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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
______________________________________________________
 FORM 10-Q
 (Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 2019
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to              
 
Commission file number 0-23071
______________________________________________________
 THE CHILDREN’S PLACE, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
31-1241495
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification Number)
 
 
 
500 Plaza Drive
 
 
Secaucus, New Jersey
 
07094
(Address of Principal Executive Offices)
 
(Zip Code)

(201) 558-2400
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one).
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares outstanding of the registrant’s common stock with a par value of $0.10 per share, as of May 27, 2019 was 15,847,270 shares.


Table of Contents

THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
 
QUARTERLY REPORT ON FORM 10-Q
 
FOR THE PERIOD ENDED MAY 4, 2019
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
 
THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
May 4,
2019
 
February 2,
2019
 
May 5,
2018
 
(unaudited)
 
 
 
(unaudited)
 
(in thousands, except par value)
ASSETS
 

 
 

 
 

Current assets:
 

 
 

 
 

Cash and cash equivalents
$
66,111

 
$
69,136

 
$
90,121

Accounts receivable
39,562

 
35,123

 
31,960

Inventories
341,174

 
303,466

 
334,680

Prepaid expenses and other current assets
27,156

 
27,670

 
69,569

Total current assets
474,003

 
435,395

 
526,330

Long-term assets:
 

 
 

 
 

Property and equipment, net
249,836

 
260,357

 
260,762

Right-of-use assets
458,702

 

 

Tradenames, net
73,656

 

 

Deferred income taxes
15,106

 
17,750

 
9,986

Other assets
14,651

 
13,544

 
13,849

Total assets
$
1,285,954

 
$
727,046

 
$
810,927

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

LIABILITIES:
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Revolving loan
$
153,072

 
$
48,861

 
$
46,800

Accounts payable
205,643

 
194,786

 
219,488

Current lease liabilities
133,783

 

 

Income taxes payable
2,452

 
997

 
1,326

Accrued expenses and other current liabilities
105,252

 
86,755

 
97,487

Total current liabilities
600,202

 
331,399

 
365,101

Long-term liabilities:
 

 
 

 
 

Deferred rent liabilities

 
44,329

 
49,019

Long-term lease liabilities
367,307

 

 

Other tax liabilities
5,025

 
5,080

 
3,914

Income taxes payable
18,939

 
18,939

 
34,598

Other long-term liabilities
14,107

 
12,862

 
15,158

Total liabilities
1,005,580

 
412,609

 
467,790

COMMITMENTS AND CONTINGENCIES
 

 
 

 
 

STOCKHOLDERS’ EQUITY:
 

 
 

 
 

Preferred stock, $1.00 par value, 1,000 shares authorized, 0 shares issued and outstanding

 

 

Common stock, $0.10 par value, 100,000 shares authorized; 15,915, 15,873 and 17,409 issued; 15,867, 15,827 and 16,605 outstanding
1,592

 
1,588

 
1,741

Additional paid-in capital
149,435

 
146,991

 
242,675

Treasury stock, at cost (48, 47 and 804 shares)
(2,747
)
 
(2,685
)
 
(102,498
)
Deferred compensation
2,747

 
2,685

 
2,498

Accumulated other comprehensive loss
(15,542
)
 
(14,934
)
 
(14,010
)
Retained earnings
144,889

 
180,792

 
212,731

Total stockholders’ equity
280,374

 
314,437

 
343,137

Total liabilities and stockholders’ equity
$
1,285,954

 
$
727,046

 
$
810,927

See accompanying notes to these consolidated financial statements.

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Table of Contents

THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
 
(In thousands, except earnings per share)
Net sales
$
412,382

 
$
436,314

Cost of sales (exclusive of depreciation and amortization)
260,406

 
276,122

Gross profit
151,976

 
160,192

Selling, general, and administrative expenses
128,006

 
118,471

Depreciation and amortization
18,584

 
17,406

Asset impairment charges
348

 
1,257

Operating income
5,038

 
23,058

Interest expense
(1,799
)
 
(663
)
Interest income
88

 
366

Income before provision (benefit) for income taxes
3,327

 
22,761

Provision (benefit) for income taxes
(1,163
)
 
(8,776
)
Net income
$
4,490

 
$
31,537

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.28

 
$
1.85

Diluted
$
0.28

 
$
1.78

 
 
 
 
Weighted average common shares outstanding
 
 
 
Basic
15,847

 
17,002

Diluted
16,107

 
17,734

 
 
 
 
Cash dividends declared per common share
$
0.56

 
$
0.50

 
See accompanying notes to these consolidated financial statements.


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THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)



 
Thirteen Weeks Ended
 
May 4, 2019
 
May 5, 2018
 
(In thousands)
Net income
$
4,490

 
$
31,537

Other comprehensive income:
 
 
 
Foreign currency translation adjustment
(683
)
 
(1,206
)
Change in fair value of cash flow hedges, net of income taxes
75

 
27

Total comprehensive income
$
3,882

 
$
30,358



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THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Total
 
 
Common Stock
 
Paid-In
 
Deferred
 
Retained
 
Comprehensive
 
Treasury Stock
 
Stockholders'
(in thousands, except dividends per share)
 
Shares
 
Amount
 
Capital
 
Compensation
 
Earnings
 
Loss
 
Shares
 
Value
 
Equity
BALANCE, February 3, 2018
 
17,257

 
$
1,726

 
$
258,501

 
$
2,436

 
$
226,303

 
$
(12,831
)
 
(46
)
 

($2,436
)
 
$
473,699

Vesting of stock awards
 
458

 
46

 
(70
)
 
 
 
 
 
 
 
 
 
 
 
(24
)
Stock-based compensation
 
 
 
 
 
8,801

 
 
 
 
 
 
 
 
 
 
 
8,801

Capitalized stock-based compensation
 
 
 
 
 
85

 
 
 
 
 
 
 
 
 
 
 
85

Purchase and retirement of shares
 
(306
)
 
(31
)
 
(25,000
)
 
 
 
(37,217
)
 
 
 
(757
)
 
(100,000
)
 
(162,248
)
Dividends declared ($0.50 per share)
 
 
 
 
 
 
 
 
 
(8,409
)
 
 
 
 
 
 
 
(8,409
)
Unvested dividends
 
 
 
 
 
358

 
 
 
(358
)
 
 
 
 
 
 
 

ASC Topic 606 Adjustment
 
 
 
 
 
 
 
 
 
875

 
 
 
 
 
 
 
875

Change in cumulative translation
 adjustment
 
 
 
 
 
 
 
 
 
 
 
(1,206
)
 
 
 
 
 
(1,206
)
Change in fair value of cash flow
 hedges, net of income taxes
 
 
 
 
 
 
 
 
 
 
 
27

 
 
 
 
 
27

Deferral of common stock into
 deferred compensation plan
 
 
 
 
 
 
 
62

 
 
 
 
 

 
(62
)
 

Net income
 
 
 
 
 
 
 
 
 
31,537

 
 
 
 
 
 
 
31,537

BALANCE, May 5, 2018
 
17,409

 
$
1,741

 
$
242,675

 
$
2,498

 
$
212,731

 
$
(14,010
)
 
(803
)
 
$
(102,498
)
 
$
343,137

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, February 2, 2019
 
15,873

 
$
1,588

 
$
146,991

 
$
2,685

 
$
180,792

 
$
(14,934
)
 
(47
)
 

($2,685
)
 
$
314,437

Vesting of stock awards
 
403

 
40

 
(4
)
 
 
 
 
 
 
 
 
 
 
 
36

Stock-based compensation
 
 
 
 
 
7,759

 
 
 
 
 
 
 
 
 
 
 
7,759

Purchase and retirement of shares
 
(363
)
 
(36
)
 
(5,526
)
 
 
 
(29,581
)
 
 
 
 
 
 
 
(35,143
)
Dividends declared ($0.56 per share)
 
 
 
 
 
 
 
 
 
(8,930
)
 
 
 
 
 
 
 
(8,930
)
Unvested dividends
 
 
 
 
 
215

 
 
 
(215
)
 
 
 
 
 
 
 

ASC Topic 842 Adjustment
 
 
 
 
 
 
 
 
 
(1,667
)
 
 
 
 
 
 
 
(1,667
)
Change in cumulative translation
 adjustment
 
 
 
 
 
 
 
 
 
 
 
(683
)
 
 
 
 
 
(683
)
Change in fair value of cash flow
 hedges, net of income taxes
 
 
 
 
 
 
 
 
 
 
 
75

 
 
 
 
 
75

Deferral of common stock into
 deferred compensation plan
 
 
 
 
 
 
 
62

 
 
 
 
 
(1
)
 
(62
)
 

Net income
 
 
 
 
 
 
 
 
 
4,490

 
 
 
 
 
 
 
4,490

BALANCE, May 4, 2019
 
15,913

 
$
1,592

 
$
149,435

 
$
2,747

 
$
144,889

 
$
(15,542
)
 
(48
)
 
$
(2,747
)
 
$
280,374




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THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
4,490

 
$
31,537

Reconciliation of net income to net cash provided by (used in) operating activities:
 

 
 

Non-cash portion of operating lease expense
38,731

 

Depreciation and amortization
18,584

 
17,406

Stock-based compensation
7,759

 
8,797

Deferred taxes
3,159

 
2,573

Asset impairment charges
348

 
1,257

Other
69

 
91

Changes in operating assets and liabilities:
 
 
 
Inventories
(38,323
)
 
(11,070
)
Accounts receivable
(4,468
)
 
(5,896
)
Prepaid expenses and other current assets
4,840

 
140

Other non-current assets
3,394

 
(980
)
Income taxes payable, net of prepayments
(2,955
)
 
(16,436
)
Accounts payable and other current liabilities
28,699

 
(40,283
)
Other long-term liabilities
(43,142
)
 
119

Net cash provided by (used in) operating activities
21,185

 
(12,745
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(11,009
)
 
(11,065
)
Acquisition of assets
(76,000
)
 

Proceeds from sale of short-term investments

 
15,000

Change in deferred compensation plan
517

 
(333
)
Net cash provided by (used in) investing activities
(86,492
)
 
3,602

CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repurchase of common stock, including shares surrendered for tax withholdings and transaction costs
(33,319
)
 
(162,248
)
Payment of dividends
(8,930
)
 
(8,409
)
Borrowings under revolving loan
306,279

 
301,340

Repayments under revolving loan
(202,068
)
 
(276,000
)
Net cash provided by (used in) financing activities
61,962

 
(145,317
)
Effect of exchange rate changes on cash and cash equivalents
320

 
62

Net decrease in cash and cash equivalents
(3,025
)
 
(154,398
)
Cash and cash equivalents, beginning of period
69,136

 
244,519

Cash and cash equivalents, end of period
$
66,111

 
$
90,121

 
See accompanying notes to these consolidated financial statements.

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THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
 
(In thousands)
OTHER CASH FLOW INFORMATION:
 

 
 

Net cash paid (refunded) during the period for income taxes
$
(1,379
)
 
$
5,572

Cash paid during the period for interest
1,537

 
595

Increase (decrease) in accrued purchases of property and equipment
(2,019
)
 
1,042

 
See accompanying notes to these consolidated financial statements.


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THE CHILDREN’S PLACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
BASIS OF PRESENTATION
Description of Business
The Children's Place, Inc. and subsidiaries (the “Company”) is the largest pure-play children's specialty apparel retailer in North America. The Company provides apparel, footwear, accessories, and other items for children. The Company designs, contracts to manufacture, sells at retail and wholesale, and licenses to sell, trend right, high-quality merchandise at value prices, the substantial majority of which is under its proprietary “The Children's Place”, "Place", and "Baby Place" brand names.
The Company classifies its business into two segments: The Children’s Place U.S. and The Children’s Place International.  Included in The Children’s Place U.S. segment are the Company's U.S. and Puerto Rico-based stores and revenue from its U.S.- based wholesale business. Included in The Children's Place International segment are its Canadian-based stores, revenue from the Company's Canada wholesale business, as well as revenue from international franchisees. Each segment includes an e-commerce business located at www.childrensplace.com.
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of The Children’s Place, Inc. (the “Company”) as of May 4, 2019 and May 5, 2018 and the results of its consolidated operations for the thirteen weeks ended May 4, 2019 and May 5, 2018 and cash flows for the thirteen weeks ended May 4, 2019 and May 5, 2018 and stockholders' equity for the thirteen weeks ended May 4, 2019 and May 5, 2018. The consolidated financial position as of February 2, 2019 was derived from audited financial statements.  Due to the seasonal nature of the Company’s business, the results of operations for the thirteen weeks ended May 4, 2019 and May 5, 2018 are not necessarily indicative of operating results for a full fiscal year.  These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
Terms that are commonly used in the Company’s notes to consolidated financial statements are defined as follows:
First Quarter 2019 — The thirteen weeks ended May 4, 2019
First Quarter 2018 — The thirteen weeks ended May 5, 2018
FASB — Financial Accounting Standards Board
SEC — U.S. Securities and Exchange Commission
U.S. GAAP — Generally Accepted Accounting Principles in the United States
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
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly‑owned subsidiaries. Intercompany balances and transactions have been eliminated. FASB ASC 810--Consolidation is considered when determining whether an entity is subject to consolidation.
Fiscal Year
The Company's fiscal year is a 52-week or 53-week period ending on the Saturday on or nearest to January 31.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and amounts of revenues and expenses reported during the period. Actual results could differ from the assumptions used and estimates made by management, which could have a material impact on the Company's financial position

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or results of operations. Significant estimates inherent in the preparation of the consolidated financial statements include: reserves for the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived assets; fair value measurements; accounting for income taxes and related uncertain tax positions; insurance reserves; valuation of stock-based compensation awards and related estimated forfeiture rates, among others.
Reclassifications
Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
Leases
The Company adopted Accounting Standards Update No. 2016-02 "Leases" ("Topic 842") as of the beginning of fiscal 2019 using the modified retrospective transition method. Topic 842 requires that all leases greater than 12 months be recorded on the balance sheet as a right-of-use asset with a corresponding liability.
See Note 3 "Leases" for further details on the Company's adoption of Topic 842.
Inventories
Inventories, which consist primarily of finished goods, are stated at the lower of cost or net realizable value, with cost determined on an average cost basis. The Company capitalizes certain supply chain costs in inventory, and these costs are reflected within cost of sales as the inventories are sold. Inventory shrinkage is estimated in interim periods based upon the historical results of physical inventory counts in the context of current year facts and circumstances.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets when events indicate that their carrying value may not be recoverable. Such events include historical trends or projected trend of cash flow losses or a future expectation that the Company will sell or dispose of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment, the Company groups its 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.
The Company reviews all stores that have reached comparable sales status, or sooner if circumstances should dictate, on at least an annual basis. The Company believes 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 operating losses, the Company projects future cash flows over the remaining life of the lease and compares the total undiscounted cash flows to the net book value of the related long-lived assets. If the undiscounted cash flows are less than the related net book value of the long-lived assets, they are written down to their fair market value. The Company primarily determines fair market value to be the discounted future cash flows directly associated with those assets. In evaluating future cash flows, the Company considers 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. Internal factors include the Company's ability to gauge the fashion taste of its customers, control variable costs such as cost of sales and payroll and, in certain cases, its ability to renegotiate lease costs.
Stock-based Compensation
The Company generally grants time vesting stock awards ("Deferred Awards") and performance-based stock awards ("Performance Awards") to employees at management levels.  The Company also grants Deferred Awards to its non-employee directors.  Deferred Awards are granted in the form of a defined number of restricted stock units that require each recipient to complete a service period. Deferred Awards generally vest ratably over three years, except for those granted to non-employee directors, which generally vest after one year. Performance Awards are granted in the form of restricted stock units which have performance criteria that must be achieved for the awards to vest (the "Target Shares") in addition to a service period requirement. For Performance Awards issued during fiscal 2016 and 2017 (the “2016 and 2017 Performance Awards”), an employee may earn from 0% to 200% of their Target Shares based on the achievement of cumulative adjusted earnings per share achieved for the three-year performance period, adjusted operating margin expansion achieved for the three-year performance period and adjusted return on invested capital ("adjusted ROIC") achieved as of the end of the performance period. The 2016 and 2017 Performance Awards cliff vest, if earned, after completion of the three-year performance period. The fair value of the 2016 and 2017 Performance Awards granted is based on the closing price of our common stock on the grant date. For Performance Awards issued during fiscal 2018 (the “2018 Performance Awards”), an employee may earn from 0% to 250% of their Target Shares based on cumulative adjusted earnings per share achieved for the three-year performance period, adjusted operating margin expansion achieved for the three-year performance period, adjusted ROIC achieved as of the end of the performance period and our adjusted ROIC relative to that of companies in our peer group as of the end of the performance period. The 2018 Performance Awards cliff vest, if earned, after completion of the three-year performance period. The fair value of the 2018 Performance Awards granted is based on the closing price of our common stock on the grant date.

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Stock-based compensation expense is recognized ratably over the related service period reduced for estimated forfeitures of those awards not expected to vest due to employee turnover. Stock-based compensation expense, as it relates to Performance Awards, is also adjusted based on the Company's estimate of adjusted earnings per share and adjusted operating margin expansion and adjusted return on invested capital and ranking of our adjusted return on investment capital relative to that of companies in our peer group as they occur.
Deferred Compensation Plan
The Company has a deferred compensation plan (the “Deferred Compensation Plan”), which is a nonqualified plan, for eligible senior level employees.  Under the plan, participants may elect to defer up to 80% of his or her base salary and/or up to 100% of his or her bonus to be earned for the year following the year in which the deferral election is made.  The Deferred Compensation Plan also permits members of the Board of Directors to elect to defer payment of all or a portion of their retainer and other fees to be earned for the year following the year in which a deferral election is made.  In addition, eligible employees and directors of the Company may also elect to defer payment of any shares of Company stock that is earned with respect to stock-based awards.  Directors may elect to have all or a certain portion of their fees earned for their service on the Board invested in shares of the Company’s common stock.  Such elections are irrevocable.  The Company is not required to contribute to the Deferred Compensation Plan, but at its sole discretion, can make additional contributions on behalf of the participants. Deferred amounts are not subject to forfeiture and are deemed invested among investment funds offered under the Deferred Compensation Plan, as directed by each participant.  Payments of deferred amounts (as adjusted for earnings and losses) are payable following separation from service or at a date or dates elected by the participant at the time the deferral is elected.  Payments of deferred amounts are generally made in either a lump sum or in annual installments over a period not exceeding 15 years.  All deferred amounts are payable in the form in which they were made, except for board fees invested in shares of the Company's common stock, which will be settled in shares of Company common stock.  Earlier distributions are not permitted except in the case of an unforeseen hardship.
The Company has established a rabbi trust that serves as an investment to shadow the Deferred Compensation Plan liability. The assets of the rabbi trust are general assets of the Company and as such, would be subject to the claims of creditors in the event of bankruptcy or insolvency.  Investments of the rabbi trust consist of mutual funds and Company common stock.  The Deferred Compensation Plan liability, excluding Company common stock, is included within other long-term liabilities and changes in the balance, except those relating to payments, are recognized as compensation expense within selling, general, and administrative expenses.  The value of the mutual funds is included in other assets and related earnings and losses are recognized as investment income or loss, which is included within selling, general, and administrative expenses.  Company stock deferrals are included within the equity section of the Company’s consolidated balance sheet as treasury stock and as a deferred compensation liability.  Deferred stock is recorded at fair market value at the time of deferral and any subsequent changes in fair market value are not recognized.
Fair Value Measurement and Financial Instruments
FASB ASC 820--Fair Value Measurements and Disclosure provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.
This topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of the hierarchy are defined as follows:
Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities
The Company’s cash and cash equivalents, assets of the Company’s Deferred Compensation Plan, accounts receivable, accounts payable, current lease liabilities, and revolving loan are all short-term in nature. As such, their carrying amounts approximate fair value and fall within Level 1 of the fair value hierarchy. The Company stock that is included in the Deferred Compensation Plan is not subject to fair value measurement.
The Company's assets and liabilities include foreign exchange forward contracts that are measured at fair value using observable market inputs such as forward rates, the Company's credit risk, and our counterparties’ credit risks. Based on these inputs, the Company's derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.

The Company’s assets measured at fair value on a nonrecurring basis include long-lived assets, such as intangible assets, fixed assets, and right-of-use assets. The Company reviews the carrying amounts of such assets when events indicate that their

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carrying amounts may not be recoverable. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to fall within Level 3 of the fair value hierarchy.

Recently Issued Accounting Standards

Adopted in Fiscal 2019

In August 2017, the FASB issued guidance relating to the accounting for hedging activities. This guidance aims to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in the guidance expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. We adopted this guidance in the First Quarter 2019. This adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued guidance relating to the accounting for leases. This guidance applies a right-of-use model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments. The lease term is the noncancellable period of the lease, and includes both periods covered by an option to extend the lease, if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease, if the lessee is reasonably certain not to exercise that termination option. We adopted this guidance in the First Quarter 2019 using the modified-retrospective method. Refer to Note 3, "Leases”, for additional information.

To Be Adopted After Fiscal 2019

In August 2018, the FASB issued guidance related to the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aims to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. We do not expect the guidance to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurement. The amendments modify current fair value measurement disclosure requirements by removing, adding, or modifying certain fair value measurement disclosures. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption is permitted. We plan to adopt the new disclosure requirements on a prospective basis beginning in the year of adoption. We do not expect the guidance to have a material impact on our consolidated financial statements.
    
2. REVENUES
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

The following table presents our revenues disaggregated by geography:

 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
Net sales:
(In thousands)
South
$
147,064

 
$
153,764

Northeast
97,903

 
105,878

West
61,994

 
66,605

Midwest
54,648

 
57,501

International and other
50,773

 
52,566

Total net sales
$
412,382

 
$
436,314


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The Company recognizes revenue, including shipping and handling fees billed to customers, upon purchase at the Company's retail stores or when received by the customer if the product was purchased via e-commerce, net of coupon redemptions and anticipated sales returns. The Company deferred approximately $5.1 million and $2.6 million as of May 4, 2019 and May 5, 2018, respectively, based upon estimated time of delivery, at which point control passes to the customer, and is recorded in accrued expenses and other current liabilities. Sales tax collected from customers is excluded from revenue.

For the sale of goods with a right of return, the Company recognizes revenue for the consideration it expects to be entitled to and calculates an allowance for estimated sales returns based upon the Company's sales return experience. Adjustments to the allowance for estimated sales returns in subsequent periods are generally not material based on historical data, thereby reducing the uncertainty inherent in such estimates. The allowance for estimated sales returns, which is recorded in accrued expenses and other current liabilities, was approximately $1.6 million and $1.3 million as of May 4, 2019 and May 5, 2018, respectively.

Our private label credit card is issued to our customers for use exclusively at The Children's Place stores and online at www.childrensplace.com, and credit is extended to such customers by a third-party financial institution on a non-recourse basis to us. The private label credit card includes multiple performance obligations, including marketing and promoting the program on behalf of the bank and the operation of the loyalty rewards program. Included in the agreement with the third-party financial institution was an upfront bonus paid to the Company. The upfront bonus is recognized as revenue and allocated between brand and reward obligations. As the license of the Company’s brand is the predominant item in the performance obligation, the amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur.

In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration, such as additional bonuses, including profit-sharing, over the life of the program. Similar to the upfront bonus, the usage-based royalties and bonuses are recognized as revenue and allocated between the brand and reward obligations. The amount allocated to the brand obligation is recognized on a straight-line basis over the initial term. The amount allocated to the reward obligation is recognized on a point-in-time basis as redemptions under the loyalty program occur. In addition, the annual profit-sharing amount is estimated and recognized quarterly within an annual period when earned. The additional bonuses are amortized over the contract term based on anticipated progress against future targets and level of risk associated with achieving the targets. The Company deferred approximately $0.5 million as of May 4, 2019 in relation to its private label credit card performance obligations.

The Company has a points-based customer loyalty program, in which customers earn points based on purchases and other promotional activities. These points can be redeemed for coupons to discount future purchases. A contract liability is estimated based on the standalone selling price of benefits earned by customers through the program and the related redemption experience under the program. The value of each point earned is recorded as deferred revenue and is included within accrued expenses and other current liabilities. The total contract liability related to this program was $3.8 million and $4.8 million as of May 4, 2019 and May 5, 2018, respectively.

The Company's policy with respect to gift cards is to record revenue as and when the gift cards are redeemed for merchandise. The Company recognizes gift card breakage income in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property and is recorded within net sales. Prior to their redemption, gift cards are recorded as a liability, included within accrued expenses and other current liabilities. The total contract liability related to gift cards issued was $17.0 million and $15.9 million as of May 4, 2019 and May 5, 2018, respectively. The liability is estimated based on expected breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:

 
Contract Liability
 
(In thousands)
Balance at February 2, 2019
$
17,867

Gift cards sold
7,139

Gift cards redeemed
(7,142
)
Gift card breakage
(831
)
Balance at May 4, 2019
$
17,033



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The Company has an international expansion program through territorial agreements with franchisees. The Company generates revenues from the franchisees from the sale of product and, in certain cases, sales royalties. The Company records net sales and cost of goods sold on the sale of product to franchisees when the franchisee takes ownership of the product. The Company records net sales for royalties when the applicable franchisee sells the product to their customers. Under certain agreements, the Company receives a fee from each franchisee for exclusive territorial rights. The Company records this territorial fee as deferred revenue and amortizes the fee into gross sales over the life of the territorial agreement.

3. LEASES
Adoption of ASC Topic 842, "Leases"

On February 3, 2019, the Company adopted ASC Topic 842 "Leases" ("Topic 842") using the modified retrospective method. Results for reporting periods beginning in fiscal 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 840" Leases" ("Topic 840").

On February 3, 2019, the Company recognized a cumulative-effect charge of $1.7 million, net of tax, to the opening balance of retained earnings, which represents the initial impairment of right-of-use assets related to retail locations.

For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. The right-of-use asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives. For finance leases, the right-of-use asset is initially measured at cost and subsequently amortized using the straight-line method generally from the lease commencement date to the earlier of the end of its useful life or the end of the lease term.

The Company has elected the package of practical expedients permitted under the transition guidance within the new standard. Accordingly, we have adopted these practical expedients and did not reassess: (1) whether an expired or existing contract is a lease or contains an embedded lease; (2) lease classification of an expired or existing lease; (3) capitalization of initial direct costs for an expired or existing lease.

The Company has made an accounting policy election by class of underlying asset to not apply the recognition requirements of Topic 842 to leases with an initial term of 12 months or less. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

In certain leases, the Company has the right to exercise lease renewal options. Renewal option periods are included in the measurement of lease right-of-use assets and lease liabilities where the exercise is reasonably certain to occur.

The Company has lease agreements with lease and non-lease components. The Company elected a policy to account for lease and non-lease components as a single component for all asset classes.

The discount rate is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the Company is required to use its incremental borrowing rate. The discount rate for a lease is determined based on the information available at the later of adoption of Topic 842 or at lease commencement. In general, the Company accounts for the underlying leased asset and applies a discount rate at the lease level. However, there are certain non-real estate leases for which the Company utilizes the portfolio method by aggregating similar leased assets based on the underlying lease term.

As of May 4, 2019, the Company's finance leases were not material to the consolidated balance sheets, consolidated statements of operations, or consolidated statement of cash flows.

We have certain lease agreements structured with both a fixed base rent and a contingent rent based on a percentage of sales over contractual levels, others with only contingent rent based on a percentage of sales and some with a fixed base rent adjusted periodically for inflation or changes in fair market value of the underlying real estate. Contingent rent is recognized as sales occur. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We have operating leases for retail stores, corporate offices, distribution facilities, and certain equipment. Our leases have remaining lease terms of less than 1 year up to 10 years, some of which may include options to extend the leases for up to five years, and some of which may include options to early terminate the lease.

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The following components of lease expense are included in the Company's consolidated statement of operations:
 
May 4, 2019
 
(in thousands)
Operating lease cost
$
38,731

Variable lease cost1
$
15,937

Total lease cost
$
54,668

1Includes short term leases with lease periods of less than 12 months.

As of May 4, 2019, the weighted-average remaining operating lease term was 4.8 years and the weighted-average discount rate for operating leases was 5.0%.

Cash paid for amounts included in the measurement of operating lease liabilities in the First Quarter 2019 was approximately $39.8 million.

Right-of-use assets obtained in exchange for new operating lease liabilities was approximately $33.2 million.

As of May 4, 2019, the maturities of lease liabilities were as follows:
 
May 4, 2019
 
Operating Leases
 
(in thousands)
Remainder of 2019
$
117,624

2020
133,783

2021
102,066

2022
70,062

2023
44,854

Thereafter
80,814

Total lease payments
$
549,203

Less: imputed interest
$
(48,113
)
Present value of lease liabilities
$
501,090


Future minimum annual lease payments under the Company's operating leases at February 2, 2019 were as follows:

 
 
Minimum Operating Lease Payments
 
 
(In thousands)
2019
 
$
143,601

2020
 
117,037

2021
 
86,788

2022
 
57,734

2023
 
32,218

Thereafter
 
50,263

Total minimum lease payments
 
$
487,641



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4. INTANGIBLE ASSETS
During the First Quarter 2019, the Company acquired certain intellectual property and related assets (the “Gymboree Assets”) of Gymboree Group, Inc. and related entities, which included the worldwide rights to the names “Gymboree” and “Crazy 8” and other intellectual property, including trademarks, domain names, copyrights, and customer databases. These intangible assets, inclusive of acquisition costs, are recorded in the long-term assets section of the consolidated balance sheets.
The Company's intangible assets were as follows:
 
 
 
 
May 4, 2019
 
 
Useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
(in thousands)
Gymboree tradename(1)
 
Indefinite
 
$
69,725

 
$

 
$
69,725

Crazy 8 tradename(1)
 
5 years
 
4,000

 
69

 
3,931

Customer databases(2)
 
3 years
 
3,000

 
83

 
2,917

Total intangibles, net
 
 
 
$
76,725

 
$
152

 
$
76,573

(1) 
Included within Tradenames, net in the consolidated balance sheets.
(2) 
Included within Other assets in the consolidated balance sheets.

5. STOCKHOLDERS’ EQUITY
Share Repurchase Programs
The Company's Board of Directors has authorized the following share repurchase programs which were active during the First Quarter 2019 and First Quarter 2018: (1) $250 million in March 2017 (the "2017 Share Repurchase Program") and (2) $250 million in March 2018 (the "2018 Share Repurchase Program"). The 2017 Share Repurchase Programs has been completed. At May 4, 2019, there was approximately $206 million remaining on the 2018 Share Repurchase Program. Under these programs, the Company may repurchase shares in the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under a program will depend on a variety of factors including price, corporate and regulatory requirements, and other market and business conditions. The Company may suspend or discontinue a program at any time, and may thereafter reinstitute purchases, all without prior announcement.
Pursuant to the Company's practice, including due to restrictions imposed by the Company's insider trading policy during black-out periods, the Company withholds and surrenders shares of vesting stock awards and makes payments to taxing authorities as required by law to satisfy the withholding tax requirements of all equity award recipients. The Company's payment of the withholding taxes in exchange for the surrendered shares constitutes a purchase of its common stock. The Company also acquires shares of its common stock in conjunction with liabilities owed under the Company's Deferred Compensation Plan, which are held in treasury.
The following table summarizes the Company's share repurchases:
 
 
Thirteen Weeks Ended
 
 
May 4, 2019
 
May 5, 2018
 
 
 Shares
 
Value
 
 Shares
 
Value
 
 
(In thousands)
 Shares repurchases related to:
 
 
 
 
 
 
 
 
 2017 Share Repurchase Program (1)
 

 
$

 
1,034

 
$
137,248

 2018 Share Repurchase Program(2)(3)
 
344.3

 
$
33,319

 

 
$

Shares acquired and held in treasury under Deferred Compensation Plan
 
0.7

 
$
62

 
0.4

 
$
62

(1) 
Inclusive of 0.3 million shares and $37.2 million in the First Quarter 2018 withheld to cover taxes in conjunction with the vesting of stock awards.
(2) 
Inclusive of 0.2 million shares for approximately $15.3 million in the First Quarter 2019 withheld to cover taxes in conjunction with the vesting of stock awards.
(3) 
Subsequent to May 4, 2019 and through May 27, 2019, the Company repurchased approximately 0.1 million shares for approximately $10.4 million, inclusive of 40 thousand shares for approximately $4.5 million withheld to cover taxes in conjunction with the vesting of stock awards.

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In accordance with the FASB ASC 505--Equity, the par value of the shares retired is charged against common stock and the remaining purchase price is allocated between additional paid-in capital and retained earnings.  The portion charged against additional paid-in capital is done using a pro-rata allocation based on total shares outstanding.  Related to all shares retired during the First Quarter 2019 and the First Quarter 2018, approximately $29.6 million and $37.2 million, respectively, were charged to retained earnings.
Dividends
The First Quarter 2019 dividend of $0.56 per share was paid on April 26, 2019 to shareholders of record on the close of business on April 15, 2019. During the First Quarter 2019, $9.1 million was charged to retained earnings, of which $8.9 million related to cash dividends paid and $0.2 million related to dividend share equivalents on unvested Deferred Awards and Performance Awards. During the First Quarter 2018, $8.8 million was charged to retained earnings, of which $8.4 million related to cash dividends paid and $0.4 million related to dividend share equivalents on unvested Deferred Awards and Performance Awards.
The Company's Board of Directors declared a quarterly cash dividend of $0.56 per share to be paid June 28, 2019 to shareholders of record on the close of business on June 18, 2019. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by the Company’s Board of Directors based on a number of factors, including business and market conditions, the Company’s future financial performance, and other investment priorities.

6. STOCK-BASED COMPENSATION
The following table summarizes the Company’s stock-based compensation expense:
 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
 
(In thousands)
   Deferred Awards
$
4,150

 
$
3,813

   Performance Awards
3,609

 
4,984

Total stock-based compensation expense (1)
$
7,759

 
$
8,797

____________________________________________
(1) 
During the First Quarter 2019 and the First Quarter 2018, approximately $1.0 million and $1.0 million, respectively, were included within cost of sales. All other stock-based compensation is included in selling, general, and administrative expenses. 
The Company recognized a tax benefit related to stock-based compensation expense of approximately $2.1 million and $2.3 million during the First Quarter 2019 and the First Quarter 2018, respectively.
Changes in the Company’s Unvested Stock Awards during the First Quarter 2019
Deferred Awards
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
(In thousands)
 
 
Unvested Deferred Awards, beginning of period
299

 
$
99.98

Granted
97

 
98.89

Vested
(54
)
 
117.34

Forfeited
(6
)
 
112.34

Unvested Deferred Awards, end of period
336

 
$
96.66



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Total unrecognized stock-based compensation expense related to unvested Deferred Awards approximated $22.2 million as of May 4, 2019, which will be recognized over a weighted average period of approximately 1.5 years.
Performance Awards
 
Number of
Shares (1)
 
Weighted
Average
Grant Date
Fair Value
 
(In thousands)
 
 
Unvested Performance Awards, beginning of period
352

 
$
90.66

Shares earned in excess of target
181

 
75.83

Vested shares, including shares vested in excess of target
(349
)
 
75.83

Forfeited
(1
)
 
126.47

Unvested Performance Awards, end of period
183

 
$
104.17

____________________________________________
(1) 
For those awards in which the performance period is complete, the number of unvested shares is based on actual shares that will vest upon completion of the service period. 
For those awards in which the performance period is not yet complete, the number of unvested shares in the table above is based on the participants earning their Target Shares at 100%. However, the cumulative expense recognized reflects changes in estimated adjusted earnings per share, adjusted operating margin expansion, and adjusted return on invested capital as they occur. Total unrecognized stock-based compensation expense related to unvested Performance Awards approximated $6.1 million as of May 4, 2019, which will be recognized over a weighted average period of approximately 1.2 years.

7. EARNINGS PER COMMON SHARE
The following table reconciles net income and share amounts utilized to calculate basic and diluted earnings per common share:
 
Thirteen Weeks Ended
 
May 4, 2019
 
May 5, 2018
 
(In thousands)
Net income
$
4,490

 
$
31,537

 
 
 
 
Basic weighted average common shares
15,847

 
17,002

Dilutive effect of stock awards
260

 
732

Diluted weighted average common shares
16,107

 
17,734



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8. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
 
 
May 4, 2019
 
February 2, 2019
 
May 5, 2018
 
 
(In thousands)
Property and equipment:
 
 

 
 

 
 

Land and land improvements
 
$
3,403

 
$
3,403

 
$
3,403

Building and improvements
 
35,568

 
35,568

 
35,548

Material handling equipment
 
51,934

 
51,934

 
50,102

Leasehold improvements
 
299,735

 
301,233

 
309,365

Store fixtures and equipment
 
270,755

 
273,430

 
265,770

Capitalized software
 
256,343

 
254,064

 
239,770

Construction in progress
 
20,568

 
14,823

 
20,980

 
 
938,306

 
934,455

 
924,938

Accumulated depreciation and amortization
 
(688,470
)
 
(674,098
)
 
(664,176
)
Property and equipment, net
 
$
249,836

 
$
260,357

 
$
260,762


At May 4, 2019, the Company performed impairment testing on 971 stores with a total net book value of approximately $72.0 million. During the First Quarter 2019, the Company recorded asset impairment charges of $0.3 million primarily for five stores, all of which were fully impaired.
At May 5, 2018, the Company performed impairment testing on 1,002 stores with a total net book value of approximately $79.4 million. During the First Quarter 2018, the Company recorded asset impairment charges of $0.3 million for two stores, both of which were fully impaired. Additionally, during the First Quarter 2018, the Company recorded asset impairment charges of $1.0 million related to the write-down of information technology systems.
9. CREDIT FACILITY
The Company and certain of its domestic subsidiaries maintain a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), Bank of America, N.A., HSBC Business Credit (USA) Inc., and JPMorgan Chase Bank, N.A., as lenders (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent and Swing Line Lender. The following discussion of the Company's Credit Agreement is as of May 4, 2019. See Note 14 "Subsequent Events" for information concerning an amendment to the Credit Agreement.
The Credit Agreement consists of a $250 million asset based revolving credit facility, with a $50 million sublimit for standby and documentary letters of credit and an uncommitted accordion feature that could provide up to $50 million of additional availability. Revolving credit loans outstanding under the Credit Agreement bear interest, at the Company’s option, at:
(i)
the prime rate, plus a margin of 0.50% to 0.75% based on the amount of the Company’s average excess availability under the facility; or
(ii)
the London InterBank Offered Rate, or “LIBOR”, for an interest period of one, two, three, or six months, as selected by the Company, plus a margin of 1.25% to 1.50% based on the amount of the Company’s average excess availability under the facility.
The Company is charged a fee of 0.25% on the unused portion of the commitments.  Letter of credit fees range from 0.625% to 0.75% for commercial letters of credit and from 0.75% to 1.00% for standby letters of credit.  Letter of credit fees are determined based on the amount of the Company's average excess availability under the facility. The amount available for loans and letters of credit under the Credit Agreement is determined by a borrowing base consisting of certain credit card receivables, certain trade and franchise receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves.
The outstanding obligations under the Credit Agreement may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods.  The Company is not subject to any early termination fees. 

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The Credit Agreement contains covenants which include conditions on stock buybacks and the payment of cash dividends or similar payments.  Credit extended under the Credit Agreement is secured by a first priority security interest in substantially all of the Company’s U.S. assets excluding intellectual property, software, equipment, and fixtures.
The Company has capitalized an aggregate of approximately $4.3 million in deferred financing costs related to the Credit Agreement. The unamortized balance of deferred financing costs at May 4, 2019 was approximately $0.4 million. Unamortized deferred financing costs are amortized over the remaining term of the Credit Agreement.
The table below presents the components of the Company’s credit facility:
 
May 4,
2019
 
February 2,
2019
 
May 5,
2018
 
(In millions)
Credit facility maximum
$
250.0

 
$
250.0

 
$
250.0

Borrowing base
250.0

 
250.0

 
250.0

 
 
 
 
 
 
Outstanding borrowings
153.1

 
48.9

 
46.8

Letters of credit outstanding—standby
6.3

 
7.0

 
7.0

Utilization of credit facility at end of period
159.4

 
55.9

 
53.8

 
 
 
 
 
 
Availability (1)
$
90.6

 
$
194.1

 
$
196.2

 
 
 
 
 
 
Interest rate at end of period
3.8
%
 
6.0
%
 
3.5
%
 
First Quarter 2019
 
Fiscal
2018
 
First Quarter 2018
Average end of day loan balance during the period
$
141.8

 
$
64.4

 
$
38.8

Highest end of day loan balance during the period
196.8

 
156.4

 
151.6

Average interest rate
4.6
%
 
4.3
%
 
4.6
%
____________________________________________
(1) 
The sublimit availability for the letters of credit was $43.7 million, $43.0 million, and $43.0 million at May 4, 2019, February 2, 2019, and May 5, 2018, respectively.

10. LEGAL AND REGULATORY MATTERS
 
The Company is a defendant in Rael v. The Children’s Place, Inc., a purported class action, pending in the U.S. District Court, Southern District of California.  In the initial complaint filed in February 2016, the plaintiff alleged that the Company falsely advertised discount prices in violation of California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act.  The plaintiff filed an amended complaint in April 2016, adding allegations of violations of other state consumer protection laws.  In August 2016, the plaintiff filed a second amended complaint, adding an additional plaintiff and removing the other state law claims.  The plaintiffs’ second amended complaint seeks to represent a class of California purchasers and seeks, among other items, injunctive relief, damages, and attorneys’ fees and costs. 
The Company engaged in mediation proceedings with the plaintiffs in December 2016 and April 2017. The parties reached an agreement in principle in April 2017, and signed a definitive settlement agreement in November 2017, to settle the matter on a class basis with all individuals in the U.S. who made a qualifying purchase at The Children’s Place from February 11, 2012 through the date of preliminary approval by the court of the settlement. The settlement is subject to court approval and provides for merchandise vouchers for class members who submit valid claims, as well as payment of legal fees and expenses and claims administration expenses. The court has stayed the matter, pending an appellate court ruling in another lawsuit to which the Company is not a party. The settlement, if ultimately approved by the court, will result in the dismissal of all claims through the date of the court’s preliminary approval of the settlement. However, if the settlement is rejected by the court, the parties will likely return to litigation, and in such event, no assurance can be given as to the ultimate outcome of this matter. In connection with the proposed settlement, the Company recorded a reserve for $5.0 million in its consolidated financial statements in the first quarter of fiscal 2017.
The Company is also involved in various legal proceedings arising in the normal course of business. In the opinion of management, any ultimate liability arising out of these proceedings will not have a material adverse effect on the Company's financial position, results of operations, or cash flows.

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11. INCOME TAXES
The Company computes income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between the financial statement and income tax basis of assets and liabilities. The Company's deferred tax assets and liabilities are comprised largely of differences relating to depreciation and amortization, rent expense, inventory, stock-based compensation, and various accruals and reserves.
The Company’s effective tax rate for the First Quarter 2019 was (35.0)% compared to (38.6)% during the First Quarter 2018. The effective tax rate was higher during the First Quarter 2019 primarily as a result of a decrease in excess tax benefits related to the vesting of equity shares. The excess tax benefits decreased from approximately $14.2 million in the First Quarter 2018 to $2.1 million in the First Quarter 2019.

On December 22, 2017, the U.S. government passed the Tax Cuts and Jobs Act (“the Tax Act”), which required U.S. companies to pay a mandatory one-time transition tax on historical offshore earnings that have not been repatriated to the U.S. While the Company is no longer permanently reinvested to the extent earnings were subject to the transition tax under the Tax Act, no additional income taxes have been provided on any earnings subsequent to the transition or for any additional outside basis differences inherent in these entities, as these amounts continue to be permanently reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis differences in these entities (i.e., basis differences in excess of that subject to the one-time transition tax) is not practicable.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in provision for income taxes. The total amount of unrecognized tax benefits as of May 4, 2019, February 2, 2019, and May 5, 2018 were $5.0 million, $5.0 million and $3.9 million, respectively, and is included within non-current liabilities. The Company recognized less than $0.1 million in each of the First Quarter 2019 and the First Quarter 2018, respectively, of additional interest expense related to its unrecognized tax benefits. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in provision for income taxes.

The Company is subject to tax in the United States and foreign jurisdictions, including Canada and Hong Kong. The Company, joined by its domestic subsidiaries, files a consolidated income tax return for federal income tax purposes. The Company, with certain exceptions, is no longer subject to income tax examinations by U.S. federal, state and local, or foreign tax authorities for tax years 2013 and prior.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.

12. DERIVATIVE INSTRUMENTS
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates attributable to inventory purchases denominated in a foreign currency. Specifically, our Canadian subsidiary’s functional currency is the Canadian dollar, but purchases inventory from suppliers in U.S. dollars. In order to mitigate the variability of cash flows associated with certain of these forecasted inventory purchases, we enter into foreign exchange forward contracts. These contracts typically mature within 12 months. We do not use forward contracts to engage in currency speculation and we do not enter into derivative financial instruments for trading purposes.
The Company accounts for all of its derivatives and hedging activity under FASB ASC 815--Derivatives and Hedging.
Under the Company’s risk management policy and in accordance with guidance under the topic, in order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis. The Company would discontinue hedge accounting under a foreign exchange forward contract prospectively (i) if management determines that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is terminated, (iii) if the forecasted transaction being hedged by the derivative is no longer probable of occurring, or (iv) if management determines that designation of the derivative as a hedge instrument is no longer appropriate.

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All derivative instruments are presented at gross fair value on the consolidated balance sheets within either prepaid expenses and other current assets or accrued expenses and other current liabilities. As of May 4, 2019, the Company had foreign exchange forward contracts with an aggregate notional amount of $8.7 million and the fair value of the derivative instruments was an asset of $1.6 million. As these foreign exchange forward contracts are measured at fair value using observable market inputs such as forward rates, the Company's credit risk and our counterparties’ credit risks, they are classified within Level 2 of the valuation hierarchy. Cash settlements related to these forward contracts are recorded within cash flows from operating activities within the consolidated statements of cash flows.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings within cost of sales (exclusive of depreciation and amortization) in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in earnings within selling, general, and administrative expenses, consistent with where the Company records realized and unrealized foreign currency gains and losses on transactions in foreign denominated currencies. There were no losses related to hedge ineffectiveness during the First Quarter 2019. Assuming May 4, 2019 exchange rates remain constant, $0.7 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified from OCI into earnings over the next 12 months. Changes in fair value associated with derivatives that are not designated and qualified as cash flow hedges are recognized as earnings within selling, general, and administrative expenses.
The Company enters into foreign exchange forward contracts with major banks and has risk exposure in the event of nonperformance by either party. However, based on our assessment, the Company believes that obligations under the contracts will be fully satisfied. Accordingly, there was no requirement to post collateral or other security to support the contracts as of May 4, 2019.

13. SEGMENT INFORMATION
In accordance with FASB ASC 280---Segment Reporting, the Company reports segment data based on geography: The Children’s Place U.S. and The Children’s Place International.  Each segment includes an e-commerce business located at www.childrensplace.com.  Included in The Children’s Place U.S. segment are the Company’s U.S. and Puerto Rico-based stores and revenue from the Company's U.S.-based wholesale business. Included in The Children's Place International segment are the Company's Canadian-based stores, revenue from the Company's Canadian wholesale business and revenue from international franchisees. The Company measures its segment profitability based on operating income, defined as income before interest and taxes.  Net sales and direct costs are recorded by each segment.  Certain inventory procurement functions such as production and design as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services are managed by The Children’s Place U.S. segment.  Expenses related to these functions, including depreciation and amortization, are allocated to The Children’s Place International segment based primarily on net sales.  The assets related to these functions are not allocated.  The Company periodically reviews these allocations and adjusts them based upon changes in business circumstances.  Net sales to external customers are derived from merchandise sales and the Company has no major customers that account for more than 10% of its net sales.  As of May 4, 2019, The Children’s Place U.S. owned and operated 849 stores and The Children’s Place International owned and operated 122 stores. As of May 5, 2018, The Children’s Place U.S. owned and operated 876 stores and The Children’s Place International owned and operated 126 stores.
The following tables provide segment level financial information:

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Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
 
(In thousands)
Net sales:
 

 
 

The Children’s Place U.S.
$
374,657

 
$
395,779

The Children’s Place International (1)
37,725

 
40,535

Total net sales
$
412,382

 
$
436,314

Operating income:
 

 
 

The Children’s Place U.S.
$
4,161

 
$
21,356

The Children’s Place International
877

 
1,702

Total operating income
$
5,038

 
$
23,058

Operating income as a percent of net sales:
 

 
 

The Children’s Place U.S.
1.1
%
 
5.4
%
The Children’s Place International
2.3
%
 
4.2
%
Total operating income
1.2
%
 
5.3
%
Depreciation and amortization:
 

 
 

The Children’s Place U.S.
$
16,709

 
$
15,541

The Children’s Place International
1,875

 
1,865

Total depreciation and amortization
$
18,584

 
$
17,406

Capital expenditures:
 

 
 

The Children’s Place U.S.
$
10,800

 
$
10,846

The Children’s Place International
209

 
219

Total capital expenditures
$
11,009

 
$
11,065

 
____________________________________________
(1) 
Net sales from The Children's Place International are primarily derived from revenues from Canadian operations.

 
May 4, 2019
 
February 2, 2019
 
May 5, 2018
Total assets:
(In thousands)
The Children’s Place U.S.
$
1,183,611

 
$
651,728

 
$
732,815

The Children’s Place International
102,343

 
75,318

 
78,112

Total assets
$
1,285,954

 
$
727,046

 
$
810,927

14. SUBSEQUENT EVENTS
On May 9, 2019, the Company and certain of its domestic subsidiaries amended and restated its credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), Bank of America, N.A., HSBC Business Credit (USA) Inc., and JPMorgan Chase Bank, N.A., as lenders and Wells Fargo, as Administrative Agent, Collateral Agent and Swing Line Lender. The Credit Agreement, which now expires in May 2024, consists of a $325 million asset based revolving credit facility, with a $50 million sublimit for standby and documentary letters of credit.
Subsequent to May 4, 2019 and through May 27, 2019, the Company repurchased approximately 0.1 million shares for approximately $10.4 million, inclusive of 40 thousand shares for approximately $4.5 million withheld to cover taxes in conjunction with the vesting of stock awards.

The Company announced that its Board of Directors has declared a quarterly cash dividend of $0.56 per share to be paid on June 28, 2019 to shareholders of record on the close of business on June 18, 2019.






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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Quarterly Report on Form 10-Q contains 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. 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 2, 2019. Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company’s business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions, the risk that the Company’s strategic initiatives to increase sales and margin are delayed or do not result in anticipated improvements, the risk of delays, interruptions and disruptions in the Company’s global supply chain, including resulting from foreign sources of supply in less developed countries or more politically unstable countries, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, various types of litigation, including class action litigations brought under consumer protection, employment, and privacy and information security laws and regulations, the imposition of regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, and the uncertainty of weather patterns. 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 2, 2019.
Terms that are commonly used in our management’s discussion and analysis of financial condition and results of operations are defined as follows:
First Quarter 2019 — The thirteen weeks ended May 4, 2019
First Quarter 2018 — The thirteen weeks ended May 5, 2018
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.
Gross Margin — Gross profit expressed as a percentage of net sales
SG&A — Selling, general, and administrative expenses
FASB — Financial Accounting Standards Board
SEC — U.S. Securities and Exchange Commission
U.S. GAAP — Generally Accepted Accounting Principles in the United States
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
Our Business
We are the largest pure-play children's specialty apparel retailer in North America. We design, contract to manufacture, sell at retail and wholesale, and license to sell, trend right, high quality merchandise at value prices, the substantial majority of which is under our proprietary “The Children's Place”, "Place", and "Baby Place" brand names. As of May 4, 2019, we operated 971 stores across North America, our e-commerce business at www.childrensplace.com, and had 212 international points of distribution open and operated by our eight franchise partners in 20 countries.


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Segment Reporting
In accordance with the “Segment Reporting” topic of the FASB ASC, 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.  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 the Company's Canadian 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 from external customers are derived from merchandise sales, and we have no major customers that account for more than 10% of our net sales.  As of May 4, 2019, The Children’s Place U.S. owned and operated 849 stores and The Children’s Place International owned and operated 122 stores. As of May 5, 2018, The Children’s Place U.S. owned and operated 876 stores and The Children’s Place International owned and operated 126 stores.
Recent Developments
On April 4, 2019, we completed the acquisition of certain intellectual property and related assets (the “Gymboree Assets”) of Gymboree Group, Inc. and related entities, which includes the worldwide rights to the names “Gymboree” and “Crazy 8” and other intellectual property, including trademarks, domain names, copyrights, and customer databases. The purchase price was funded by cash on hand and borrowings under the Company’s revolving credit facility.
Additionally, on May 9, 2019, we amended and restated our Credit Agreement to increase the availability of our asset based revolving credit facility to $325 million from $250 million. See Note 14 "Subsequent Events" for information concerning the amendment to the Credit Agreement.
On May 10, 2019, tariffs on certain imported merchandise from China increased from 10% to 25%. For the Company, products affected include backpacks, fashion bags, lunch bags, and hats. The Company expects this increase to have a minimal adverse affect on our financial position, results of operations, and cash flows. Tariffs of 25% have been formally proposed on all remaining goods imported from China. If imposed, these tariffs would affect all other of the Company's products imported from China, such as apparel and footwear, and would have an adverse impact on our financial position, results of operations, and cash flows.
Operating Highlights
Our Comparable Retail Sales decreased 4.6% during the First Quarter 2019 and net sales decreased by $23.9 million, or 5.5%, to $412.4 million during the First Quarter 2019. First Quarter 2019 was severely impacted by competitor inventory liquidations and delayed income tax refunds.
  Gross margin leveraged 20 basis points to 36.9% during the First Quarter 2019 from 36.7% during the First Quarter 2018. The comparability of our gross margin was affected by certain restructuring and fleet optimization items during the First Quarter 2019 and First Quarter 2018. Excluding the impact of these items, gross margin de-leveraged 30 basis points to 36.7% during the First Quarter 2019 from 37.0% during the First Quarter 2018. The de-leverage primarily related to competitor inventory liquidations, de-leverage of fixed expenses resulting from the decline in Comparable Retail Sales and the adverse impact of increased penetration of our e-commerce business. This was offset by our merchandise margin expansion, which was driven by strong inventory management, lower product costs, and higher realized pricing.
Selling, general, and administrative expenses increased $9.5 million to $128.0 million during the First Quarter 2019 from $118.5 million during the First Quarter 2018. As a percentage of net sales, SG&A increased 380 basis points to 31.0% during the First Quarter 2019 from 27.2% during the First Quarter 2018. The increase was primarily due to de-leverage of fixed expenses resulting from the decline in Comparable Retail Sales and higher incentive compensation expense.
Provision (benefit) for income taxes was a benefit of $1.2 million during the First Quarter 2019 compared to a benefit of $8.8 million during the First Quarter 2018.  Our effective tax rate was (35.0)% and (38.6)% in the First Quarter 2019 and the First Quarter 2018, respectively. The effective tax rate was higher during the First Quarter 2019 primarily as a result of a decrease in excess tax benefits related to the vesting of equity shares. The excess tax benefits decreased from approximately $14.2 million in the First Quarter 2018 to an excess tax benefit of $2.1 million in the First Quarter 2019.

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Net income was $4.5 million during the First Quarter 2019 compared to $31.5 million during the First Quarter 2018, due to the factors discussed above.  Earnings per diluted share was $0.28 in the First Quarter 2019 compared to $1.78 per diluted share in the First Quarter 2018.  This decrease in earnings per share is due to the factors noted above, partially offset by a lower weighted average common shares outstanding of approximately 1.6 million, which is the result of our share repurchase program.
We continue to make progress on our key strategic growth initiatives--superior product, business transformation through technology, alternate channels of distribution, and fleet optimization.
Focus on product remains our top priority and strong product acceptance and our inventory management are anticipated to deliver gross margin and inventory productivity benefits.

Our business transformation through technology initiative has two key components: digital transformation and inventory management. With respect to digital transformation, our goal is to deliver one to one personalization focusing on improving customer acquisition and increasing customer engagement with our brand and to continue to gain market share. The transformation of our digital capabilities will continue during fiscal 2019 as we continue to make foundational enhancements to further support our digital platform, including: moving to responsive design, which will provide a consistent customer experience across all devices; adding a content management system; adding a digital asset management system; cross device linking to drive personalization; a full point-of-sale roll-out with save the sale functionality; and the continued roll-out of buy-on-line ship to store. With respect to inventory management, we have implemented assortment planning, allocation, replenishment, order planning, and forecasting tools.

With respect to alternate channels of distribution, we continued our international expansion program during the First Quarter 2019 with our franchise partners and added additional international points of distribution (stores, shop in shops, e-commerce site) bringing our total count to 212 points of distribution operating in 20 countries. Along with Semir, China's largest specialty children's apparel retailer, we plan to open approximately 15 to 20 locations in the China market in fiscal 2019. In our wholesale business, our relationship with Amazon continues to develop with the expansion of our replenishment program.
We continue to evaluate our store fleet as part of our fleet optimization initiative to improve store productivity and plan to close approximately 300 stores through fiscal 2020, which includes the 213 stores closed since the announcement of this initiative. We have identified 25 new store openings through our Gymboree due diligence and plan to open approximately 10 new stores in fiscal 2019. However, we will remain a net closer of stores.
 
During the First Quarter 2019, we repurchased approximately 0.3 million shares for approximately $33.3 million under our share repurchase program inclusive of shares surrendered to cover tax withholdings associated with the vesting of equity awards. As of May 4, 2019, there was approximately $206.0 million remaining pursuant to the 2018 Share Repurchase Program. We also paid cash dividends of $8.9 million during the First Quarter 2019 and announced that our Board of Directors has declared a quarterly cash dividend of $0.56 per share to be paid on June 28, 2019 to shareholders of record on the close of business on June 18, 2019.
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 those average translation rates that most impact our operating results:
 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
Average Translation Rates (1)
 
 
 
Canadian Dollar
0.7505
 
0.7840
Hong Kong Dollar
0.1274
 
0.1276
China Yuan Renminbi
0.1490
 
0.1571
__________________________________________________
(1) 
The average translation rates are the average of the monthly translation rates used during each period to translate the respective income statements.  The rates represent the U.S. dollar equivalent of a unit of each foreign currency.





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CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reported period.  In many cases, there are alternative policies or estimation techniques that could be used.  We continuously review the application of our accounting policies and evaluate 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 from our estimates.
The accounting policies and 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 policies and estimates with the Audit Committee of our Board of Directors, which has reviewed our related disclosures herein.
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, and market conditions.  Our historical estimates have not differed materially from actual results and a 10% difference in our reserve as of May 4, 2019 would have impacted net income by approximately $0.1 million.  Our reserve balance at May 4, 2019 was approximately $1.8 million compared to $3.7 million at May 5, 2018.
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. A 0.5% difference in our shrinkage rate as a percentage of cost of goods sold could impact each quarter's net income by approximately $0.6 million.
Stock-Based Compensation- We account for stock-based compensation according to the provisions of FASB ASC 718-- Compensation-Stock Compensation.
Time Vesting and Performance-Based Awards
We generally grant time vesting and performance-based stock awards to employees at management levels and above.  We also grant time vesting stock awards to our non-employee directors.  Time vesting awards are granted in the form of restricted stock units that require each recipient to complete a service period ("Deferred Awards"). Deferred Awards granted to employees generally vest ratably over three years. Deferred Awards granted to non-employee directors generally vest after one year. Performance-based stock awards are granted in the form of restricted stock units which have a 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 Board's Compensation Committee, the Company may settle vested Deferred Awards and Performance Awards to the employee 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. For Performance Awards issued during fiscal 2016 and fiscal 2017 (the “2016 and 2017 Performance Awards”), an employee may earn from 0% to 200% of their Target Shares based on the cumulative adjusted earnings per share achieved for the three-year performance period, adjusted operating margin expansion achieved for the three-year performance period, and adjusted return on invested capital ("adjusted ROIC") achieved at the end of the performance period. The 2016 and 2017 Performance Awards cliff vest, if earned, after completion of the applicable three year performance period. The fair value of the 2016 and 2017 Performance Awards granted is based on the closing price of our common stock on the grant date. For Performance Awards issued during fiscal 2018 (the “2018 Performance Awards”), an employee may earn from 0% to 250% of their Target Shares based on the cumulative adjusted earnings per share achieved for the three-year performance period, adjusted operating margin expansion achieved for the three-year performance period, adjusted ROIC achieved as of the end of the performance period, and our adjusted ROIC relative to that of companies in our peer group as of the end of the performance period. The 2018 Performance Awards cliff vest, if earned, after completion of the three-year performance period. The fair value of the 2018 Performance Awards granted is based on the closing price of our common stock on the grant date. Compensation expense is recognized ratably over the related service period reduced for estimated forfeitures of those awards not expected to vest due to employee turnover. While actual forfeitures could vary significantly from those estimated, a 10% change in our estimated forfeiture rate would impact our fiscal 2019 net income by approximately $1.1 million. 
Impairment of Long-Lived Assets- We periodically review our long-lived assets 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

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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 been open for at least two years, or sooner if circumstances should dictate, on at least an annual basis.  We believe waiting two years 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 operating losses, we project future cash flows over the remaining life of the lease and compare the total undiscounted cash flows to the net book value of the related long-lived assets.  If the undiscounted 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 determine fair market value to be the discounted future cash flows associated with those assets.  In evaluating future cash flows, we 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.  Internal factors include our ability to gauge the fashion taste of our customers, control variable costs such as cost of sales and payroll, and in certain cases, our ability to renegotiate lease costs. 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, future impairment charges could be material.  At May 4, 2019, the average net book value per store was approximately $0.1 million.
Income Taxes-We utilize the 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 that apply to taxable income in effect for the years in which the basis differences and tax assets are expected to be realized.  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.  If, in the future 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.
 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 financial statements.
Fair Value Measurement and Financial Instruments- FASB ASC 820--Fair Value Measurements and Disclosure provides a single definition of fair value, together with a framework for measuring it and requires additional disclosure about the use of fair value to measure assets and liabilities.
This topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of the hierarchy are defined as follows:
Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities

Our cash and cash equivalents, accounts receivable, assets of the Company’s Deferred Compensation Plan, accounts payable, current lease liabilities, and revolving loan are all short-term in nature.  As such, their carrying amounts approximate fair value and fall within Level 1 of the fair value hierarchy. The Company stock included in the Deferred Compensation Plan is not subject to fair value measurement.

Our assets measured at fair value on a nonrecurring basis include long-lived assets, such as intangible assets, fixed assets, and right-of-use assets. We review the carrying amounts of such assets when events indicate that their carrying amounts may not be recoverable. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to fall within Level 3 of the fair value hierarchy.

Our derivative assets and liabilities include foreign exchange forward contracts that are measured at fair value using observable market inputs such as forward rates, our credit risk, and our counterparties’ credit risks. Based on these inputs, our derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.

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Insurance and Self-Insurance Liabilities- Based on our assessment of risk and cost efficiency, we self-insure as well as purchase insurance policies to provide for workers' compensation, general liability and property losses, cyber-security coverage, as well as directors' and officers' liability, vehicle liability, and employee medical benefits.  We estimate risks and record a liability based upon historical claim experience, insurance deductibles, severity factors, and other actuarial assumptions.  These estimates include inherent uncertainties due to the variability of the factors involved, including type of injury or claim, required services by the providers, healing time, age of claimant, case management costs, location of the claimant, and governmental regulations.  While we believe that our risk assessments are appropriate, these uncertainties or a deviation in future claims trends from recent historical patterns could result in our recording additional or reduced expenses, which may be material to our results of operations.  Our historical estimates have not differed materially from actual results and a 10% difference in our insurance reserves as of May 4, 2019 would have impacted net income by approximately $0.5 million.
Recently Issued Accounting Standards

Adopted in Fiscal 2019

In August 2017, the FASB issued guidance relating to the accounting for hedging activities. This guidance aims to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in the guidance expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. We adopted this guidance in the First Quarter 2019. This adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued guidance relating to the accounting for leases. This guidance applies a right-of-use model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments. The lease term is the noncancellable period of the lease, and includes both periods covered by an option to extend the lease, if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease, if the lessee is reasonably certain not to exercise that termination option. We adopted this guidance in the First Quarter 2019 using the modified-retrospective method. Refer to Note 3, "Leases”, for additional information.

To Be Adopted After Fiscal 2019

In August 2018, the FASB issued guidance related to the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aims to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. We do not expect the guidance to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurement. The amendments modify current fair value measurement disclosure requirements by removing, adding, or modifying certain fair value measurement disclosures. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption is permitted. We plan to adopt the new disclosure requirements on a prospective basis beginning in the year of adoption. We do not expect the guidance to have a material impact on our consolidated financial statements.

RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected statement of operations data 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, gross profit increased approximately 20 basis points to 36.9% of net sales during the First Quarter 2019 from 36.7% during the First Quarter 2018.  Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e., “leveraging”), the more efficiently we have utilized the investments we have made in our business.  Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., “de-leveraging”), we have less efficiently utilized the

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investments we have made in our business.
 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
Net sales
100.0
 %
 
100.0
 %
Cost of sales (exclusive of depreciation and amortization)
63.1

 
63.3

Gross profit
36.9

 
36.7

Selling, general, and administrative expenses
31.0

 
27.2

Depreciation and amortization
4.5

 
4.0

Asset impairment charge
0.1

 
0.3

Operating income
1.2

 
5.3

Income before income taxes
0.8

 
5.2

Provision (benefit) for income taxes
(0.3
)
 
(2.0
)
Net income
1.1
 %
 
7.2
 %
Number of Company-operated stores, end of period
971

 
1,002

____________________________________________
 Table may not add due to rounding.
 
The following tables set forth net sales by segment, for the periods indicated.
 
Thirteen Weeks Ended
 
May 4,
2019
 
May 5,
2018
Net sales:
(In thousands) 
The Children’s Place U.S.
$
374,657

 
$
395,779

The Children’s Place International
37,725

 
40,535

Total net sales
$
412,382

 
$
436,314

 
First Quarter 2019 Compared to the First Quarter 2018
 
Net sales decreased by $23.9 million, or 5.5%, to $412.4 million during the First Quarter 2019 from $436.3 million during the First Quarter 2018First Quarter 2019 was adversely impacted by competitor inventory liquidations and delayed income tax refunds. Our net sales decreased by $23.9 million driven primarily by a Comparable Retail Sales decrease of 4.6%.
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 Comparative Retail Sales and revenues.
The Children’s Place U.S. net sales decreased $21.1 million, or 5.3%, to $374.7 million in the First Quarter 2019 compared to $395.8 million in the First Quarter 2018.  This decrease primarily resulted from a U.S. Comparable Retail Sales decrease of 4.4%.
The Children’s Place International net sales decreased $2.8 million, or 6.9%, to $37.7 million in the First Quarter 2019 compared to $40.5 million in the First Quarter 2018.  The decrease resulted primarily from a Canadian Comparable Retail Sales decrease of 6.4%.
Total e-commerce sales, which include postage and handling, increased to approximately 29.2% of net sales during First Quarter 2019 from approximately 26.8% during First Quarter 2018.
Gross profit decreased by $8.2 million to $152.0 million during the First Quarter 2019 from $160.2 million during the First Quarter 2018.  Gross margin leveraged 20 basis points to 36.9% during the First Quarter 2019 from 36.7% during the First Quarter 2018. The comparability of our gross margin was affected by certain restructuring and fleet optimization items during the First Quarter 2019 and First Quarter 2018. Excluding the impact of these items, gross margin de-leveraged 30 basis points to 36.7% during the First Quarter 2019 from 37.0% during the First Quarter 2018. The de-leverage primarily related to competitor inventory liquidations, de-leverage of fixed expenses resulting from the decline in Comparable Retail Sales and the

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adverse impact of increased penetration of our e-commerce business. This was offset by our merchandise margin expansion, which was driven by strong inventory management, lower product costs, and higher realized pricing.
Gross profit as a percentage of net revenues 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 material costs. These factors, among others, may cause gross profit as a percentage of net revenues to fluctuate from period to period.

Selling, general, and administrative expenses increased $9.5 million to $128.0 million during the First Quarter 2019 from $118.5 million during the First Quarter 2018. As a percentage of net sales, SG&A increased 380 basis points to 31.0% during the First Quarter 2019 from 27.2% during the First Quarter 2018. The increase was primarily due to de-leverage of fixed expenses resulting from the decline in Comparable Retail Sales and higher incentive compensation expense.
Asset impairment charges were $0.3 million during the First Quarter 2019, primarily all of which related to the full impairment of five stores. Asset impairment charges during the First Quarter 2018 were $1.3 million, of which $0.3 million related to the full impairment of two stores, and $1.0 million related to the write-down of information technology systems.
Depreciation and amortization was $18.6 million during the First Quarter 2019 compared to $17.4 million during the First Quarter 2018 reflecting increased depreciation associated with our ongoing investment in business transformation initiatives.
Benefit for income taxes was $1.2 million during the First Quarter 2019 compared to $8.8 million during the First Quarter 2018.  Our effective tax rate was (35.0)% and (38.6)% in the First Quarter 2019 and the First Quarter 2018, respectively. The effective tax rate was higher during the First Quarter 2019 primarily as a result of a decrease in excess tax benefits related to the vesting of equity shares. The excess tax benefits decreased from approximately $14.2 million in the First Quarter 2018 to $2.1 million in the First Quarter 2019.
Net income was $4.5 million during the First Quarter 2019 compared to $31.5 million during the First Quarter 2018, due to the factors discussed above.  Earnings per diluted share was $0.28 in the First Quarter 2019 compared to $1.78 per diluted share in the First Quarter 2018.  This decrease in earnings per share is due to the factors noted above, partially offset by a lower weighted average common shares outstanding of approximately 1.6 million, which is the result of our share repurchase program.

LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our working capital needs 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, and the financing of capital projects, including investments in new systems, and the repurchases of our common stock and payment of dividends.
Our working capital decreased $287.4 million to a deficit of $126.2 million at May 4, 2019 compared to $161.2 million at May 5, 2018, primarily due to the funding of the Gymboree assets acquisition and the adoption of Topic 842, which resulted in an increase in current lease liabilities. During the First Quarter 2019, the Company increased its borrowings under its revolving credit facility in order to fund the $76.0 million Gymboree assets acquisition. During the First Quarter 2019, we repurchased approximately 0.3 million shares for approximately $33.3 million, inclusive of shares repurchased and surrendered to cover tax withholdings associated with the vesting of equity awards.  During the First Quarter 2018, we repurchased approximately 1.0 million shares for approximately $162.2 million, inclusive of shares repurchased and surrendered to cover tax withholdings associated with the vesting of equity awards. We also paid cash dividends of $8.9 million and $8.4 million during the First Quarter 2019 and the First Quarter 2018, respectively. Subsequent to May 4, 2019 and through May 27, 2019, we repurchased approximately 0.1 million shares for approximately $10.4 million, inclusive of 40 thousand shares for approximately $4.5 million withheld to cover taxes in conjunction with the vesting of stock awards, and declared a quarterly cash dividend of $0.56 per share to be paid on June 28, 2019 to shareholders of record on the close of business on June 18, 2019. 
At May 4, 2019, our credit facility provides for borrowings up to the lesser of $250.0 million or our borrowing base, as defined by the credit facility agreement (see “Credit Facility” below).  At May 4, 2019, we had $153.1 million of outstanding borrowings and $90.6 million available for borrowing. In addition, at May 4, 2019, we had $6.3 million of outstanding letters of credit with an additional $43.7 million available for issuing letters of credit.
We expect to be able to meet our working capital and capital expenditure requirements for the foreseeable future by using our cash on hand, cash flows from operations, and availability under our credit facility. 

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Credit Facility
We and certain of our domestic subsidiaries maintain a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), Bank of America, N.A., HSBC Business Credit (USA) Inc., and JPMorgan Chase Bank, N.A. as lenders (collectively, the “Lenders”) and Wells Fargo, as Administrative Agent, Collateral Agent and Swing Line Lender (the “Credit Agreement”). The following discussion of the Company's Credit Agreement is as of May 4, 2019. See Note 14 "Subsequent Events" for information concerning an amendment to the Credit Agreement.
The Credit Agreement consists of a $250 million asset based revolving credit facility, with a $50 million sublimit for standby and documentary letters of credit and an uncommitted accordion feature that could provide up to $50 million of additional availability. Revolving credit loans outstanding under the Credit Agreement bear interest, at the Company’s option, at:
(i)
the prime rate plus a margin of 0.50% to 0.75% based on the amount of our average excess availability under the facility; or
(ii)
the London InterBank Offered Rate, or “LIBOR”, for an interest period of one, two, three, or six months, as selected by us, plus a margin of 1.25% to 1.50% based on the amount of our average excess availability under the facility.
We are charged an unused line fee of 0.25% on the unused portion of the commitments.  Letter of credit fees range from 0.625% to 0.750% for commercial letters of credit and range from 0.75% to 1.00% for standby letters of credit.  Letter of credit fees are determined based on the amount of our average excess availability under the facility. The amount available for loans and letters of credit under the Credit Agreement is determined by a borrowing base consisting of certain credit card receivables, certain trade and franchise receivables, certain inventory and the fair market value of certain real estate, subject to certain reserves.
The outstanding obligations under the Credit Agreement may be accelerated upon the occurrence of certain events, including, among others, non-payment, breach of covenants, the institution of insolvency proceedings, defaults under other material indebtedness and a change of control, subject, in the case of certain defaults, to the expiration of applicable grace periods.  We are not subject to any early termination fees. 
The Credit Agreement contains covenants, which include conditions on stock repurchases and the payment of cash dividends or similar payments.  Credit extended under the Credit Agreement is secured by a first priority security interest in substantially all of our U.S. assets excluding intellectual property, software, equipment, and fixtures.
We have capitalized an aggregate of approximately $4.3 million in deferred financing costs related to the Credit Agreement. The unamortized balance of deferred financing costs at May 4, 2019 was approximately $0.4 million. Unamortized deferred financing costs are amortized over the remaining term of the Credit Agreement.
Cash Flows and Capital Expenditures
During the First Quarter 2019, cash flows provided by operating activities were $21.2 million compared to cash flows used in operating activities of $12.7 million during the First Quarter 2018. The increase was primarily due to working capital changes.
During the First Quarter 2019, cash flows used in investing activities were $86.5 million compared to cash flows provided by investing activities of $3.6 million during the First Quarter 2018. This change was primarily due to the Gymboree assets acquisition.
During the First Quarter 2019, cash flows provided by financing activities were $62.0 million compared to cash flows used in financing activities of $145.3 million during the First Quarter 2018.  The increase primarily resulted from a decrease in purchases of our common stock, primarily related to our accelerated share repurchase program in the First Quarter 2018, as well as increased borrowings under our revolving credit facility during the First Quarter 2019.
We anticipate that total capital expenditures will be approximately $75 million in fiscal 2019, primarily related to our business transformation initiatives, system integration costs associated with our re-launch of the Gymboree brand, and new store openings, compared to $71 million in fiscal 2018. Our ability to continue to meet our capital requirements in fiscal 2019 depends on our cash on hand, our ability to generate cash flows from operations, and our available borrowings under our revolving credit facility.  Cash flow generated from operations depends on our ability to achieve our financial plans.  During the First Quarter 2019, we were able to fund our capital expenditures with cash on hand and cash generated from operating activities supplemented by funds from our revolving credit facility.  We believe that our existing cash on hand, cash generated from operations, and funds available to us through our revolving credit facility will be sufficient to fund our capital and other cash requirements for the foreseeable future. 


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Derivative Instruments
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates attributable to inventory purchases denominated in a foreign currency. Specifically, our Canadian subsidiary’s functional currency is the Canadian dollar, but purchases inventory from suppliers in U.S. dollars. In order to mitigate the variability of cash flows associated with certain of these forecasted inventory purchases, we enter into foreign exchange forward contracts. These contracts typically mature within 12 months. We do not use forward contracts to engage in currency speculation, and we do not enter into derivative financial instruments for trading purposes.
All derivative instruments are presented at gross fair value on the consolidated balance sheets within either prepaid expenses and other current assets or accrued expenses and other current liabilities. As of May 4, 2019, we had foreign exchange forward contracts with an aggregate notional amount of $8.7 million and the fair value of the derivative instruments was an asset of $1.6 million.

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, our financial position and results of operations are routinely subject to market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities, income, and expenses.  We utilize cash from operations and short-term borrowings to fund our working capital and investment needs. 
Cash and Cash Equivalents
Cash and cash equivalents are normally invested in short-term financial instruments that will be used in operations within 90 days of the balance sheet date.  Because of the short-term nature of these instruments, changes in interest rates would not materially affect the fair value of these financial instruments. 
Interest Rates
Our credit facility bears interest at a floating rate equal to the prime rate or LIBOR, plus a calculated spread based on our average excess availability.  As of May 4, 2019, we had $153.1 million in borrowings under our credit facility. A 10% change in the prime rate or LIBOR interest rates would not have had a material impact on our interest expense.
Foreign Assets and Liabilities
Assets and liabilities outside the United States are primarily located in Canada and Hong Kong.  Our investments in our Canadian and Hong Kong subsidiaries are considered long-term. As of May 4, 2019, net assets in Canada and Hong Kong were approximately $34.0 million and $43.0 million, respectively.  A 10% increase or decrease in the Canadian and Hong Kong exchange rates would increase or decrease the corresponding net investment by approximately $3.4 million and $4.3 million, respectively.  All changes in the net investment of our foreign subsidiaries are recorded in other comprehensive income as unrealized gains or losses. 
As of May 4, 2019, we had approximately $58.8 million of our cash and cash equivalents held in foreign countries, of which approximately $11.2 million was in Canada, approximately $43.1 million was in Hong Kong and approximately $4.5 million was in other foreign countries.
Foreign Operations
We have exchange rate exposure primarily with respect to certain revenues and expenses denominated in Canadian dollars. As a result, fluctuations in exchange rates impact the amount of our reported sales and expenses.  Assuming a 10% change in foreign exchange rates, First Quarter 2019 net sales could have decreased or increased by approximately $3.2 million and total costs and expenses could have decreased or increased by approximately $4.4 million.  Additionally, we have foreign currency denominated receivables and payables that when settled, result in transaction gains or losses.  At May 4, 2019, we had foreign currency denominated receivables and payables, including inter-company balances, of $4.3 million and $5.7 million, respectively. 

Our Canadian subsidiary’s functional currency is the Canadian dollar but purchases inventory from suppliers in U.S. dollars. In order to mitigate the variability of cash flows associated with certain of these forecasted inventory purchases, we enter into foreign exchange forward contracts. As of May 4, 2019, we had foreign exchange forward contracts with an aggregate notional amount of $8.7 million and the fair value of the derivative instruments was an asset of $1.6 million.

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Assuming a 10% change in Canadian foreign exchange rates, the fair value of these instruments could have decreased by or increased by approximately $0.9 million. Any resulting changes in the fair value of the instruments would be partially offset by changes in the underlying balance sheet positions. We do not hedge all transactions denominated in foreign currency.

We import a vast majority of our merchandise from foreign countries, primarily China, Bangladesh, Vietnam, India, and Indonesia.  Consequently, any significant or sudden change in these foreign countries' political, foreign trade, financial, banking or currency policies and practices, or the occurrence of significant labor unrest, could have a material adverse impact on our financial position, results of operations, and cash flows.

Item 4.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed only to provide "reasonable assurance" that the controls and procedures will meet their objectives. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Management, including our Chief Executive Officer and President and our Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of May 4, 2019. Based on that evaluation, our Chief Executive Officer and President and our Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level, as of May 4, 2019, to ensure that all information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our principal executive, principal accounting and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS.
 
Certain legal proceedings in which we are involved are discussed in Note 10 to the consolidated financial statements and Part I, Item 3 of our Annual Report on Form 10-K for the year ended February 2, 2019. See Note 10 to the accompanying consolidated financial statements for a discussion of the recent developments concerning our legal proceedings.
 
Item 1A.
RISK FACTORS.
 
There were no material changes to the risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the year ended February 2, 2019.
 

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Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
In March 2018, the Board of Directors authorized a $250 million share repurchase program (the "2018 Share Repurchase Program"). Under the Share Repurchase Programs, the Company may repurchase shares in the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under the programs will depend on a variety of factors including price, corporate and regulatory requirements, and other market and business conditions. We may suspend or discontinue the program at any time, and may thereafter reinstitute purchases, all without prior announcement.

The following table provides a month-by-month summary of our share repurchase activity during the First Quarter 2019:
Period
 
Total Number of
Shares Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Approximate Dollar
Value (in thousands) of
Shares that May Yet
Be Purchased Under
the Plans or Programs
2/3/19-3/2/19 (1)
 
108,893

 
$
91.08

 
108,200

 
$
229,171

3/3/19-4/6/19 (2)
 
173,264

 
96.39

 
173,264

 
212,470

4/7/19-5/4/19
 
62,800

 
107.54

 
62,800

 
205,716

Total
 
344,957

 
$
96.75

 
344,264

 
$
205,716

____________________________________________
(1) 
Consists of 693 shares acquired as treasury stock as directed by participants in the Company's deferred compensation plan .
(2) 
Consists of 158,864 shares withheld to cover taxes in conjunction with the vesting of stock awards.




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Item 6.
Exhibits.
 
The following exhibits are filed with this Quarterly Report on Form 10-Q:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS*
 
XBRL Instance Document.
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase.
________________________________________

(+) Filed herewith.
(*) Compensation arrangement.


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*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement  or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
THE CHILDREN’S PLACE, INC.
 
 
 
 
 
 
 
 
Date:
May 29, 2019
By:
/S/ JANE T. ELFERS
 
 
 
JANE T. ELFERS
 
 
 
Chief Executive Officer and President
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
Date:
May 29, 2019
By:
/S/ ROBERT HELM
 
 
 
ROBERT HELM
 
 
 
Vice President, Finance and Accounting
 
 
 
(Principal Accounting Officer)
 
 
 
 

36
Exhibit



EXHIBIT 10.1
SVPs and above

PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT

THE CHILDREN’S PLACE, INC.
This Performance-Based Restricted Stock Unit Award Agreement (the “Agreement”), effective as of __________, 20___ (the “Award Date”), is entered into by and between The Children’s Place, Inc., a Delaware corporation (the “Company”), and ______________ (the “Awardee”).
WHEREAS, the Company desires to provide the Awardee an incentive to participate in the success and growth of the Company through the opportunity to earn a proprietary interest in the Company;
WHEREAS, to give effect to the foregoing intentions, the Company desires to grant the Awardee the right to receive shares of the Company’s common stock, par value $0.10 per share (the “Common Stock”), pursuant to Section 9 of the 2011 Equity Incentive Plan of the Company (the “Plan”), subject to the terms and conditions set forth herein; and
WHEREAS, capitalized terms not otherwise defined herein or in Exhibit A hereto shall have the meanings ascribed thereto in the Plan.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows:
1.Award. Subject to the terms and conditions set forth in this Agreement, and as otherwise provided in the Plan, the Company shall issue and deliver to the Awardee the number of shares of Common Stock, if any, earned in accordance with Exhibit A (the “Performance Shares”) in April 2022, but in no event later than April 15, 2022 (the “Vesting Date”), provided that a determination has been made by the Board or the Committee that the performance targets and conditions set forth in Exhibit A have been achieved, and at what levels those performance targets and conditions have been achieved (by reference to Exhibit A) (a “Determination”), and provided further that the Awardee is in the employ of the Company or its subsidiaries on the Vesting Date.
2.    Incorporation by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan. Any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan. The Committee shall have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its

1



decision shall be binding and conclusive upon the Awardee and his or her legal representative in respect of any questions arising under the Plan or this Agreement. By signing this Agreement, Awardee acknowledges that he or she has had an opportunity to review the Plan and agrees to be bound by all the terms and provisions of the Plan (and this Agreement).
3.    Termination of Employment Due to Death, Disability or Retirement. In the event that Awardee’s employment with the Company and/or its subsidiaries terminates due to Awardee’s death, Disability or Retirement (i) prior to a Determination, then the performance targets in Exhibit A shall be deemed to have been achieved at target, and the conditions set forth in Exhibit A shall be deemed to have been satisfied, and, therefore, the Target Number of Performance Shares (as set forth in Exhibit A) shall immediately vest and be delivered to the Awardee (or Awardee’s estate, as applicable) within 10 days following the date of such termination of employment, provided that if such termination of employment occurs on or prior to the date on which 50% of the Performance Period (as set forth in Exhibit A) has elapsed, only 50% of the Target Number of Performance Shares shall immediately vest and be so delivered or (ii) after a Determination, then any Performance Shares that are determined to have been earned by Awardee in accordance with Exhibit A shall, to the extent not previously delivered to Awardee, vest and be delivered to Awardee (or Awardee’s estate, as applicable) within 10 days following the date of such termination of employment.
4.    Termination of Service. Except as otherwise provided in Sections 3 above or 5 below, upon termination of the Awardee’s employment with the Company and its subsidiaries, this Award shall terminate and all of Awardee’s rights to receive Performance Shares and dividend equivalents otherwise credited pursuant to Section 6 below shall be forfeited immediately.
5.    Termination and Change in Control.
(a)Prior to Determination of Performance. Notwithstanding any provision herein to the contrary, if a Change in Control occurs prior to a Determination, then immediately prior to such Change in Control, the Target Number of Performance Shares (as set forth in Exhibit A) shall automatically convert into service-based Performance Shares, and such service-based Performance Shares shall vest and be immediately delivered to the Awardee on the Vesting Date (without regard to achievement of any of the Performance Requirements set forth on Exhibit A), provided that the Awardee is in the employ of the Company or its subsidiaries on the Vesting Date.   Notwithstanding any provision herein to the contrary, in the event that an Involuntary Termination Event occurs either (i) within six (6) months prior to or (ii) within one (1) year following the occurrence of a Change in Control, the outstanding unvested service-based Performance Shares shall immediately become fully vested and be immediately delivered to the Awardee (in the case of an Involuntary Termination occurring prior to the occurrence of a Change in Control, such delivery shall be made immediately prior to the occurrence of the Change in Control, and in the case of an Involuntary Termination occurring after a Change in Control, such delivery shall be made immediately following the occurrence of the Involuntary Termination).


2



(b)After Determination of Performance. In the event that after a Determination, an Involuntary Termination Event and a Change in Control occur, then the number of Performance Shares determined to have been earned shall immediately vest and shall be immediately delivered to the Awardee.

(c)Involuntary Termination Event. The term “Involuntary Termination Event” shall mean (i) the involuntary termination of the Awardee’s employment with the Company or any of its subsidiaries (other than for Cause, death or Disability) or (ii) the Awardee’s resignation of employment with the Company or any of its subsidiaries for Good Reason.
(d)Good Reason. The term “Good Reason” shall mean the occurrence of any of the following without the Awardee’s prior written consent: (i) a material reduction in the Awardee’s then current base salary or target bonus percentage, (ii) a material diminution of the Awardee’s duties or responsibilities, (iii) the assignment to the Awardee of duties or responsibilities which are materially inconsistent with the Awardee’s previous duties or responsibilities, or (iv) relocation of the Awardee’s principal work location to a location more than thirty (30) miles from the Awardee’s previous principal work location; provided, however, that no such occurrence shall constitute Good Reason unless the Awardee provides the Company with written notice of the matter within thirty (30) days after the Awardee first has knowledge of the matter and, in the case of clauses (i), (ii) or (iii) hereof, the Company fails to cure such matter within ten (10) days after its receipt of such notice.
6.    Dividend Equivalents. The Company shall credit the Awardee in respect of each Performance Share (and each Dividend Equivalent Share (or fraction thereof)) subject to this Award with dividend equivalents in the form of a number of shares of Common Stock (including any fractional shares) (the “Dividend Equivalent Shares”) equal to (i) the amount of each dividend (including extraordinary dividends if so determined by the Committee) declared to other stockholders of the Company in respect of one share of Common Stock divided by (ii) the Fair Market Value of a share of Common Stock on the payment date for the applicable dividend. On the date that Performance Shares are delivered to the Awardee hereunder (whether pursuant to Sections 1, 3 or 5), the Dividend Equivalent Shares in respect of the aggregate number of delivered Performance Shares shall also be delivered to the Awardee, with the aggregate number of such Dividend Equivalent Shares being rounded down to the nearest whole share (but, in any event, no fewer than one share). No dividend equivalents shall be accrued for the benefit of the Awardee with respect to record dates occurring prior to the Award Date, or with respect to record dates occurring on or after the date, if any, on which the Awardee’s rights to receive Performance Shares are forfeited.
7.    Transfer Restrictions. Prior to delivery of any Common Stock with respect to the Performance Shares or the Dividend Equivalent Shares, the Awardee shall not be deemed to have any ownership or stockholder rights (including without limitation dividend and voting rights) with respect to such shares, nor may the Awardee sell, assign, pledge or otherwise transfer (voluntarily or involuntarily) this Award, or any of the Performance Shares or any of the Dividend Equivalent Shares prior to delivery thereof.

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8.    Changes in Capitalization. In the event of (a) any dividend (other than regular cash dividends) or other distribution (whether in the form of cash, shares of Common Stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, split-off, spin-off, combination, repurchase or exchange of shares of Common Stock or other securities of the Company, issuance of warrants or other rights to acquire shares of Common Stock or other securities of the Company, or other similar corporate transaction or event that affects the shares of Common Stock, or (b) unusual or nonrecurring events affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange or inter-dealer quotation service, accounting principles or law, such that in any case an adjustment to this Award is determined by the Committee in its sole discretion to be necessary or appropriate, then this Award shall be adjusted in such manner as the Committee may deem equitable in accordance with Section 12 of the Plan.
9.    Government Regulations. Notwithstanding anything contained herein to the contrary, the Company’s obligation to issue or deliver the Performance Shares (or Dividend Equivalent Shares) or any certificates evidencing such shares shall be subject to the terms of all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchanges as may be required.
10.    Withholding Taxes. Awardee shall be required to pay to the Company or its subsidiary, and the Company or its subsidiary shall have the right (but not the obligation) and is hereby authorized to withhold from amounts payable and/or property deliverable to the Awardee, the amount of any required withholding taxes in respect of the Performance Shares and the Dividend Equivalent Shares, or any other payment or transfer under the Award, and to take such other action as may be necessary in the opinion of the Committee or the Company to satisfy all obligations for the payment of such withholding taxes.
11.    Awardee Representations. The Awardee has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by this Agreement. The Awardee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents, if any, made to the Awardee. The Awardee understands that the Awardee (and, subject to Section 10 above, not the Company) shall be responsible for the Awardee’s own tax liability arising as a result of the transactions contemplated by this Agreement.
12.    Clawback/Forfeiture. The Committee may in its sole discretion cancel this Award if the Awardee, without the consent of the Company, while employed by or providing services to the Company or any Affiliate or after termination of such employment or service, violates a non-competition, non-solicitation, non-disparagement, non-disclosure covenant or agreement or otherwise has engaged in or engages in activity that is in conflict with or adverse to the interest of the Company or any Affiliate, including fraud or conduct contributing to any financial restatements or irregularities, as determined by the Committee in its sole discretion. If the Awardee otherwise has engaged in or engages in any activity referred to in the preceding sentence, as determined by the Committee in its sole discretion, the Awardee will forfeit any

4



compensation, gain or other value realized thereafter on the vesting or settlement of this Award, the sale or other transfer of this Award, or the sale of shares of Common Stock acquired in respect of this Award, and must promptly repay such amounts to the Company. If the Awardee receives any amount in excess of what the Awardee should have received under the terms of this Award for any reason (including without limitation by reason of a financial restatement, mistake in calculations or other administrative error), all as determined by the Committee in its sole discretion, then the Awardee shall be required to promptly repay any such excess amount to the Company. To the extent required by applicable law (including without limitation Section 302 of the Sarbanes-Oxley Act of 2002 and Section 954 of the Dodd Frank Wall Street Reform and Consumer Protection Act) and/or the rules and regulations of NASDAQ or other securities exchange or inter-dealer quotation system on which the Common Stock is listed or quoted, or if so required pursuant to a written policy adopted by the Company, this Award shall be subject (including on a retroactive basis) to clawback, forfeiture or similar requirements (and such requirements shall be deemed incorporated by reference into this Award and this Agreement). In the event that this Section 12 and/or such written policy is deemed to be unenforceable, then the award of Performance Shares shall be deemed to be unenforceable due to the lack of adequate consideration.
13.    Employment. Neither this Agreement nor any action taken hereunder shall be construed as giving the Awardee any right of continuing employment by the Company or its subsidiaries.
14.    Notices. Notices or communications to be made hereunder shall be in writing and shall be delivered in person, by registered mail, by confirmed facsimile or by a reputable overnight courier service to the Company at its principal office or to the Awardee at his or her address contained in the records of the Company.
15.    Governing Law. This Agreement shall be construed under the laws of the State of Delaware, without regard to conflict of laws principles.
16.    Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings relating to the subject matter of this Agreement. Notwithstanding the foregoing, this Agreement and the Award made hereby shall be subject to the terms of the Plan. In the event of a conflict between this Agreement and the Plan, the terms and conditions of the Plan shall control.
17.    Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and the Awardee and their respective permitted successors, assigns, heirs, beneficiaries and representatives. This Agreement is personal to the Awardee and may not be assigned by the Awardee without the prior written consent of the Company. Any attempted assignment in violation of this Section shall be null and void.
18.    Amendment. This Agreement may be amended or modified only as provided in Section 14 of the Plan or by a written instrument executed by both the Company and the Awardee.

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19.    Survivorship. This Agreement shall continue in effect until there are no further rights or obligations of the parties outstanding hereunder and shall not be terminated by either party without the express written consent of both parties.

* * *
 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused their duly authorized officer to execute this Agreement as of the date first written above.
THE CHILDREN’S PLACE, INC.
By:
    
Name: Leah Swan
Title: Senior Vice President, Human Resources

AWARDEE
By:
    
Name:



Date:
    

Exhibit A

(a)    Awardee’s Name: ______________________________
(b)    Award Date: __________, 20___
(c)
Performance Period: the three (3) fiscal years of the Company commencing on February 3, 2019 and ending on January 29, 2022 (“Fiscal Years 2019-2021”)    
(d)    Target Number of Performance Shares available to be earned: ______
(e)
Maximum Number of Performance Shares available to be earned: 250% of the Target Number of Performance Shares set forth above


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[Continued on next page.]

A-1




(f)    Performance Requirements: Subject to the terms and conditions set forth in the Performance-Based Restricted Stock Unit Award Agreement, the Awardee shall earn the number of Performance Shares determined in clauses (1), (2), (3) and (4) below.
(1)
Adjusted EPS – The Awardee shall earn fifty percent (50%) of the percentage of the Target Number of Performance Shares by reference to the cumulative Adjusted EPS achieved for Fiscal Years 2019-2021 as set forth in the following table. If the sum of Adjusted EPS achieved for Fiscal Years 2019-2021 falls between the thresholds set forth in the following table, the percentage of the Target Number of Performance Shares to be earned shall be determined by linear interpolation:
Sum of Adjusted EPS
for Fiscal Years 2019-2021
Percentage of the Target Number of Performance Shares to be Earned
$[____] or Greater
200%
$[____]
190%
$[____]
180%
$[____]
170%
$[____]
160%
$[____]
150%
$[____]
140%
$[____]
130%
$[____]
120%
$[____]
110%
$[____]
100% (Target)
$[____]
90%
$[____]
80%
$[____]
70%
$[____]
60%
$[____]
50%
$[____]
40%
$[____]
30%
$[____]
20%
$[____]
10%
$[____] or less
0

A-2



(2)
Adjusted Operating Margin Expansion – The Awardee shall earn twenty-five percent (25%) of the percentage of the Target Number of Performance Shares by reference to the Adjusted Operating Margin Expansion achieved (measured in basis points) from the beginning of Fiscal Year 2019 to the end of Fiscal Year 2021 as set forth in the following table. If the Adjusted Operating Margin Expansion achieved as aforesaid falls between the thresholds set forth in the following table, the percentage of the Target Number of Performance Shares to be earned shall be determined by linear interpolation:
Adjusted Operating Margin Expansion from the beginning of Fiscal Year 2019 to the end of Fiscal Year 2021
(in basis points)
Percentage of the Target Number of Performance Shares to be Earned
[___] or greater
200%
[___]
190%
[___]
180%
[___]
170%
[___]
160%
[___]
150%
[___]
140%
[___]
130%
[___]
120%
[___]
110%
[___]
100% (Target)
[___]
90%
[___]
80%
[___]
70%
[___]
60%
[___]
50%
[___]
40%
[___]
30%
[___]
20%
[___]
10%
[___] or less
0


A-3



(3)
Adjusted ROIC – The Awardee shall earn twenty-five percent (25%) of the percentage of the Target Number of Performance Shares by reference to the Adjusted ROIC achieved for Fiscal Year 2021 as set forth in the following table. If the Adjusted ROIC achieved for Fiscal Year 2021 falls between the thresholds set forth in the following table, the percentage of the Target Number of Performance Shares to be earned shall be determined by linear interpolation:

Adjusted ROIC for Fiscal
Year 2021
Percentage of the Target Number of Performance Shares
to be Earned
[___]% or greater
200%
[___]%
190%
[___]%
180%
[___]%
170%
[___]%
160%
[___]%