The Children’s Place Facing Stock Option Scrutiny

The backdating of stock options controversy hit the apparel retail sector Wednesday after The Children’s Place Retail Stores Inc. said an investigation by an outside attorney revealed errors in its practices.

As a result, the company expects to restate financial results for the past three fiscal years and the first quarter of this year. The retailer also said the Securities and Exchange Commission contacted the children’s apparel retailer on Sept. 29 in connection with the internal, informal investigation of the company’s stock option grants.

The backdating of stock options, designed to make stock-option grants more attractive to managers, has resulted in over 120 internal, SEC and Department of Justice investigations of public companies, mostly in the technology sector. In retail, Home Depot, Barnes & Noble and Bed Bath & Beyond have been the subject of investigations. The Children’s Place is the first company in the retail apparel sector to say that it found errors in the dating of stock options.

Regarding the impact of these errors, the company said it anticipates reinstating financial statements for the fiscal years ended January 2006, 2005 and 2004 and for the first quarter of fiscal 2006 ended April 29. It will also revise the preliminary financial information for the period ended July 29, 2006.

The company said in a release that it believes “this expected restatement will not have a material impact on its fiscal 2006 operating results” and is committed to resolving these issues as quickly as possible.

The Children’s Place’s audit committee requested an investigation by their outside counsel, and in September the counsel found the company’s records did not match the legal grant data for certain stock options, resulting in errors in the dating of these options, according to a Sept. 8 report by Kimberly Greenberger, retail analyst at Citigroup.

“The company’s counsel concluded, with one exception in 2001, the errors in granting and recording stock options were unintentional,” Greenberger said in the report. “The one instance in 2001, which was a grant to members of senior management, was ruled inconclusive, which does not imply the misdating of the grants was either intentional or unintentional, but necessitates further scrutiny [before] the final conclusion can be reached.”