Childrens Place, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with our audited financial statements and notes thereto included in Part IV, Item 15. Exhibits and Financial Statement Schedules. This Annual Report on Form 10-K contains 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,” “believe,” 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 Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K for the fiscal year ended February 1, 2025. 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 stockholder, and the uncertainty of weather patterns, as well as other risks discussed in the Company’s filings with the SEC from time to time. 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. As used in this Annual Report on Form 10-K, references to the “Company”, “The Children’s Place”, “we”, “us”, “our”, and similar terms refer to The Children’s Place, Inc. and its subsidiaries. Our fiscal year ends on the Saturday on or nearest to January 31. Other terms that are commonly used in our Management’s Discussion and Analysis of Financial Condition and Results of Operations are defined as follows: • Fiscal 2025 — The fifty-two weeks ending January 31, 2026 • Fiscal 2024 — The fifty-two weeks ended February 1, 2025 • Fiscal 2023 — The fifty-three weeks ended February 3, 2024 • Fiscal 2022 — The fifty-two weeks ended January 28, 2023 • SEC — U.S. Securities and Exchange Commission • U.S. GAAP — Generally Accepted Accounting Principles in the United States • FASB — Financial Accounting Standards Board • FASB ASC — FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants • AUR — Average unit retail price 34 Table of Contents • 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. A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred. However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is re-opened for a full fiscal month • Cost of Sales — Cost of inventory sold, including certain buying, design, and distribution expenses, and shipping and handling costs on merchandise sold. • Gross Margin — Gross profit expressed as a percentage of net sales • SG&A — Selling, general, and administrative expenses OVERVIEW Our Business We are the largest pure-play children’s specialty retailer in North America with an omni-channel 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, 495 stores in North America, wholesale marketplaces, 190 international points of distribution in 13 countries through our six franchise partners, and social media channels on Instagram, Facebook, X, formerly known as Twitter, YouTube and Pinterest. Our digital storefronts are at www.childrensplace.com and www.gymboree.com , where our customers are able to shop online for the same merchandise available in our physical stores, but also certain exclusive merchandise only available at our e-commerce sites. 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 and revenue from international franchisees. We measure our segment profitability based on operating income (loss), defined as income (loss) 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 during Fiscal 2024. Refer to “Note 17. Segment Information” of the Consolidated Financial Statements of this Form 10-K for more information. Recent Developments Macroeconomic conditions, including inflationary pressures, higher interest rates, and other domestic and geopolitical factors, continued to adversely affect our core customer in Fiscal 2024. While some of these inflationary pressures, including freight input costs and product input costs, had improved in Fiscal 2024, we may continue to experience inflationary pressures on our product input costs and distribution costs. In Fiscal 2024, these pressures contributed to a decrease in consumer discretionary apparel purchases. We expect these macroeconomic conditions, including but not limited to increased product input costs, transportation costs, distribution costs, and geopolitical conditions like changes in foreign policies of the United States, and other inflationary pressures, to continue to have an impact during Fiscal 2025. In February and March 2025, the U.S. government announced the intention to impose tariffs on certain goods imported from Canada, Mexico and China. On April 2, 2025, it was further announced that tariffs would be applied to all countries importing goods to the United States. We continue to monitor the impact of any of these tariffs that become effective, as well as potential retaliatory tariffs imposed by other countries. These tariffs could have a material adverse impact on the global retail industry, supply chains worldwide, and other political and macroeconomic conditions, which could increase our product input costs in Fiscal 2025 and beyond, and also affect customer sentiment in deciding whether to purchase U.S. goods as opposed to other alternatives. 35 Table of Contents On February 6, 2025, we completed a rights offering (“Rights Offering”) pursuant to which we distributed to the holders of record of our Common stock as of the close of business on December 13, 2024, the record date for the Rights Offering, non-transferable subscription rights to purchase, in the aggregate, up to 9.2 million shares of Common stock. Each subscription right entitled its holder to purchase 0.7220 shares of Common stock at a subscription price of $9.75 per whole share of Common stock. Additionally, rights holders who fully exercised their basic subscription rights were entitled to subscribe for additional shares of Common stock that remained unsubscribed as a result of any unexercised basic subscription rights. The subscription price was payable by rights holders (i) in cash, (ii) by delivery in lieu of cash of an equivalent amount of any indebtedness for borrowed money (principal and/or accrued and unpaid interest) owed by us to such rights holder, or (iii) by delivery of a combination of cash and such indebtedness. Upon the completion of the Rights Offering, we issued 9.2 million shares of Common stock for a total purchase price of $90.0 million. Mithaq Capital SPC, a Cayman segregated portfolio company (“Mithaq”), which is a controlling stockholder of the Company, purchased 6.7 million of shares of Common stock pursuant to the Rights Offering and as of February 6, 2025, it owns and controls the voting power of 62.2% of our outstanding shares of Common stock. Mithaq paid (i) $5.1 million of the subscription price for such shares in cash and (ii) the remaining $60.2 million of the subscription price for such shares by delivery of indebtedness for borrowed money owed by us to Mithaq pursuant to that certain interest-free unsecured promissory note for a $78.6 million term loan (the “Initial Mithaq Term Loan”), dated February 29, 2024, by and among us, certain subsidiaries of the Company, and Mithaq. Accordingly, the aggregate outstanding indebtedness owed by us to Mithaq pursuant to both of our term loans from Mithaq, collectively, has been reduced to $108.4 million as of February 6, 2025. We received approximately $29.8 million in gross cash proceeds from the Rights Offering on February 6, 2025. Substantially all of the gross cash proceeds from the Rights Offering were used towards prepaying our asset-based revolving credit facility (the “ABL Credit Facility”) under our Amended and Restated Credit Agreement dated May 9, 2019 (as amended from time to time, the “Credit Agreement”), with Wells Fargo, National Association (“Wells Fargo”), Bank of America, N.A., HSBC Bank (USA), N.A., JPMorgan Chase Bank, N.A., Truist Bank and PNC Bank, National Association, as lenders (collectively, the “Credit Agreement Lenders”), and Wells Fargo, as Administrative Agent, Collateral Agent and Swing Line Lender. On March 17, 2025, we announced that John Szczepanksi has been appointed Chief Financial Officer, effective March 31, 2025. Pillar Two Model Rules The Organization for Economic Cooperation and Development (“OECD”) has introduced a global minimum corporate tax rate of 15% under its Pillar Two initiative (“Pillar Two”), effective for tax years beginning in January 2024. Although the U.S. and Hong Kong had not yet adopted the Pillar Two rules in 2024, other regions where we conduct business, primarily Canada, have begun to enact such legislation. The implementation of the Pillar Two rules in each jurisdiction in which it operates is not expected to have a material impact on our effective tax rate. We are closely monitoring legislative developments globally to evaluate potential impacts on our financial statements as more regions implement the Pillar Two rules. Operating Highlights Net sales decreased $216.2 million, or 13.5%, to $1.386 billion during Fiscal 2024 from $1.603 billion during Fiscal 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. The Company also experienced a decrease in brick-and-mortar revenue due to a lower store count and lower sales volume. This was partially offset by an increase in wholesale revenue, as we continue to strengthen relationships with our partners. During Fiscal 2024, we closed 29 stores and opened one Gymboree stand-alone store in Paramus, New Jersey. Comparable retail sales decreased 13.4% for Fiscal 2024, largely due to the planned decrease in e-commerce revenue. Gross profit increased $14.2 million, or 3.2%, to $459.5 million during Fiscal 2024 from $445.3 million during Fiscal 2023. Gross margin increased 530 basis points to 33.1% during Fiscal 2024, compared to 27.8% during Fiscal 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, in addition to optimized shipping carrier rates, which resulted in a significant reduction in freight costs. Operating loss was $(13.7) million during Fiscal 2024 compared to $(83.8) million during Fiscal 2023. Operating margin leveraged 420 basis points to (1.0)% of net sales. Net loss was $(57.8) million, or $(4.53) per diluted share, during Fiscal 2024 compared to $(154.5) million, or $(12.34) per diluted share, during Fiscal 2023, due to the factors discussed above. 36 Table of Contents 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”). Fiscal Year Ended Fiscal Year Ended Variance February 1, 2025 % of Net Sales February 3, 2024 % of Net Sales $ % % of Net Sales (amounts in thousands) Net sales $ 1,386,269 100.0 % $ 1,602,508 100.0 % $ (216,239) (13.5) % — % Cost of sales (exclusive of depreciation and amortization) 926,808 66.9 % 1,157,234 72.2 % (230,426) (19.9) % (5.3) % Gross profit 459,461 33.1 % 445,274 27.8 % 14,187 3.2 % 5.3 % Selling, general, and administrative expenses 405,550 29.3 % 447,343 27.9 % (41,793) (9.3) % 1.4 % Depreciation and amortization 39,612 2.9 % 47,186 2.9 % (7,574) (16.1) % — % Asset impairment charges 28,000 2.0 % 34,543 2.2 % (6,543) (18.9) % (0.2) % Operating loss (13,701) (1.0) % (83,798) (5.2) % 70,097 (83.6) % 4.2 % Related party interest expense (6,493) (0.5) % — — % (6,493) (100.0) % (0.5) % Other interest expense, net (29,254) (2.1) % (30,000) (1.9) % 746 (2.5) % (0.2) % Loss before provision for income taxes (49,448) (3.6) % (113,798) (7.1) % 64,350 (56.5) % 3.5 % Provision for income taxes 8,371 0.6 % 40,743 2.5 % 32,372 (79.5) % (1.9) % Net loss $ (57,819) (4.2) % $ (154,541) (9.6) % $ 96,722 (62.6) % 5.4 % Non-GAAP Reconciliation We have presented certain measures on a non-GAAP basis. Adjusted net loss, adjusted net loss per diluted share, adjusted selling, general, and administrative expenses, and adjusted operating income (loss) are non-GAAP measures. These measures are not intended to replace GAAP financial information, and may be different from non-GAAP measures reported by other companies. The most comparable GAAP measures are net loss, net loss per diluted share, selling, general, and administrative expenses, and operating income (loss), respectively. We believe the income and expense items excluded as non-GAAP adjustments are not reflective of the performance of our core business, and that providing this supplemental disclosure to investors will facilitate comparisons of the past and present performance of our core business. Fiscal 2024 Compared to Fiscal 2023 Net sales decreased $216.2 million, or 13.5%, to $1.386 billion during Fiscal 2024 from $1.603 billion during Fiscal 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. We also experienced a decrease in brick-and-mortar revenue due to a lower store count and lower sales volume. This was partially offset by an increase in wholesale revenue, as we continue to strengthen relationships with our partners. Comparable retail sales decreased 13.4% for Fiscal 2024, largely due to the planned decrease in e-commerce revenue. Gross profit increased $14.2 million, or 3.2%, to $459.5 million during Fiscal 2024 from $445.3 million during Fiscal 2023. Gross m argin increased 530 basis points to 33.1% of net sales during Fiscal 2024, compared to 27.8% during Fiscal 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, in addition to optimized shipping carrier rates, which resulted in a significant reduction in freight costs. 37 Table of Contents Gross profit is calculated as consolidated net sales less cost of goods sold. Gross margin is calculated as gross profit divided by consolidated net sales. Gross profit as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, changes in foreign currency exchange rates, and fluctuations in input 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 $405.6 million during Fiscal 2024, compared to $447.3 million during Fiscal 2023. The decrease in SG&A was due to significant reductions in marketing expenses of $31.0 million, as we eliminated inflated and unprofitable marketing costs and to a lesser extent, due to reductions in store payroll and corporate payroll. We were successful in reducing SG&A expenses by $41.7 million despite an increase in incentive compensation and equity compensation of $21.0 million. Fiscal 2024 results included incremental operating expenses of $35.3 million, including restructuring costs of $11.7 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 $1.4 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. Fiscal 2023 results included incremental operating expenses of $14.9 million, including restructuring costs of $10.5 million, fleet optimization costs of $3.1 million, a reserve of $3.0 million for a customer lawsuit, contract termination costs of $3.0 million, professional and consulting fees of $1.8 million, partially offset by a settlement payment received of $6.5 million. Excluding the impact of these charges, Adjusted SG&A expenses were $370.3 million during Fiscal 2024, compared to $432.5 million during Fiscal 2023, and leveraged 30 basis points to 26.7% of net sales. This represents the lowest level of Adjusted selling, general, and administrative expenses in over 15 years for a full fiscal year. Depreciation and amortization was $39.6 million during Fiscal 2024, compared to $47.2 million during Fiscal 2023. This decrease was primarily driven by reduced depreciation of capitalized software and the permanent closure of 29 stores during Fiscal 2024. Asset impairment charges were $28.0 million during Fiscal 2024 due to the reduction in fair value of the Gymboree tradename, which was primarily due to reductions in Gymboree sales forecasts. Asset impairment charges were $34.5 million during Fiscal 2023 for long-lived assets, inclusive of ROU assets. These charges were due to the reduction in fair value of the Gymboree tradename attributable to an increase in the discount rate used to value the tradename and reductions in Gymboree sales forecasts. The remaining impairment charges were related to underperforming stores identified in our ongoing store portfolio evaluation primarily as a result of decreased net sales and cash flow projections. Operating loss was $(13.7) million during Fiscal 2024, compared to $(83.8) million during Fiscal 2023. The Fiscal 2024 results were impacted by incremental operating expense of $66.4 million, including SG&A expenses of $35.3 million, as described above, asset impairment charges of $28.0 million on the Gymboree tradename, accelerated depreciation of $2.2 million, and additional change in control charges impacting gross margin of $0.9 million. The Fiscal 2023 results were impacted by incremental operating expenses of $51.3 million, including SG&A expenses of $14.9 million, as described above, asset impairment charges of $34.5 million, and accelerated depreciation of $2.0 million. Excluding the impact of these incremental charges, Adjusted operating income was $52.7 million during Fiscal 2024, compared to an Adjusted operating loss of $(32.5) million and leveraged 580 basis points to 3.8% of net sales. Related party interest expense was $6.5 million during Fiscal 2024, due to interest-equivalent charges from loans entered into with Mithaq during Fiscal 2024. There was no related party interest expense during Fiscal 2023. Other interest expense, net was $29.3 million during Fiscal 2024, compared to $30.0 million during Fiscal 2023. The decrease was primarily due to the paydown of the $50.0 million term loan (the “2021 Term Loan”) under our Credit Agreement, partially offset by higher average interest rates associated with our ABL Credit Facility. Provision for income taxes was $8.4 million during Fiscal 2024, compared to $40.7 million during Fiscal 2023. Our effective tax rate was a provision of (16.9)% and (35.8)% during Fiscal 2024 and Fiscal 2023, respectively. The change in our effective tax rate and income tax provision for Fiscal 2024 compared to Fiscal 2023 was primarily driven by the establishment of a valuation allowance against our net deferred tax assets in Fiscal 2023 and a shift in the jurisdictional earnings mix in Fiscal 2024. We continue to adjust the valuation allowance based on ongoing operating results. Net loss was $(57.8) million, or $(4.53) per diluted share, during Fiscal 2024, compared to $(154.5) million, or $(12.34) per diluted share, during Fiscal 2023, due to the factors described above. Adjusted net income was $5.5 million, or $0.43 per diluted share during Fiscal 2024, compared to Adjusted net loss of $(103.3) million, or $(8.25) per diluted share, during Fiscal 2023 due to factors described above, in addition to the impact of income taxes of $3.1 million on the non-GAAP charges. 38 Table of Contents The following table sets forth Net sales and Operating loss, respectively, by segment, for the periods indicated: Fiscal Years Ended February 1, 2025 February 3, 2024 (in thousands) The Children’s Place U.S. $ 1,266,500 $ 1,457,352 The Children’s Place International (1) 119,769 145,156 Total net sales $ 1,386,269 $ 1,602,508 ___________________________________________ (1) The Company’s foreign subsidiaries, primarily in Canada, have operating results based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S dollars. Fiscal Years Ended February 1, 2025 February 3, 2024 (in thousands) The Children’s Place U.S. $ (3,746) $ (86,482) The Children’s Place International (9,955) 2,684 Total segment operating loss $ (13,701) $ (83,798) The Children’s Place U.S. (0.3) % (5.9) % The Children’s Place International (8.3) % 1.8 % Total segment operating loss as a percentage of net sales (1.0) % (5.2) % The Children’s Place U.S. Net sales decreased $190.9 million, or 13.1%, to $1.266 billion during Fiscal 2024, compared to $1.457 billion during Fiscal 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. We also experienced a decrease in brick-and-mortar revenue due to a lower store count and lower sales volume. This was partially offset by an increase in wholesale revenue, as we continue to strengthen relationships with our partners. The Children’s Place International Net sales decreased $25.4 million, or 17.5%, to $119.8 million during Fiscal 2024, compared to $145.2 million during Fiscal 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. We also experienced a decrease in brick-and-mortar revenue due to a lower store count and lower sales volume. The Children’s Place U.S. Operating loss was $(3.7) million during Fiscal 2024, compared to $(86.5) million during Fiscal 2023. The Children’s Place U.S. operating margin improved during Fiscal 2024 primarily due to the success of our strategies to rationalize profit-draining promotions and limit unprofitable shipping offers, in addition to optimized shipping carrier rates, which resulted in a significant reduction in freight costs. We were also able to significantly reduce marketing expenses, as we eliminated inflated and unprofitable marketing costs and to a lesser extent, by reductions in store payroll and corporate payroll. The Children’s Place International Operating loss was $(10.0) million during Fiscal 2024, compared to Operating income of $2.7 million during Fiscal 2023. The Children’s Place International operating margin was negatively impacted during Fiscal 2024 due to shifts in our supply chain which resulted in increased freight, duty and commission costs to transfer inventory from the U.S. into Canada, partially offset by occupancy cost savings achieved due to the closure of our distribution center in Toronto, Canada. Fiscal 2023 Compared to Fiscal 2022 See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2024 for the Fiscal 2023 to Fiscal 2022 comparative discussion. 39 Table of Contents QUARTERLY RESULTS AND SEASONALITY Our quarterly results of operations have fluctuated and are expected to continue to fluctuate materially depending on a variety of factors, including overall economic conditions, the timing and number of store openings and closures, increases or decreases in Comparable Retail Sales, weather conditions (such as unseasonable temperatures or storms), and changes in our merchandise mix and pricing strategy, including changes to address competitive factors. The combination and severity of one or more of these factors could result in material fluctuations in our results of operations. In connection with the completion of our Rights Offering on February 6, 2025, our diluted weighted average common shares outstanding and diluted earnings (loss) per common share were retroactively adjusted for all periods presented by a factor of 1.002. Refer to “Note 18. Subsequent Events” of the Consolidated Financial Statements of this Form 10-K for more information. The following table sets forth certain statement of operations data for each of our last four fiscal quarters. The quarterly statement of operations data set forth below reflect, in our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the results of operations for these fiscal quarters (unaudited): Fiscal Year Ended February 1, 2025 First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except diluted earnings (loss) per common share) Net sales $ 267,878 $ 319,655 $ 390,173 $ 408,562 Cost of sales (exclusive of depreciation and amortization) 175,137 207,861 251,832 291,977 Gross profit 92,741 111,794 138,341 116,585 Selling, general, and administrative expenses 109,094 96,065 99,817 100,574 Depreciation and amortization 11,635 9,505 9,266 9,206 Asset impairment charges — 28,000 — — Operating income (loss) (27,988) (21,776) 29,258 6,805 Related party interest expense (389) (2,087) (2,078) (1,939) Other interest expense, net (7,332) (7,144) (8,000) (6,778) Income (loss) before provision (benefit) for income taxes (35,709) (31,007) 19,180 (1,912) Provision (benefit) for income taxes 2,086 1,107 (900) 6,078 Net income (loss) $ (37,795) $ (32,114) $ 20,080 $ (7,990) Diluted earnings (loss) per common share $ (2.98) $ (2.51) $ 1.57 $ (0.62) Diluted weighted average common shares outstanding 12,665 12,793 12,822 12,805 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 consist primarily of inventory purchases, rent and marketing expenses; the payment of interest expense on our ABL Credit Facility, and the financing of capital projects. During Fiscal 2024, we entered into an interest-free, unsecured and subordinated promissory note with Mithaq for a $78.6 million Initial Mithaq Term Loan and an unsecured and subordinated $90.0 million term loan (the “New Mithaq Term Loan”; and together with the Initial Mithaq Term Loan, collectively, the “Mithaq Term Loans”). As of February 6, 2025, $60.2 million under the Initial Mithaq Term Loan was repaid pursuant to the completion of the Rights Offering, leaving an aggregate of $108.4 million outstanding under the Mithaq Term Loans. As of February 1, 2025, we had $245.7 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”). 40 Table of Contents Our working capital deficit decreased $114.2 million to $50.1 million at February 1, 2025, compared to $164.3 million at February 3, 2024, primarily reflecting a decrease in our accounts payable balances as we paid down past due vendors, partially offset by an increase in our inventory and accounts receivable balances. As of February 1, 2025, we had total liquidity of $85.5 million, including $40.2 million of availability under our ABL Credit Facility, $40.0 million of availability under our Mithaq Credit Facility and $5.3 million of cash on hand. At February 1, 2025, we had $16.0 million of outstanding letters of credit with an additional $9.0 million available for issuing letters of credit under our ABL Credit Facility. We expect to be able to meet our working capital and capital expenditure requirements for at least the next twelve months from the date that our consolidated financial statements for Fiscal 2024 were issued, by using our cash on hand, cash flows from operations, and availability under our ABL Credit Facility and Mithaq Credit Facility. Share Repurchase Program In November 2021, the board of directors (the “Board of Directors”) authorized a $250.0 million share repurchase program (the “Share Repurchase Program”). Currently, given the terms of our Credit Agreement, as amended by the seventh amendment to the Credit Agreement (the “Seventh Amendment”), dated as of April 18, 2024, the repurchase of any shares would require fulfilling the heightened payment conditions under our Credit Agreement, except that repurchases of shares as described above in “Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”, pursuant to our practice as a result of our insider trading policy, are expressly permitted. During Fiscal 2024, we repurchased approximately 0.1 million shares of our common stock for $0.7 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards. During Fiscal 2023, we repurchased approximately 0.2 million shares for $7.1 million, consisting of shares surrendered to cover tax withholding associated with the vesting of equity awards. As of February 1, 2025, there was $156.5 million remaining availability under the Share Repurchase Program. Cash Flows and Capital Expenditures Cash used in operating activities was $117.6 million during Fiscal 2024, compared to $92.8 million of cash provided by operating activities during Fiscal 2023. Cash used in operating activities during Fiscal 2024 was primarily the result of a decrease in accounts payable as we paid down past due vendors and an increase in inventory. Cash provided by operating activities of $92.8 million during Fiscal 2023 was primarily the result of a lower inventory balance, reflecting lower average unit costs, and improved inventory management, as well as an increase in accounts payable and other planned changes in working capital. Cash used in investing activities was $15.8 million during Fiscal 2024, compared to $27.8 million during Fiscal 2023. The decrease was driven by lower capital expenditures incurred during the year. Cash provided by financing activities was $128.4 million during Fiscal 2024, compared to cash used in financing activities of $68.3 million during Fiscal 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 2025 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 the foreseeable future. Selected Consolidated Balance Sheets Data Certain components of our Consolidated Balance Sheets as of February 1, 2025 and February 3, 2024 were as follows: Fiscal Years Ended February 1, 2025 February 3, 2024 (in thousands) Accounts receivable $ 42,701 $ 33,219 Inventories 399,602 362,099 Accounts payable 126,716 225,549 Accounts receivable were $42.7 million at February 1, 2025, compared to $33.2 million at February 3, 2024. The increase of $9.5 million, or 28.5%, was primarily driven by the timing of wholesale customer shipments and associated payments. 41 Table of Contents Inventories were $399.6 million at February 1, 2025, compared to $362.1 million at February 3, 2024. The increase of $37.5 million, or 10.4%, was primarily the result of a higher number of units on hand. Accounts payable were $126.7 million at February 1, 2025, compared to $225.5 million at February 3, 2024. The decrease of $98.8 million, or 43.8%, was primarily the result of paying down past due vendors that existed at the end of Fiscal 2023. 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 the 2021 Term Loan under our Credit Agreement. 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 the Company’s 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 the Company’s 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 Fiscal 2024, Fiscal 2023, and Fiscal 2022, we recognized $25.0 million, $24.2 million, and $10.2 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 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 and our subsidiaries’ 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. 42 Table of Contents The tables below present the components of our ABL Credit Facility as of the end of Fiscal 2024 and Fiscal 2023: February 1, 2025 February 3, 2024 (in millions) Total borrowing base availability (1) $ 301.9 $ 258.4 Credit facility availability (1) 433.0 400.5 Maximum borrowing availability (2) 301.9 258.4 Outstanding borrowings 245.7 226.7 Letters of credit outstanding—standby 16.0 7.4 Utilization of credit facility at end of period 261.7 234.1 Availability (3) $ 40.2 $ 24.3 Interest rate at end of period 7.6% 8.1% February 1, 2025 February 3, 2024 (in millions) Average end-of-day loan balance during the period $ 284.5 $ 315.5 Highest end-of-day loan balance during the period $ 366.9 $ 379.4 Average interest rate 8.7% 7.5% ____________________________________________ (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 $9.0 million at February 1, 2025 and $42.6 million at February 3, 2024. The 2021 Term Loan bore interest, payable monthly, at (i) the SOFR per annum plus 2.750% for any portion that was a SOFR loan, or (ii) 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 Fiscal 2024, Fiscal 2023, and Fiscal 2022, we recognized $1.1 million, $4.0 million, and $2.3 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 February 1, 2025 and February 3, 2024, unamortized deferred financing costs amounted to $3.8 million and $2.2 million, respectively, related to our ABL Credit Facility. Mithaq Term Loans Mithaq is a controlling stockholder of the Company. We and certain of our subsidiaries maintain the Initial Mithaq Term Loan, consisting of (i) a first tranche in an aggregate principal amount of $30.0 million (the “First Tranche”) and (ii) 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 the New Mithaq Term Loan. 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 Fiscal 2024, we recognized $6.5 million in deferred interest-equivalent expense related to the New Mithaq Term Loan. 43 Table of Contents 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 the Company and certain of our subsidiaries, Wells Fargo and Mithaq, pursuant to which the Mithaq Term Loans are subordinated in payment priority to the obligations of us and our subsidiaries 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 and our subsidiaries’ 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 February 1, 2025, unamortized deferred financing costs amounted to $2.6 million related to the Mithaq Term Loans. Maturities of our principal debt payments on the Mithaq Term Loans as of February 1, 2025 are as follows: February 1, 2025 (in thousands) 2025 $ — 2026 — 2027 168,600 Thereafter — Total related party debt $ 168,600 As of February 6, 2025, $60.2 million under the Initial Mithaq Term Loan was repaid pursuant to the completion of the Rights Offering, leaving an aggregate of $108.4 million outstanding under the Mithaq Term Loans, payable in fiscal year 2027. Refer to “Note 18. Subsequent Events” of the Consolidated Financial Statements for additional detail. 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 and Mithaq entered into an Amendment No. 1 to the Commitment Letter, 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 February 1, 2025, no debt had been incurred under the Mithaq Credit Facility. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS For a discussion of our contractual obligations and commercial commitments, see “Note 8. Leases”, “Note 9. Debt”, and “Note 10. Commitments and Contingencies” of the Consolidated Financial Statements, “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. 44 Table of Contents CRITICAL ACCOUNTING ESTIMATES 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. “Note 1. Basis of Presentation and Summary of Significant Accounting Policies” of the Consolidated Financial Statements, “Item 8. Financial Statements and Supplementary Data” of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. The accounting estimates discussed below include those that we believe are the most critical to aid in fully understanding and evaluating our financial results. Senior management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors, which has reviewed our related disclosures herein. Impairment of Long-Lived Assets We periodically review our long-lived assets for impairment when events indicate that their carrying value may not be recoverable. Such events include a historical or projected trend of cash flow losses or a future expectation that we will sell or dispose of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment, we group our long-lived assets at the lowest possible level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We review all stores that have reached comparable sales status for impairment on at least an annual basis, or sooner if circumstances so dictate. We believe waiting this period of time allows a store to reach a maturity level where a more comprehensive analysis of financial performance can be performed. For each store that shows indications of impairment, we perform a recoverability test comparing estimated undiscounted future cash flows to the carrying value of the related long-lived assets. If the undiscounted future cash flows are less than the related net book value of the long-lived assets, they are written down to their fair market value. We primarily use discounted future cash flows directly associated with those assets, which consist principally of property and equipment and right-of-use (“ROU”) lease assets, to determine their fair market values. Estimating the fair market value of long-lived assets using the discounted cash flow model requires management to estimate future revenues, expenses, discount rates, long-term growth rates, and other factors in order to project future cash flows. The assumptions used to evaluate future cashflows consider external and internal factors. External factors comprise the local environment in which the store resides, including mall traffic, competition, and their effect on sales trends, as well as macroeconomic factors, such as inflationary pressures impacting our customer, and changes in product input costs, transportation costs, distribution costs and wage rates. Internal factors include our ability to gauge the fashion taste of our customers, control over variable costs such as cost of sales and payroll, and in certain cases, our ability to renegotiate lease costs. In addition, the Company utilizes market-corroborated inputs, including sales per square foot and cost of occupancy rates, in its calculation of the fair value of its ROU assets and any necessary discounting required for rent rates based on macroeconomic conditions or local mall conditions. If external factors should change unfavorably, if actual sales should differ from our projections, or if our ability to control costs is insufficient to sustain the necessary cash flows, changes in these estimates can have a significant impact on the assessment of fair market value, which could result in material impairment charges. Impairment of Indefinite-Lived Intangible Assets Our intangible assets with an indefinite life consists of the acquired Gymboree tradename, and it is tested for impairment using a qualitative assessment to determine whether its fair value is below its carrying value. If there are indicators of impairment, we perform a quantitative assessment to estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. Estimating the fair value of indefinite-lived intangible assets using the relief-from-royalty method requires management to estimate future revenues, royalty rates, discount rates, long-term growth rates, and other factors in order to project future cash flows. If macroeconomic conditions deteriorate, if interest rates increase, or if actual sales should differ from our projections, changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment charges. 45 Table of Contents We identified an indicator of impairment in our qualitative assessment performed during Fiscal 2024, primarily due to reductions in Gymboree sales forecasts, and performed a quantitative impairment assessment of the Gymboree tradename. Based on this assessment, we recorded an impairment charge of $28.0 million, primarily due to reductions in Gymboree sales forecasts and a reduction in the royalty rate used to value the tradename, which reduced the carrying value to its fair value of $13.0 million as of August 3, 2024. As of February 1, 2025, the tradename’s carrying value was $13.0 million. Unfavorable changes in certain of our key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 100-basis point increase in the discount rate or a 10% decrease in forecasted revenue would result in further impairment charges of approximately $1.0 million. Income Taxes We utilize the asset and liability method of accounting for income taxes as set forth in FASB ASC 740— Income Taxes . Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities, as well as for net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to taxable income in effect for the years in which the basis differences and tax assets are expected to be realized. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts reflected for income taxes in our consolidated financial statements. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances, we consider projected future taxable income, the availability of tax planning strategies, taxable income in prior carryback years, and future reversals of existing taxable temporary differences. The assumptions utilized in determining future taxable income require significant judgment. Actual operating results in future years could differ from our current assumptions, judgments and estimates. If we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would decrease earnings in the period in which such determination is made. As of February 1, 2025, we believe it is not more likely than not that future taxable income will be sufficient to allow us to recover substantially all of the value assigned to our deferred tax assets. Thus, in Fiscal 2024, we increased our valuation allowance to $88.1 million, primarily related to assets in the U.S. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements. Due to uncertainties in any income tax audit, our assumptions regarding the ultimate settlement of unrecognized tax positions may change and the actual tax benefits may differ significantly from current estimates. Stock-Based Compensation We account for stock-based compensation according to the provisions of FASB ASC 718— Compensation-Stock Compensation. We grant time-vesting and performance-based stock awards to employees at senior management levels. We also grant time-vesting stock awards to our non-employee independent directors. Time-vesting awards are granted in the form of restricted stock units that require each recipient to complete a service period (“Deferred Awards”). Performance-based stock awards are granted in the form of restricted stock units, which have performance criteria that must be achieved for the awards to be earned, in addition to a service period requirement (“Performance Awards”), and each Performance Award has a defined number of shares that an employee can earn (the “Target Shares”). With the approval of the Human Capital & Compensation Committee, we may settle vested Deferred Awards and Performance Awards in shares, in a cash amount equal to the market value of such shares at the time all requirements for delivery of the award have been met, or in part shares and cash. In Fiscal 2024, there was a change of control of the Company, which triggered a conversion of all then-outstanding Performance Awards into service-based Performance Awards in accordance with their terms. As a result, the Fiscal 2023, Fiscal 2022, and fiscal year 2021 Performance Awards will all vest or have vested, as applicable, at their Target Shares on their respective vesting dates without regard to the achievement of any of the performance metrics associated with those awards, provided that the recipient be employed at the Company on each such vesting date. In Fiscal 2024, the stock awards granted to employees at senior management levels were a combination of both Deferred Awards and Performance Awards. The Deferred Award portion has a one-year vesting schedule, while the Performance Award portion is subject to graded vesting over the subsequent two years of the stock award, whereby employees may earn from 0% to 200% of their Target Shares in each of those years, based on the terms of the award and our achievement of certain performance goals established for such Performance Awards. The expense recognized for Performance Awards throughout the service period and the number of shares that are projected to ultimately vest, are based on the estimated degree to which the related performance metrics are expected to be achieved. Actual 46 Table of Contents performance may differ from such projections, which would impact the number of shares that vest and the total amount of expense recognized for the related Performance Awards, which could have a material impact on our consolidated financial statements. Inventory Valuation We value inventory at the lower of cost or net realizable value, with cost determined using an average cost method. The estimated market value of inventory is determined based on an analysis of historical sales trends of our individual product categories, the impact of market trends and economic conditions, and a forecast of future demand, as well as plans to sell through inventory. Estimates may differ from actual results due to the quantity, quality, and mix of products in inventory, consumer and retailer preferences, market conditions, and other catastrophic events. Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts. Our historical estimates for inventory obsolescence and shrinkage have not differed materially from actual results. Recently Issued Accounting Standards Refer to “Note 1. Basis of Presentation and Summary of Significant Accounting Policies” of the Consolidated Financial Statements, “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for discussion regarding the impact of recently issued accounting standards on our consolidated financial statements.