2022 results included incremental operating expenses, including restructuring costs of $1.2 million, fleet optimization costs of $1.0 million, professional and consulting fees of $0.7 million, and a provision for foreign settlement of $0.4 million.

Excluding the impact of these incremental charges, SG&A deleveraged 120 basis points to 27.3% of net sales, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales and higher planned marketing spending, partially offset by permanent reductions in store expenses and home office payroll, and adjustments to variable profitability-based equity compensation, amounting to a benefit of $6.4 million during Year-To-Date 2023 , compared to an expense of $17.9 million during Year-To-Date 2022.

Depreciation and amortization was $35.5 million during Year-To-Date 2023, compared to $39.3 million during Year-To-Date 2022.

Asset impairment charges were $3.1 million during Year-To-Date 2023, inclusive of ROU assets.

Asset impairment charges were $1.4 million during Year-To-Date 2022, inclusive of ROU assets.

Operating income (loss) decreased $85.3 million to a loss of $(22.0) million during Year-To-Date 2023 from income of $63.3 million during Year-To-Date 2022.

Operating margin deleveraged 700 basis points to (1.9)% of net sales during Year-To-Date 2023.

The Year-To-Date 2023 results included incremental operating expenses of $20.4 million, compared to $4.8 million during Year-To-Date 2022.

Excluding the impact of these incremental charges, operating margin deleveraged 550 basis points to (0.1)% of net sales.

Net interest expense was $21.5 million during Year-To-Date 2023, compared to $8.1 million during Year-To-Date 2022.

The increase was primarily driven by higher borrowings and higher average interest rates associated with our revolving credit facility and term loan due to continued market-based rate increases.

Provision (benefit) for income taxes was a benefit of $(17.8) million during Year-To-Date 2023 compared to a provision of $5.8 million during Year-To-Date 2022.

Our effective tax rate was a benefit of (40.9)% and a provision of 10.5% during Year-To-Date 2023 and Year-To-Date 2022, respectively.

The change in our effective tax rate and income tax benefit for Year-To-Date 2023 was primarily driven by the Year-To-Date 2023 pretax loss as compared to pretax income for Year-To-Date 2022, jurisdictional earnings mix, the impact of certain non-deductible executive compensation, and the release of a reserve in the first quarter of Fiscal 2022 of $6.4 million for unrecognized tax benefits as a result of a settlement with a taxing authority which was nonrecurring, in addition to the utilization of the discrete tax provision methodology discussed in “Note 12.

Income Taxes” to the accompanying consolidated financial statements.

Net income (loss) decreased $75.1 million to a loss of $(25.7) million, or $(2.06) per diluted share during Year-To-Date 2023, compared to income of $49.4 million, or $3.68 per diluted share during Year-To-Date 2022 , due to the factors discussed above.

There were no asset impairment charges in the First Quarter 2024.

Operating loss decreased $2.1 million to $(28.0) million during the First Quarter 2024, compared to $(30.1) million during the First Quarter 2023.

Operating loss was impacted by several charges due to the recent change of control as a result of the investment in the Company by Mithaq Capital SPC, a Cayman segregated portfolio company (“Mithaq”), and several new financing initiatives.

These charges, which include $10.8 million of non-cash equity compensation charges and $3.8 million in other fees associated with the change of control, and $6.7 million of financing related charges, have been classified as non-GAAP adjustments, leading to an adjusted operating loss of ($5.1) million in the First Quarter 2024, compared to an adjusted operating loss of ($24.5) million in the First Quarter 2023, and leveraged 570 basis points to (1.9)% of net sales.

Net interest expense was $7.7 million during the First Quarter 2024, compared to $5.9 million during the First Quarter 2023.

The increase in interest expense was driven by higher average interest rates associated with our revolving credit facility due to the impact of refinancings and continued market-based rate increases.

Provision (benefit) for income taxes was a provision of $2.1 million during the First Quarter 2024, compared to a benefit of $(7.1) million during the First Quarter 2023.

Our effective tax rate was a provision of (5.8)% and a benefit of 19.8% in the First Quarter 2024 and First Quarter 2023, respectively.

The change in our effective tax rate and income tax provision (benefit) for the First Quarter 2024 compared to the First Quarter 2023 was primarily driven by the establishment of a valuation allowance against our net deferred tax assets.

Net loss, which reflected several unusual charges associated with the recent change of control due to the investment in the Company by Mithaq, and our new financing initiatives, increased $9.0 million to $(37.8) million, or $(2.99) per diluted share during the First Quarter 2024, compared to $(28.8) million, or $(2.33) per diluted share during the First Quarter 2023, due to the factors discussed above .

LIQUIDITY AND CAPITAL RESOURCES

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

Currently, o ur primary uses of cash are for working capital requirements, which are principally inventory purchases, the payment of interest expense on our revolving credit facility and term loan, and the financing of capital projects.

On November 16, 2021, we completed the refinancing of our previous $360.0 million asset-based revolving credit facility and our previous $80.0 million 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 (as amended from time to time, the “Credit Agreement”).

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

Subsequently, on June 5, 2023, we entered into a fifth amendment to our Credit Agreement, pursuant to which, among other things, our ABL Credit Facility was increased to $445.0 million.

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

As previously disclosed in our Form 8-K dated October 30, 2023, we became aware of an inadvertent calculation error contained in the June, July and August 2023 borrowing base certificates provided to the lenders under our Credit Agreement, all of which have since been remedied.

While the lenders determined the calculation error resulted in certain technical defaults under the Credit Agreement (including us not being in compliance with certain debt covenants), we and the lenders entered into a Waiver and Amendment Agreement (the “Waiver Agreement”) on October 24, 2023, pursuant to which the lenders waived all of the defaults and we agreed to certain temporary enhanced reporting requirements and temporary restrictions on certain payments.

These enhanced reporting requirements and restrictions will cease once we achieve certain excess availability thresholds.

At no time prior to or following entering into the Waiver Agreement were we prevented from borrowing under the Credit Agreement in the ordinary course.

Our working capital deficit increased $89.5 million to $108.4 million at October 28, 2023, compared to $18.9 million at October 29, 2022, primarily reflecting a decrease in our inventory balance from the accelerated liquidation of seasonal inventory and cash on hand, and an increase in borrowings on our ABL Credit Facility, partially offset by a decrease in our accounts payable balance.

At October 28, 2023, we had $358.7 million of outstanding borrowings under our $445.0 million ABL Credit Facility and we had total liquidity of $42.1 million, including $28.6 million of availability under our ABL Credit Facility (after factoring in our excess availability threshold, as defined below), and $13.5 million of cash on hand.

In addition, at October 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.

We expect to be able to meet our working capital and capital expenditure requirements for the foreseeable future by using our cash on hand, cash flows from operations, and availability under our ABL Credit Facility.

Our primary uses of cash are for working capital requirements, which are principally inventory purchases, the payment of interest expense on our revolving credit facility and interest-equivalent expenses on our term loans, and the financing of capital projects.

Our working capital deficit decreased $49.1 million to $63.6 million at May 4, 2024, compared to $112.7 million at April 29, 2023, primarily reflecting a decrease in borrowings on our $433.0 million asset-based revolving credit facility (the “ABL Credit Facility”) under our Credit Agreement and in our accounts payable balances, partially offset by a decrease in our inventory balance, driven by lower average unit costs and improved inventory management.

At May 4, 2024, we had $226.1 million of outstanding borrowings under our $433.0 million ABL Credit Facility and no borrowings under our Shariah-compliant $40.0 million senior unsecured credit facility with Mithaq (the “Mithaq Credit Facility”).

We had total liquidity of $60.7 million, including $47.7 million of availability under our ABL Credit Facility (after factoring in our excess availability threshold, as defined below), $40.0 million of availability under our Mithaq Credit Facility, and $13.0 million of cash on hand.

At May 4, 2024, we had $12.2 million of outstanding letters of credit, with an additional $12.8 million available for issuing letters of credit under our ABL Credit Facility.

We expect to be able to meet our working capital, capital expenditure, and debt service requirements for at least the next twelve months from the date that our consolidated financial statements for the First Quarter 2024 were issued, by using our cash on hand, cash flows from operations, and availability under our ABL Credit Facility and Mithaq Credit Facility.

ABL Credit Facility and 2021 Term Loan

We and certain of our subsidiaries maintain the $445.0 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., JPMorgan Chase Bank, N.A., and PNC Bank, National Association, 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.

The ABL Credit Facility includes a $25.0 million Canadian sublimit and a $50.0 million sublimit for standby and documentary letters of credit.

Under the ABL Credit Facility, based on the amount of our average daily excess availability under the facility, borrowings outstanding bear interest, at our option, at:

(i) the prime rate per annum, plus a margin of 1.250% or 1.500%;

(ii) the Secured Overnight Financing Rate (“SOFR”) per annum, plus a margin of 2.000% or 2.250%.

We are charged a fee of 0.200% on the unused portion of the commitments.

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 our 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.

Once we achieve a consolidated EBITDA of at least $200.0 million across four consecutive fiscal quarters, and based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility would bear interest, at our option, at:

We and certain of our subsidiaries maintain the $433.0 million ABL Credit Facility and, before it was fully repaid, maintained a $50.0 million term loan (the “2021 Term Loan”) under our Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”), Truist Bank, Bank of America, N.A., HSBC Business Credit (USA) Inc., JPMorgan Chase Bank, N.A., and PNC Bank, National Association as the Credit Agreement Lenders and Wells Fargo, as Administrative Agent, Collateral Agent, Swing Line Lender and, before the 2021 Term Loan was fully repaid, Term Agent.

The ABL Credit Facility will mature and, before it was fully repaid, the 2021 Term Loan would have matured, in November 2026.

As of the effective date of the Seventh Amendment, the ABL Credit Facility includes a $25.0 million Canadian sublimit and a $25.0 million sublimit for standby and documentary letters of credit.

Under the ABL Credit Facility, borrowings outstanding bear interest, at our option, at:

(i) the prime rate per annum, plus a margin of 2.000%;

(ii) the Secured Overnight Financing Rate (“SOFR”) per annum, plus 0.100%, plus a margin of 3.000%.

Prior to the effective date of the Seventh Amendment, we were charged a fee of 0.200% on the unused portion of the commitments.

As of the effective date of the Seventh Amendment, based on the size of the unused portion of the commitments, we are charged a fee ranging from 0.250% to 0.375%.

Letter of credit fees are at 1.125% for commercial letters of credit and 1.750% for standby letters of credit.

From and after February 4, 2025 and on the first day of each fiscal quarter thereafter, based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility will bear interest, at our option, at:

(i) the prime rate per annum, plus a margin of 1.750% or 2.000%;

(ii) the SOFR 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 average daily excess availability under the facility.

For the Third Quarter 2023 and Year-To-Date 2023, we recognized $7.2 million and $18.0 million, respectively, in interest expense related to the ABL Credit Facility.

For the Third Quarter 2022 and Year-To-Date 2022, we recognized $3.0 million and $6.9 million, respectively, in interest expense related to the ABL Credit Facility.

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.

(ii) the SOFR per annum, plus 0.100%, plus a margin of 2.750% or 3.000%.

Letter of credit fees will range from 1.000% to 1.125% for commercial letters of credit and will range from 1.500% to 1.750% for standby letters of credit.

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

For the First Quarter 2024 and First Quarter 2023, we recognized $5.7 million and $4.7 million, respectively, in interest expense related to the ABL Credit Facility.

Prior to the effective date of the Seventh Amendment, when the 2021 Term Loan was fully repaid, credit extended under the ABL Credit Facility was 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.

As of the effective date of the Seventh Amendment, the ABL Credit Facility is secured on a first priority basis by all of the foregoing collateral.

The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain customary 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, and a fixed-charge coverage ratio covenant, which only becomes effective in the event that borrowings and other uses of credit exceed the maximum borrowing availability (as reflected in the table below), based on our ability to maintain a certain amount of excess availability for borrowings (the “excess availability threshold”).

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 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.

Pursuant to the Seventh Amendment, the requisite payment condition thresholds for some of these covenants have been heightened, resulting in certain actions such as the repurchase of shares and payment of cash dividends becoming more difficult to perform.

Additionally, if we are unable to maintain a certain amount of excess availability for borrowings (the “excess availability threshold”), we may be subject to cash dominion.

The ABL Credit Facility contains 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, such as a change of control.

In October 2023, we became aware of inadvertent calculation errors contained in the June, July and August 2023 borrowing base certificates provided to the Credit Agreement Lenders under our Credit Agreement, all of which have since been remedied.

As the Credit Agreement Lenders determined that the calculation errors resulted in certain technical defaults under the Credit Agreement (including us not being in compliance with certain debt covenants), we and the Credit Agreement Lenders entered into a Waiver and Amendment Agreement (the “Waiver Agreement”) on October 24, 2023, pursuant to which the Credit Agreement Lenders waived all of the defaults and we agreed to certain temporary enhanced reporting requirements and temporary restrictions on certain payments.

These enhanced reporting requirements and restrictions will cease once we achieve certain excess availability thresholds.

At no time prior to or following entering into the Waiver Agreement were we prevented from borrowing under the Credit Agreement in the ordinary course in accordance with its terms.

During the First Quarter 2024, Mithaq became the controlling shareholder of the Company and this change of control triggered an event of default under the Credit Agreement, thus subjecting us to cash dominion by the Credit Agreement Lenders.

Subsequently, the Credit Agreement Lenders agreed to forbear from enforcing certain other rights and remedies during a limited forbearance period.

On April 16, 2024, we and certain of our subsidiaries entered into the Seventh Amendment to the Credit Agreement with the Credit Agreement Lenders that, among other things, provided a permanent waiver of the change of control event of default.

As of the effective date of the Seventh Amendment, the ABL Credit Facility was reduced from $445.0 million to $433.0 million, and until we achieve certain excess availability thresholds, the Seventh Amendment preserves the temporary enhanced reporting requirements under the Waiver Agreement and continues to impose cash dominion.

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

2023 January 28,

2023 October 29,

2024 February 3,

2024 April 29,

(in millions)

Total borrowing base availability, net of the excess availability threshold, as applicable $ 394.7 $ 363.8 $ 463.9

Credit facility maximum, net of the excess availability threshold, as applicable 400.5 315.0 350.0

Total borrowing base availability (1)

$ 286.0 $ 258.4 $ 408.9

Credit facility availability (2)

433.0 400.5 315.0

Maximum borrowing availability (3)

12 unchanged sentences

____________________________________________

(1) Lower of the credit facility maximum and the total borrowing base availability, both net of the excess availability threshold.

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

The Term Loan bears interest, payable monthly, at (a) the SOFR per annum plus 2.750% for any portion that is a SOFR loan, or (b) the base rate per annum plus 2.000% for any portion that is a base rate loan.

The Term Loan is pre-payable at any time without penalty, and does not require amortization.

For the Third Quarter 2023 and Year-To-Date 2023, we recognized $0.4 million, and $2.4 million, respectively, in interest expense related to the Term Loan.

For the Third Quarter 2022 and Year-To-Date 2022, we recognized $0.6 million, and $1.5 million, respectively, in interest expense related to the Term Loan.

The Term Loan is secured by a first priority security interest in 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 October 28, 2023, unamortized deferred financing costs amounted to $2.4 million, of which $2.2 million related to our ABL Credit Facility.

(1) In the First Quarter 2024, given that the Company was under cash dominion, the total borrowing base availability was only net of the availability block under the Credit Agreement as of the effective date of the Seventh Amendment, and the excess availability threshold was not applicable.

For the second quarter of Fiscal 2024, if applicable, the total borrowing base availability will need to be net of the excess availability threshold for 60 consecutive days after June 30, 2024 in order to exit cash dominion.

In Fiscal 2023, the total borrowing base availability was net of the excess availability threshold under the Credit Agreement prior to the effective date of the Seventh Amendment.

(2) In the First Quarter 2024, given that the Company was under cash dominion, the excess availability threshold under the Credit Agreement as of the effective date of the Seventh Amendment was not applicable to the determination of the credit facility availability.

For the second quarter of Fiscal 2024, if applicable, the credit facility availability will need to be net of the excess availability threshold for 60 consecutive days after June 30, 2024 in order to exit cash dominion.

In Fiscal 2023, the credit facility availability was net of the excess availability threshold under the Credit Agreement prior to the effective date of the Seventh Amendment.

(3) The lower of the credit facility availability and the total borrowing base availability.

(4) The sub-limit availability for letters of credit was $12.8 million at May 4, 2024, and $42.6 million at February 3, 2024 and April 29, 2023.

The 2021 Term Loan bore interest, payable monthly, at (a) the SOFR per annum plus 2.750% for any portion that was a SOFR loan, or (b) the base rate per annum plus 2.000% for any portion that was a base rate loan.

The 2021 Term Loan was pre-payable at any time without penalty, and did not require amortization.

For the First Quarter 2024 and First Quarter 2023, we recognized $1.1 million and $0.9 million, respectively, in interest expense related to the 2021 Term Loan.

As of the effective date of the Seventh Amendment, the 2021 Term Loan was fully repaid.

As of May 4, 2024, unamortized deferred financing costs amounted to $2.9 million related to our ABL Credit Facility.

Mithaq Term Loans

We and certain of our subsidiaries maintain an interest-free, unsecured and subordinated promissory note with Mithaq for a $78.6 million term loan (the “Initial Mithaq Term Loan”), consisting of (a) a first tranche in an aggregate principal amount of $30.0 million (the “First Tranche”) and (b) a second tranche in an aggregate principal amount of $48.6 million (the “Second Tranche”).

We received the First Tranche on February 29, 2024 and the Second Tranche on March 8, 2024.

The Initial Mithaq Term Loan matures on February 15, 2027.

The Initial Mithaq Term Loan is guaranteed by each of our subsidiaries that guarantee our ABL Credit Facility.

We and certain of our subsidiaries also maintain a Shariah-compliant unsecured and subordinated $90.0 million term loan with Mithaq (the “New Mithaq Term Loan”;

and together with the Initial Mithaq Term Loan, collectively, the “Mithaq Term Loans”).

The New Mithaq Term Loan matures on April 16, 2027, and requires monthly payments equivalent to interest charged at the SOFR plus 4.000% per annum, with such monthly payments to Mithaq deferred until April 30, 2025.

The New Mithaq Term Loan is guaranteed by each of our subsidiaries that guarantee our ABL Credit Facility.

For the First Quarter 2024, we recognized $0.4 million in deferred interest-equivalent expense related to the New Mithaq Term Loan.

The Mithaq Term Loans are subject to an amended and restated subordination agreement (as amended from time to time, the “Subordination Agreement”), dated as of April 16, 2024, by and among us and certain of our subsidiaries, Wells Fargo and Mithaq, pursuant to which the Mithaq Term Loans are subordinated in payment priority to our obligations under the Credit Agreement.

Subject to such subordination terms, the Mithaq Term Loans are prepayable at any time and from time to time without penalty and do not require any mandatory prepayments.

The Mithaq Term Loans contain customary affirmative and negative covenants substantially similar to a subset of the covenants set forth in the Credit Agreement, including limits on our ability to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, dispositions or restricted payments, or to change the nature of our business.

The Mithaq Term Loans, however, do not provide for any closing, prepayment or exit fees, or other fees typical for transactions of this nature, do not impose additional reserves on borrowings under the Credit Agreement, and do not contain certain other restrictive covenants.

The Mithaq Term Loans contain certain customary events of default, which include (subject in certain cases to customary grace periods), nonpayment of principal, breach of other covenants of the Mithaq Term Loans, inaccuracy in representations or warranties, acceleration of certain other indebtedness (including under the Credit Agreement), certain events of bankruptcy, insolvency or reorganization, such as a change of control, and invalidity of any part of the Mithaq Term Loans.

As of May 4, 2024 unamortized deferred financing costs amounted to $2.0 million related to the Mithaq Term Loans.

Maturities of the Company’s principal debt payments as of May 4, 2024 are as follows:

(in thousands)

Remainder of 2024

Mithaq Commitment Letter

On May 2, 2024, we entered into a commitment letter with Mithaq for a Shariah-compliant $40.0 million Mithaq Credit Facility.

Under the Mithaq Credit Facility, we may request for advances at any time prior to July 1, 2025.

If any debt is incurred under the Mithaq Credit Facility, it shall require monthly payments equivalent to interest charged at the SOFR plus 5.000% per annum.

Such debt shall be unsecured and shall be guaranteed by each of our subsidiaries that guarantee our ABL Credit Facility.

Similar to the Mithaq Term Loans, such debt shall also be subject to the Subordination Agreement, contain customary affirmative and negative covenants substantially similar to a subset of the covenants set forth in the Credit Agreement, and contain certain customary events of default.

Additionally, such debt shall require no mandatory prepayments and shall mature no earlier than July 1, 2025.

As of May 4, 2024, no debt had been incurred under the Mithaq Credit Facility.

Cash Flows and Capital Expenditures

Cash used in operating activities was $42.6 million during Year-To-Date 2023, compared to $17.0 million during Year-To-Date 2022.

Cash used in operating activities during Year-To-Date 2023 was primarily the result of a lower inventory balance and losses incurred during the period, partially offset by other planned changes in working capital.

Cash used in operating activities during Year-To-Date 2022 was primarily the result of the timing of inventory receipts as a result of global supply chain disruptions, partially offset by earnings generated during the period, the receipt of a net income tax refund of $15.7 million, as well as other planned changes in working capital.

Cash used in investing activities was $24.5 million during Year-To-Date 2023, compared to $31.6 million during Year-To-Date 2022, primarily driven by the timing of capital expenditures.

Cash provided by financing activities was $64.0 million during Year-To-Date 2023, compared to $14.0 million during Year-To-Date 2022.

The increase primarily resulted from net borrowings under our ABL Credit Facility, offset by lower repurchases of our common stock during Year-To-Date 2023 compared to Year-To-Date 2022.

We anticipate total capital expenditures to be in the range of $25 million to $30 million in Fiscal 2023, primarily to support our distribution center expansion, digital initiatives, and enhancement of our fulfillment capabilities, compared to $45.6 million in Fiscal 2022.

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.

Cash used in operating activities was $110.8 million during the First Quarter 2024, compared to cash provided by operating activities of $5.1 million during the First Quarter 2023.

Cash used in operating activities during the First Quarter 2024 was primarily the result of a higher inventory balance, lower accounts payable balance and losses incurred during the period.

Cash used in investing activities was $4.7 million during the First Quarter 2024, compared to $11.0 million during the First Quarter 2023, driven by lower capital expenditures.

Cash provided by financing activities was $114.9 million during the First Quarter 2024, compared to $7.8 million during the First Quarter 2023.

The increase primarily resulted from proceeds from the Mithaq Term Loans, partially offset by the repayment of the 2021 Term Loan.

Our ability to continue to meet our capital requirements in Fiscal 2024 depends on our cash on hand, our ability to generate cash flows from operations, and available borrowings under our ABL Credit Facility and Mithaq Credit Facility.

Cash flows generated from operations depends on our ability to achieve our financial plans.

We believe that our existing cash on hand, cash generated from operations, and funds available to us through our ABL Credit Facility will be sufficient to fund our capital and other cash requirements for the foreseeable future.

We believe that our cash on hand, cash generated from operations, and funds available to us through our ABL Credit Facility and Mithaq Credit Facility will be sufficient to fund our capital and other cash requirements for at least the next twelve months from the date that our consolidated financial statements for the First Quarter 2024 were issued.

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-Q

Item 2. Management’s Discussion and Analysis