The Children's Place Inc.
04/10/2026 | Press release | Distributed by Public on 04/10/2026 14:01
Annual Report for Fiscal Year Ending January 31, 2025 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our audited financial statements and notes thereto included in Part IV, Item 15. Exhibits and Financial Statement Schedules. This Annual Report on Form 10-K contains or may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to the Company's strategic initiatives and results of operations, including adjusted net income (loss) per diluted share. Forward-looking statements typically are identified by use of terms such as "may," "will," "should," "plan," "project," "expect," "anticipate," "estimate," "believe," and similar words, although some forward-looking statements are expressed differently. These forward-looking statements are based upon the Company's current expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ materially. Some of these risks and uncertainties are described in the Company's filings with the Securities and Exchange Commission, including in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K for the fiscal year ended January 31, 2026. Included among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will be unable to achieve operating results at levels sufficient to fund and/or finance the Company's current level of operations and repayment of indebtedness, the risk that changes in trade policy and tariff regimes, including newly imposed U.S. tariffs and any responsive non-U.S. tariffs, may impact the Company's international manufacturing and operations or customers' discretionary spending habits, the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences, the risks resulting from the highly competitive nature of the Company's business and its dependence on consumer spending patterns, which may be affected by changes in economic conditions (including inflation), the risk that changes in the Company's plans and strategies with respect to pricing, capital allocation, capital structure, investor communications and/or operations may have a negative effect on the Company's business, the risk that the Company's strategic initiatives to increase sales and margin, improve operational efficiencies, enhance operating controls, decentralize operational authority and reshape the Company's culture are delayed or do not result in anticipated improvements, the risk of delays, interruptions, disruptions and higher costs in the Company's global supply chain, including resulting from disease outbreaks, foreign sources of supply in less developed countries, more politically unstable countries, or countries where vendors fail to comply with industry standards or ethical business practices, including the use of forced, indentured or child labor, the risk that the cost of raw materials or energy prices will increase beyond current expectations or that the Company is unable to offset cost increases through value engineering or price increases, various types of litigation, including class action litigation brought under securities, consumer protection, employment, and privacy and information security laws and regulations, risks related to the existence of a controlling stockholder, and the uncertainty of weather patterns, as well as other risks discussed in the Company's filings with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
As used in this Annual Report on Form 10-K, references to the "Company", "The Children's Place", "we", "us", "our", and similar terms refer to The Children's Place, Inc. and its subsidiaries. Our fiscal year ends on the Saturday on or nearest to January 31. Other terms that are commonly used in our Management's Discussion and Analysis of Financial Condition and Results of Operations are defined as follows:
•Fiscal 2026 - The fifty-two weeks ending January 30, 2027
•Fiscal 2025 - The fifty-two weeks ended January 31, 2026
•Fiscal 2024 - The fifty-two weeks ended February 1, 2025
•Fiscal 2023 - The fifty-three weeks ended February 3, 2024
•SEC - U.S. Securities and Exchange Commission
•U.S. GAAP - Generally Accepted Accounting Principles in the United States
•FASB - Financial Accounting Standards Board
•FASB ASC - FASB Accounting Standards Codification, which serves as the source for authoritative U.S. GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative U.S. GAAP for SEC registrants
•AUR - Average unit retail price
•Comparable Retail Sales - Net sales, in constant currency, from stores that have been open for at least 14 consecutive months and from our e-commerce store, excluding postage and handling fees. Store closures in the current fiscal year will be excluded from Comparable Retail Sales beginning in the fiscal quarter in which the store closes. A store that is closed for a substantial remodel, relocation, or material change in size will be excluded from Comparable Retail Sales for at least 14 months beginning in the fiscal quarter in which the closure occurred. However, stores that temporarily close will be excluded from Comparable Retail Sales until the store is re-opened for a full fiscal month
•Cost of Sales - Cost of inventory sold, including certain buying, design, and distribution expenses, and shipping and handling costs on merchandise sold.
•Gross Margin - Gross profit expressed as a percentage of net sales
•SG&A - Selling, general, and administrative expenses
OVERVIEW
Our Business
We are one of the only pure-play children's specialty retailers in North America with an omni-channel presence. We design, contract to manufacture, and sell fashionable, high quality apparel, accessories and footwear predominantly at value prices, primarily under our proprietary brands: "The Children's Place" and "Gymboree". Our global retail and wholesale network includes two digital storefronts, 498 stores in North America, wholesale marketplaces, 223 international points of distribution in 12 countries through our nine international franchise and wholesale partners, and social media channels on Instagram, Facebook, and X, formerly known as Twitter. Our digital storefronts are at www.childrensplace.comand www.gymboree.com, where our customers are able to shop online for the same merchandise available in our physical stores, as well as certain exclusive merchandise offered only on our e-commerce sites.
Segment Reporting
In accordance with FASB ASC 280 - Segment Reporting, we report segment data based on geography: The Children's Place U.S. and The Children's Place International. Each segment includes an e-commerce business located at www.childrensplace.com andwww.gymboree.com. Included in The Children's Place U.S. segment are our U.S. and Puerto Rico-based stores and revenue from our U.S.-based wholesale business. Included in The Children's Place International segment are our Canadian-based stores and revenue from international franchisees. We measure our segment profitability based on operating income (loss), defined as income (loss) before interest and taxes. Net sales and direct costs are recorded by each segment. Certain inventory procurement functions such as production and design, as well as corporate overhead, including executive management, finance, real estate, human resources, legal, and information technology services, are managed by The Children's Place U.S. segment. Expenses related to these functions, including depreciation and amortization, are allocated to The Children's Place International segment based primarily on net sales. The assets related to these functions are not allocated. We periodically review these allocations and adjust them based upon changes in business circumstances. Net sales to external customers are derived from merchandise sales, and we have one U.S. wholesale customer that individually accounted for more than 10% of our net sales during Fiscal 2025 and Fiscal 2024. Refer to "Note 16. Segment Information" of the Consolidated Financial Statements in this Form 10-K for more information.
Recent Developments
Macroeconomic conditions, including inflationary pressures, interest rates, tariffs, and other domestic and geopolitical factors, continued to adversely affect our core customer. During Fiscal 2025, these pressures contributed to a decrease in consumer discretionary apparel purchases. We expect these macroeconomic conditions, including but not limited to increased product input costs, transportation costs, distribution costs, and geopolitical conditions like changes in foreign policies of the United States, and other inflationary pressures, to continue to have an adverse impact during Fiscal 2026.
During Fiscal 2025, we commenced our transformation initiative to right-size our organization and operations. We opened our new office in Lahore, Pakistan to accelerate cross-functional efficiencies. We expect these benefits to ramp up in Fiscal 2026 to drive significant improvement in our operating results. We have already implemented actions related to home office headcount reductions, supply chain optimization, and third-party non-merchandise spend, which is expected to generate approximately $30 million in gross annualized benefits, with further gross benefits of approximately $15 million expected to be actioned and realized in Fiscal 2026, bringing total gross benefits to approximately $45 million, partially offset by approximately $10 million to $15 million in one-time and recurring operating costs.
On February 5, 2026, we entered into a Receivables Purchase Agreement (the "RPA") with TRMEF Basis II LLC ("TRMEF") to sell our CARES Act income tax receivable of $19.1 million plus accrued interest of $3.7 million at a purchase rate of 88.5%, for a total purchase price of $20.1 million. We received net cash proceeds of $15.9 million, after insurance and legal fees amounting to $0.7 million. The remaining proceeds of $3.5 million are expected to be received in two tranches as follows: (i) upon confirmation by the IRS of submission by the IRS of the Revenue Agent Report to the Joint Committee on Taxation, TRMEF shall pay $2.5 million less the amount of any downward adjustments in respect of the tax refund claim set forth in such Revenue Agent Report, and (ii) on the date on which TRMEF receives payment in full in cash of the refund claim, TRMEF shall pay $1.0 million less 10% of accrued interest as of the effective date of the RPA. We used the net proceeds from the sale of our income tax receivable to partially pay down our borrowings under our asset-based revolving credit facility (the "ABL Credit Facility").
During Fiscal 2025, the U.S. government imposed tariffs on certain goods imported from other countries into the United States. While we developed plans to mitigate most of the effects of these tariffs through a range of strategic initiatives, including pricing strategies, the establishment of stronger vendor partnerships, and improvements in inbound ocean rates, these tariffs still resulted in an adverse impact on our margins. In February 2026, the U.S. Supreme Court ruled that certain tariffs under the International Emergency Economic Powers Act ("IEEPA") were invalid, and in March 2026, the U.S. Court of International Trade ruled that the U.S. Customs and Border Protection ("CBP") must refund duties imposed under IEEPA. On March 31, 2026, we entered into a Claim Sale and Purchase Agreement with Alnus Investors, LLC ("Alnus") to sell our claims for refunds of tariffs originally invoked under IEEPA and were previously paid to the CBP. Alnus purchased an aggregate amount of $38.2 million of these refund claims at a purchase rate of 67.2%, for a total purchase price of $25.7 million. We used the net proceeds from the sale of these refund claims to partially pay down our borrowings under our ABL Credit Facility.
RESULTS OF OPERATIONS
We believe that our e-commerce and brick-and-mortar retail store operations are highly interdependent, with both sharing common customers purchasing from a common pool of product inventory. Accordingly, we believe that consolidated omni-channel reporting presents the most meaningful and appropriate measure of our performance. 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"). To the extent that our sales have increased at a faster rate than our costs (i.e., "leverage"), 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., "deleverage"), we have utilized the investments we have made in our business less efficiently.
Fiscal 2025 Compared to Fiscal 2024
| Fiscal Year Ended | Fiscal Year Ended | Variance | |||||||||||||||||||||
|
January 31, 2026 |
% of Net Sales |
February 1, 2025 |
% of Net Sales | $ | % | % of Net Sales | |||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||
| Net sales | $ | 1,208,830 | 100.0 | % | $ | 1,386,269 | 100.0 | % | $ | (177,439) | (12.8) | % | - | % | |||||||||
| Cost of sales (exclusive of depreciation and amortization) | 847,272 | 70.1 | % | 926,808 | 66.9 | % | 79,536 | 8.6 | % | (3.2) | % | ||||||||||||
| Gross profit | 361,558 | 29.9 | % | 459,461 | 33.1 | % | (97,903) | (21.3) | % | (3.2) | % | ||||||||||||
| Selling, general, and administrative expenses | 383,693 | 31.7 | % | 405,550 | 29.3 | % | 21,857 | 5.4 | % | (2.4) | % | ||||||||||||
| Depreciation and amortization | 33,073 | 2.7 | % | 39,612 | 2.9 | % | 6,539 | 16.5 | % | 0.2 | % | ||||||||||||
| Asset impairment charges | 2,004 | 0.2 | % | 28,000 | 2.0 | % | 25,996 | 92.8 | % | 1.8 | % | ||||||||||||
| Operating loss | (57,212) | (4.7) | % | (13,701) | (1.0) | % | (43,511) | (317.6) | % | (3.7) | % | ||||||||||||
| Related party interest expense | (7,607) | (0.6) | % | (6,493) | (0.5) | % | (1,114) | (17.2) | % | (0.1) | % | ||||||||||||
| Other interest expense, net | (25,466) | (2.1) | % | (29,254) | (2.1) | % | 3,788 | 12.9 | % | - | % | ||||||||||||
| Loss before provision (benefit) for income taxes | (90,285) | (7.5) | % | (49,448) | (3.6) | % | (40,837) | (82.6) | % | (3.9) | % | ||||||||||||
| Provision (benefit) for income taxes | (2,022) | (0.2) | % | 8,371 | 0.6 | % | 10,393 | 124.2 | % | 0.8 | % | ||||||||||||
| Net loss | $ | (88,263) | (7.3) | % | $ | (57,819) | (4.2) | % | $ | (30,444) | (52.7) | % | (3.1) | % | |||||||||
Net sales decreased $177.4 million, or 12.8%, to $1.209 billion during Fiscal 2025 from $1.386 billion during Fiscal 2024, primarily driven by a decrease in e-commerce sales due to lower traffic and conversion. We also experienced a decrease in brick-and-mortar revenue from lower sales volume due to lower traffic, particularly in the first half of the fiscal year. Our stores and e-commerce sales were both impaired by the current macroeconomic environment, including the impact of tariffs, which has negatively affected our consumer. We also experienced a decrease in wholesale revenue due to the planned reduction in shipments to Amazon during the year to rebalance their inventory levels. Comparable retail sales decreased 8.4% for Fiscal 2025.
Gross profit decreased $97.9 million, or 21.3%, to $361.6 million during Fiscal 2025 from $459.5 million during Fiscal 2024. Gross margin decreased 320 basis points to 29.9% of Net sales during Fiscal 2025, compared to 33.1% of Net sales during Fiscal 2024. The decrease in gross margin was caused primarily by an increase in inventory reserves (200 bps), the impact of higher tariffs on our product (140 bps), and a higher penetration of markdown sales and dilutions (70 bps), partially offset by favorable product costs (100 bps) as we shifted strategies to respond to the impact of higher tariff costs.
Gross profit is calculated as consolidated Net sales less Cost of goods sold (exclusive of depreciation and amortization). Gross margin is calculated as gross profit divided by consolidated net sales. Gross profit as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, changes in foreign currency exchange rates, and fluctuations in input costs. These factors, among others, may cause gross profit as a percentage of net sales to fluctuate from period to period.
Selling, general, and administrative expenseswere $383.7 million during Fiscal 2025, compared to $405.6 million during Fiscal 2024 and deleveraged 240 basis points to 31.7% of Net sales. The decrease was due to a reduction in one-time costs incurred during Fiscal 2024, as described below, partially offset by an increase in marketing expenses. Fiscal 2025 results included incremental operating expenses of $2.6 million, including restructuring costs of $2.7 million, partially offset by the reversal of a legal settlement accrual. Fiscal 2024 results included incremental operating expenses of $35.3 million, including restructuring costs of $11.7 million, primarily due to changes in our senior leadership team, non-cash equity compensation charges of $9.9 million and other fees of $3.8 million associated with the change of control, financing-related charges of $7.0 million, lender required consulting fees of $2.4 million, fleet optimization costs of $1.4 million, costs associated with the closure of our Canada distribution center of $0.8 million, and other professional and consulting fees of $0.6 million, partially offset by the reversal of a legal settlement accrual of $2.3 million. Excluding the impact of these charges, Adjusted SG&A expenses were $381.1 million during Fiscal 2025, compared to $370.3 million during Fiscal 2024, and deleveraged 480 basis points to 31.5% of Net sales.
Depreciation and amortizationwas $33.1 million during Fiscal 2025, compared to $39.6 million during Fiscal 2024. This decrease was primarily driven by reduced depreciation of capitalized software.
Asset impairment charges were $2.0 million during Fiscal 2025. Asset impairment charges were $28.0 million during Fiscal 2024, primarily due to the reduction in fair value of the Gymboree tradename.
Operating losswas $(57.2) million during Fiscal 2025, compared to $(13.7) million during Fiscal 2024. The Fiscal 2025 results were impacted by incremental operating expense of $4.6 million, including SG&A expenses of $2.6 million, as described above, and asset impairment charges of $2.0 million. The Fiscal 2024 results were impacted by incremental operating expenses of $66.4 million, including SG&A expenses of $35.3 million, as described above, asset impairment charges of $28.0 million on the Gymboree tradename, accelerated depreciation of $2.2 million, and additional change in control charges impacting gross margin of $0.9 million. Excluding the impact of these incremental charges, Adjusted operating loss was $(52.6) million during Fiscal 2025, compared to an Adjusted operating income of $52.7 million during Fiscal 2024.
Related party interest expense was $7.6 million during Fiscal 2025, compared to $6.5 million during Fiscal 2024. The increase was due to a full year of interest-equivalent charges compared to a partial year in the prior period.
Other interest expense, netwas $25.5 million during Fiscal 2025, compared to $29.3 million during Fiscal 2024. The decrease was primarily driven by lower average borrowings and interest rates on our ABL Credit Facility, partially offset by the write-off of deferred financing costs associated with the refinancing of our ABL Credit Facility and the partial paydown of our first term loan entered into with our majority shareholder, Mithaq Capital SPC ("Mithaq"), as a result of our rights offering completed on February 6, 2025 ("Rights Offering").
Provision (benefit) for income taxeswas a benefit of $(2.0) million during Fiscal 2025, compared to a provision of $8.4 million during Fiscal 2024. Our effective tax rate was a benefit of 2.2% and a provision of (16.9)% during Fiscal 2025 and Fiscal 2024, respectively. The change in the provision (benefit) for income taxes and in the effective tax rate is primarily due to shifts in earnings mix and a higher pretax loss for Fiscal 2025, in addition to the impact of favorable provision to return adjustments and a reduction in reserves for unrecognized income tax benefits. We continue to adjust the valuation allowance based upon ongoing operating results.
Net losswas $(88.3) million, or $(4.01) per diluted share, during Fiscal 2025, compared to $(57.8) million, or $(4.53) per diluted share, during Fiscal 2024, due to the factors described above. Adjusted net loss was $(81.4) million, or $(3.70) per diluted share during Fiscal 2025, compared to Adjusted net income of $5.5 million, or $0.43 per diluted share, during Fiscal 2024 due to factors described above.
The following table sets forth Net sales and Operating loss, respectively, by segment, for the periods indicated:
___________________________________________
| Fiscal Years Ended | |||||||||||
|
January 31, 2026 |
February 1, 2025 |
||||||||||
| (in thousands) | |||||||||||
| The Children's Place U.S. | $ | 1,103,459 | $ | 1,266,500 | |||||||
|
The Children's Place International (1)
|
105,371 | 119,769 | |||||||||
| Total net sales | $ | 1,208,830 | $ | 1,386,269 | |||||||
| The Children's Place U.S. | $ | (41,488) | $ | (3,746) | |||||||
|
The Children's Place International (1)
|
(15,724) | (9,955) | |||||||||
| Total segment operating loss | $ | (57,212) | $ | (13,701) | |||||||
| The Children's Place U.S. | (3.8) | % | (0.3) | % | |||||||
|
The Children's Place International (1)
|
(14.9) | % | (8.3) | % | |||||||
| Total segment operating loss as a percentage of net sales | (4.7) | % | (1.0) | % | |||||||
(1)Our foreign subsidiaries, primarily in Canada, have operating results based in foreign currencies and are thus subject to the fluctuations of the corresponding translation rates into U.S dollars.
The Children's Place U.S. Net sales decreased $163.0 million, or 12.9%, to $1.103 billion during Fiscal 2025, compared to $1.266 billion during Fiscal 2024, driven by a decrease in e-commerce sales due to lower traffic and conversion. We also experienced a decrease in brick-and-mortar revenue from lower sales volume due to lower traffic, particularly in the first half of the fiscal year. Our stores and e-commerce sales were both impaired by the current macroeconomic environment, including the impact of tariffs, which has negatively affected our consumer. We also experienced a decrease in wholesale revenue due to the planned reduction in shipments to Amazon during the year to rebalance their inventory levels.
The Children's Place International Net sales decreased $(14.4) million, or 12.0%, to $105.4 million during Fiscal 2025, compared to $119.8 million during Fiscal 2024, driven by a decrease in e-commerce sales due to lower traffic and conversion. We also experienced a decrease in brick-and-mortar revenue from lower sales volume due to lower traffic, particularly in the first half of the fiscal year.
The Children's Place U.S. Operating loss was $(41.5) million during Fiscal 2025, compared to $(3.7) million during Fiscal 2024, primarily due to lower net sales and gross margin.
The Children's Place International Operating loss was $(15.7) million during Fiscal 2025, compared to $(10.0) million during Fiscal 2024, primarily due to lower net sales and gross margin.
Fiscal 2024 Compared to Fiscal 2023
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2025 for the Fiscal 2024 to Fiscal 2023 comparative discussion.
Non-GAAP Reconciliation
We have presented certain measures on a non-GAAP basis. Adjusted net income (loss), adjusted net income (loss) per diluted share, adjusted gross profit, adjusted selling, general, and administrative expenses, and adjusted operating income (loss) are non-GAAP measures. These measures are not intended to replace GAAP financial information, and may be different from non-GAAP measures reported by other companies. The most comparable GAAP measures are net income (loss), net income (loss) per diluted share, gross profit, selling, general, and administrative expenses, and operating income (loss), respectively. We believe the income and expense items excluded as non-GAAP adjustments are not reflective of the performance of our core business, and that providing this supplemental disclosure to investors will facilitate comparisons of the past and present performance of our core business.
| Fiscal Year Ended | |||||||||||||||||
| January 31, 2026 | |||||||||||||||||
| (amounts in thousands, except per share amounts) | |||||||||||||||||
| Gross profit |
Selling, general and administrative expenses |
Operating loss | Net loss | Diluted loss per common share | |||||||||||||
| As reported (GAAP) | $ | 361,558 | $ | 383,693 | $ | (57,212) | $ | (88,263) | $ | (4.01) | |||||||
| Restructuring costs | - | (2,665) | 2,665 | 2,665 | |||||||||||||
| Loss on extinguishment of debt | - | - | - | 2,223 | |||||||||||||
| Asset impairment charges | - | - | 2,004 | 2,004 | |||||||||||||
| Provision for legal settlement | - | 46 | (46) | (46) | |||||||||||||
| Aggregate impact of non-GAAP adjustments | - | (2,619) | 4,623 | 6,846 | |||||||||||||
| Income tax effect | - | - | - | - | |||||||||||||
| As adjusted | $ | 361,558 | $ | 381,074 | $ | (52,589) | $ | (81,417) | $ | (3.70) | |||||||
| % of Net Sales (GAAP) | 29.9 | % | 31.7 | % | (4.7) | % | (7.3) | % | |||||||||
| % of Net Sales (As adjusted) | 29.9 | % | 31.5 | % | (4.4) | % | (6.7) | % | |||||||||
| Fiscal Year Ended | |||||||||||||||||
| February 1, 2025 | |||||||||||||||||
| (amounts in thousands, except per share amounts) | |||||||||||||||||
| Gross profit |
Selling, general and administrative expenses |
Operating income (loss) | Net income (loss) | Diluted earnings (loss) per common share | |||||||||||||
| As reported (GAAP) | $ | 459,461 | $ | 405,550 | $ | (13,701) | $ | (57,819) | $ | (4.53) | |||||||
| Fleet optimization | - | (1,428) | 1,428 | 1,428 | |||||||||||||
| Restructuring costs | - | (11,678) | 11,678 | 11,678 | |||||||||||||
| Accelerated depreciation | - | - | 2,246 | 2,246 | |||||||||||||
| Asset impairment charges | - | - | 28,000 | 28,000 | |||||||||||||
| Change of control | 905 | (13,684) | 14,589 | 14,589 | |||||||||||||
| Contract termination costs | - | (7,008) | 7,008 | 7,008 | |||||||||||||
| Credit agreement / lender-required consulting fees | - | (2,390) | 2,390 | 2,390 | |||||||||||||
| Canada distribution center closure | - | (781) | 781 | 781 | |||||||||||||
| Professional and consulting fees | - | (580) | 580 | 580 | |||||||||||||
| Provision for legal settlement | - | 2,279 | (2,279) | (2,279) | |||||||||||||
| Aggregate impact of non-GAAP adjustments | 905 | (35,270) | 66,421 | 66,421 | |||||||||||||
| Income tax effect | - | - | - | (3,113) | |||||||||||||
| As adjusted | $ | 460,366 | $ | 370,280 | $ | 52,720 | $ | 5,489 | $ | 0.43 | |||||||
| % of Net Sales (GAAP) | 33.1 | % | 29.3 | % | (1.0) | % | (4.2) | % | |||||||||
| % of Net Sales (As adjusted) | 33.2 | % | 26.7 | % | 3.8 | % | 0.4 | % | |||||||||
QUARTERLY RESULTS AND SEASONALITY
Our quarterly results of operations have fluctuated and are expected to continue to fluctuate materially depending on a variety of factors, including overall economic conditions, the timing and number of store openings and closures, increases or decreases in Comparable Retail Sales, weather conditions (such as unseasonable temperatures or storms), and changes in our merchandise mix and pricing strategy, including changes to address competitive factors. The combination and severity of one or more of these factors could result in material fluctuations in our results of operations.
The following table sets forth certain statement of operations data for each of our last four fiscal quarters. The quarterly statement of operations data set forth below reflect, in our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the results of operations for these fiscal quarters (unaudited):
|
Fiscal Year Ended January 31, 2026
|
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|
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
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| (in thousands, except diluted loss per common share) | ||||||||||||||||||||||||||
| Net sales | $ | 242,125 | $ | 298,006 | $ | 339,466 | $ | 329,233 | ||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization) | 171,342 | 196,734 | 227,162 | 251,868 | ||||||||||||||||||||||
| Gross profit | 70,783 | 101,272 | 112,304 | 77,365 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 86,670 | 89,596 | 101,301 | 106,292 | ||||||||||||||||||||||
| Depreciation and amortization | 8,230 | 7,570 | 7,334 | 9,939 | ||||||||||||||||||||||
| Asset impairment charges | - | - | - | 2,004 | ||||||||||||||||||||||
| Operating income (loss) | (24,117) | 4,106 | 3,669 | (40,870) | ||||||||||||||||||||||
| Related party interest expense | (1,871) | (1,868) | (1,869) | (1,998) | ||||||||||||||||||||||
| Other interest expense, net | (6,691) | (6,150) | (6,252) | (6,375) | ||||||||||||||||||||||
| Loss before provision (benefit) for income taxes | (32,679) | (3,912) | (4,452) | (49,243) | ||||||||||||||||||||||
| Provision (benefit) for income taxes | 1,344 | 1,453 | (132) | (4,688) | ||||||||||||||||||||||
| Net loss | $ | (34,023) | $ | (5,365) | $ | (4,320) | $ | (44,555) | ||||||||||||||||||
| Diluted loss per common share | $ | (1.57) | $ | (0.24) | $ | (0.19) | $ | (2.01) | ||||||||||||||||||
| Diluted weighted average common shares outstanding | 21,629 | 22,142 | 22,170 | 22,170 | ||||||||||||||||||||||
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our working capital needs typically follow a seasonal pattern, peaking during the third fiscal quarter based on seasonal inventory purchases. Our primary uses of cash are for working capital requirements, which consist primarily of inventory purchases, rent and marketing expenses, the payment of interest expense on our ABL Credit Facility and term loans, and the financing of capital projects.
During Fiscal 2024, we entered into an interest-free, unsecured and subordinated promissory note with Mithaq for a $78.6 million Initial Mithaq Term Loan and a separate unsecured and subordinated promissory note for a $90.0 million term loan (the "New Mithaq Term Loan"; and together with the Initial Mithaq Term Loan, collectively, the "Mithaq Term Loans"). As of February 6, 2025, $60.2 million under the Initial Mithaq Term Loan was repaid pursuant to the completion of our Rights Offering, leaving $18.4 million outstanding under the Initial Mithaq Term Loan. Pursuant to our refinancing transactions on December 16, 2025, the New Mithaq Term Loan was amended to allow us to defer our monthly payments upon written notice to Mithaq, and as an amendment consent fee, its principal amount was increased by $2.7 million to $92.7 million, leaving an aggregate of $111.1 million outstanding under the Mithaq Term Loans as of January 31, 2026.
On December 16, 2025, we entered into a term loan agreement (the "SLR Loan Agreement") with SLR Credit Solutions ("SLR") for a $100.0 million term loan (the "SLR Term Loan"). We used the net proceeds to partially pay down our borrowings under the ABL Credit Facility. The principal amount outstanding as of January 31, 2026 was $100.0 million.
As of January 31, 2026, we had $131.1 million of outstanding borrowings under our $350.0 million ABL Credit Facility and no borrowings under our $40.0 million senior unsecured credit facility with Mithaq (the "Mithaq Credit Facility").
Our working capital improved by $60.2 million to a surplus of $10.1 million at January 31, 2026, compared to a deficit of $50.1 million at February 1, 2025, primarily due to the SLR Term Loan net proceeds that were used to partially pay down the outstanding borrowings under our ABL Credit Facility and a decrease in our accounts payable balances due to lower inventory purchases, partially offset by a decrease in inventory due to improved inventory management as we continue to align our inventory levels with our growth and product strategy, and better balance the mix of fashion and basic product.
As of January 31, 2026, we had total liquidity of $89.9 million, including $44.4 million of availability under our ABL Credit Facility, $40.0 million of availability under our Mithaq Credit Facility, and $5.5 million of cash on hand. At January 31, 2026, we had $23.7 million of outstanding letters of credit with an additional $6.3 million available for issuing letters of credit under our ABL Credit Facility.
We expect to be able to meet our working capital and capital expenditure requirements for at least the next twelve months from the date that our consolidated financial statements for Fiscal 2025 were issued, by using our cash on hand, cash flows from operations, and availability under our ABL Credit Facility and Mithaq Credit Facility.
Share Repurchase Program
In November 2021, our board of directors (the "Board") authorized a $250.0 million share repurchase program (the "Share Repurchase Program"). Currently, given the terms of our credit agreement with Wells Fargo as its administrative agent and our term loan agreement with SLR, the repurchase of any shares would require fulfilling stringent payment conditions under those agreements, except that repurchases of shares as described in "Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities", pursuant to our practice as a result of our insider trading policy, are expressly permitted. During Fiscal 2025, we repurchased approximately 0.1 million shares of our common stock for $0.4 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards. During Fiscal 2024, we repurchased approximately 0.1 million shares for $0.7 million, consisting of shares surrendered to cover tax withholdings associated with the vesting of equity awards. As of January 31, 2026, there was $156.1 million remaining availability under the Share Repurchase Program.
Cash Flows and Capital Expenditures
Cash provided by operating activities was $8.1 million during Fiscal 2025, compared to $117.6 million of cash used in operating activities during Fiscal 2024, representing a net increase of $125.7 million. Cash provided by operating activities during Fiscal 2025 was primarily the result of decreases in inventory and accounts receivable, partially offset by larger net losses. Cash used in operating activities during Fiscal 2024 was primarily the result of a decrease in accounts payable as we paid down past vendors and an increase in inventory.
Cash used in investing activities was $17.4 million during Fiscal 2025, compared to $15.8 million during Fiscal 2024, driven by higher capital expenditures.
Cash provided by financing activities was $7.0 million during Fiscal 2025, compared to $128.4 million during Fiscal 2024. The decrease primarily resulted from proceeds received from the Mithaq Term Loans during Fiscal 2024 and lower net borrowings on our ABL Credit Facility, partially offset by the net cash proceeds received from the SLR Term Loan and the Rights Offering completed during Fiscal 2025.
Our ability to continue to meet our capital requirements in Fiscal 2026 depends on our cash on hand, our ability to generate cash flows from operations, and available borrowings under our ABL Credit Facility and Mithaq Credit Facility. Cash flows generated from operations depend on our ability to achieve our financial plans. We believe that our cash on hand, cash generated from operations, and funds available to us through our ABL Credit Facility and Mithaq Credit Facility will be sufficient to fund our capital and other cash requirements for the foreseeable future.
Selected Consolidated Balance Sheets Data
Certain components of our Consolidated Balance Sheets were as follows:
| Fiscal Years Ended | |||||||||||
|
January 31, 2026 |
February 1, 2025 |
||||||||||
| (in thousands) | |||||||||||
| Accounts receivable | $ | 25,967 | $ | 42,701 | |||||||
| Inventories | 325,100 | 399,602 | |||||||||
| Accounts payable | 108,481 | 126,716 | |||||||||
Accounts receivable were $26.0 million at January 31, 2026, compared to $42.7 million at February 1, 2025. The decrease of $16.7 million, or 39.2%, was primarily driven by a reduction in our wholesale receivables.
Inventories were $325.1 million at January 31, 2026, compared to $399.6 million at February 1, 2025. The decrease of $74.5 million, or 18.6%, was primarily the result of a lower number of units on hand due to better inventory management.
Accounts payable were $108.5 million at January 31, 2026, compared to $126.7 million at February 1, 2025. The decrease of $18.2 million, or 14.4%, was primarily the result of a reduction in inventory purchases during Fiscal 2025.
ABL Credit Facility
The Company and certain subsidiaries maintain the $350.0 million ABL Credit Facility under its Amended and Restated Credit Agreement dated May 9, 2019 (as amended from time to time, the "Credit Agreement"), with Wells Fargo Bank, National Association ("Wells Fargo"), as the sole lender party thereto, and as Administrative Agent, Collateral Agent, and Swing Line Lender. The ABL Credit Facility will mature on the earlier of December 16, 2030, or the maturity date under our term loan agreement with SLR as further described below.
Previously, from April 18, 2024 to December 15, 2025, the ABL Credit Facility included a $25.0 million Canadian sublimit and a $25.0 million sublimit for standby and documentary letters of credit. As of December 16, 2025, which is the effective date of the eighth amendment to the Credit Agreement (the "Eighth Amendment"), the ABL Credit Facility includes a $25.0 million Canadian sublimit and a $30.0 million sublimit for standby and documentary letters of credit.
Previously, from February 4, 2025 to December 15, 2025, on the first day of each fiscal quarter within that period, based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility bore interest, at our option, at:
(i)the prime rate per annum, plus a margin of 1.750% or 2.000%; or
(ii)the Secured Overnight Financing Rate ("SOFR") per annum, plus 0.100%, plus a margin of 2.750% or 3.000%.
From December 16, 2025 to January 31, 2026, based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility bore interest, at our option, at:
(i)the prime rate per annum, plus a margin of 1.250%; or
(ii)the SOFR per annum, plus a margin of 2.250%.
From and after February 1, 2026, and on the first day of each fiscal quarter thereafter, based on the amount of our average daily excess availability under the facility, borrowings outstanding under the ABL Credit Facility bear interest, at our option at:
(i)the prime rate per annum, plus a margin of 1.000%, 1.250% or 1.500%; or
(ii)the SOFR per annum, plus a margin of 2.000%, 2.250% or 2.500%.
As of April 18, 2024, based on the size of the unused portion of the commitments, we are charged a fee ranging from 0.250% to 0.375%.
Previously, from February 4, 2025 to December 15, 2025, letter of credit fees ranged from 1.000% to 1.125% for commercial letters of credit and ranged from 1.500% to 1.750% for standby letters of credit.
From December 16, 2025 to January 31, 2026, letter of credit fees were 0.625% for commercial letters of credit and were 1.250% for standby letters of credit. As of February 1, 2026, letter of credit fees range from 0.500% to 0.750% for commercial letters of credit and range from 1.000% to 1.500% for standby letters of credit. These fees are determined based on the amount of our average daily excess availability under the facility.
Prior to December 16, 2025, the amount available for loans and letters of credit under the ABL Credit Facility was determined by a borrowing base consisting of certain credit card receivables, certain trade receivables, certain inventory, and the fair market value of certain real estate, subject to certain reserves. As of December 16, 2025, the fair market value of certain real estate is no longer included in this borrowing base.
For Fiscal 2025, Fiscal 2024, and Fiscal 2023,we recognized $19.1 million, $25.0 million, and $24.2 million, respectively, in interest expense related to the ABL Credit Facility.
Previously, from April 18, 2024 to December 15, 2025, credit extended under the ABL Credit Facility was secured by a first priority security interest in substantially all of our U.S. and Canadian assets, including our intellectual property, certain furniture, fixtures, equipment, and pledges of subsidiary capital stock. As of December 16, 2025, credit extended under the ABL Credit Facility is secured by a first priority security interest in substantially all of our U.S. and Canadian assets, other than intellectual property, real estate, certain furniture, fixtures and equipment, and pledges of subsidiary capital stock, and a second priority security interest in our intellectual property, real estate, certain furniture, fixtures and equipment, and pledges of subsidiary capital stock.
The outstanding obligations under the ABL Credit Facility may be accelerated upon the occurrence of certain customary events of default, as described below. We are not subject to any early termination fees.
The ABL Credit Facility contains covenants, which include conditions on stock buybacks and the payment of cash dividends or similar payments. These covenants also limit the ability of the Company and its subsidiaries to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, or dispositions or to change the nature of its business. Pursuant to a prior amendment, the requisite payment condition thresholds for some of these covenants were heightened, resulting in certain actions such as the repurchase of shares and payment of cash dividends becoming more difficult to perform. Additionally, if we are unable to maintain a certain amount of excess availability for borrowings, we may be subject to cash dominion, and pursuant to the Eighth Amendment, we are required to maintain excess availability of at least $35.0 million, subject to increase based on our borrowing base (the "excess availability requirement"). We were in compliance with this excess availability requirement as of January 31, 2026.
The ABL Credit Facility contains customary events of default, which include (subject in certain cases to customary grace and cure periods) nonpayment of principal or interest, breach of covenants, failure to pay certain other indebtedness, and certain events of bankruptcy, insolvency or reorganization, such as a change of control.
We recorded a loss on extinguishment of debt of $1.2 million during Fiscal 2025 when we entered into the Eighth Amendment, which is recorded within Other interest expense.
As of January 31, 2026 and February 1, 2025, unamortized deferred financing costs amounted to $5.6 million and $3.8 million related to our ABL Credit Facility.
The table below presents the components of our ABL Credit Facility as of the end of Fiscal 2025 and Fiscal 2024:
|
January 31, 2026 |
February 1, 2025 |
||||||||||
| (in millions) | |||||||||||
| Borrowing base | $ | 234.2 | $ | 301.9 | |||||||
| Credit facility size | 350.0 | 433.0 | |||||||||
|
Maximum borrowing availability (1)
|
199.2 | 301.9 | |||||||||
| Outstanding borrowings | 131.1 | 245.7 | |||||||||
| Letters of credit outstanding-standby | 23.7 | 16.0 | |||||||||
| Utilization of credit facility at end of period | 154.8 | 261.7 | |||||||||
|
Availability (2)
|
$ | 44.4 | $ | 40.2 | |||||||
| Interest rate at end of period | 6.5% | 7.6% | |||||||||
| Average end-of-day loan balance during the period | $ | 248.7 | $ | 284.5 | |||||||
| Highest end-of-day loan balance during the period | $ | 302.7 | $ | 366.9 | |||||||
| Average interest rate | 7.6% | 8.7% | |||||||||
(1)Prior to the Eighth Amendment, the lower of the credit facility size and the borrowing base, without factoring in any excess availability requirement. Pursuant to the Eighth Amendment, as of December 16, 2025, our maximum borrowing availability is the lower of the credit facility size and the borrowing base, net of the new excess availability requirement.
(2)The sub-limit availability for letters of credit was $6.3 million at January 31, 2026 and $9.0 million at February 1, 2025.
SLR Term Loan
On December 16, 2025, the Company and certain of its subsidiaries entered into the SLR Loan Agreement with SLR and other affiliated SLR entities as the lenders party thereto, and SLR as Administrative Agent, and Collateral Agent, providing for a $100.0 million SLR Term Loan. We used the net proceeds from the SLR Term Loan to partially pay down our borrowings under the ABL Credit Facility.
The SLR Term Loan (i) matures on the earlier of December 16, 2030, or the maturity date under the ABL Credit Facility, (ii) bears interest, payable monthly, (a) until June 16, 2026, at the SOFR per annum plus 5.250% for any portion that is a SOFR loan, or at the base rate per annum plus 4.250% for any portion that is a base rate loan; or (b) from and after June 17, 2026, at the SOFR per annum plus 5.250% or 6.250% for any portion that is a SOFR loan, or at the base rate per annum plus 4.250% or 5.250% for any portion that is a base rate loan, based on our consolidated fixed charge coverage ratio for the trailing twelve-month period as of the most recent fiscal quarter just ended.
The SLR Term Loan is secured by a first priority security interest in our intellectual property, real estate, certain furniture, fixtures and equipment, and pledges of subsidiary capital stock, and a second priority security interest in the collateral secured by a first priority security interest under the ABL Credit Facility. The SLR Term Loan is guaranteed by each of our subsidiaries that guarantees our ABL Credit Facility.
The SLR Term Loan is, in whole or in part, pre-payable any time and from time to time, subject to certain prepayment premiums specified in the SLR Loan Agreement, plus accrued and unpaid interest.
The SLR Term Loan contains customary affirmative and negative covenants substantially similar to a subset of the covenants set forth in the Credit Agreement, including limits on the ability of the Company and its subsidiaries to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, dispositions or restricted payments, or to change the nature of its business.
The SLR Term Loan contains certain customary events of default, which include (subject in certain cases to customary grace periods), nonpayment of principal, breach of other covenants of the SLR Term Loan, inaccuracy in representations or warranties, acceleration of certain other indebtedness (including under the Credit Agreement), certain events of bankruptcy, insolvency or reorganization, such as a change of control, and invalidity of any part of the SLR Term Loan. Additionally, the SLR Term Loan contains the same excess availability requirement as the ABL Credit Facility. We were in compliance with this excess availability requirement as of January 31, 2026.
For Fiscal 2025, we recognized $1.2 million in interest expense related to the SLR Term Loan. As of January 31, 2026, the interest rate was 8.9%.
As of January 31, 2026, unamortized deferred financing costs amounted to $2.4 million related to our SLR Term Loan.
Mithaq Term Loans
Mithaq Capital SPC, a Cayman segregated portfolio company ("Mithaq"), is a controlling stockholder of the Company. The Company and certain subsidiaries maintain an interest-free, unsecured and subordinated promissory note with Mithaq (the "Initial Mithaq Term Loan"), dated February 29, 2024, by and among the Company, certain of its subsidiaries, and Mithaq. During the first quarter of Fiscal 2025, $60.2 million under the Initial Mithaq Term Loans was repaid pursuant to the completion of our Rights Offering, leaving $18.4 million outstanding under the Initial Mithaq Term Loan as of January 31, 2026. We recorded a loss on extinguishment of debt of $1.0 million during Fiscal 2025, due to the partial prepayment of the Initial Mithaq Term Loan, which is recorded within Other interest expense. For more information about the Rights Offering, refer to "Note 10. Stockholders' Deficit" of the Consolidated Financial Statements in this Form 10-K for more information.
The Initial Mithaq Term Loan matures on April 16, 2031 and is guaranteed by each of our subsidiaries that guarantees our ABL Credit Facility.
The Company and certain subsidiaries also maintain an unsecured and subordinated promissory note with Mithaq for a $90.0 million term loan (the "New Mithaq Term Loan"; and together with the Initial Mithaq Term Loan, collectively, the "Mithaq Term Loans"), dated April 16, 2024, by and among the Company, certain of its subsidiaries, and Mithaq.
The New Mithaq Term Loan also matures on April 16, 2031, and requires monthly payments equivalent to interest charged at the SOFR per annum plus 4.000%, with the first year's monthly payments to Mithaq deferred until April 30, 2025. On April 28, 2025, the Company and Mithaq entered into Amendment No. 1 to the New Mithaq Term Loan promissory note, which subjected these deferred monthly payments due as of April 30, 2025 to a payment plan, payable in installments prior to the end of Fiscal 2025. The New Mithaq Term Loan is guaranteed by each of our subsidiaries that guarantees our ABL Credit Facility.
Pursuant to our refinancing transactions on December 16, 2025, the New Mithaq Term Loan was further amended to allow us to defer our monthly payments upon written notice to Mithaq, and as an amendment consent fee, its principal amount was increased by $2.7 million to $92.7 million, leaving an aggregate of $111.1 million outstanding under the Mithaq Term Loans. These amendments were evaluated under FASB ASC 470 -Debt, and accounted for as debt modifications. The $2.7 million increase in principal amount and the related deferred financing costs are accounted for as noncash financing activities within our Consolidated Statements of Cash Flows.
For Fiscal 2025 and Fiscal 2024, we recognized $7.4 million and $6.5 million, respectively, in interest-equivalent expense related to the New Mithaq Term Loan. As of January 31, 2026, the interest-equivalent rate was 7.8%.
For Fiscal 2025, we paid $8.3 million in interest-equivalent charges to Mithaq. These payments were made in the form of Murabaha transactions to be compliant with Shariah law. The purchase and sale of commodities as a result of these transactions have been accounted for in accordance with FASB ASC 610 - Other income, and presented on a net basis within Related party interest expense. As of January 31, 2026 and February 1, 2025, interest-equivalent expense payable to Mithaq was $5.6 million and $6.5 million, respectively, which is recorded within Accrued expenses and other current liabilities.
The Mithaq Term Loans are subject to an amended and restated subordination agreement (as amended from time to time, the "Mithaq Subordination Agreement"), dated as of April 16, 2024, by and among the Company and certain subsidiaries, Wells Fargo and Mithaq, pursuant to which the Mithaq Term Loans are subordinated in payment priority to the obligations of the Company and its subsidiaries under the Credit Agreement.
Pursuant to our refinancing transactions in December 2025, the Mithaq Term Loans are also subordinated in payment priority to the obligations of the Company and its subsidiaries under the SLR Term Loan. Subject to such subordination terms, the Mithaq Term Loans are prepayable at any time and from time to time without penalty and do not require any mandatory prepayments.
The Mithaq Term Loans contain customary affirmative and negative covenants substantially similar to a subset of the covenants set forth in the Credit Agreement, including limits on the ability of the Company and its subsidiaries to incur certain liens, to incur certain indebtedness, to make certain investments, acquisitions, dispositions or restricted payments, or to change the nature of its business. The Mithaq Term Loans, however, do not provide for any closing, prepayment or exit fees, or other fees typical for transactions of this nature, do not impose additional reserves on borrowings under the Credit Agreement, and do not contain certain other restrictive covenants.
The Mithaq Term Loans contain certain customary events of default, which include (subject in certain cases to customary grace periods), nonpayment of principal, breach of other covenants of the Mithaq Term Loans, inaccuracy in representations or warranties, acceleration of certain other indebtedness (including under the Credit Agreement), certain events of bankruptcy, insolvency or reorganization, such as a change of control, and invalidity of any part of the Mithaq Term Loans.
As of January 31, 2026 and February 1, 2025, unamortized deferred financing costs amounted to $3.6 million and $2.6 million, respectively, related to the Mithaq Term Loans.
Maturities of our principal debt payments on the SLR Term Loan and Mithaq Term Loans are as follows:
| January 31, 2026 | |||||
| (in thousands) | |||||
| 2026 | $ | - | |||
| 2027 | - | ||||
| 2028 | - | ||||
| 2029 | - | ||||
| 2030 | 100,000 | ||||
| 2031 | 111,100 | ||||
|
Total principal debt payments
|
$ | 211,100 | |||
Mithaq Commitment Letter
On May 2, 2024, the Company entered into a commitment letter (the "Commitment Letter") with Mithaq for a $40.0 million credit facility (the "Mithaq Credit Facility"). Initially, under the Mithaq Credit Facility, we had the ability to request for advances at any time prior to July 1, 2025. On December 16, 2025, the Company and Mithaq entered into an Amendment No. 3 to the Commitment Letter, that extended the deadline for requesting advances until December 16, 2030.
If any debt is incurred under the Mithaq Credit Facility, it shall require monthly payments equivalent to interest charged at the SOFR per annum plus 9.000%. Such debt shall be unsecured and shall be guaranteed by each of our subsidiaries that guarantees our ABL Credit Facility. Similar to the Mithaq Term Loans, such debt shall also be subject to the Mithaq Subordination Agreement, contain customary affirmative and negative covenants substantially similar to a subset of the covenants set forth in the Credit Agreement, and contain certain customary events of default. Additionally, such debt shall require no mandatory prepayments and shall mature no earlier than December 16, 2030. As of January 31, 2026, no debt had been incurred under the Mithaq Credit Facility.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
For a discussion of our contractual obligations and commercial commitments, see "Note 7. Leases", "Note 8. Debt", and "Note 9. Commitments and Contingencies" of the Consolidated Financial Statements, "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses reported during the period. We continuously review the appropriateness of the estimates used in preparing our financial statements; however, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Consequently, actual results could differ materially from our estimates. "Note 1. Basis of Presentation and Summary of Significant Accounting Policies" of the Consolidated Financial Statements, "Item 8. Financial Statements and Supplementary Data" of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements.
The accounting estimates discussed below include those that we believe are the most critical to aid in fully understanding and evaluating our financial results. Senior management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board, which has reviewed our related disclosures herein.
Impairment of Long-Lived Assets
We periodically review our long-lived assets for impairment when events indicate that their carrying value may not be recoverable. Such events include a historical or projected trend of cash flow losses or a future expectation that we will sell or dispose of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment, we group our long-lived assets at the lowest possible level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
We review all stores that have reached comparable sales status for impairment on at least an annual basis, or sooner if circumstances so dictate. We believe waiting this period of time allows a store to reach a maturity level where a more comprehensive analysis of financial performance can be performed. For each store that shows indications of impairment, we perform a recoverability test comparing estimated undiscounted future cash flows to the carrying value of the related long-lived assets. If the undiscounted future cash flows are less than the related net book value of the long-lived assets, they are written down to their fair market value. We primarily use discounted future cash flows directly associated with those assets, which consist principally of property and equipment and right-of-use ("ROU") lease assets, to determine their fair market values. Estimating the fair market value of long-lived assets using the discounted cash flow model requires management to estimate future revenues, expenses, discount rates, long-term growth rates, and other factors in order to project future cash flows. The assumptions used to evaluate future cashflows consider external and internal factors. External factors comprise the local environment in which the store resides, including mall traffic, competition, and their effect on sales trends, as well as macroeconomic factors, such as inflationary pressures impacting our customer, and changes in product input costs, transportation costs, distribution costs and wage rates. Internal factors include our ability to gauge the fashion taste of our customers, control over variable costs such as cost of sales and payroll, and in certain cases, our ability to renegotiate lease costs. In addition, the Company utilizes market-corroborated inputs, including sales per square foot and cost of occupancy rates, in its calculation of the fair value of its ROU assets and any necessary discounting required for rent rates based on macroeconomic conditions or local mall conditions. If external factors should change unfavorably, if actual sales should differ from our projections, or if our ability to control costs is insufficient to sustain the necessary cash flows, changes in these estimates can have a significant impact on the assessment of fair market value, which could result in material impairment charges.
Impairment of Indefinite-Lived Intangible Assets
Our intangible assets with an indefinite life consists of the acquired Gymboree tradename, and it is tested for impairment using a qualitative assessment to determine whether its fair value is below its carrying value. If there are indicators of impairment, we perform a quantitative assessment to estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. Estimating the fair value of indefinite-lived intangible assets using the relief-from-royalty method requires management to estimate future revenues, royalty rates, discount rates, long-term growth rates, and other factors in order to project future cash flows. If macroeconomic conditions deteriorate, if interest rates increase, or if actual sales should differ from our projections, changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment charges.
We perform a periodic impairment assessment of the Gymboree tradename, in accordance with FASB ASC 350 - Intangibles - Goodwill and Other. Based on this assessment, we did not identify any indicators of impairment during Fiscal 2025. We recorded a $28.0 million impairment charge in Fiscal 2024, which reduced the carrying value to its fair value of $13.0 million. We recorded a $29.0 million impairment charge in Fiscal 2023. As of January 31, 2026, the tradename's carrying value was $13.0 million.
Income Taxes
We utilize the asset and liability method of accounting for income taxes as set forth in FASB ASC 740 - Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities, as well as for net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to taxable income in effect for the years in which the basis differences and tax assets are expected to be realized. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts reflected for income taxes in our consolidated financial statements.
A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances, we consider projected future taxable income, the availability of tax planning strategies, taxable income in prior carryback years, and future reversals of existing taxable temporary differences. The assumptions utilized in determining future taxable income require significant judgment. Actual operating results in future years could differ from our current assumptions, judgments and estimates. If we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would decrease earnings in the period in which such determination is made. As of January 31, 2026, we believe it is not more likely than not that future taxable income will be sufficient to allow us to recover substantially all of the value assigned to our deferred tax assets. Thus, in Fiscal 2025, we increased our valuation allowance by $20.9 million to $109.1 million.
We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements. Due to uncertainties in any income tax audit, our assumptions regarding the ultimate settlement of unrecognized tax positions may change and the actual tax benefits may differ significantly from current estimates.
Stock-Based Compensation
We account for stock-based compensation according to the provisions of FASB ASC 718 - Compensation- Stock Compensation. We grant time-vesting and performance-based stock awards to employees at senior management levels. We also grant time-vesting stock awards to our non-employee independent directors. Time-vesting awards are granted in the form of restricted stock units that require each recipient to complete a service period ("Deferred Awards"). Performance-based stock awards are granted in the form of restricted stock units, which have performance criteria that must be achieved for the awards to be earned, in addition to a service period requirement ("Performance Awards"), and each Performance Award has a defined number of shares that an employee can earn (the "Target Shares"). The expense recognized for Performance Awards throughout the service period and the number of shares that are projected to ultimately vest, are based on the estimated degree to which the related performance metrics are expected to be achieved. Actual performance may differ from such projections, which would impact the number of shares that vest and the total amount of expense recognized for the related Performance Awards, which could have a material impact on our consolidated financial statements. With the approval of the Human Capital & Compensation Committee, we may settle vested Deferred Awards and Performance Awards in shares, in a cash amount equal to the market value of such shares at the time all requirements for delivery of the award have been met, or in part shares and cash. In Fiscal 2024, there was a change of control of the Company, which triggered a conversion of all then-outstanding Performance Awards into service-based Performance Awards in accordance with their terms. As a result, the Fiscal 2023, fiscal year 2022, and fiscal year 2021 Performance Awards will all vest or have vested, as applicable, at their Target Shares on their respective vesting dates without regard to the achievement of any of the performance metrics associated with those awards, provided that the recipient be employed at the Company on each such vesting date.
In Fiscal 2025, the stock awards granted to employees at senior management levels were Deferred Awards that vest in three equal tranches in fiscal year 2027, fiscal year 2028 and fiscal year 2029.
Inventory Valuation
We value inventory at the lower of cost or net realizable value, with cost determined using an average cost method. The estimated market value of inventory is determined based on an analysis of historical sales trends of our individual product categories, the impact of market trends and economic conditions, and a forecast of future demand, as well as plans to sell through inventory. Estimates may differ from actual results due to the quantity, quality, and mix of products in inventory, consumer and retailer preferences, market conditions, and other catastrophic events. Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts. Our historical estimates for inventory obsolescence and shrinkage have not differed materially from actual results.
Recently Issued Accounting Standards
Refer to "Note 1. Basis of Presentation and Summary of Significant Accounting Policies" of the Consolidated Financial Statements, "Item 8. Financial Statements and Supplementary Data" of this Form 10-K for discussion regarding the impact of recently issued accounting standards on our consolidated financial statements.
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