Childrens Place, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains or may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company ’ s strategic initiatives and results of operations, including adjusted net income (loss) per diluted share. Forward-looking statements typically are identified by use of terms such as “may,” “will,” “should,” “plan,” “project,” “expect,” “anticipate,” “estimate,” and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are based upon the Company ’ s current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ materially. Some of these risks and uncertainties are described in the Company ’ s filings with the Securities and Exchange Commission, including in the "Risk Factors" section 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 litigation 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 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 2024 — The thirteen weeks ended November 2, 2024 • Third Quarter 2023 — The thirteen weeks ended October 28, 2023 • Second Quarter 2024 — The thirteen weeks ended August 3, 2024 • Year-To-Date 2024 — The thirty-nine weeks ended November 2, 2024 • Year-To-Date 2023 — The thirty-nine weeks ended October 28, 2023 • Fiscal 2024 — The fifty-two weeks ending February 1, 2025 • Fiscal 2023 — The fifty-three weeks ended February 3, 2024 • SEC — U.S. Securities and Exchange Commission • U.S. GAAP — Generally Accepted Accounting Principles in the United States • FASB — Financial Accounting Standards Board • FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants • AUR — Average unit retail price • 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 24 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. However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is reopened for a full fiscal month. • Gross Margin — Gross profit expressed as a percentage of net sales • SG&A — Selling, general, and administrative expenses OVERVIEW Our Business 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”. Our global retail and wholesale network includes two digital storefronts, more than 500 stores in North America, wholesale marketplaces, 199 international points of distribution in 15 countries through six international franchise partners, and social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest. Segment Reporting In accordance with FASB ASC 280— Segment Reporting , we report segment data based on geography: The Children’s Place U.S. and The Children’s Place International. Each segment includes an e-commerce business located at www.childrensplace.com and www.gymboree.com. Included in The Children’s Place U.S. segment are our U.S. and Puerto Rico-based stores and revenue from our U.S.-based wholesale business. Included in The Children’s Place International segment are our Canadian-based stores, revenue from our Canadian-based wholesale business, as well as revenue from international franchisees. We measure our segment profitability based on operating income, defined as income before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children’s Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales. The assets related to these functions are not allocated. 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 for the Third 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 Third Quarter 2024. These macroeconomic conditions are expected to continue to have an adverse impact during the remainder of Fiscal 2024. On August 23, 2024, we appointed Claudia Lima-Guinehut as Brand President, effective as of September 9, 2024. Ms. Lima-Guinehut succeeded Maegan Markee, who departed pursuant to a mutual agreement with the Company effective as of June 14, 2024. On September 18, 2024, we entered into a lease agreement for office space in Lahore, Pakistan, with the lease term commencing on December 1, 2024 and expiring on November 30, 2034. We expect to utilize this office space primarily for back-office support, sourcing services and other business and corporate matters as needed. On October 3, 2024, we announced Sheamus Toal will be leaving his positions as Chief Operating Officer and Chief Financial Officer, effective December 13, 2024. On October 30, 2024, we announced our partnership with global fashion and lifestyle online retailer, SHEIN. This collaboration brings our apparel to SHEIN’s platform, opening up opportunities for us to reach customers that would not typically be found in our customer file. This partnership marks a significant step forward, combining our heritage and value with SHEIN’s global reach. On November 19, 2024, we opened our first Gymboree store at the Garden State Plaza in Paramus, New Jersey. 25 Also, as previously disclosed, we entered into a letter agreement with our majority shareholder, Mithaq Capital SPC, a Cayman segregated portfolio company (“Mithaq”), on February 29, 2024 (the “Letter Agreement”), pursuant to which, among other things, we are required to use reasonable best efforts to prepare, file, and cause to be effective a registration statement, prospectus and other materials required under applicable law to permit, and to then commence and complete, a rights offering. In furtherance of our efforts to comply with such pre-existing contractual obligation, and following the determination of the disinterested directors on our current Board of Directors (the “Disinterested Directors”) that a rights offering is in the best interests of the Company and its stockholders and would, among other things, provide us with an opportunity to raise capital and deleverage and more generally strengthen our balance sheet, on September 25, 2024, the Disinterested Directors unanimously approved the commencement and completion of a rights offering. On October 15, 2024, we filed a preliminary prospectus with the SEC for the rights offering on Form S-1. On December 3, 2024, the Disinterested Directors unanimously approved that the record date for the rights offering would be December 13, 2024. Operating Highlights Net sales decreased $90.0 million, or 18.8%, to $390.2 million during the Third Quarter 2024 from $480.2 million during the Third Quarter 2023, driven by a combination of the anticipated decrease in e-commerce revenue, as we proactively rationalized our unprofitable promotional strategies, inflated marketing spend and “free shipping” offers to improve profitability, in addition to decreased brick and mortar revenue due to a lower store count and lower transactions. These efforts were successful during the Third Quarter 2024 in driving profitability despite having lower sales. During the Third Quarter 2024, we closed five stores and did not open any new stores. Comparable retail sales decreased 17.1% for the Third Quarter 2024, largely driven by the planned decrease in e-commerce revenue, as we proactively sacrificed unprofitable sales to improve profitability. Gross profit decreased $23.8 million to $138.3 million during the Third Quarter 2024, compared to $162.1 million during the Third Quarter 2023. Gross margin, however, increased 180 basis points to 35.5% of net sales in the Third Quarter 2024, compared to 33.7% of net sales in the Third Quarter 2023. The increase in gross margin 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 in input costs were combined with the success of our strategies to rationalize profit-draining promotions and limit unprofitable shipping offers, which resulted in a significant improvement in the leverage of e-commerce freight costs. Operatin g income was $29.3 million during the Third Quarter 2024 compared to $45.0 million during the Third Quarter 2023. Operating margin deleveraged 190 basis points to 7.5% of net sales. Net income was $20.1 million, or $1.57 per diluted share, during the Third Quarter 2024 compared to $38.5 million, or $3.05 per diluted share, during the Third 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. Digital remains a top priority and we continue to expand our digital capabilities. 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. As we continue to focus on our digital business, 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. 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 November 2, 2024, there was $156.7 million remaining availability under the Share Repurchase Program. 26 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. dollars. The table below summarizes the average translation rates that most significantly impact our operating results: Thirteen Weeks Ended Thirty-nine Weeks Ended November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023 Average Translation Rates (1) Canadian dollar 0.7324 0.7374 0.7325 0.7418 Hong Kong dollar 0.1285 0.1278 0.1281 0.1276 ____________________________________________ (1) The average translation rates are the average of the monthly translation rates during each period to translate the respective statement of operations. Each rate represents the U.S. dollar equivalent of the respective foreign currency. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES We describe our significant accounting policies in “Note 1. 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. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses reported during the period. We continuously review the appropriateness of the estimates used in preparing our financial statements; however, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. 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 February 3, 2024. Our critical accounting estimates include impairment of long-lived assets, impairment of indefinite-lived intangible assets, income taxes, stock-based compensation, and inventory valuation. There have been no material changes in these critical accounting estimates from those described in our most recent Annual Report on Form 10-K. Recent Accounting Standards Updates 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 We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory. Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance, including net sales. The following table sets forth, for the periods indicated, selected data from our Consolidated Statements of Operations expressed as a percentage of Net sales. We primarily evaluate the results of our operations as a percentage of Net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of Net sales (i.e., “basis points”). For example, SG&A increased 380 basis points to 25.6% of Net sales during the Third Quarter 2024 from 21.8% during the Third Quarter 2023. Accordingly, to the extent that 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. Conversely, if our sales increase at a faster rate than our costs (i.e., “leveraging”), the more efficiently we have utilized the investments we have made in our business. 27 Thirteen Weeks Ended Thirty-nine Weeks Ended November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 64.5 66.3 64.9 69.8 Gross profit 35.5 33.7 35.1 30.2 Selling, general, and administrative expenses 25.6 21.8 31.2 28.7 Depreciation and amortization 2.4 2.4 3.1 3.1 Asset impairment charges — 0.1 2.9 0.3 Operating income (loss) 7.5 9.4 (2.1) (1.9) Related party interest expense (0.5) — (0.5) — Other interest expense, net (2.1) (1.7) (2.3) (1.9) Income (loss) before provision (benefit) for income taxes 4.9 7.7 (4.9) (3.8) Provision (benefit) for income taxes (0.2) (0.3) 0.2 (1.6) Net income (loss) 5.1 % 8.0 % (5.1) % (2.2) % Number of Company stores, end of period 510 591 510 591 The following table sets forth net sales by segment, for the periods indicated: Thirteen Weeks Ended Thirty-nine Weeks Ended November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023 (in thousands) Net sales: The Children’s Place U.S. $ 356,163 $ 441,865 $ 894,744 $ 1,048,568 The Children’s Place International 34,010 38,369 82,962 98,906 Total net sales $ 390,173 $ 480,234 $ 977,706 $ 1,147,474 Third Quarter 2024 Compared to Third Quarter 2023 Net sales decreased $90.0 million or 18.8%, to $390.2 million during the Third Quarter 2024 from $480.2 million during the Third Quarter 2023, driven by a combination of the anticipated decrease in e-commerce revenue, as we proactively rationalized our unprofitable promotional strategies, inflated marketing spend and “free shipping” offers to improve profitability, in addition to decreased brick and mortar revenue due to a lower store count and lower transactions. These efforts were successful during the Third Quarter 2024 in driving profitability despite having lower sales. During the Third Quarter 2024, we closed five stores and did not open any new stores. Comparable retail sales decreased 17.1% for the Third Quarter 2024, largely driven by the planned decrease in e-commerce revenue, as we proactively sacrificed unprofitable sales to improve profitability. The Children’s Place U.S. net sales decreased $85.7 million or 19.4%, to $356.2 million in the Third Quarter 2024, compared to $441.9 million in the Third Quarter 2023, driven by a combination of the anticipated decrease in e-commerce revenue, as we proactively rationalized our unprofitable promotional strategies, inflated marketing spend and “free shipping” offers to improve profitability, in addition to decreased brick and mortar revenue due to a lower store count and lower transactions. The Children’s Place International net sales decreased $4.4 million or 11.4%, to $34.0 million in the Third Quarter 2024, compared to $38.4 million in the Third Quarter 2023, driven by a combination of the anticipated decrease in e-commerce revenue, as we proactively rationalized our unprofitable promotional strategies, inflated marketing spend and “free shipping” offers to improve profitability. Total e-commerce sales, which include postage and handling, were 55.3% of net retail sales and 46.5% of net sales during the Third Quarter 2024, compared to 57.0% and 50.0%, respectively, during the Third Quarter 2023. 28 Gross profit decreased $23.8 million to $138.3 million in the Third Quarter 2024, compared to $162.1 million in the Third Quarter 2023. Gross margin, however, increased 180 basis points to 35.5% of net sales in the Third Quarter 2024, compared to 33.7% of net sales in the Third Quarter 2023. The increase in gross margin 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 in input costs were combined with the success of our strategies to rationalize profit-draining promotions and limit unprofitable shipping offers, which resulted in a significant improvement in the leverage of e-commerce freight costs. 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 were well-controlled at $99.8 million during the Third Quarter 2024, compared to $104.8 million during the Third Quarter 2023 . The Third Quarter 2024 results included incremental operating expenses of $6.0 million, including restructuring costs of $4.8 million, primarily due to recent changes in our senior leadership team, lender required consulting fees of $0.5 million, broken financing deal fees of $0.3 million, other professional and consulting fees of $0.2 million, and fleet optimization costs of $0.1 million. The Third Quarter 2023 results included incremental operating expenses of $1.9 million, including restructuring costs of $0.8 million, credit agreement amendment costs of $0.8 million, and fleet optimization costs of $0.4 million. Excluding the impact of these incremental charges, Adjusted SG&A expenses were $93.8 million during the Third Quarter 2024, compared to $102.9 million during the Third Quarter 2023, and deleveraged 260 basis points to 24.0% of net sales, given the planned lower sales. We were successful in reducing Adjusted SG&A expenses by $9.1 million despite the reversal of $12.6 million in incentive compensation and equity compensation accruals in the prior year. This decrease was due to significant reductions in marketing expenses, as we eliminated inflated and unprofitable marketing costs and to a lesser extent, due to reductions in store payroll and home office payroll, partially offset by the impact of the change in incentive compensation and equity compensation accruals. This represents the lowest level of Adjusted selling, general, and administrative expenses in over 15 years for the third quarter of a fiscal year. Depreciation and amortization was $9.3 million during the Third Quarter 2024, compared to $11.7 million during the Third 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 $0.6 million during the Third 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 during the Third Quarter 2024 . Operating income was $29.3 million during the Third Quarter 2024, compared to $45.0 million during the Third Quarter 2023. The Third Quarter 2024 results were impacted by incremental operating expenses of $6.0 million, as described within SG&A expenses above. The Third Quarter 2023 results were impacted by incremental operating expenses of $2.9 million, including SG&A expenses of $1.9 million, as described above, asset impairment charges of $0.6 million, and accelerated depreciation of $0.5 million. Excluding the impact of these incremental charges, Adjusted operating income was $35.3 million in the Third Quarter 2024, compared to $47.9 million in the Third Quarter 2023, and deleveraged 100 basis points to 9.0% of net sales. The Children’s Place International operating margin was negatively impacted during the Third Quarter 2024 due to the closure of our distribution center in Toronto, Canada, and is expected to be partially offset by potential duty drawback claims in the future. Related party interest expense was $2.1 million during the Third Quarter 2024, due to interest-bearing borrowings from loans entered into with Mithaq during Fiscal 2024. There was no related party interest expense during the Third Quarter 2023. Other interest expense, net was $8.0 million during the Third Quarter 2024, compared to $7.9 million during the Third 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, partially offset by lower average borrowings. Provision (benefit) for income taxes was a benefit of $(0.9) million during the Third Quarter 2024, compared to $(1.5) million during the Third Quarter 2023. Our effective tax rate was a benefit of (4.7)% and (3.9)% in the Third Quarter 2024 and Third Quarter 2023, respectively. The change in our effective tax rate and income tax provision (benefit) for the Third Quarter 2024 compared to the Third Quarter 2023 was primarily driven by the establishment of a valuation allowance against our net deferred tax assets in Fiscal 2023, partially offset by a favorable shift in the jurisdictional earnings mix in Fiscal 2024. In the comparable period last year, we calculated the provision (benefit) for income taxes based on the actual effective tax rate for Year-To-Date 2023 by applying the discrete method. Net income was $20.1 million, or $1.57 per diluted share during the Third Quarter 2024, compared to $38.5 million, or $3.05 per diluted share during the Third Quarter 2023, due to the factors discussed above . 29 Year-To-Date 2024 Compared to Year-To-Date 2023 Net sales decreased $169.8 million or 14.8% , to $977.7 million during Year-To-Date 2024 from $1.147 billion during Year-To-Date 2023, primar ily due to reductions in retail sales due to a 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 12.6% during Year-To-Date 2024, largely due to the planned decrease in e-commerce revenue. The Children’s Place U.S. net sales decreased $153.8 million or 14.7%, to $894.7 million during Year-To-Date 2024, compared to $1.049 billion during Year-To-Date 2023, primarily due to a 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 $15.9 million or 16.1%, to $83.0 million during Year-To-Date 2024, compared to $98.9 million during Year-To-Date 2023, primarily due to 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. Total e-commerce sales, which include postage and handling, were 52.8% of net retail sales and 45.7% of net sales during Year-To-Date 2024, compared to 52.1% and 46.2%, respectively, during Year-To-Date 2023. Gross profit decreased $3.5 million to $342.9 million during Year-To-Date 2024, compared to $346.4 million during Year-To-Date 2023. Gross margin, however, leveraged 490 basis points to 35.1% of net sales during Year-To-Date 2024, compared to 30.2% during Year-To-Date 2023. The increase in gross margin was primarily due to reductions in product input costs, including cotton and supply chain costs, which negatively impacted margins in the prior year. These improvements in input costs were combined with the success of our strategies to rationalize profit-draining promotions and limit unprofitable shipping offers, which resulted in a significant improvement in the leverage of e-commerce freight costs. 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 were $305.0 million during Year-To-Date 2024, compared to $329.8 million during Year-To-Date 2023. The Year-To-Date 2024 results included incremental operating expenses of $34.2 million, including restructuring costs of $11.2 million, primarily due to changes in our senior leadership team, non-cash equity compensation charges of $9.9 million and other fees of $3.8 million associated with the change of control, financing-related charges of $7.0 million, lender required consulting fees of $2.4 million, fleet optimization costs of $0.9 million, costs associated with the closure of our Canada distribution center of $0.8 million, and other professional and consulting fees of $0.6 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 of $15.9 million, 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. Excluding the impact of these incremental charges, Adjusted SG&A expenses were $270.8 million during Year-To-Date 2024, compared to $313.8 million during Year-To-Date 2023, and deleveraged 40 basis points to 27.7% of net sales, given the planned lower sales. We were successful in reducing Adjusted SG&A expenses by $43.0 million despite the reversal of $18.7 million in incentive compensation and equity compensation accruals in the prior year. This decrease was due to significant reductions in marketing expenses, as we eliminated inflated and unprofitable marketing costs and to a lesser extent, due to reductions in store payroll, home office payroll and professional fees, partially offset by the impact of the change in incentive compensation and equity compensation accruals. This represents the lowest level of Adjusted selling, general, and administrative expenses in over 15 years for the first three quarters of a fiscal year. Depreciation and amortization was $30.4 million during Year-To-Date 2024, compared to $35.5 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. Asset impairment charges were $28.0 million during Year-To-Date 2024 due to the reduction in fair value of the Gymboree tradename during the Second Quarter 2024, 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 $3.1 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. 30 Operating loss was $(20.5) million during Year-To-Date 2024, compared to $(22.0) million during Year-To-Date 2023. The Year-To-Date 2024 results were impacted by incremental operating expenses of $64.9 million, including SG&A expenses of $34.2 million, as described above, an impairment charge of $28.0 million on the Gymboree tradename, accelerated depreciation of $1.8 million, and additional change in control charges impacting gross margin of $0.9 million. The Year-To-Date 2023 results were impacted by incremental operating expenses of $20.4 million, including SG&A expenses of $15.9 million, as described above, asset impairment charges of $3.1 million, and accelerated depreciation of $1.4 million. Excluding the impact of these incremental charges, Adjusted operating income was $44.4 million during Year-To-Date 2024, or an improvement of $46.0 million compared to an Adjusted operating loss of $(1.6) million during Year-To-Date 2023, and leveraged 460 basis points to 4.5% of net sales. The Children’s Place International operating margin was negatively impacted during Year-To-Date 2024 due to the closure of our distribution center in Toronto, Canada, and is expected to be partially offset by potential duty drawback claims in the future. Related party interest expense was $4.6 million during Year-To-Date 2024, due to interest-bearing borrowings from loans entered into with Mithaq during Fiscal 2024. There was no related party interest expense during Year-To-Date 2023. Other interest expense, net was $22.5 million during Year-To-Date 2024, compared to $21.5 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, partially offset by lower average borrowings. Provision (benefit) for income taxes was a provision of $2.3 million during Year-To-Date 2024 compared to a benefit of $(17.8) million during Year-To-Date 2023. Our effective tax rate was a provision of (4.8)% and a benefit of 40.9% 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, restructuring charges, and charges due to our change in control, as described above, was $(49.8) million , or $(3.91) per diluted share during Year-To-Date 2024, compared to $(25.7) million , or $(2.06) per diluted share during Year-To-Date 2023 , due to the factors discussed abov e. Adjusted net income was $15.1 million, or $1.18 per diluted share during Year-To-Date 2024, compared to an Adjusted net loss of $(10.6) million, or $(0.85) per diluted share during Year-To-Date 2023. LIQUIDITY AND CAPITAL RESOURCES Liquidity Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases. Our primary uses of cash are for working capital requirements, which are principally inventory purchases, the payment of interest expense on our revolving credit facility, and the financing of capital projects. Our working capital deficit decreased $62.1 million to $46.3 million at November 2, 2024, compared to $108.4 million at October 28, 2023, primarily reflecting a decrease in our accounts payable balances and an increase in our accounts receivable balances. At November 2, 2024, we had $362.4 million of outstanding borrowings under our $433.0 million asset-based revolving credit facility (the “ABL Credit Facility”) under our Credit Agreement and no borrowings under our $40.0 million senior unsecured credit facility with Mithaq (the “Mithaq Credit Facility”). We had total liquidity of $94.0 million, including $48.3 million of availability under our ABL Credit Facility, $40.0 million of availability under our Mithaq Credit Facility, and $5.7 million of cash on hand. At November 2, 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 Third 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 the rights offering, that we are currently contemplating, and for which a preliminary prospectus has been filed with the SEC on Form S-1 on October 15, 2024. 31 ABL Credit Facility and 2021 Term Loan 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 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: (i) the prime rate per annum, plus a margin of 2.000%; or (ii) the Secured Overnight Financing Rate (“SOFR”) per annum, plus 0.100%, plus a margin of 3.000%. 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. 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 and an availability block. 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%; or (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 Third Quarter 2024 and Year-To-Date 2024, we recognized $7.1 million and $19.1 million, respectively, in interest expense related to the ABL Credit 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. 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 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. 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. 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. 32 The tables below present the components of our ABL Credit Facility: November 2, 2024 February 3, 2024 October 28, 2023 (in millions) Total borrowing base availability (1) $ 422.9 $ 258.4 $ 394.7 Credit facility availability (1) 433.0 400.5 400.5 Maximum borrowing availability (2) 422.9 258.4 394.7 Outstanding borrowings 362.4 226.7 358.7 Letters of credit outstanding—standby 12.2 7.4 7.4 Utilization of credit facility at end of period 374.6 234.1 366.1 Availability (3) $ 48.3 $ 24.3 $ 28.6 Interest rate at end of period 8.1% 8.1% 8.0% ____________________________________________ (1) In Fiscal 2023, the total borrowing base availability and credit facility availability were both 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, and entering into cash dominion by crossing the excess availability threshold no longer poses the same risk of default under the Credit Agreement. (2) The lower of the credit facility availability and the total borrowing base availability. (3) The sub-limit availability for letters of credit was $12.8 million at November 2, 2024, and $42.6 million at February 3, 2024 and October 28, 2023. Year-To-Date 2024 Fiscal 2023 Year-To-Date 2023 (in millions) Average end of day loan balance during the period $ 280.9 $ 315.5 $ 327.6 Highest end of day loan balance during the period $ 366.9 $ 379.4 $ 379.4 Average interest rate 9.0% 7.5% 7.0% 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. We recognized $1.1 million in interest expense related to the 2021 Term Loan during Year-To-Date 2024. 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 2021 Term Loan. As of April 18, 2024, the 2021 Term Loan was fully repaid. As of November 2, 2024, unamortized deferred financing costs amounted to $4.3 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 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”). 33 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 Third Quarter 2024 and Year-To-Date 2024, we recognized $2.1 million and $4.6 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. 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 November 2, 2024 unamortized deferred financing costs amounted to $2.9 million related to the Mithaq Term Loans. Maturities of our principal debt payments on the Mithaq Term Loans as of November 2, 2024 are as follows: November 2, 2024 (in thousands) Remainder of 2024 $ — 2025 — 2026 — 2027 168,600 Thereafter — Total related party debt $ 168,600 Mithaq Commitment Letter 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. 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, 2026. As of November 2, 2024, no debt had been incurred under the Mithaq Credit Facility. 34 Cash Flows and Capital Expenditures Cash used in operating activities was $238.9 million during Year-To-Date 2024, compared to $42.6 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 $15.9 million during Year-To-Date 2024, compared to $24.5 million during Year-To-Date 2023, driven by lower capital expenditures. Cash provided by financing activities was $248.0 million during Year-To-Date 2024, compared to $64.0 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 Third Quarter 2024 were issued. 35