Exhibit 99.2
THE
CHILDREN’S PLACE,
INC.
To Our Shareholders:
The full transition of governance of The Children’s
Place, Inc. (“TCP” or the “Company”) was made on March 8, 2024. We took governance in the faith that we can protect
and compound, at a reasonable rate of return, the per-share intrinsic value of TCP benefitting all fellow shareholders with whom I am
aligned. This letter is intended for long-term shareholders who have a serious interest in their holdings as distinguished from
speculators. Had our positions been reversed, this Honest-to-God letter would have been what I wanted.
* * * * * * * * * * * *
Who is Mithaq?
Mithaq Holding Company is a decentralized family
office that follows a disciplined value-investing approach. My partner and fellow TCP board member Muhammad Asif Seemab and I aspire to
master Chapters 8 and 20 of Professor Benjamin Graham’s “The Intelligent Investor.” We allocate our capital opportunistically
to a handful of high-quality public/private businesses managed by first-class management through full/partial equity stakes purchased
at less than their intrinsic value as determined by our careful analysis, emphasizing concentrating on the best ideas and holding them
over a long period or until fruition.
My father, who is also my role model, Saleh A.
AlRajhi (1921 – 2011), had no inherited wealth. Mithaq’s wealth, by and large, is the fruit of my father's toil. Therefore,
considering our fiduciary responsibilities and care to immediate family members who have committed large portions of their net worth in
Mithaq, our first job is wealth preservation and, second, to generate a better-than-average risk-adjusted return to compound total equity
value over the longest time possible.
Mithaq’s model is autonomy-and-trust rather
than the more common approach of command-and-control. Our business model relies more on mutual trust than just relying on traditional
internal controls. Our operation is highly decentralized, and the capital allocation decisions are highly centralized. This mix of loose
and tight is based on trust to an extreme degree. While speaking at the University of Southern California in 2007, Charlie Munger said
“The highest form that civilization can reach is a seamless web of deserved trust—not much procedure, just totally reliable
people correctly trusting one another.”
At Mithaq, we strive to cement our reputation
as a great home for founders, owners, and first-class management. We believe that we champion lifelong partnerships that are based on
trust—as trust is what works. This simple yet great virtue has profound implications for business, and life too. This model is built
on bone-deep values, not formulas.
Mithaq Capital SPC, the controlling shareholder
of TCP, is an independent limited-investor, private mutual fund licensed by the Cayman Islands Monetary Authority. By design, only 15
investors can subscribe to the fund and it is not open to the general public. We use this platform to manage investments (public equities
and alternative investments) across the globe, and we serve selected family and team members only, i.e., no outsiders and we eat our own
cooking.
A significant portion of Asif’s and almost
all my net worth is invested in Mithaq. Being the largest shareholder translates into sharing the downside as well as the upside. That's
an attitude I admire.
When management doesn't share the downside risk,
they take risky bets to pursue big rewards (with a ton of hope, I must add), regardless of the potential permanent loss of capital.
Like marriage, ownership of a business is a long-term
commitment. Had investing worked the same way, investors would have set high standards and patiently waited to cherry-pick the right one.
The global village has positioned us better than our ancestors as we have the advantage of choosing from a much broader menu across the
globe with a variety of alternative investment options. The more options we have, the more likely we make high-quality decisions, and
our basic rationale for global investing is that it offers a bigger pond to fish in.
At Mithaq, we had envisioned that our investing
journey would evolve from owning partial stakes in businesses to controlling a few fully owned, high-quality and free-cash-flow generative
businesses. This will enable us to control their free cash flows and reinvest them to acquire more high-quality and free-cash-flow generative
businesses managed by first-class management.
Time has come to give credit where credit is due.
The educational influence we have had and still have on and through us, from our investing heroes, Messrs. Warren Buffett and Charlie
Munger, is abundant. Their journey evolved from owning partly owned stakes in businesses to controlling a few fully owned, high-quality
and free-cash-flow generative businesses.
Although we are going through the same evolution
in our investing journey, and as much as we aspire to follow our investing heroes, we strive to practice independent thinking without
blindly cloning heroes’ investment books.
The decision for this journey and its objectives is anything but straightforward.
In honor of the late Charlie Munger (1924 –
2023), Vice Chairman of Berkshire Hathaway and Warren Buffett’s long-term business partner, or better known by his children as a
“book with legs” the following speech, “How to Guarantee a Life of Misery,” was delivered on June 13, 1986:
“First, be unreliable. Do not
faithfully do what you have engaged to do. If you will only master this one habit you will more than counterbalance the combined
effect of all your virtues, howsoever great. If you like being distrusted and excluded from the best human contribution and company,
this prescription is for you. Master this one habit and you can always play the role of the hare in the fable, except that instead
of being outrun by one fine turtle you will be outrun by hordes and hordes of mediocre turtles and even by some mediocre turtles on
crutches.”
“I must warn you that if you
don’t follow my first prescription it may be hard to end up miserable, even if you start disadvantaged. I had a roommate in
college who was and is severely dyslexic. But he is perhaps the most reliable man I have ever known. He has had a wonderful life so
far, outstanding wife and children, chief executive of a multibillion-dollar corporation.”
Reliability is the number one quality in dealing
with people and managing other people's money. The rewards of being trustworthy, honest and reliable are infinite. Therefore, we will
always seek to represent all shareholders with unshakeable reliability and high-quality work standards. However, we urge you to tamp down
your expectations to avoid any disappointment.
* * * * * * * * * * * *
Historical Facts
Below is a summary of selective historical financial data
of The Children's Place, Inc.:
| | | |
| | |
| | |
| | |
| | |
| | |
Gross | | |
Return on | |
| Financial | | |
Total | | |
Cash From | | |
SG&A | | |
Free Cash | | |
Profit After | | |
Profit | | |
Invested | |
| Year** | | |
Revenue* | | |
Operations* | | |
Expenses* | | |
Flows* | | |
Tax* | | |
Margin* | | |
Capital*** | |
| 2011 | | |
| 1,673,998,976 | | |
| 174,048,000 | | |
| 452,459,008 | | |
| 90,103,000 | | |
| 83,124,000 | | |
| 39.6 | % | |
| 14.1 | % |
| 2012 | | |
| 1,715,862,016 | | |
| 156,103,008 | | |
| 477,424,992 | | |
| 76,339,000 | | |
| 74,345,000 | | |
| 38.4 | % | |
| 12.4 | % |
| 2013 | | |
| 1,809,485,952 | | |
| 205,042,000 | | |
| 510,918,016 | | |
| 114,860,000 | | |
| 63,243,000 | | |
| 38.2 | % | |
| 10.2 | % |
| 2014 | | |
| 1,765,789,056 | | |
| 173,470,000 | | |
| 485,652,992 | | |
| 100,864,000 | | |
| 53,026,000 | | |
| 37.1 | % | |
| 8.6 | % |
| 2015 | | |
| 1,761,324,032 | | |
| 161,410,000 | | |
| 470,686,016 | | |
| 89,198,000 | | |
| 56,888,000 | | |
| 35.3 | % | |
| 9.4 | % |
| 2016 | | |
| 1,725,777,024 | | |
| 182,650,000 | | |
| 469,897,984 | | |
| 140,504,992 | | |
| 57,884,000 | | |
| 36.2 | % | |
| 10.3 | % |
| 2017 | | |
| 1,785,315,968 | | |
| 199,292,000 | | |
| 454,143,008 | | |
| 164,608,000 | | |
| 102,336,000 | | |
| 37.6 | % | |
| 19.0 | % |
| 2018 | | |
| 1,870,274,944 | | |
| 214,383,008 | | |
| 476,486,016 | | |
| 155,726,000 | | |
| 84,698,000 | | |
| 38.0 | % | |
| 15.7 | % |
| 2019 | | |
| 1,938,083,968 | | |
| 139,914,000 | | |
| 498,343,008 | | |
| 68,800,000 | | |
| 100,960,000 | | |
| 35.3 | % | |
| 26.3 | % |
| 2020 | | |
| 1,870,668,008 | | |
| 177,902,000 | | |
| 478,120,000 | | |
| 120,400,000 | | |
| 73,300,000 | | |
| 35.0 | % | |
| 19.0 | % |
| 2021 | | |
| 1,522,598,016 | | |
| (35,717,000 | ) | |
| 428,233,984 | | |
| (66,302,000 | ) | |
| (140,364,992 | ) | |
| 21.9 | % | |
| (42.3 | )% |
| 2022 | | |
| 1,915,363,968 | | |
| 133,276,000 | | |
| 459,168,992 | | |
| 103,969,000 | | |
| 187,171,008 | | |
| 41.5 | % | |
| 41.3 | % |
| 2023 | | |
| 1,708,482,048 | | |
| (8,218,000 | ) | |
| 460,972,000 | | |
| (53,795,000 | ) | |
| (1,138,000 | ) | |
| 30.1 | % | |
| 1.7 | % |
| 2024 | | |
| 1,602,508,000 | | |
| 92,800,000 | | |
| 447,343,000 | | |
| 65,241,000 | | |
| (154,541,000 | ) | |
| 27.8 | % | |
| (27.8 | )% |
*: Source: Public filings.
**: Financial Year 2024 means
the accounting year ended on February 3, 2024 (FY2023 ended on January 28, 2023).
***: Source: Bloomberg. The Invested Capital is adjusted down
by the short and long term operating lease liabilities under ASC 842.
Over the last 14-years, TCP has generated annual
net income ranging from $53 million to $187 million with only a few years of reported losses. Over the same period, TCP generated annual
free cash flows ranging from $69 million to $140 million and almost all used to buy back the shares.
Since FY2009, TCP’s buybacks amounted
to $1.598 billion, and $135 million distributed through cash dividends. This helped in reducing the share count from 29.5 million shares
to 12.6 million shares (57.3% net reduction!) after incorporating shares issued to management under stock-based compensation.
Over the last 14-years, TCP revenue has remained
relatively flat, while the number of stores decreased from 995 to 523 (a 47% reduction). E-commerce revenue as a percentage of total revenue
went up from 9% in FY2011 to 48.3% (53.9% as a percentage of retail revenue) in FY2024. Despite the significant shift in revenue channel,
SG&A expenses remained relatively flat.
During FY1997 to FY2017 (a span of 20-years),
TCP's median gross profit margin stood at approx. 40% (simple average 39%) vs. 39% of the closest listed peer in the United States. However,
post FY2018, TCP’s closest peer has improved its gross profit margin by 6-7% whereas TCP lost 7%.
During
FY1999 to FY2012, the inventory turnover, which measures the number of times the inventory is sold during the year, remained at 5x
whereas during FY2013 to FY2019, it went down to 3.9x, and post FY2022 it has come down to sub 3x.
Over the past 14-years, TCP has
spent $952 million on information technology related costs out of which $534 million is expensed out in P&L and $419 million was
capitalized and is being expensed through depreciation over time. In the last six years, the average annual IT spend is 4.1% of
total revenue, while a typical retail company’s net profit margin is around 5-7%.
While it is an intangible asset and an accounting
matter, an impairment charge of $29 million on the Gymboree tradename is recorded in FY2024, primarily due to an increase in the discount
rate and $5.6 million of impairment charges to stores.
Beyond capex, due to a material shift in the revenue
channel to e-commerce, we don’t believe TCP should require continuous material capital expenditure, and historically, TCP maintained
a clean balance sheet, with minimal debt except for a few specific periods. TCP has high exposure to debt currently, and the net interest
expense was $30 million for FY2024 as compared to $13.2 million last year.
Over the last 14-years, the return on invested
capital was double-digits in nine years, single-digits in three years, and negative in two years. We believe that, over time, a company's
share price tends to reflect its underlying operating performance. It's akin to gravity. Thus, over time, an investor's return would match
the return that the underlying business earns on its invested capital.
In the absence of material capital expenditure
on a continuous basis, TCP’s core business does not have unlimited capacity to reinvest its retained earnings. In other words, over
the long run, our expectation is that the intrinsic value of TCP should be more dependent on how management allocates its retained earnings.
* * * * * * * * * * * *
Strategy Going Forward
We have no master plan. Master planning works
perfectly in theory but more often fails in practice. We will always seek to be opportunistic, and the present board has enough
skin-in-the-game and will take a more active role, not only in governance, but also in overseeing management’s capital allocation
decisions. While we have influence as board members, we cannot eliminate all poor decisions. Even if we execute really well, some things
just take time. Without going into specifics, below are some preliminary observations on the strategy that we expect management to execute:
Capital Allocation: Over the long run the
intrinsic value of the business depends on how wisely management allocates capital. Therefore, we will always seek to be opportunistic
and allocate capital thoughtfully and intelligently. Our priority would be to invest in business growth and use free cash flows to reduce
and ultimately eliminate debt over time. Once TCP is debt-free, we will consider the best use of capital depending on the opportunities
at that time. For example, we would only expect to buy back shares if the market value is materially lower than the intrinsic value.
Liquidity and Debt: Being
debt-averse, wherever it is possible and economically viable, we will be prioritizing paying back the debt. The size of the runway
of corporations and investors' time horizons more often shrink under debt. A business selling affordable products that is unable to
pass on inflationary pressures to customers shouldn’t be run on debt. Instead, decent liquidity should always be kept on the
balance sheet of such businesses. We do not want to leave TCP at the mercy and kindness of lenders who are not aligned with
TCP’s shareholders. This is a reason why, when TCP was faced with the possibility of having to accept what we believe to be
outrageous terms from another prospective lender, Mithaq stepped in to lend on terms materially more favorable to TCP. TCP will also
raise equity capital through a rights offering committed to at the time we provided our initial TCP rescue financing, which,
depending on the market conditions at the time of the rights offering, will add permanent capital to and strengthen the balance
sheet.
Operational Efficiencies: We will take
steps to examine obtainable operational efficiencies and to implement disciplined expense management, to build a strong foundation for
long-term growth. The growth of human capital at headquarters often leads to the proliferation of unnecessary bureaucracy and complexity
that hampers innovation, demoralizes talented individuals, and the customer-centric mindset may take a backseat as internal processes
and procedures become the primary concern. Moreover, unnecessary bureaucracy can lead to frustration among team members. Talented individuals
who thrive in dynamic and autonomous environments may lose motivation, decrease their productivity, and may even leave. Since the majority
of total revenue is e-commerce, the quantum of human capital should be adjusted accordingly.
Operating Controls: We will take steps
to enhance the operating controls to minimize mistakes and reduce bureaucracy. A lean management style eliminates costs, speeds decision-making,
and attracts talented individuals with an ownership mentality who challenge the status quo and periodically evaluate practices for their
cost and benefit. We will implement a zero-based budgeting approach across all departments so that we identify further opportunities to
achieve efficiency. We will also strive to apply technology-led optimization initiatives to automate any repetitive tasks to reduce costs
and strive for logistics and operational excellence.
Compensation Structure and Decentralization:
We intend to implement an appropriate performance-based incentive system, in which business units are incentivized for the factors they
can control and are not penalized for the factors they can’t control. Incentive is the principal driver of behavior. With proper
incentives, you get proper outcomes. TCP will grow leaders internally or hire competent individuals, give them authority, incentivize
them and leave them alone. Such incentive systems can’t be achieved unless authority is decentralized. We will take steps to delegate
tasks to the responsible individuals and those individuals should shoulder responsibility for the process and the outcome. This approach
makes team members champion new ideas. A hands-off approach, responsibility and trust motivate the best.
Culture: We will take steps to shape a
culture where talented individuals i.e., intelligent, energetic and ethical who think like owners can prosper. A decentralized culture
assumes autonomy and that can’t be achieved without trust in team leaders. TCP operates in an industry where one has to continuously
innovate. Innovation can’t be achieved without trying multiple things and failing in the process. TCP will have a culture where
it would be OK to fail as long as we’re learning and improving. We will seek to create a culture that can attract, empower, retain
and incentivize such first-class worthy individuals so that we sail in the same boat, and maintain a competitive edge in the ever-evolving
business landscape. Eventually, we will seek for TCP to have a culture of a seamless web of deserved trust, ownership mentality and a
sense of responsibility.
No Quarterly Calls and Market Guidance:
To achieve long-term gains, one has to ignore the short-term fluctuations. A quarter (or even a year for that matter) is too short to
judge management’s performance. Rather, it pushes management to prioritize short-term small wins at the cost of long-term material
gains. Therefore, TCP does not expect to conduct quarterly calls or provide quarterly earnings guidance to the market. This will liberate
management from managing the outer scorecard. Rather, they will spend time on managing the inner scorecard, i.e., the business performance.
This does not mean that management will not have internal goals about financial metrics. We want management to focus on long-sighted decisions
and long-term value creation, not on short-sighted decisions and behaviors to meet or beat quarter-to-quarter earnings guidance.
Transparency and Open Communication : We
aim to provide you with the information we would desire if our roles were reversed, and to treat you the way we would want to be treated.
We also value intellectual honesty and are open-minded to changing our beliefs when proven wrong. We will always prioritize our competitive
advantage while sharing information, so we won't disclose anything that will weaken our business moat unless required by reporting obligations.
In a nutshell, the main objective is to protect
and compound, at a reasonable rate of return, the per-share intrinsic value of TCP following a thoughtful approach. Meaning, TCP under
our governance will take, if it makes sense, some unconventional steps, i.e., aversion to debt, replacing unnecessary complexity with
simplicity, not unnecessarily relying on advisors and consultants, no quarterly calls/guidance, a decentralized management style and lean
management structure, long-term focus, proper compensation structure to align the interests of management with shareholders, and stewardship
of capital.
The board members have visited TCP headquarters,
its distribution center in Alabama, various warehouses, and a few retail stores and met the senior leadership team, vice presidents, district
managers, and store managers to identify opportunities to pursue long-term results. The good news is that we’ve identified a few
opportunities. We believe some of these can be fixed quickly but others might take time. Two are outlined below:
(1) Minimum Order
Size for Free Shipping: TCP in its whole history offered free shipping without any minimum order size. This was financially unsustainable,
as it resulted in significant losses on low-value orders. Almost all competitors in the specialty retail industry apply a minimum order
size to qualify for free shipping which ranges from $35 to $50. In February 2024, TCP finally implemented a minimum order size of $20
to qualify for free shipping. For value-conscious customers, a free shipping option is still available through the buy-online-ship-to-store
(BOSS) method. The data suggests that, after factoring in all variable costs, orders falling within the $20-39.99 range either result
in a loss, breakeven, or yield a thin profit margin that can only be covered if we earn a sufficient gross margin. Our analyses suggest
that we have more room to increase the minimum order threshold while remaining competitive in terms of pricing. Increasing the minimum
order size to a higher threshold makes economic sense and management is currently thoughtfully thinking through this decision.
(2) Expansion
and Automation of Distribution Center: TCP has a total of 120 acres of land in Fort Payne, Alabama, out of which the South East
Distribution Center (the “SEDC”) is built on 16 acres and the remaining is either parking or unused space. TCP usually
has over 53 million units at peak during the year, out of which only 20 million units can be stored in the SEDC, 11.8 million units
at a third-party fulfilment center and the rest are stored in seven offsite warehouses. TCP pays approximately $15 million in annual
rent to this third party and these offsite warehouses. The SEDC is fairly automated, except for the picking process, which is labor
intensive and requires employees to walk for an average of 7 miles per day. The fulfillment costs of the third party are higher than
SEDC. Keeping inventory at multiple locations brings its own inefficiencies (e.g., duplicate inventory, split shipments, utilities,
security, transport, and additional labor). To address these issues, management will seek proposals to expand and automize the SEDC.
This decision would not only save costs, but also enhance overall operational efficiency.
The implementation of all of the above is not
easy, but we intend to achieve it v-e-r-y s-l-o-w-l-y so as to best ensure proper implementation and success. In making decisions, our
fundamental focus will be on long-term results rather than being swayed by short-term profitability considerations or reacting to –
Wall Street – immediate responses. Delayed gratification is a component of compounding wealth, so shareholders’ patience
would be the most logical course…
* * * * * * * * * * * *
Other Information
We seek to follow a tell-it-like-it-is policy,
and we reckon, this is the best form of proper communication and is important, particularly when things do not go well, which is inevitable
from time to time. We, like all candid boards and management, are not infallible.
As your Chairman, I will waive all and any form
of future fees and/or salary and/or compensation. I do not need any financial motivation other than to enhance the per-share intrinsic
value of TCP. Mithaq owns a meaningful equity stake and has also provided unsecured loans to TCP on TCP-favorable terms. If this level
of exposure and commitment does not motivate us to turn TCP back to profitability and govern it reliably, nothing else will.
In no way do we guarantee nor promise returns,
but rest assured that we are going to roll up our sleeves and strive to be reliable fiduciaries and work diligently to uphold this privilege.
I am certain we will experience agonizing periods. Mr. Market1 will swing TCP’s
share price up and down from time to time and I hope that shareholders can weather with us through thick and thin.
Our Annual Report on Form 10-K filed with the
U.S. Securities and Exchange Commission (“SEC”) sets forth detailed information on our business and our audited financial
statements. Shareholders can access much of TCP's information on our corporate website https://corporate.childrensplace.com and the SEC’s
EDGAR website https://www.sec.gov/edgar/.
| May 24, 2024 |
Turki Saleh A. AlRajhi |
| |
Chairman of the Board |
| |
|
| 1 | Mr. Market: In 1949, Professor Benjamin Graham coined the term “Mr. Market” in his famous
book, The Intelligent Investor. He elaborated on this concept in detail in Chapter 8, “The Investor and Market Fluctuations”.
The “Mr. Market” metaphor represents the irrational or contradictory traits of the stock market and the risks of following
groupthink. The seductive fellow named “Mr. Market” will knock on your door every day and offer you a price to either buy
or sell your interest in a business, and investors have the liberty to either take the offer or ignore it. “Mr. Market” does
not express any positive or negative feelings about your actions. The point is that price and value may disconnect widely, and intelligent
investors should make rational decisions and never fall under the influence of “Mr. Market” while buying or selling any business.
|
Forward-Looking Statement
This letter contains or may contain forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited
to statements relating to the Company’s strategic initiatives and results of operations, including adjusted net income (loss) per
diluted share. Forward-looking statements typically are identified by use of terms such as “may,” “will,” “should,”
“plan,” “project,” “expect,” “anticipate,” “estimate” and similar words, although
some forward-looking statements are expressed differently. These forward-looking statements are based upon the Company’s current
expectations and assumptions and are subject to various risks and uncertainties that could cause actual results and performance to differ
materially. Some of these risks and uncertainties are described in the Company’s filings with the Securities and Exchange Commission,
including in the “Risk Factors” section of its annual report on Form 10-K for the fiscal year ended February 3, 2024. Included
among the risks and uncertainties that could cause actual results and performance to differ materially are the risk that the Company will
be unable to achieve operating results at levels sufficient to fund and/or finance the Company’s current level of operations and
repayment of indebtedness, the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences,
the risks resulting from the highly competitive nature of the Company’s business and its dependence on consumer spending patterns,
which may be affected by changes in economic conditions (including inflation), the risk that changes in the Company’s plans and
strategies with respect to pricing, capital allocation, capital structure, investor communications and/or operations may have a negative
effect on our 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 litigations
brought under securities, consumer protection, employment, and privacy and information security laws and regulations, the imposition of
regulations affecting the importation of foreign-produced merchandise, including duties and tariffs, risks related to the existence of
a controlling shareholder, and the uncertainty of weather patterns. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date they were made. The Company undertakes no obligation to release publicly any revisions to
these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
