The following discussion should be read in conjunction with our audited financial statements and notes thereto included in this Annual Report. 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 under the caption “Risk Factors” in the Business Section of the Company’s Annual Report on Form 10-K for the year ended February 2, 2002. 

## Overview 

The Children’s Place Retail Stores, Inc. is a specialty retailer of apparel and accessories for children from newborn to twelve years of age. As of March 15, 2002, we operated 543 stores in 47 states, located primarily in regional shopping malls. We also sell our merchandise on our website. Over the last several years, we have been aggressively opening new stores to capitalize on our business strengths and strong store economics. During fiscal 1999, fiscal 2000 and fiscal 2001, we opened a total of 84, 108 and 121 new stores, respectively. We closed one store in fiscal 2000 and one store in fiscal 2001. We intend to continue our expansion program and currently plan to open approximately 130 stores in fiscal 2002, which will include approximately 30 stores in Canada. 

Our net sales have grown significantly during the past several years, primarily as a result of new store openings. During fiscal 2001, we reported a comparable store sales decline of 8% due in part to the difficult economic climate which caused a slowdown in store traffic. We reported comparable store sales growth of 15% and 4% during fiscal 1999 and fiscal 2000, respectively. Despite the weak sales environment, net income increased 9% to $46.6 million in fiscal 2001 from $42.7 million in fiscal 2000. We were able to achieve improved profitability in fiscal 2001 through higher margins on our merchandise, a focus on our inventory levels and expense control. Earnings per share also increased 8% to $1.73 per share in fiscal 2001 from $1.60 in fiscal 2000. 

During fiscal 2002, we plan to focus our efforts on the opening of approximately 130 stores, the start-up of our Canadian operations and distribution facility, and the implementation of certain information system initiatives, as well as an ongoing assessment of our administrative infrastructure to support our growing business. 

## Critical Accounting Policies 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 shipped from our distribution center if the product was purchased from our website. Actual return rates have historically been within our expectations and the reserve established. However, in the unlikely event that the actual rate of sales returns by customers increased significantly, our operational results could be adversely affected. 

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 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 based upon its current rate of sale, the season, age and sell-through of the item. To the extent that our estimates differ from actual results, 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 and 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. 

Litigation – 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 business. 

