SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fifty-two weeks ended January 29, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-23071

THE CHILDREN’S PLACE RETAIL STORES, INC.

(Exact name of registrant as specified in its charter)

Delaware		31-1241495
(State or other jurisdiction of		(I.R.S. employer identification
incorporation or organization)		number)

915 Secaucus Road
Secaucus, New Jersey		07094
(Address of Principal Executive Offices)		(Zip Code)

(201) 558-2400
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

The aggregate market value of common stock held by non-affiliates was $353,551,056 at the close of business on July 31, 2004 (the last business day of the registrant’s most recently completed second fiscal quarter) based on the closing price of the common stock as reported on the Nasdaq Stock Market.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: Common Stock, par value $0.10 per share, outstanding at April 1, 2005: 27,411,078 shares.

Documents Incorporated by Reference: Portions of the Company’s Proxy Statement for its annual meeting of stockholders to be held on June 23, 2005, are incorporated partially in Part III hereof.

PART I

ITEM 1. — BUSINESS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, discussions of the Company’s operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption “Risk Factors.” Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with the Company’s audited financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Overview

The Children’s Place Retail Stores, Inc. and subsidiaries (the “Company”) is a leading specialty retailer of children’s merchandise. The Company designs, contracts to manufacture and sells high-quality, value-priced merchandise under its proprietary “The Children’s Place” and licensed “Disney Store” brand names. As of April 1, 2005, the Company owned and operated 752 The Children’s Place stores and 306 Disney Stores across North America and an Internet store at www.childrensplace.com.

The Children’s Place is a specialty retailer of apparel and accessories for children from newborn to ten years of age. Our merchandising objective is to offer a unique, colorful, coordinated and balanced lifestyle assortment of high quality, basic and fashion merchandise, at prices that represent substantial value to our customers.

In November 2004, the Company acquired, through a wholly-owned subsidiary, the Disney Store retail chain in North America (the “DSNA Business”) from an affiliate of The Walt Disney Company (“Disney”). Disney Store originated the themed specialty retail environment when its first store opened in Glendale, California in 1987. Disney Store offers immediate access to unique Disney-branded products, such as apparel, toys, plush, and souvenirs. Disney Store’s core customer is between the ages of three to six years old.

The Company is structured such that its administrative functions (e.g., finance, real estate, human resources, legal, information technology) are shared by both brands. Functions such as design, merchandising, marketing and store operations are run independently of each other to maintain clearly defined and differentiated brands. Each brand is overseen by a President who manages day-to-day operations and who reports directly to our Chairman and Chief Executive Officer.

During fiscal 2004, we opened 62 The Children’s Place stores compared to the opening of 53 The Children’s Place stores in fiscal 2003. We closed three The Children’s Place stores and seven Disney Stores in fiscal 2004, compared to closing five The Children’s Place stores in fiscal 2003. Our store growth plan in fiscal 2005 includes opening approximately 60 The Children’s Place stores and 10 Disney Stores.

We believe that the following core competencies are critical to our long-term success:

Merchandising Strategy. The Children’s Place merchandising strategy is built on offering an appealing collection of interchangeable outfits and accessories to create a coordinated look distinctive to the brand. We offer an updated, focused assortment of styles in a variety of colors and patterns, with the aim of consistently creating a fresh, youthful look at value prices that we believe distinguishes “The Children’s Place” brand. We divide the year into quarterly merchandising seasons: spring, summer, back-to-school and holiday. Within each season we deliver two

merchandise lines. Each season is built around a theme that includes an assortment of coordinated basic and fashion apparel with matching accessories designed to encourage multiple item purchases and wardrobe building.

Our Disney Store merchandising strategy is to offer customers a unique, high quality, character driven merchandise assortment at everyday value prices. Our objective is to offer a focused assortment that addresses all of a child’s lifestyle needs while also offering something for the whole family. During fiscal 2005, we plan to weight the merchandise mix towards children’s apparel and toys, while de-emphasizing the adult apparel category. Currently, the Disney Store business is heavily concentrated in the Halloween and holiday seasons. To reduce the level of seasonality, going forward, we plan to create more compelling seasonal assortments during spring, summer and back-to-school. These plans have been initiated, and will begin to impact operating results in the second half of fiscal 2005, with the full effect of the change in merchandising strategy to occur in fiscal 2006. (For clarification, the “DSNA Business” refers to the business we acquired from Disney as of November 21, 2004, whereas the “Disney Store business” refers to the Disney Store business we have operated since the acquisition.)

High Quality/Value Pricing Strategy. We believe that our quality, value price positioning is an important component of our long-term strategy. We offer high-quality clothing and accessories under “The Children’s Place” brand name at prices below most of our direct mall-based competitors. We employ this value pricing strategy across our entire merchandise offering. Our attractive price points are an important factor in the broad consumer appeal that The Children’s Place brand has benefited from over the years. At Disney Store, we believe that combining the strong appeal of Disney characters with our value pricing strategy will be well received by customers.

Brand Image. We continue to build a strong brand image and customer loyalty for “The Children’s Place” by (1) offering high-quality products at value prices, (2) providing a distinctive collection of coordinated and interchangeable outfits and accessories, (3) maintaining a uniform merchandise presentation, (4) emphasizing our fashionable, youthful image in our marketing visuals and (5) selling our merchandise exclusively in our 752 The Children’s Place stores and on our website. The Disney Store benefits from one of the strongest brand names in North America. Elements of the Disney Store brand are being positioned similarly to The Children’s Place. We will emphasize high-quality products at value prices and offer a more coordinated merchandise product offering. However, the Disney Store experience will be more interactive and experiential for children, and will also emphasize the “magic” and memories of the Disney character portfolio.

Low-Cost Sourcing. We control the design, sourcing and presentation of our products sold at both The Children’s Place and Disney Store. We believe that this control is essential in assuring the consistency and quality of our merchandise and the image of each of our brands, as well as in our ability to deliver value to our customers. We have established long-standing relationships with our trading company and buying agents. Through these relationships and our extensive knowledge of low cost sourcing, we are able to offer our customers high-quality products at value prices. Furthermore, we believe that our integrated merchandise approach, from in-house design to in-store presentation, enables us to quickly identify and respond to market trends, uphold rigorous product quality standards, manage the cost of our merchandise and strengthen our brands. Our offices in Hong Kong, Shanghai and New Delhi add to our ability to lower costs, capitalize on new sourcing opportunities, increase our control over product quality and enable us to respond to changing merchandise trends more effectively and efficiently. We plan to apply our low-cost sourcing expertise to Disney Store. These plans have been initiated, and will begin to impact operating results in the second half of fiscal 2005, with the full effect of the change in sourcing strategy to occur in fiscal 2006.

Experienced Management Team. Our management team is led by Ezra Dabah, who guides the management of the Company using his broad apparel merchandising and buying expertise, which includes approximately 20 years in the children’s segment of the market. In addition, the other members of our management team have an average of 16 years of retail or apparel industry experience and an average of nine years with the Company.

Disney Store Acquisition

In November 2004, two of our subsidiaries acquired the “Disney Store” chain of retail stores in North America from affiliates of Disney. As a result of the acquisition, these subsidiaries acquired a total of 313 Disney Stores,

consisting of all existing Disney Stores in the United States and Canada, other than “flagship” stores and stores located at Disney theme parks and other Disney properties. In addition, the lease obligations for all 313 stores and other legal obligations became obligations of our subsidiaries.

Like The Children’s Place, Disney Store is a proprietary, mall-based, vertically integrated specialty retailer, with a similar customer demographic. We believe that combining the Disney brand with our merchandising, sourcing and retail operating expertise will result in significant margin expansion and expense leverage. As of January 31, 2005, we transitioned the Disney Store business onto our technology systems, and are receiving and distributing merchandise through our distribution centers. Going forward, our focus includes: utilizing our low-cost sourcing expertise to reduce product costs and enhancing merchandise margin; remodeling between 30 and 35 Disney Stores into our new store prototype for Disney Stores; and creating, developing and executing our merchandising strategy. We believe these strategies, combined with lowering retail prices and leveraging expenses across a larger sales base, should lead to increased profitability.

Merchandising Process

While we have separate design and merchandising teams for each brand, the process and planning schedules are similar. To execute our merchandising strategies, we rely on the coordinated efforts of our design, merchandising, sourcing, planning and allocation teams. These teams, in conjunction with senior management, review prior season results, fashion trends, colors and designs that we will offer in upcoming seasons. Merchandising selects products from the assortment of merchandise designs that are created by the design team for production. In addition, the Disney Store design team assesses characters and attends toy shows and fairs to determine what toys to include in the assortment. Then, based upon detail design specifications, including production quantities determined by merchandising and planning, the sourcing team arranges for the manufacture of the selected styles.

Our design and trend teams analyze and interpret current and emerging fashion trends, translating them into a broad selection of merchandise appropriate for upcoming seasons. In addition, our Disney Store design and trend teams evaluate the popularity and relevancy of existing characters, as well as the perceived customer receptivity to new characters, to create a unique and compelling merchandise assortment. Across both brands, work on each of our seasonal lines begins approximately one year before the season, with the gathering of samples and market intelligence on fashion trends. This process involves extensive European and domestic market research, media, trade shows, fashion magazines, the services of fashion and color forecast organizations, analysis of prior season performance and at Disney Store, collaboration with other business units of Disney such as the Consumer Products Division and the Disney studios. After the design teams present their ideas, the designers, with the direction of merchandising, translate those ideas into a merchandise assortment that reflects the theme of the season. These interpretations include variations in fabric and other materials, product color, decoration, character selection and age-appropriate silhouettes. Potential items are designed using computer aided design technology, giving us the opportunity to consider a wide range of style and fashion options. In addition, our sourcing teams and Asian offices coordinate the production of apparel prototype samples which enable our merchandising teams to ensure that our merchandise will properly reflect our design concepts, and allow us to get the most accurate understanding of an item’s color, fit, texture and quality. We have also instituted a process that involves working with samples in a simulated in-store environment. This enables our design, merchandising, visual and marketing teams to create a cohesive, well balanced and fresh approach to each season.

The merchandise management teams create a detailed purchasing plan for the season covering each department, category and key item, based on historical, current and emerging category trends. The production process takes approximately five months from order confirmation to receipt of merchandise at our distribution facilities. Our planning teams monitor current and projected inventory levels on a weekly basis and analyze sales patterns to predict future demand for various categories. We regularly monitor sales and maintain some flexibility to adjust merchandise on order for future seasons or to accelerate delivery of merchandise. Our merchandise allocation teams are responsible for planning and allocating merchandise to each store based on sales levels, merchandise turns and other factors.

Sourcing and Procurement

We combine management’s extensive apparel sourcing experience with a cost-based buying strategy to control merchandise costs, infuse quality features into our product and deliver value to our customers. We believe we have a thorough understanding of the economics of apparel manufacturing, including costs of materials and components. This knowledge enables us to determine the most cost-effective country and manufacturer from which to source each item and obtain high quality, low product costs. Relying on our supplier relationships, our knowledge of manufacturing costs and our ability to leverage increasing volumes, we believe we have been able to arrange for the manufacture of high-quality apparel and accessories at low cost. With the addition of the Disney Store business, we are now sourcing “hardlines” merchandise such as toys, mugs, and snow globes using the same sourcing strategies.

Our sourcing team makes on-site visits to our independent agents and various manufacturers to negotiate product costs, finalize technical specifications for each product and confirm delivery of merchandise manufactured to our specifications. During fiscal 2004, more than 200 independent manufacturers located primarily in Asia produced merchandise sold at The Children’s Place to our specifications. Given the timing of the acquisition of the DSNA Business, we did not source any Disney Store merchandise sold during fiscal 2004, and we were unable to materially impact Disney Store merchandise to be sold during the first half of fiscal 2005. Merchandise that was sourced by us is expected to begin to arrive in stores during the third and fourth quarters of fiscal 2005. To support our growing inventory needs and to control merchandise costs, we continue to pursue global sourcing opportunities and consider product quality and cost, reliability of the manufacturer, and service and product lead times, among other factors.

We have no exclusive or long-term contracts with our manufacturers and typically transact business on an item-by-item basis under purchase orders at freight on board cost in U.S. dollars. We are parties to agency agreements with commissioned independent agents who oversee production, assist in sourcing and pre-production approval, provide quality inspection and ensure timely delivery of merchandise. During fiscal 2004, we purchased approximately 15% of our products from a commissioned, independent agent in Taiwan, and approximately 20% of our product through a Hong Kong-based trading company. This trading company is responsible for procurements from wholly-owned facilities as well as contract manufacturers located throughout Asia. We have developed long-term, continuous relationships with key individual manufacturers and material suppliers, which have yielded numerous benefits, including quality control, low costs, and flexible working arrangements. In addition, we believe our offices in Hong Kong, Shanghai and New Delhi enable us to obtain more favorable material and manufacturing costs and quickly identify and act on new sourcing and supplier opportunities. Our Asian offices also facilitate our prototype sample production and enable us to foster stronger relationships with our suppliers, manufacturers, agents and trading companies. During fiscal 2004, we purchased approximately 30% of our merchandise without the aid of commissioned buying agents or trading companies. Together with our agents and key suppliers, we use tracking systems that enable us to anticipate potential delivery delays in our orders and take action to mitigate the impact of any delays. Using our purchase order, advanced shipping notification and tracking systems, our independent agents and our sourcing department actively monitor the status of each purchase order from order confirmation to merchandise receipt.

To ensure quality and promote consumer confidence in our products, we augment our manufacturers’ testing requirements with our own, in-house quality assurance laboratory to test and evaluate fabric, trimming materials and pre-production samples against a comprehensive range of physical performance standards before production begins. The quality control personnel of our Asian offices, independent agents and trading company visit the various manufacturing facilities to monitor and improve the quality control and production process. Our Asian offices have enhanced our quality control by enabling us to monitor component and manufacturing quality at close range and address related problems at an early stage. With this focus on pre-production quality approval, we are generally able to detect and correct quality-related problems before bulk production begins. We do not accept finished goods until each purchase order receives formal certification of compliance from our agents’ or appointed third party inspectors.

In addition to our quality control procedures, we have implemented a social compliance program designed to promote compliance with local legal regulations, as well as ethical and socially responsible business practices.

The program involves on-site facility visits by either our social compliance auditors or third party providers, review of documentation, and interviews of facility management and workers. Additionally, our program includes education and training of our associates and our suppliers in order to ensure the sustainability of our program.

Company Stores

Existing Stores. As of April 1, 2005, we operated 752 The Children’s Place stores and 306 Disney Stores in North America. Most of The Children’s Place stores are clustered in and around major metropolitan areas in regional malls, with the exception of 88 strip center, 73 outlet and 47 street stores. All of our Disney Stores are in regional malls with the exception of one outlet store. The following table sets forth the number of stores in each state, Canadian province and Puerto Rico as of April 1, 2005:

UNITED STATES AND PUERTO RICO

State	Number of The Children’s Place Stores	Number of Disney Stores	Total Number of Stores
Alabama	9	3	12
Arizona	11	6	17
Arkansas	2	1	3
California	65	45	110
Colorado	9	4	13
Connecticut	15	6	21
Delaware	4	2	6
Florida	43	25	68
Georgia	18	6	24
Hawaii	2	1	3
Idaho	1	1	2
Illinois	36	15	51
Indiana	14	7	21
Iowa	6	1	7
Kansas	5	2	7
Kentucky	7	3	10
Louisiana	9	3	12
Maine	4	1	5
Maryland	22	6	28
Massachusetts	23	7	30
Michigan	21	9	30
Minnesota	11	3	14
Mississippi	4	0	4
Missouri	15	5	20
Montana	1	0	1
Nebraska	3	0	3
New Hampshire	4	4	8
New Jersey	39	15	54
New Mexico	2	2	4
New York	73	21	94
Nevada	6	2	8
North Carolina	17	7	24
North Dakota	1	0	1
Ohio	25	13	38
Oklahoma	2	2	4
Oregon	9	3	12
Pennsylvania	38	19	57
Rhode Island	3	1	4
South Carolina	10	0	10
South Dakota	1	0	1
Tennessee	12	5	17
Texas	43	20	63
Utah	6	0	6
Vermont	1	0	1
Virginia	18	7	25
Washington	10	5	15
West Virginia	1	2	3
Wisconsin	9	3	12

Puerto Rico	6	0	6

Total United States and Puerto Rico	696	293	989

CANADA

Province	Number of The Children’s Place Stores	Number of Disney Stores	Total Number of Stores
Alberta	4	2	6
British Columbia	3	1	4
Manitoba	2	1	3
New Brunswick	2	1	3
Nova Scotia	2	1	3
Ontario	28	7	35
Quebec	13	0	13
Saskatchewan	2	0	2

Total Canada	56	13	69

Total Stores	752	306	1,058

Store Type.

The Children’s Place. Our average store is approximately 4,500 square feet and features a design that incorporates light wood floors, fixtures and trim. The store is brightly lit, featuring floor-to-ceiling glass windows that allow our colorful fashions to attract customers from the outside. A customized grid system throughout the store’s upper perimeter displays featured merchandise, marketing photographs and promotions. Each line is merchandised as a collection of coordinated fashion and basic items, with matching accessories. We continually refine our merchandise presentation strategy to improve the shopping experience of our customers. We believe that our merchandise presentation effectively displays “The Children’s Place” coordinated look and creates a visually attractive selling environment that maximizes customer convenience and encourages the purchase of multiple items.

During fiscal 2002, we introduced a new store prototype. The stores are unique, fun, bright and use color to create boutique-like settings that better differentiate the various departments within the store. The stores also feature wide aisles for customers with strollers, and more wall space allowing for enhanced merchandise presentation and ease of shopping. As of April 1, 2005, 140 stores were in this format. In fiscal 2005, all of our new stores (except for outlets) and remodels will be in the prototype design.

Our street and strip center locations represent approximately 18% of The Children’s Place store base and provide opportunities for further penetration in established markets.

Our typical outlet stores are approximately 6,000 square feet and represent approximately 10% of The Children’s Place store base. Our outlet stores are mostly located in outlet centers and are strategically placed within each market to liquidate markdown merchandise from nearby stores. We also sell an assortment of full-priced merchandise in our outlet stores. We view our outlet business as an important component of our future growth.

Executive Officers and Directors

The following table lists the current executive officers and directors of the Company:

NAME	AGE	POSITION

Ezra Dabah	51	Chairman of the Board of Directors and Chief Executive Officer
Neal Goldberg	46	President, The Children’s Place
Mario A. Ciampi	44	President, Disney Store North America
Steven Balasiano	42	Senior Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary
Richard Flaks	42	Senior Vice President, Planning, Allocation and Information Technology
Amy Hauk	38	Senior Vice President, General Merchandise Manager
Brian Kleinberg	47	Senior Vice President, Marketing
Nina L. Miner	55	Senior Vice President, Design and Trend Development
Mark L. Rose	39	Senior Vice President, Chief Supply Chain Officer
Seth L. Udasin	48	Vice President, Finance, Chief Financial Officer and Treasurer
Chuck Crovitz	51	Director
Malcolm Elvey	63	Director
Robert Fisch	55	Director
Sally Frame Kasaks	60	Director
John F. Megrue	46	Director
Stanley Silverstein	80	Director

Website Access to Reports

The Company makes its corporate governance materials, ethics policy and periodic filings with the Securities and Exchange Commission available on its website, www.childrensplace.com. These documents are free of charge and are available for viewing as soon as is reasonably practical.

Risk Factors

Investors in the Company should consider the following risk factors as well as the other information contained herein.

Ability to Reposition Disney Store

A significant portion of our future success involves integrating, developing and growing the Disney Store business. The realization of any revenue growth, cost savings or synergies from the acquisition will depend largely upon our ability to: (i) secure substantially lower merchandise costs from vendors and suppliers; (ii) remodel the current store fleet into our new store prototype and successfully operate the stores; (iii) source hardlines merchandise at favorable prices; (iv) fully execute leases for 107 Disney Stores operating under letter agreements from landlords as of April 1, 2005; (v) execute our strategies for Disney Store without adversely impacting the existing The Children’s Place business; and (vi) obtain required approvals from Disney on a timely basis.

There can be no assurance that we can successfully execute any of these actions or that our strategies for Disney Store will achieve the results necessary to generate profits. If we fail to adequately integrate the Disney Store operation or cannot successfully execute its growth strategy, our results of operations will be adversely impacted.

Need to Anticipate and Respond to Merchandise Trends

Our continued success will depend in part on our ability to anticipate and respond to fashion trends and consumer preferences. Our design, manufacturing and distribution process generally takes up to one year, during which time fashion trends and consumer preferences may change. Failure to anticipate, identify or respond to future fashion trends may adversely affect customer acceptance of our products or require substantial markdowns, which could have a material adverse effect on our business.

Inability to Maintain Profitable Growth

Our future operating results will depend largely upon our ability to manage a larger business profitably and open and operate new stores successfully. We anticipate opening approximately 70 stores during fiscal 2005, which will include approximately 60 The Children’s Place stores and 10 Disney Stores. Our ability to open and operate new stores successfully depends on many factors, including, among others, the availability of suitable store locations, the ability to negotiate acceptable lease terms, the ability to timely complete necessary construction, the ability to successfully integrate new stores into our existing operations, the ability to hire and train store personnel and the ability to recognize and respond to regional and climate-related differences in customer preferences.

We cannot assure you that we will achieve our planned expansion on a timely and profitable basis or that we will be able to achieve results similar to those achieved in existing locations in prior periods. In fiscal 2004, The Children’s Place store base grew by 8.5% compared to 7% during fiscal 2003, and is anticipated to grow by approximately 8% in fiscal 2005. Including the Disney Stores, our total store base grew by 53% in fiscal 2004, and is anticipated to grow by approximately 7% in fiscal 2005. Operating margins may also be adversely affected during periods in which we have incurred expenses in anticipation of new store openings. We may not be able to sustain the new store return on investment we experienced in fiscal 2004 of 87%. Furthermore, we need to continually evaluate the adequacy of our store management and our information and distribution systems to manage our planned expansion. Any failure to successfully and profitably execute our expansion plans could have a material adverse effect on our business.

We believe that cash on hand, cash generated from operations and funds available under our credit facilities will be sufficient to fund our capital and other cash flow requirements for our business for at least the next 12 months. However, it is possible that we may be required to seek additional funds for our capital and other cash flow needs, and we cannot assure you that we will be able to obtain such funds on terms favorable to us or at all.

Potential Disruptions in Receiving and Distribution

Our merchandise is shipped directly from manufacturers through freight consolidators to our distribution centers. Our operating results depend in large part on the orderly operation of our receiving and distribution process, which depends on manufacturers’ adherence to shipping schedules and our effective management of our distribution facilities. Furthermore, it is possible that events beyond our control, such as a military action, strike, natural disaster or other disruption, could result in delays in delivery of merchandise to our stores. Any such event could have a material adverse effect on our business.

Sensitivity to Economic, Regional and Other Business Conditions

Our business is sensitive to customers’ spending patterns which are subject to prevailing regional and national economic conditions such as consumer confidence, recession, interest rates, energy prices and taxation. We are, and will continue to be, susceptible to changes in national and regional economic conditions, raw material costs, weather conditions, demographic and population characteristics, hourly wage legislation, consumer preferences and other regional factors.

Changes in Comparable Store Sales Results from Period to Period

Numerous factors affect our comparable store sales results, including, among others, merchandise assortment, retail prices, fashion trends, weather conditions, macro-economic conditions, the retail sales environment and our success in executing our business strategy. During fiscal 2004, we reported a comparable store sales increase of 16%, which we believe was primarily due to the success of our strategic initiatives. During fiscal 2003, we reported a comparable store sales increase of 4%. Our monthly comparable store sales results have fluctuated significantly in the past and we anticipate that our monthly comparable store sales will continue to fluctuate in the future. Moreover, comparable store sales for any particular period may decrease in the future. Further, in February 2006, approximately 270 Disney Stores will be added to our comparable store sales base, which may adversely impact our consolidated comparable store sales performance. The investment community often follows comparable store sales results closely and significant fluctuations in these results may affect the price of our Common Stock. Any variations in our comparable store sales results could have a material adverse effect on the market price of our Common Stock.

Effect of Fluctuations in Quarterly Results and Seasonality on Income

As is the case with many retailers, we experience seasonal fluctuations in our net sales and net income. Our net sales and net income are generally weakest during the first two fiscal quarters, and are lower during the second fiscal quarter than during the first fiscal quarter. For example, in fiscal 2004, 23%, 19%, 28% and 30% of our net sales from The Children’s Place occurred in the first, second, third and fourth quarters, respectively. Including Disney Store for the 10 weeks during which we operated the business in fiscal 2004, 20%, 16%, 24% and 40% of our consolidated net sales occurred in the first, second, third and fourth quarters, respectively. In fiscal 2004, we experienced a second quarter loss and expect to experience a second quarter loss in fiscal 2005. It is possible that we will continue to experience second quarter losses in future periods. It is also possible that we could experience losses in other quarters. Our first quarter results are heavily dependent upon sales during the period leading up to the Easter holiday. Our third quarter results are heavily dependent upon back-to-school sales and Disney Store is heavily dependent on Halloween. Our fourth quarter results are heavily dependent upon sales during the holiday season. Weak sales during any of these periods could have a material adverse effect on our business.

Our quarterly results of operations may also fluctuate significantly from quarter to quarter as a result of a variety of other factors, including overall macro-economic conditions, the timing of new store openings and related pre-opening and other start-up costs, net sales contributed by new stores, increases or decreases in comparable store sales, weather conditions, shifts in the timing of certain holidays, changes in our merchandise mix and pricing strategy. Moreover, a significant portion of Disney Store net sales are generated during the third and fourth quarters of the fiscal year, which will therefore make the seasonality of the total company more heavily weighted to those quarters. Any failure by us to meet our business plans for, in particular, the third and fourth quarter of any fiscal year would have a material adverse effect on our earnings, which in all likelihood would not be offset by satisfactory results achieved in other quarters of the same fiscal year. In addition, because our expense levels are based in part on expectations of future sales levels, a shortfall in expected sales could result in a disproportionate decrease in our net income.

Dependence on The Walt Disney Company Character Franchise and Brand

The Disney Store business is driven largely by customers’ interests in apparel, toys and other products featuring Disney characters. New characters featured prominently in movies and home videos and national marketing campaigns heighten consumers’ interests and in-store traffic. While traditional licensed properties such as Mickey & Friends, the Pooh Family and Disney Princess may sustain store sales throughout the year, new characters enthuse young children and lead to increased customer traffic. Our ability to grow the Disney Store business is thus dependent on Disney’s ability to create new and likable characters, either proprietarily or through creative partnerships and alliances with third parties. If Disney is unable to do this, the development of new characters will be slowed, and our ability to generate increased sales at the Disney Store could be adversely affected.

The Disney Store business is strongly aligned with the “Disney” brand, the maintenance and cultivation of which is outside of our control. The Disney Store business is subject to certain risks because it relies heavily on the strong brand identification of the Disney logo, the beloved nature of the Disney characters and the Disney brand name. All of the products within the Disney Stores are intrinsically tied to consumers’ image of the Disney brand. While the Disney brand is among the world’s most recognized and highly regarded brands, it is subject to changes in public opinion and ever changing consumer preferences. If unfavorable events occur that negatively impact the consumers’ perception of Disney or the Disney brand/logo, our future results of operation and financial condition could be adversely affected.

Competition

The children’s apparel, toy and media retail markets are highly competitive. We compete in substantially all of our markets with GapKids, babyGap and Old Navy (each of which is a division of The Gap, Inc.); The Gymboree Corporation; Too, Inc.; Babies “R” Us and Toys “R” Us (each of which is a division of Toys “R” Us, Inc.); J.C. Penney Company, Inc.; Sears (a division of Sears Holdings Corporation); Kohl’s and other department stores, as well as discount stores such as Wal-Mart Stores, Inc.; Target Corporation; and K-Mart (a division of Sears Holdings Corporation). We also compete with a wide variety of specialty stores, other national and regional retail chains, catalog companies and Internet retailers. In our Disney Store business, we compete with the Disney theme parks and with third parties selling Disney-branded merchandise under license. In addition, media items such as compact discs and DVDs can be purchased in virtually every retail channel. One or more of our competitors are present in

substantially all of the areas in which we have stores. Many of our competitors are larger than us and have access to significantly greater financial, marketing and other resources than we have. We cannot assure you that we will be able to continue to compete successfully against existing or future competition.

Foreign Currency Fluctuations

We conduct our business in U.S. dollars. However, because we purchase substantially all of our products overseas, the cost of these products may be affected by changes in the values of the relevant currencies. To date, we have not significantly hedged against foreign currency fluctuations; however we may pursue hedging alternatives in the future. Since our expansion into Canada in fiscal 2002, our exposure to the risk of foreign currency fluctuations has increased. Although foreign currency fluctuations have not had a material adverse effect on our business in the past, we cannot predict whether such fluctuations will have such an effect in the future.

Dependence on Unaffiliated Manufacturers and Independent Agents

We do not own or operate any manufacturing facilities, and therefore, are dependent upon independent third parties for the manufacture of all of our products. Our products are currently manufactured to our specifications, pursuant to purchase orders, by more than 200 independent manufacturers located primarily in Asia. We have no exclusive or long-term contracts with our manufacturers and compete with other companies for manufacturing facilities. In addition, we have no formal written agreement with the Hong Kong-based trading company through which we purchased approximately 20% of our products in fiscal 2004. We also purchased approximately 15% of our products in fiscal 2004 from a single agent in Taiwan, which has an exclusive arrangement with us, but is not obligated to sell exclusively to us. Although we believe that we have established close relationships with our trading company, independent agents and principal manufacturers, the inability to maintain such relationships or to find additional sources to support future growth could have a material adverse effect on our business.

Risks of Using Foreign Manufacturers; Possible Adverse Impact of Unaffiliated Manufacturers’ Failure to Comply with Acceptable Labor Practices

Our business is subject to the risks generally associated with purchasing from foreign countries. Some of these risks are foreign governmental regulations, political instability, currency and exchange risks, quotas on the amounts and types of merchandise which may be imported into the United States and Canada from other countries, pressures from non-governmental organizations, disruptions or delays in shipments and changes in economic conditions in countries in which our manufacturing sources are located. We cannot predict the effect that such factors will have on our business arrangements with foreign manufacturing sources. If any of these factors rendered the conduct of business in a particular country undesirable or impractical, or if our current foreign manufacturing sources ceased doing business with us for any reason, our business could be materially adversely affected. Our business is also subject to the risks associated with changes in U.S. and Canadian legislation and regulations relating to imported apparel products, including quotas, duties, taxes and other charges or restrictions on imported apparel. We cannot predict whether such changes or other charges or restrictions will be imposed upon the importation of our products in the future, or the effect any such event would have on our business.

We require our independent manufacturers to operate in compliance with applicable laws and regulations and our internal requirements. While our purchasing guidelines promote ethical business practices, we do not control these manufacturers or their labor practices. Any violation of labor or other laws by one of the independent manufacturers we use or any divergence of an independent manufacturer’s labor practices from those generally accepted as ethical in the United States and Canada could have a material adverse effect on our business.

Breach of Disney License Agreement

The Disney Store business operates under a License Agreement with an affiliate of Disney, under which we have the right to use certain Disney intellectual property in the Disney Store business in exchange for ongoing royalty payments. Upon the occurrence of certain specified events, including an uncured breach of royalty non-payment and other repeated material breaches of the License Agreement by our subsidiaries, certain material breaches by us of a guaranty and commitment, and certain changes in ownership or control of The Children’s Place Retail Stores, Inc. or the subsidiaries that own and operate the Disney Store business, Disney will have the right to terminate the License Agreement. Some of these events may be beyond our control. If the License Agreement is terminated, the Disney affiliate may require us to sell the Disney Store business back to Disney or one of its affiliates or to a third party at a price to be determined by appraisal or, in the absence of such sale, to wind down the Disney Store business in an orderly manner.

Risk of Operating Stores in Foreign Countries

During fiscal 2002, we opened our first The Children’s Place stores in Canada and during fiscal 2004 we opened our first The Children’s Place stores in Puerto Rico. We cannot assure you that we will be able to address in a timely fashion the risks of operating stores in foreign countries such as governmental requirements over merchandise importation, employment, taxation and multi-lingual requirements.

Threat of Terrorism or Military Actions

We are dependent upon the continued popularity of malls as shopping destinations and the ability of mall anchor tenants and other attractions to generate customer traffic in the malls where our stores are located. Any terrorist act that decreases the level of mall traffic or other shopping traffic would have a material adverse effect on our business. In addition, military actions could negatively impact mall traffic, which would have a material adverse effect on our business.

Reliance on Information Technology

We rely on various information systems to manage our operations and regularly make investments to upgrade, enhance or replace such systems. Any delays or difficulties in transitioning to these or other new systems, or in integrating these systems with our current systems, or any other disruptions affecting our information systems, could have a material adverse effect on our business.

Dependence on Key Personnel

The leadership and expertise of Ezra Dabah, our Chairman of the Board and Chief Executive Officer, has been instrumental in our success. The loss of the services of Mr. Dabah could have a material adverse effect on our business. We have entered into an employment agreement with Mr. Dabah, but we cannot assure you that we will be able to retain his services. In addition, other members of management have substantial experience and expertise in our business and have made significant contributions to its growth and success. Most of these members of management do not have employment agreements with us. The loss of services of one or more of these individuals, or the inability to attract additional qualified managers or other personnel, could have a material adverse effect on our business. We are not protected by any key-man or similar life insurance for any of our executive officers.

Control by Certain Stockholders

As of April 1, 2005, Ezra Dabah and certain members of his family beneficially own 6,454,110 shares of our Common Stock, constituting approximately 22.9% of the outstanding Common Stock. As a result, Ezra Dabah has, and will continue to have, significant influence on the election of our directors and on determining the outcome of any matter submitted to a vote of our stockholders for approval.

Stock Price Volatility

Our Common Stock, which is quoted on the Nasdaq National Market, has experienced and is likely to experience significant price and volume fluctuations, which could adversely affect the market price of the Common Stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results, our comparable store sales results, announcements by other retailers or Disney, the overall economy, the geopolitical environment and the condition of the financial markets could cause the price of our Common Stock to fluctuate substantially.

Legislation Actions and New Accounting Pronouncements

In order to comply with the Sarbanes-Oxley Act of 2002, as well as proposed changes in listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to enhance our internal controls, hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which could cause our general and administrative expenses to increase. Effective in the third quarter of fiscal 2005, we are required to recognize compensation expense for stock-based compensation, which will negatively impact future operating results. Proposed changes in the accounting rules, including legislative and other proposals could increase the expenses we report under GAAP and affect our operating results.

Anti-Takeover Provisions of Applicable Delaware Law and Our Certificate of Incorporation and Bylaws

Certain provisions of our Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) and Amended and Restated By-laws (the “By-laws”) may have anti-takeover effects and may

PART II

ITEM 5. — MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is listed on the Nasdaq National Market under the symbol “PLCE.” The following table sets forth the range of high and low sales prices on the Nasdaq National Market of our Common Stock for the calendar periods indicated.

	High		Low
2002
First Quarter	$	36.14	$	30.91
Second Quarter	35.75		17.82
Third Quarter	20.25		6.90
Fourth Quarter	14.11		8.75

2003
First Quarter	12.90		7.87
Second Quarter	20.61		9.05
Third Quarter	22.59		17.01
Fourth Quarter	31.67		17.19

2004
First Quarter	32.85		24.25
Second Quarter	31.55		21.53
Third Quarter	24.40		16.77
Fourth Quarter	37.61		23.19

On April 1, 2005, the last reported sale price of our Common Stock was $46.63 per share. As of April 1, 2005, the number of holders of record of our common stock was approximately 92 and the number of beneficial holders of our common stock was estimated to be in excess of 11,500.

We have never paid dividends on our Common Stock. Our Board of Directors presently intends to retain any future earnings to finance our operations and the expansion of the Company. Our credit facilities prohibit any payment of dividends. Any determination in the future to pay dividends will depend upon our earnings, financial condition, cash requirements, future prospects, covenants in our credit facilities and any future debt instruments and such other factors as the Board of Directors deems appropriate at the time.

ITEM 6. — SELECTED FINANCIAL DATA

The following table sets forth certain historical financial and operating data for The Children’s Place Retail Stores, Inc and subsidiaries. The selected historical financial data is qualified by reference to, and should be read in conjunction with, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the financial statements and notes thereto included elsewhere in this report.

	Fiscal Year Ended (1)
Statement of Operations Data	January 29,			January 31,			February 1,			February 2,			February 3,
(in thousands, except per share data):	2005 (2)			2004			2003			2002			2001
				(As restated (3))			(As restated (3))			(As restated (3))			(As restated (3))
Net sales	$	1,157,548		$	797,938		$	671,409		$	656,956		$	587,385
Cost of sales	705,681			476,961			415,623			372,210			336,414
Gross profit	451,867			320,977			255,786			284,746			250,971
Selling, general and administrative expenses	329,916			235,415			194,907			176,103			155,784
Asset impairment charges (4)	164			448			4,539			0			0
Depreciation and amortization	51,835			48,700			42,945			32,683			23,887
Operating income	69,952			36,414			13,395			75,960			71,300
Interest expense (income), net	22			(255		)	(547		)	252			1,163
Income before income taxes and extraordinary gain	69,930			36,669			13,942			75,708			70,137
Provision for income taxes	26,923			13,764			5,861			29,151			27,456

Income before extraordinary gain	43,007			22,905			8,081			46,557			42,681
Extraordinary gain, net of taxes	273			—			—			—			—
Net income	$	43,280		$	22,905		$	8,081		$	46,557		$	42,681
Diluted income per common share before extraordinary gain	$	1.56		$	0.85		$	0.30		$	1.73		$	1.60
Extraordinary gain, net of taxes	0.01			—			—			—			—
Diluted net income per common share	$	1.57		$	0.85		$	0.30		$	1.73		$	1.60
Diluted weighted average common shares and common share equivalents outstanding	27,633			27,099			26,978			26,964			26,668

Selected Operating Data:
Number of stores open at end of period	1,056			691			643			520			400
Comparable store sales increase (decrease) (2) (5) (6)	16		%	4		%	(16		)%	(8		%)	4		%
Average net sales per store (in thousands) (2) (6) (7)	$	1,344		$	1,159		$	1,137		$	1,389		$	1,651
Average square footage per store (8)	4,591			4,472			4,398			4,307			4,170
Average net sales per gross square foot (2) (6) (9)	$	300		$	262		$	263		$	334		$	403

Balance Sheet Data (in thousands):
Working capital	$	177,210		$	114,275		$	79,274		$	77,342		$	40,944
Total assets	627,388			426,203			372,044			333,474			264,087
Long-term debt	0			0			0			0			0
Stockholders’ equity	311,663			256,085			228,141			216,972			166,658

(1) All references to our fiscal years refer to the 52- or 53-week year ended on the Saturday nearest to January 31 of the following year. For example, references to fiscal 2004 mean the fiscal year ended January 29, 2005. Fiscal 2000 was a 53-week year.

(2) The statement of operations data for fiscal 2004 includes ten weeks of operations for the Disney Stores from their acquisition date of November 21, 2004. The Disney Stores are not included in comparable store sales, average net sales per store and average net sales per gross foot since we did not own them for the full period.

(3) In fiscal 2004, in connection with certain lease-related accounting matters, we restated our previously issued financial statements. (See Note 4 – Financial Restatement for Lease-Related Accounting in the accompanying consolidated financial statements.)

(4) Asset impairment charges represent the write down of fixed assets in under performing stores to fair value. We wrote down assets in one store in fiscal 2004, one store in fiscal 2003 and 19 stores in fiscal 2002.

(5) We define comparable store sales as net sales from stores that have been open for more than 14 full months and that have not been substantially remodeled during that time.

ITEM 7. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited financial statements and notes thereto included in Item 15. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in “Risk Factors.”

Overview

The Children’s Place Retail Stores, Inc. and subsidiaries (the “Company”) is a specialty retailer of merchandise for children from newborn to ten years of age. The Company designs, contracts to manufacture and sells high-quality, value priced apparel and accessories and other children’s-oriented merchandise under two brands and store concepts — “The Children’s Place” and “Disney Store.” As of April 1, 2005, we operated 752 The Children’s Place stores in the United States, Canada and Puerto Rico and 306 Disney Stores in the United States and Canada. In addition, we currently operate an Internet store at www.childrensplace.com and in October 2005, we will operate an Internet store at www.disneystore.com.

In November 2004, the Company acquired the Disney Store retail chain in North America, consisting of 313 stores located in the United States and Canada and an Internet Store (the “DSNA Business”). This acquisition provided us with a strong brand through which we can serve our target customer, thus increasing our overall revenue and profitability opportunities. We believe those financial opportunities can be realized through the application of our sourcing and manufacturing strategies, merchandising expertise, everyday value pricing strategy, store design experience and leveraging our infrastructure across a larger sales base.

During fiscal 2004, as a result of the execution of our strategic initiatives and the acquisition of the DSNA Business, the Company achieved strong financial results. Net sales in fiscal 2004 increased 45% to $1.158 billion, compared to net sales of $797.9 million reported in fiscal 2003. Our net sales included $163.4 million from the ten weeks we operated the Disney Stores. During fiscal 2004, net sales from our The Children’s Place business increased $196.2 million, which represented a 25% increase over fiscal 2003. During fiscal 2004, we reported a comparable store sales increase of 16% compared to a 4% increase in fiscal 2003. Correspondingly, we believe our market share in children’s apparel increased to 3.2% from 2.6% in fiscal 2003. Net income in fiscal 2004 was $43.3 million, or $1.57 per diluted share, compared to net income of $22.9 million, or $0.85 per diluted share in fiscal 2003.

Our fiscal 2004 strategies of providing our The Children’s Place customers with a clear and focused product assortment, improved garment quality and everyday value pricing, as well as a greater depth of inventory ownership to ensure better in-stock position have contributed significantly to our financial performance in fiscal 2004. During fiscal 2005, we plan to build on our progress at The Children’s Place stores by continuing to focus on increasing store productivity and on elevating our brand awareness through external advertising. We plan to open approximately 60 The Children’s Place stores in fiscal 2005, 38 in the United States, 15 in Canada and seven in Puerto Rico.

Given the timing of the acquisition of the DSNA Business immediately in advance of the all-important holiday season, we did not want to disrupt core business operations. Therefore, during the fourth quarter of fiscal 2004, we contracted with a Disney subsidiary for certain transition services such as financial, merchandising and logistics, and information technology. At the beginning of the first quarter of fiscal 2005, much of the administrative Disney Stores integration has been completed and we are no longer using Disney’s transition services. We have migrated successfully the Disney Store business onto all of our information technology and financial systems, and we have integrated the Disney Stores onto our merchandising and logistics infrastructure. (For clarification, the “DSNA Business” refers to the business we acquired from Disney as of November 21, 2004, whereas the “Disney Store business” refers to the Disney Store business we have operated since the acquisition.) To distinguish between our two businesses and to stay target-market focused, we maintain separate design, merchandising, marketing and store

operations functions in our California office to support the Disney Stores. Our corporate offices in New Jersey will provide administrative, financial, human resources and information technology services to both businesses.

For our Disney Store business, our focus will be on improving gross margin through reduced product sourcing costs, while providing improved merchandise quality at lower retail prices to our customer. Due to the long lead time of our merchandise purchases, we will begin to impact our gross margin commencing in the back-to-school season. During fiscal 2005, subject to approval of Disney, we plan to remodel between 30 and 35 Disney Stores to a new “Mickey” store prototype we have developed, which we believe will enhance the customers’ shopping experience. We also plan to open approximately 10 new Disney Stores in fiscal 2005, including approximately six outlet stores.

During the nine-week period ended April 2, 2005, we reported total sales of $261.5 million, a 66% increase compared to sales of $157.1 million during the nine-week period ended April 3, 2004. Sales for the nine-week period include $198.4 million from The Children’s Place and $63.1 million from the Disney Stores. Our comparable store sales increased by 15% during the nine weeks ended April 2, 2005, compared to a 20% increase in comparable store sales during the corresponding nine-week period last year. The Disney Stores will not be included in the comparable store sales base until February 2006, when we expect approximately 270 Disney Stores to be added. We define comparable store sales as net sales from stores that have been open for more than 14 months and have not been substantially remodeled during that time. Consequently, as we embark on the store remodel program for the Disney Stores, the 30 to 35 store remodels planned for fiscal 2005, and future remodels, will be excluded from the comparable store sales base.

Financial Restatement for Lease-Related Accounting

In light of a recent SEC clarification on lease accounting, we re-evaluated our lease accounting policies and have corrected the way we account for our leases, specifically the accounting for operating leases with scheduled rent increases and landlord construction allowances.

Under the requirements of FASB Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” rent expense is required to be recognized on a straight-line basis over the lease term. In prior periods, we had incorrectly determined that the term of the lease begins on the commencement date of the lease, which generally coincides with the store opening date. We have corrected this policy to properly commence the lease for accounting purposes when we take physical possession of the property to begin construction. This correction has the effect of including the construction period in the determination of the period over which rent is calculated. We continue to capitalize occupancy costs incurred prior to the commencement of store pre-opening activities. These capitalized costs are amortized over the remaining lease term. The net effect of this correction was to increase depreciation expense with a corresponding decrease to rent expense and to increase the amount of deferred rent liabilities with a corresponding increase in leasehold improvements. We have corrected our prior years’ consolidated financial statements to properly account for these lease-related issues.

In addition, under FASB Technical Bulletin 88-1, “Issues Relating to Accounting for Leases,” lease incentives such as landlord construction allowances received to defray construction costs incurred by us should be reflected as a deferred lease incentive, amortized over the lease term and reflected as a reduction to rent expense. We had previously incorrectly classified landlord construction allowances as a reduction to property and equipment instead of as a deferred lease incentive. In fiscal 2004, we have corrected our accounting policy to treat landlord construction allowances as deferred lease incentives. We have restated our prior years’ consolidated financial statements to properly account for landlord construction allowances.

The primary impact of the restatement was to reclassify, and in some instances increase or decrease, certain expenses on the consolidated statements of income. In addition, property and equipment and other long term assets were increased, with corresponding increases in deferred rent liabilities. While the correction of the errors did not change total cash position, changes in classification were made in the consolidated statements of cash flows. Cash flows provided from operating activities increased with a corresponding increase in cash flows used in investing activities.

In fiscal 2003 and fiscal 2002, cost of sales was reduced by $8.7 million and $7.1 million, respectively. Conversely, depreciation expense was increased by $8.7 million in fiscal 2003 and $7.2 million in fiscal 2002. In addition, the asset impairment charge in fiscal 2002 increased by $1.4 million. Net income for fiscal 2003 and fiscal 2002 is now $22.9 million, or diluted net income per share of $0.85, and $8.1 million, or diluted net income per share of $0.30, respectively.

In addition to the changes in net income, restated net property and equipment, total assets and total liabilities as of January 31, 2004 were $211.5 million, $426.2 million and $170.1 million, respectively.

While the correction of the errors did not change our total cash position, classification of landlord construction allowances received in the consolidated statements of cash flows changed from cash flows used in investing activities to cash flows provided by operating activities. For fiscal 2003 and fiscal 2002, cash flows provided by operating activities increased by approximately $11.7 million and $20.7 million, respectively, with offsetting increases in cash flows used in investing activities.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reported period. Actual results could differ from our estimates. The accounting policies that we believe are the most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition – Sales are recognized upon purchase by customers at our retail stores or when received by the customer if the product was purchased via the Internet, net of coupon redemptions and anticipated sales returns. Actual sales return rates have historically been within our expectations and the allowance established. However, in the event that the actual rate of sales returns by customers increased significantly, our operational results could be adversely affected. Our net sales include the 7% commission we receive from a Disney subsidiary on the sale of Walt Disney World^Ò Resort and Disneyland^Ò Resort tickets.

Our policy with respect to gift cards is to record revenue as the gift cards are redeemed for merchandise. For The Children’s Place, prior to their redemption, unredeemed gift cards are recorded as a liability, included within accrued expenses and other current liabilities. We have not reduced our gift card liabilities for gift cards that are not expected to be redeemed. For Disney Store, we act as an agent on behalf of Disney for gift cards sold to customers. Therefore, we do not record a customer gift card liability for the Disney Store. However, we recognize a trade payable to Disney for the net purchases and redemptions of Disney gift cards.

We offer a private label credit card to our Children’s Place customers that provides a discount on future purchases once a minimum annual purchase threshold has been exceeded. We estimate the future discounts to be provided based on prior year history, the number of customers who have earned or are likely to earn the discount and current year sales trends on the private label credit card. We defer a proportionate amount of revenue from customers based on an estimated value of future discounts. We recognize such deferred revenue as future discounts are taken on sales above the minimum. This is done by utilizing estimates based upon sales trends and the number of customers who have earned the discount privilege. All deferred revenue is recognized by the end of the fiscal year, as our private label customers must earn the discount privilege on an annual basis, and such privilege expires prior to our fiscal year end.

Inventory Valuation – Merchandise inventories are stated at the lower of average cost or market, using the retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio by merchandise department to the retail value of inventories. At any one time, inventories include items that have been marked down to our best estimate of their fair market value. We base our decision to mark down merchandise upon its current rate of sale, the season, and the age and sell-through of the item. To the extent that our markdown estimates are not adequate, additional markdowns may have to be recorded, which could reduce our gross margins and operating results. Our success is largely dependent upon our ability to gauge the fashion taste of our customers, including the popularity and relevancy of the

Disney characters, and to provide a well-balanced merchandise assortment that satisfies customer demand. Any inability to provide the proper quantity of appropriate merchandise in a timely manner could increase future markdown rates.

Accounting for Acquisitions – The acquisition of the DSNA Business is being accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS 141”). As such, the Company has undertaken an analysis of the fair value of identified tangible and intangible assets acquired and liabilities assumed, and determined the preliminary excess of fair value of net assets acquired over cost. We utilized estimates to determine the fair value of inventory, acquired leases and certain acquisition costs. We will continue to monitor our estimates of the fair value of the assets acquired and the liabilities assumed, and while not anticipated, we may adjust these amounts during fiscal 2005. We believe that any changes to these amounts will not have a material impact on our financial condition or results of operation.

Accounting for Royalties – In exchange for the right to use certain Disney intellectual property, we are required to pay a Disney subsidiary royalty payments pursuant to a License and Conduct of Business Agreement (the “License Agreement”). Minimum royalty commitments are recorded on a straight-line basis over the life of the initial 15 year term of the License Agreement. During each period, amounts due in excess of the minimum royalty commitment are recorded as an expense if we expect to surpass the minimum royalty commitment on an annual basis, even if the contingency threshold has not been surpassed in that particular period.

We were granted a royalty holiday for all stores for two years. In addition, depending on the specific store location, certain stores have an extension of the royalty holiday for up to eight years. The actual value of the royalty holiday is not determinable until the completion of the royalty holiday period, and may differ materially from our current estimate. Changes in the estimates for the royalty holiday are adjusted on a periodic basis. The amortization of the estimated value of the royalty holiday is recognized on a straight-line basis as a reduction of royalty expense over the term of the License Agreement. Royalty expense, and the associated amortization of the royalty holiday, is recorded in selling, general and administrative expenses.

The royalty percentage does not increase over the initial 15 year term of the License Agreement, except for royalties on Internet Sales. In the first year, the Internet royalty is 5%, and 9%, and in certain instances, 10%, thereafter. We expect the effective net royalty expense to range from 4.3% to 5.0% of net sales of the Disney Store business.

Rent Expense and Deferred Rent – Rent expense and rent incentives, including landlord construction allowances, are recognized on a straight-line basis over the lease term, beginning on the date of physical possession. The Company records rent expense and rent incentives as a component of cost of sales. The unamortized portion of deferred rent is included in accrued expenses and deferred rent liabilities. Rent incurred during construction, prior to commencement of store pre-opening activities, is capitalized and then amortized starting over the remaining lease term. Unamortized pre-opening rent is included in leasehold improvements.

Impairment of Assets – We continually evaluate each store’s performance and measure the carrying value of each location’s fixed assets, principally leasehold improvements and fixtures, versus its projected cash flows. An impairment loss is recorded if the projected future cash flows are insufficient to recapture the net book value of their assets. To the extent our estimates of future cash flows are incorrect, additional impairment charges may be recorded in future periods.

Litigation – We reserve litigation settlements when we can determine the probability of outcome and can estimate costs. Estimates are adjusted as facts and circumstances require. We are involved in various legal proceedings arising in the normal course of our business. In our opinion, any ultimate liability arising out of such proceedings will not have a material adverse effect on our future business.

Stock Options – We record no compensation expense on our financial statements for stock-based compensation, since we grant stock options at prices that equal or exceed the fair market value of our common stock at the date of the grant. Effective in the third quarter of fiscal 2005, we will be required to recognize compensation expense in an amount equal to the fair value of the stock-based compensation granted to employees. We are currently assessing the full impact of the new accounting rules related to stock-based compensation on our future

PART I
1.	Business
2.	Properties
3.	Legal Proceedings
4.	Submissions of Matters to a Vote of Security Holders

PART II
5.	Market for Registrant’s Common Equity and Related Stockholder Matters
6.	Selected Financial Data
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.	Quantitative and Qualitative Disclosures about Market Risk
8.	Financial Statements and Supplementary Data
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A.	Control and Procedures

PART III
10.	Directors and Executive Officers of the Registrant
11.	Executive Compensation
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.	Certain Relationships and Related Transactions
14.	Principal Accountant Fees and Services

PART IV
15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K

	Fiscal Year Ended
	January 29, 2005		January 31, 2004		February 1, 2003
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	61.0		59.8		61.9

Gross profit	39.0		40.2		38.1
Selling, general and administrative expenses	28.5		29.5		29.0
Asset impairment charges	—		—		0.7
Depreciation and amortization	4.5		6.1		6.4