Week 6 Discussion 1 and 2

Using The Children’s place and it’s annual reports Prepare a comparative balance sheet, income statement, and statement of cash flows, and perform a horizontal analysis of the company’s balance sheet, income statement, and statement of cash flows for the most recent 2 years. Identify at least one significant change (increase or decrease) from one year to the next in a balance sheet account, income statement account, and statement of cash flows account. Identify the causes of the change in each of these accounts. Discuss the implications of each of these account changes, and your assessment of the company based on these changes. Do these changes reflect positively or negatively on the company, and what is your assessment of the outlook for the company?

Financial statements are essential for investors and other stakeholders, especially in analyzing the financial performance of a firm over a certain period. Horizontal analysis interprets the change in financial records over two or more accounting periods and can be crucial in determining the nature of the changes. This paper analyzes the financial records of The Children’s Place Inc. for the years 2021 and 2020 using the filed Form 10-K reports on the firm’s investor website (The Children’s Place, Inc., 2021; The Children’s Place, Inc., 2022).

Consolidated Balance Sheet

($ values are in thousands)

Item	January 29, 2022	January 30, 2021	Dollar Change ($)	% change
Assets
Cash and cash equivalents	54,787	63,548	-8,761	(13.79%)
Accounts receivable	21,863	39,534	-17,671	(44.7%)
Inventories	428,813	388,141	40,672	10.48%
Prepaid expenses and other current assets	76,075	55,860	20,215	36.19%
Total current assets	581,538	547,083	34,455	6.3%
Long-term assets
Property and equipment, net	155,006	181,801	-26.795	(14.74%)
Right-of-use assets	194,653	283,624	-88,971	(31.37%)
Tradenames, net	71,692	72,492	-800	(1.1%)
Deferred income taxes	23,109	45,579	-22,470	(49.3%)
Other assets	11,462	9,548	1,914	20%
Total assets	$ 1,037,460	$ 1,140,127	-102,667	(9%)
Liabilities
Total current liabilities	591,826	718,499	-126,673	(17.6%)
Long-term debt	49,685	75,346	-25,661	(34%)
Long-term portion of operating lease liabilities	134,761	214,173	-79,412	(37%)
Income taxes payable	14,939	14,939	$
Other tax liabilities	8,689	6,304	2,385	37.83%
Other long-term liabilities	12,088	17,489	-5,401	(30.88%)
Total liabilities	811,988	1,046,750	-234,762	(22%)
Total stockholders’ equity	225,472	93,377	132,095	141.47%
Total liabilities and stockholders’ equity	$1,037,460	$1,140,127	-102,667	(9%)

Notable increases were: Total stockholders’ equity by 141.47% and prepaid expenses and other current assets by 36.19%. A significant cause of the change in the stockholders’ equity is the share repurchase program and the massive increase in net income (233%) as indicated in the statement of operations. This is a positive change and indicates that the firm can balance debt and absorb surprise losses, indicating the firm’s long-term sustainability potential. Notable decreases were: Accounts receivable by 44.7%; deferred income taxes by 49.3%; and right-of-use assets by 31.37%. The decrease in accounts receivable is good for the firm because it indicates the company has successfully retrieved cash payments for credit purchases.

Income Statement (Statements of Operations)

($ values are in thousands)

Item	January 29, 2022	January 30, 2021	Dollar Change ($)	% change
Net sales	$ 1,915,364	$ 1,522,598	392,766	25.8%
Cost of sales (exclusive of depreciation and amortization)	1,120,624	1,189,347	(68,723)	(5.78%)
Gross profit	794,740	333,251	461489	138%
Selling, general, and administrative expenses	459,169	428,234	30,935	7.22%
Depreciation and amortization	58,417	66,405	(7,998)	(12%)
Asset impairment charges	1,506	38,527	(37,021)	(96%)
Operating income (loss)	275,648	(199,915)	475,563	237%
Income (loss) before provision (benefit) for income taxes	257,030	(211,758)	468,788	221%
Net income (loss)	$ 187,171	$ (140,365)	327,536	233%
Earnings (loss) per common share
Basic	$ 12.82	$ (9.59)	22.41	233.7%
Diluted	$ 12.59	$ (9.59)	22.18	231.3%
Weighted average common shares outstanding
Basic	14,597	14,631	(34)	0.23%
Diluted	14,870	14,631	239	1.63%

Notable increases were: Gross profit by 138%; operating income by 237%; income before provision (benefit) for income taxes by 221%; and net income by 233%. Gross profit increased by 138% primarily because of the leverage of fixed expenses resulting from the increase in net sales, higher merchandise margins in both our digital and store channels due to strategic pricing and promotion changes, favorable lease negotiations, and lower e-commerce fulfillment costs. Net income increased by 233% due compared to the previous year due to the impact of the COVID-19 pandemic among other factors. These changes are good for the company because they indicate a significant improvement in financial health. Notable decreases were: Asset impairment charges by 96%. The decrease in asset impairment charges is a good sign for investors because it reduces the chances of over-inflated financial statements.

Statement of Cash Flows

($ values are in thousands)

Item	January 29, 2022	January 30, 2021	Dollar Change ($)	% change
Operating activities
Net income (loss)	$ 187,171	$ (140,365)	327,536	233%
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Non-cash portion of operating lease expense	100,564	113,145	(12,581)	(11%)
Depreciation and amortization	58,417	66,405	(7,988)	(12%)
Non-cash stock-based compensation expense	30,942	14,316	16,626	116%
Asset impairment charges	1,506	38,527	(37,021)	(96%)
Deferred income tax provision (benefit)	25,846	(32,660)	58,506	179%
Loss on extinguishment of debt	3,679
Other non-cash charges, net	1,387	821	566	68.94%
Changes in operating assets and liabilities:
Inventories	(40,870)	(61,080)	20,210	33%
Accounts receivable and other assets	16,200	(3,616)	19,816	548%
Prepaid expenses and other current assets	(7,191)	7,081	14,272	201%
Income taxes payable, net of prepayments	(5,982)	(43,306)	49,288	113.8%
Accounts payable and other current liabilities	(58,334)	71,720	130,054	181.3%
Lease liabilities	(172,454)	(69,294)	(103,160)	(148.8%)
Other long-term liabilities	(7,605)	2,589	10,194	393%
Investing activities
Net cash used in investing activities	(29,290)	(30,374)	1,084	3.57%
Financing activities
Borrowings under revolving credit facility	758,681	500,872	257,809	51.47%
Repayments under revolving credit facility	(753,140)	(501,902)	(251,238)	(50%)
Proceeds from issuance of term loan, net of discount	50,000	78,637	(28,637)	(36.4%)
Repayment of term loan	(81,840)
Payment of debt issuance costs	(2,468)	(1,188)	(1,280)	(107.7%)
Purchase and retirement of common stock, including shares surrendered for tax withholdings and transaction costs	(83,974)	(15,490)	(68,484)	(442%)
Net cash provided by (used in) financing activities	(112,741)	60,929	(173,710)	(284.9%)
Net decrease in cash and cash equivalents	(8,761)	(4,939)	(3,822)	(77.4%)
Cash and cash equivalents, beginning of period	63,548	68,487	(4,939)	(7.2%)
Cash and cash equivalents, end of period	$ 54,787	$ 63,548	(8,761)	(13.79%)
Other cash flow information
Net cash paid for income taxes	$ 49,563	$ 3,643	45,920	1260%
Cash paid for interest	14,774	10,831	3,943	36.4%
Increase (decrease) in accrued capital expenditures	842	(811)	1,653	203.8%

Notable increases were: Net income by 233%; accounts receivable and other assets by 548%; net cash paid for income taxes by 1260%; and an increase in accrued capital expenditures by 203.8%. The company’s net income grew due to the decrease in effective tax rate primarily caused by the tax benefits from the CARES Act, the increase in net sales, and the changes associated with better promotion, higher merchandise margins, and other factors. Notable decreases were: Net cash used in financing activities by 284.9%; purchase and retirement of common stock, including shares surrendered for tax withholdings and transaction costs by 442%; and lease liabilities by 148.8%. The decrease in lease liability is a good thing for the company and offers a base to maintain the net income recorded in the fiscal year 2021. Overall, the company is performing well financially, especially with the increase in current assets and the decrease in total liabilities. The rise in stockholders’ equity is a crucial factor for investors and the massive increase in net sales could enable the firm to increase the number of stores this year.

References

THE CHILDREN’S PLACE, INC. (2021). Form 10-K For the fifty-two weeks ended January 30, 2021. Investor.childrensplace.com. https://investor.childrensplace.com/static-files/26f7ea63-8d41-481a-984d-b53f68e13032

THE CHILDREN’S PLACE, INC. (2022). Form 10-K For the fifty-two weeks ended January 30, 2022. Investor.childrensplace.com. https://investor.childrensplace.com/static-files/c412897e-3b00-4b60-87c8-5b3060ced9be

Use The children’s Place Inc. and their annual reports and Carter’s and their annual report to Prepare common-size balance sheets, income statements, and statements of cash flows for both companies for the latest 2 years.
Explain why common-sized financial statements are a convenient way to compare financial statement items within the same period, between periods, and between competing companies.
Perform a vertical analysis of at least one item on the common-size balance sheet, income statement, and statement of cash flows you prepared for the most recent year. Compare each item to the same item on the common-size financial statements for the previous period and to the same item on the common-size financial statements you prepared for the Carters company.
Discuss what this comparison tells you about your chosen company’s current financial condition, how it compares to the previous year, and how it compares with the financial condition of Carter’s

The paper analyzes the annual reports of The Children’s Place, Inc. (2020 & 2021) annual reports and those of Carter’s Inc. (Carter’s, Inc., 2022).

Consolidated Balance Sheet

The Children’s Place Inc.

($ values are in thousands)

Item	January 29, 2022	% change	January 30, 2021	% change
Assets
Inventories	428,813	41.33%	388,141	34%
Total current assets	581,538	56%	547,083	47.98%
Long-term assets
Property and equipment, net	155,006	14.94%	181,801	15.94%
Right-of-use assets	194,653	18.76%	283,624	24.87%
Deferred income taxes	23,109	2.22%	45,579	4%
Total assets	$ 1,037,460	100%	$ 1,140,127	100%
Liabilities
Total current liabilities	591,826	57%	718,499	63%
Income taxes payable	14,939	1.44%	14,939	1.3%
Other tax liabilities	8,689	0.84%	6,304	0.55%
Other long-term liabilities	12,088	1.17%	17,489	1.5%
Total liabilities	811,988	78.3%	1,046,750	91%
Total stockholders’ equity	225,472	21.73%	93,377	8.2%
Total liabilities and stockholders’ equity	$1,037,460	100%	$1,140,127	100%

Carter’s Inc.

($ values are in thousands)

Item	January 2, 2022	% change	Jan 1, 2021	% change
Total current assets	1,913,521	59.74%	1,946,024	57.36%
Property and equipment, net	216,004	6.75%	262,345	7.73%
Total assets	$3,201,797	100%	$3,392,580	100%
Total current liabilities	731,030	22.83%	792,532	23.36%
Total liabilities	$2,251,611	70.32%	$2,454,547	72.35%
Total stockholders’ equity	950,186	29.68%	938,033	27.65%
Total liabilities and stockholders’ equity	$3,201,797	100%	$3,392,580	100%

Income Statement (Statements of Operations)

The Children’s Place Inc.

($ values are in thousands)

Item	January 29, 2022	% change	January 30, 2021	% change
Net sales	$ 1,915,364	100%	$ 1,522,598	100%
Cost of sales (exclusive of depreciation and amortization)	1,120,624	58.5%	1,189,347	78%
Gross profit	794,740	41.49%	333,251	21.89%
Selling, general, and administrative expenses	459,169	23.97%	428,234	28.13%
Depreciation and amortization	58,417	3%	66,405	4.36%
Operating income (loss)	275,648	14.39	(199,915)	13.13%
Net income (loss)	$ 187,171	9.77%	$ (140,365)	9.22%

Carter’s Inc.

($ values are in thousands)

Item	January 2, 2022		% change	Jan 1, 2021	% change
Net sales		$ 3,486,440	100%	$ 3,024,334	100%
Cost of goods sold		1,832,045	52.55%	1,696,224	56.09%
Gross profit		1,662,274	47.68%	1,313,442	43.43%
Selling, general, and administrative expenses		1,193,876	34.24%	1,105,607	36.56%
Operating income		497,079	14.26%	189,869	6.28%
Net income (loss)		$ 339,748	9.74%	$ 109,717	3.63%

Statement of Cash Flows

The Children’s Place Inc.

 ($ values are in thousands)

Item	January 29, 2022	% change	January 30, 2021	% change
Net income (loss)	$ 187,171	100%	$ (140,365)	100%
Inventories	(40,870)	21.84%	(61,080)	43.5%
Accounts receivable and other assets	16,200	8.66%	(3,616)	2.58%
Prepaid expenses and other current assets	(7,191)	3.84%	7,081	5%
Lease liabilities	(172,454)	92%	(69,294)	49.37%
Net cash used in investing activities	(29,290)	15.65%	(30,374)	21.64%
Net decrease in cash and cash equivalents	(8,761)	4.68%	(4,939)	3.52%
Cash and cash equivalents, beginning of period	63,548	33.95%	68,487	48.79%
Cash and cash equivalents, end of period	$ 54,787	29.27%	$ 63,548	45.27%
Cash paid for interest	14,774	7.89%	10,831	7.72%

Carter’s Inc.

($ values are in thousands)

Item	January 2, 2022	% change	January 1, 2021	% change
Net income	$ 339,748	100%	$ 109,717	100%
Net cash provided by operating activities	$ 268,258	78.96%	$ 588,494	536.37%
Net cash used in investing activities	$ (32,442)	9.55%	$ (31,471)	28.68%
Net cash (used in) provided by financing activities	$ (352,710)	103.82%	$ 324,843	296%
Cash and cash equivalents, end of fiscal year	$ 984,294	289.7%	$ 1,102,323	1004%

Common size analysis allows investors to identify drastic changes in a firm’s financial statement. It applies when the financials are compared for two or three years. Any notable changes in the financials across that period can help investors decide whether to invest in a firm or not. Additionally, it is a crucial tool for comparing companies in the same industry because looking at the data, it is possible to tell the firms’ strategies and largest expenses that may offer the rival a competitive edge. It is therefore convenient to consider the percentages of each element in the financial statements expressed as a percentage of the base, an analysis that offers insight into the effectiveness of the various activities that are profitable to the company. It also helps firms to understand their performance trend and mitigate where possible at an early stage.

A firm’s current assets value is important because it determines its ability to cover short-term obligations. The Children’s Place Inc. has an overall better value for current assets than Carter’s Inc., which increased from 57% to 59%, hence a better financial standing in the short-term and this would be a good financial indicator for investors. Carter’s Inc. also has a greater value of total assets ($ 1,037,460) which shows its high chance for a better financial position in the long run than The Children’s Place Inc. ($ 1,037,460). The two companies fair almost the same in terms of the percentage of net income to total sales, but Carter’s Inc. has improved over the past year, from 3.63% to 9.74% in January 2022. Although both companies have almost the same total amount spent on investing activities, The Children’s Place Inc. spends a bigger percentage (15.65%) on investing than Carter’s Inc. (9.55%). This indicates that The Children’s Place Inc. has a greater focus on long-term sustainability and potentially better returns for stockholders.  

References

THE CHILDREN’S PLACE, INC. (2021). Form 10-K For the fifty-two weeks ended January 30, 2021. Investor.childrensplace.com. https://investor.childrensplace.com/static-files/26f7ea63-8d41-481a-984d-b53f68e13032

Carter’s, Inc. (2022). Annual reports | Carter’s Inc. Ir.carters.com. https://ir.carters.com/financial-information/annual-reports

THE CHILDREN’S PLACE, INC. (2022). Form 10-K For the fifty-two weeks ended January 30, 2022. Investor.childrensplace.com. https://investor.childrensplace.com/static-files/c412897e-3b00-4b60-87c8-5b3060ced9be