What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-09-11 compared with 2024-06-13 · 161 added, 92 removed, 186 unchanged (58% of the section changed)

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

• Second Quarter 2024 — The thirteen weeks ended August 3, 2024

• Second Quarter 2023 — The thirteen weeks ended July 29, 2023

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

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

• Year-To-Date 2024 — The twenty-six weeks ended August 3, 2024

• Year-To-Date 2023 — The twenty-six weeks ended July 29, 2023

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

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• Comparable Retail Sales — Net sales, in constant currency, from stores that have been open for at least 14 consecutive months and from our e-commerce store, excluding postage and handling fees.

Store closures in the current fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes.

Store closures in the current

fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes.

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

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• SG&A — Selling, general, and administrative expenses

We are an omni-channel children’s specialty portfolio of brands with an industry-leading digital-first operating model.

We are an omni-channel children’s specialty portfolio of brands.

We design, contract to manufacture, and sell fashionable, high quality apparel, accessories and footwear predominantly at value prices, primarily under our proprietary brands:

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

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.

As of August 3, 2024, we had 515 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 202 international points of distribution with our five franchise partners in 15 countries.

Segment Reporting

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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 no customer that individually accounted for more than 10% of our net sales.

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 for the Second Quarter 2024 and Year-To-Date 2024.

Recent Developments

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.

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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.

On August 23, 2024, we appointed Claudia Lima-Guinehut as Brand President, effective as of September 9, 2024.

Lima-Guinehut succeeded Maegan Markee, who departed pursuant to a mutual agreement with the Company effective as of June 14, 2024.

Operating Highlights

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.

Net sales decreased $25.9 million, or 7.5%, to $319.7 million during the Second Quarter 2024 from $345.6 million during the Second Quarter 2023, primarily due to an anticipated decrease in e-commerce revenue, as we proactively rationalized our unprofitable promotional strategies, inflated marketing spend and “free shipping” offers to significantly improve profitability, which was successful during the Second Quarter 2024.

These efforts not only improved the profitability of our e-commerce business, despite the lower revenue, but also benefited the brick-and-mortar channel as the stores business experienced a positive comparable store sales for the first time in ten fiscal quarters.

The wholesale business also rebounded with double-digit growth after a decline in the First Quarter 2024.

During the Second Quarter 2024, we closed three stores and did not open any new stores.

Comparable retail sales decreased 7.2% for the Second Quarter 2024, largely driven by the planned decrease in e-commerce as this business decreased by a double-digit percentage, as we proactively sacrificed unprofitable sales to improve profitability.

Stores experienced a positive comparable store sales result for the first time since the post COVID-19 period of 2021, driven by stronger units per transaction and conversion metrics, and improving traffic trends.

Gross profit increased $24.0 million to $111.8 million or 35.0% of net sales during the Second Quarter 2024 from $87.8 million or 25.4% of net sales during the Second Quarter 2023.

The 960 basis point increase was caused by a combination of factors, including reductions in product input costs, including cotton and supply chain costs, which negatively impacted margins in the prior year.

These improvements were combined with the success of our rationalization of profit-draining promotional strategies and shipping offers, which resulted in a significant improvement in the leverage of e-commerce freight costs due to our new shipping threshold for free shipping.

Operatin g loss decreased $15.1 million to $(21.8) million during the Second Quarter 2024 compared to a loss of $(36.9) million during the Second Quarter 2023.

Operating loss was impacted by incremental expenses of $36.0 million, which included an impairment charge of $28.0 million on the Gymboree tradename, primarily due to reductions in Gymboree sales forecasts and a reduction in the royalty rate used to value the tradename, and restructuring costs of $6.1 million due to recent changes in our senior leadership team.

Operating margin leveraged 390 basis points to (6.8)% of net sales.

Net loss decreased $3.3 million to $(32.1) million, or $(2.51) per diluted share, during the Second Quarter 2024 compared to $(35.4) million, or $(2.82) per diluted share, during the Second Quarter 2023, due to the factors discussed above.

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.

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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.

We have closed 684 stores since the announcement of our fleet optimization initiative in 2013, including three during the Second 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.

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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.

As of August 3, 2024, there was $156.7 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

2024 April 29,

Thirteen Weeks Ended Twenty-six Weeks Ended

2024 July 29,

2023 August 3,

2024 July 29,

Average Translation Rates (1)

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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 decreased 560 basis points to 40.7% of Net sales during the First Quarter 2024 from 35.1% during the First Quarter 2023.

For example, SG&A decreased 230 basis points to 30.1% of Net sales during the Second Quarter 2024 from 32.4% during the Second 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

2024 April 29,

Thirteen Weeks Ended Twenty-six Weeks Ended

2024 July 29,

2023 August 3,

2024 July 29,

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

Cost of sales (exclusive of depreciation and amortization) 65.4 70.0

Cost of sales 65.0 74.6 65.2 72.4

Gross profit 35.0 25.4 34.8 27.6

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

Thirteen Weeks Ended

2024 April 29,

Thirteen Weeks Ended Twenty-six Weeks Ended

2024 July 29,

2023 August 3,

2024 July 29,

(in thousands)

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Total net sales $ 319,655 $ 345,599 $ 587,533 $ 667,239

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.

Second Quarter 2024 Compared to Second Quarter 2023

Net sales decreased $25.9 million or 7.5%, to $319.7 million during the Second Quarter 2024 from $345.6 million during the Second Quarter 2023, primarily due to an anticipated decrease in e-commerce revenue, as we proactively rationalized our unprofitable promotional strategies, inflated marketing spend and “free shipping” offers to significantly improve profitability, which was successful during the Second Quarter 2024.

The wholesale business also rebounded with double-digit growth after a decline in the First Quarter 2024.

The Children’s Place U.S.

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.

net sales decreased $20.8 million or 6.6%, to $292.4 million in the Second Quarter 2024, compared to $313.2 million in the Second Quarter 2023.

This decrease was primarily due to an anticipated decrease in e-commerce revenue, as we proactively rationalized our unprofitable promotional strategies, inflated marketing spend and “free shipping” offers to significantly improve profitability.

The wholesale business also rebounded with double-digit growth after a decline in the First Quarter 2024.

The Children’s Place International net sales decreased $5.1 million or 15.8%, to $27.3 million in the Second Quarter 2024, compared to $32.4 million in the Second Quarter 2023.

Total e-commerce sales, which include postage and handling, were 49.3% of net retail sales and 41.7% of net sales during the Second Quarter 2024, compared to 50.8% and 44.3%, respectively, during the Second Quarter 2023.

Gross profit increased $24.0 million to $111.8 million in the Second Quarter 2024, compared to $87.8 million in the Second Quarter 2023.

Gross margin increased 960 basis points to 35.0% of net sales in the Second 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 $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.

Selling, general, and administrative expenses decreased $15.9 million to $96.1 million during the Second Quarter 2024 from $112.0 million during the Second Quarter 2023.

SG &A leveraged 230 basis points to 30.1% of net sales in the Second Quarter 2024.

The Second Quarter 2024 results included incremental operating expenses of $7.8 million, including restructuring costs of $6.1 million and credit agreement lender-required consulting costs of $1.1 million.

Th e Second Quarter 2023 results included incremental operating expenses of $10.3 million, including restructuring costs of $9.7 million.

Excluding the impact of these incremental charges, SG&A leveraged 180 basis points to 27.6% of net sales, primarily as a result of significant reductions in store payroll and home office payroll, and the elimination of inflated and unprofitable marketing costs.

This represents the lowest level of Adjusted selling, general, and administrative expenses in over 15 years for the second quarter of a fiscal year.

Depreciation and amortization was $9.5 million during the Second Quarter 2024, compared to $12.0 million during the Second 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.

Asset impairment charges were $28.0 million during the Second Quarter 2024 due to the reduction in fair value of the Gymboree tradename, which was primarily due to reductions in Gymboree sales forecasts and a reduction in the royalty rate used to value the tradename.

Asset impairment charges were $0.8 million during the Second Quarter 2023 , inclusive of right-of-use (“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.

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 .

Operating loss decreased $15.1 million to $(21.8) million during the Second Quarter 2024, compared to $(36.9) million during the Second Quarter 2023.

Operating loss was impacted by incremental expenses of $36.0 million, which included an impairment charge of $28.0 million on the Gymboree tradename, and restructuring costs of $6.1 million due to recent changes in our senior leadership team.

These charges have been classified as non-GAAP adjustments, leading to a shift back to profitability with an adjusted operating income of $14.2 million in the Second Quarter 2024, or an improvement of $39.2 million compared to an adjusted operating loss of $(25.0) million in the Second Quarter 2023, and leveraged 1,170 basis points to 4.5% of net sales.

Net interest expense was $9.2 million during the Second Quarter 2024, compared to $7.6 million during the Second Quarter 2023.

The increase in interest expense was primarily driven by higher average interest rates associated with our revolving credit facility due to the impact of refinancings and continued market-based rate increases, partially offset by continued benefits associated with certain non-interest bearing loans from our majority shareholder, Mithaq Capital SPC, a Cayman segregated portfolio company (“Mithaq”).

Provision (benefit) for income taxes was a provision of $1.1 million during the Second Quarter 2024, compared to a benefit of $(9.2) million during the Second Quarter 2023.

Our effective tax rate was a provision of (3.6)% and a benefit of 20.7% in the Second Quarter 2024 and Second Quarter 2023, respectively.

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

Net loss , which included certain non-cash impairment charges and non-operating restructuring charges, decreased $3.3 million to $(32.1) million, or $(2.51) per diluted share during the Second Quarter 2024, compared to $(35.4) million, or $(2.82) per diluted share during the Second Quarter 2023, due to the factors discussed above .

Adjusted net income shifted back to profitability after two years of losses during the Second Quarter 2024, improving by $30.4 million to $3.9 million, or $0.30 per diluted share, compared to an adjusted net loss of $(26.5) million, or $(2.12) per diluted share during the Second Quarter 2023.

Year-To-Date 2024 Compared to Year-To-Date 2023

Net sales decreased $79.7 million or 11.9% , to $587.5 million during Year-To-Date 2024 from $667.2 million during Year-To-Date 2023, primar ily due to reductions in retail sales due to lower store count, and anticipated declines in e-commerce demand due to the rationalization of promotions, reductions in inflated and unprofitable marketing spend, and the strategic decision to change “free shipping” offers, as we proactively sacrificed unprofitable sales in an effort to improve profitability.

Comparable retail sales decreased 9.4% during Year-To-Date 2024.

The Children’s Place U.S.

net sales decreased $68.1 million or 11.2%, to $538.6 million during Year-To-Date 2024, compared to $606.7 million during Year-To-Date 2023.

This decrease was primarily due to lower store count, and anticipated declines in e-commerce demand due to the rationalization of promotions, reductions in inflated and unprofitable marketing spend, and the strategic decision to change “free shipping” offers, as we proactively sacrificed unprofitable sales in an effort to improve profitability.

The Children’s Place International net sales decreased $11.5 million or 19.1%, to $49.0 million during Year-To-Date 2024, compared to $60.5 million during Year-To-Date 2023.

Total e-commerce sales, which include postage and handling, were 51.2% of net retail sales and 45.1% of net sales during Year-To-Date 2024, compared to 48.0% and 42.9%, respectively, during Year-To-Date 2023.

Gross profit increased $20.3 million to $204.5 million during Year-To-Date 2024, compared to $184.2 million during Year-To-Date 2023.

Gross margin leveraged 720 basis points to 34.8% of net sales during Year-To-Date 2024.

The increase was primarily due to reductions in product input costs, including cotton and supply chain costs, which negatively impacted margins in the prior year.

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 $19.7 million to $205.2 million during Year-To-Date 2024 from $224.9 million during Year-To-Date 2023.

SG&A deleveraged 120 basis points to 34.9% of net sales during Year-To-Date 2024.

The Year-To-Date 2024 results included incremental operating expenses, including costs associated with our change of control of $13.7 million, financing related charges of $6.7 million, restructuring costs of $6.4 million, and credit agreement lender-required consulting costs of $1.9 million, partially offset by the reversal of a legal settlement accrual of $2.3 million.

The Year-To-Date 2023 results included incremental operating expenses, including restructuring costs of $9.9 million, contract termination fees of $3.0 million, and fleet optimization costs of $1.2 million.

Excluding the impact of these incremental charges, SG&A leveraged 150 basis points to 30.1% of net sales, primarily as a result of significant reductions in store payroll and home office payroll, and the elimination of inflated and unprofitable marketing costs.

This represents the lowest level of Adjusted selling, general, and administrative expenses in over 15 years for the first two quarters of a fiscal year.

Depreciation and amortization was $21.1 million during Year-To-Date 2024, compared to $23.8 million during Year-To-Date 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 the accelerated depreciation related to the voluntary early termination of the corporate office lease.

Asset impairment charges were $28.0 million during Year-To-Date 2024 due to the reduction in fair value of the Gymboree tradename, which was primarily due to reductions in Gymboree sales forecasts and a reduction in the royalty rate used to value the tradename.

Asset impairment charges were $2.5 million during Year-To-Date 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.

Operating loss decreased $17.2 million to $(49.8) million during Year-To-Date 2024, compared to $(67.0) million during Year-To-Date 2023.

Operating loss was impacted by incremental expenses of $58.9 million, which included an impairment charge of $28.0 million on the Gymboree tradename, primarily due to reductions in Gymboree sales forecasts and a reduction in the royalty rate used to value the tradename, restructuring costs of $6.4 million primarily due to recent changes in our senior leadership team, and several charges due to our recent change of control, due to the investment in us by Mithaq, and several new financing initiatives, 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.

These charges have been classified as non-GAAP adjustments, leading to a shift back to profitability with an adjusted operating income of $9.2 million during Year-To-Date 2024, or an improvement of $58.7 million compared to an adjusted operating loss of $(49.5) million during Year-To-Date 2023, and leveraged 900 basis points to 1.6% of net sales.

Net interest expense was $17.0 million during Year-To-Date 2024, compared to $13.5 million during Year-To-Date 2023.

The increase was primarily driven by higher average interest rates associated with our revolving credit facility due to the impact of refinancings and continued market-based rate increases, partially offset by continued benefits associated with certain non-interest bearing loans from our majority shareholder, Mithaq.

Provision (benefit) for income taxes was a provision of $3.2 million during Year-To-Date 2024 compared to a benefit of $(16.4) million during Year-To-Date 2023.

Our effective tax rate was a provision of (4.8)% and a benefit of 20.3% during Year-To-Date 2024 and Year-To-Date 2023, respectively.

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

Net loss , which included certain non-cash impairment charges and non-operating restructuring charges, increased $(5.7) million to $(69.9) million , or $(5.50) per diluted share during Year-To-Date 2024, compared to $(64.2) million , or $(5.16) per diluted share during Year-To-Date 2023 , due to the factors discussed above.

Adjusted net loss, which was driven by losses in the First Quarter 2024 and partially offset by profits in the Second Quarter 2024, was $(11.0) million, or $(0.87) per diluted share during Year-To-Date 2024 , compared to $(51.2) million, or $(4.12) per diluted share during Year-To-Date 2023.

LIQUIDITY AND CAPITAL RESOURCES

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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.

Our working capital deficit decreased $74.9 million to $71.2 million at August 3, 2024, compared to $146.1 million at July 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 an increase in accounts receivable balances.

At August 3, 2024, we had $316.7 million of outstanding borrowings under our $433.0 million ABL Credit Facility and no borrowings under our $40.0 million senior unsecured credit facility with Mithaq (the “Mithaq Credit Facility”).

We had total liquidity of $116.9 million, including $67.3 million of availability under our ABL Credit Facility, $40.0 million of availability under our Mithaq Credit Facility, and $9.6 million of cash on hand.

At August 3, 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 Second 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.

This liquidity may be further supplemented with proceeds from a future rights offering, if any, that we are currently contemplating.

ABL Credit Facility and 2021 Term Loan

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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.

As of April 18, 2024, which is 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:

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(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%.

Prior to April 18, 2024, we were charged a fee of 0.200% on the unused portion of the commitments.

As of April 18, 2024, 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.

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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.

For the Second Quarter 2024 and Year-To-Date 2024, we recognized $6.3 million and $12.0 million, respectively, in interest expense related to the ABL Credit Facility.

For the Second Quarter 2023 and Year-To-Date 2023, we recognized $6.1 million and $10.8 million, respectively, in interest expense related to the ABL Credit Facility.

Prior to April 18, 2024, 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.

As of April 18, 2024, 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 of default, as further described below.

We are not subject to any early termination fees.

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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.

As of April 18, 2024, the ABL Credit Facility was reduced from $445.0 million to $433.0 million, and until we achieved certain excess availability thresholds, the Seventh Amendment preserved the temporary enhanced reporting requirements under the Waiver Agreement and continued to impose cash dominion.

As of August 29, 2024, we are no longer under cash dominion and we have reverted to the standard reporting requirements under the Credit Agreement.

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

2024 February 3,

2024 April 29,

2024 July 29,

(in millions)

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____________________________________________

(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.

(1) In the Second Quarter 2024, given that we were under cash dominion, the excess availability threshold was not applicable to the total borrowing base availability.

As of August 29, 2024, we are no longer under cash dominion.

In Fiscal 2023, the total borrowing base availability was calculated net of the excess availability threshold under the Credit Agreement, as prior to the Seventh Amendment, crossing that threshold would have resulted in cash dominion, which would have triggered a fixed charge coverage ratio covenant test and would likely have led to a default under the Credit Agreement.

As of the Seventh Amendment, the fixed charge coverage ratio covenant has been removed from the Credit Agreement.

(2) In the Second Quarter 2024, given that we were under cash dominion, the excess availability threshold was not applicable to the determination of the credit facility availability.

As of August 29, 2024, we are no longer under cash dominion.

In Fiscal 2023, the credit facility availability was calculated net of the excess availability threshold, as prior to the Seventh Amendment, crossing that threshold would have resulted in cash dominion, which would have triggered a fixed charge coverage ratio covenant test and would likely have led to a default under the Credit Agreement.

As of the Seventh Amendment, the fixed charge coverage ratio covenant has been removed from the Credit Agreement.

(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.

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

We recognized $1.1 million in interest expense related to the 2021 Term Loan during Year-To-Date 2024.

For the Second Quarter 2023 and Year-To-Date 2023, we recognized $1.0 million and $1.9 million, respectively, in interest expense related to the 2021 Term Loan.

As of April 18, 2024, the 2021 Term Loan was fully repaid.

As of August 3, 2024, unamortized deferred financing costs amounted to $2.4 million related to our ABL Credit Facility.

Mithaq Term Loans

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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”;

We and certain of our subsidiaries also maintain an 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”).

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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.

For the Second Quarter 2024 and Year-To-Date 2024, we recognized $2.1 million and $2.5 million, respectively, 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.

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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:

As of August 3, 2024 unamortized deferred financing costs amounted to $3.2 million related to the Mithaq Term Loans.

Maturities of our principal debt payments as of August 3, 2024 are as follows:

August 3, 2024

(in thousands)

Remainder of 2024

Total related party debt

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.

On May 2, 2024, we entered into a commitment letter (“the Commitment Letter”) with Mithaq for a $40.0 million Mithaq Credit Facility.

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

On September 10, 2024, we entered into an Amendment No.

1 to the Commitment Letter with Mithaq, that extended the deadline for requesting advances until July 1, 2026.

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.

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Additionally, such debt shall require no mandatory prepayments and shall mature no earlier than July 1, 2026.

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

As of August 3, 2024, no debt had been incurred under the Mithaq Credit Facility.

Cash Flows and Capital Expenditures

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.

Cash used in operating activities was $194.7 million during Year-To-Date 2024, compared to $32.7 million during Year-To-Date 2023.

Cash used in operating activities during Year-To-Date 2024 was primarily the result of higher inventory purchases and a lower accounts payable balance compared to Fiscal 2023.

Cash used in investing activities was $12.5 million during Year-To-Date 2024, compared to $18.3 million during the Year-To-Date 2023, driven by lower capital expenditures.

Cash provided by financing activities was $203.7 million during Year-To-Date 2024, compared to $53.0 million during Year-To-Date 2023.

The increase primarily resulted from proceeds from higher net borrowings under our ABL Credit Facility and 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 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