Q2 2020 Children's Place Inc Earnings Call
Get momentarily until that time airlines will again be placed on mute the cold. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the children's place second quarter 2020, <unk> earnings Conference call. This call is being recorded if you object to a recording of this call. Please disconnect at this time.
All participants have been placed any listen only mode and the floor will be opened for your questions. Following the presentation.
After the speaker's remarks, there will be a question and answer session.
ASCII question. During this time simply press star one on your telephone keypad to withdraw your question press. The pound key it is now my pleasure to turn the floor over to Anthony I Tarnow director of Investor Relations to begin.
Good morning.
Welcome to the children's place this conference call.
On the call today are Jane Elfers, President and Chief Executive Officer, and Mike Scarpa, Chief operating officer in Chief Financial Officer.
The children's place issued a press release early this morning and copies of the release and presentation materials for today's call has been posted on the Investor Relations section of the company's website.
After the speaker's remarks, there will be a question answer session.
Before we begin I'd like to remind participants any forward looking statements made today are subject to the safe Harbor statement found in this mornings press release as well is in the Companys FCC filings, including the risk factor section of the company's annual report on form 10-K for its most recent fiscal year.
These forward looking statements involve risk and uncertainties that could cause actual results could differ materially.
The company undertakes no obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances. After the date hereof.
After the prepared remarks, we will open the call up to your questions. We ask that each of you limit yourself to one question, so that everyone well have an opportunity.
And with that I'd like to turn the call over to Jane Elfers.
Thank you Anthony and good morning, everyone. We generated a 118% increase in our digital channel in Q2, we've clearly benefited from our digital transformation investment, which provided us with the omni channel capabilities necessary to fulfill our strong online demand.
In Creed digital adoption accelerated by Kobin 19.
Continues to drive online sales to an increasingly greater share of our overall sales representing a long term marketshare opportunity.
Importantly, our digital growth came from both existing and new customers.
Since March we have increased new customers to our digital file by approximately 175%.
Converted our store only customers to omni channel customers at a rate approximately three times, the pre pandemic rate and increased our app downloads by 115%.
And according to NPD data through June wherever the only pure play children's retailer to gain market share year to date.
With respect to inventory the teams did a great job selling through our spring and summer product and we're entering Q3 seasonal carryover inventory down approximately 50%.
Importantly, we have zero pack and hold on our balance sheet or sitting in overseas factories, which allows us to continue to take full advantage of what we believe will be a favorable AC environment in 2021.
With respect to fleet optimization. The next phase of our fleet optimization initiative Leverages, our lease flexibility to accelerate store closings.
We are targeting 300 store closures through the end of fiscal 2021 with 200 in fiscal 2020.
Inclusive of the 100 and to permanent store closures, we executed during the first half of 2020.
And 100 closures in fiscal 2021.
Bringing our total fleet to approximately 625 stores by the end of fiscal 21.
And lastly, since the onset of the pandemic in March we have focused on internally modeling and externally discussing the potential short term headwinds of coven 19, as they relate to our business.
Particularly the impact of continued remote learning through the back half of the year and the pressure on Q4 due to reduced holiday traffic and a sustained promotional environment at the same time Weve remained focused on the long term by accelerating our digital and fleet optimization.
Strategies in support of market share opportunities that have been and we'll continue to be created by the pandemic.
And now I'll turn it over to Mike.
Thank you Jane and good morning, everyone.
I'll start by reviewing our Q2 results.
I will then provide an update on our progress on the strategic actions taken to significantly accelerate or store closures I.
I will then provide some insight on our current business.
Starting with our Q2 results.
In the fiscal second quarter, we generated an adjusted EPS loss of $1.48.
Net sales decreased approximately 12%.
To $369 million versus last years $421 million.
Ecommerce sales increased 118% to approximately 71% of total net sales as online accelerated following store closures in March.
Despite our stores being closed for over half of the selling days in the quarter.
Sales growth was up mid single digits through the end the June when school districts across the country began moving to remote or hybrid learning models, which we believe meaningfully impacted sales in July.
Last year July represented approximately 39% of total Q2 sales.
Adjusted gross margin.
Adjusted gross margin decreased 760 basis points to 25.4% of net sales.
Merchandise margins were down slightly in the quarter as a result of liquidation sales at stores permanently closed during the quarter.
Merchandise margins in our digital business increased in the quarter.
The gross margin decrease was primarily the result of higher fulfillment costs related to meaningfully higher levels of ship from store activity due to strong digital demand.
Adjusted gross margin excluded approximately $27 million in charges.
Primarily due to occupancy charges related to stores temporarily closed due to covert 19.
We did resumed rent payments on a modified basis in Q2 stores began to reopen.
Adjusted EPS DNA.
Adjusted as teenagers was approximately $104 million versus $116 million last year.
And de Levered 60 basis points to 28.1% of net sales.
Primarily as a result of de leverage of fixed expenses, resulting from the decline in sales.
Partially offset by a reduction in operating expenses.
Associated with actions taken in response to the Cobot 19 pandemic.
Adjusted EPS DNA excludes approximately $11 million in certain items, primarily related to approximately $9 million in charges due to incremental coven 19 expenses in stores, along with store closing costs.
Adjusted operating income.
Adjusted operating loss for the quarter was $25 million versus operating income of $6 million last year.
De Levered 820 basis points to negative 6.8% of sales.
Tax rate.
Our adjusted tax rate was 22.2% versus 15.9% last year.
Moving onto the balance sheet.
Our cash and short term investments ended the quarter at $36 million as compared to $72 million in Q1.
We ended the quarter with $251 million outstanding on our revolving credit facility compared to $235 million outstanding on our revolving credit facility in Q1.
The changes reflect funding to support operations and seasonal working capital needs.
Inventory management continues to be a top priority for us and we exited the quarter with inventories down approximately 1% to last year, there with seasonal carryover inventory down by roughly half, allowing us to enter the important back half with current seasonal inventory.
Based on current sales trends.
We anticipate a build in inventory levels in Q3 versus last year, primarily in uniform and basics.
The company plans to feature it's back to school assortment for an extended period of time permitting parents to shop leader when there's additional certainty on the timing of a return to in person learning.
Moving on to cash flow.
And liquidity, we used approximately $43 million and cash flow from operations in the second quarter as compared to 2 million in catch generated in Q2 last year.
Historically the company generates the majority of its annual cash flow in the back half of the year.
Capital expenditures in Q2 were approximately $9 million.
I'll now provide a brief update on our store activity in the quarter along with planned actions, we're taking to accelerate our fleet optimization initiative.
We permanently closed 98 locations in the quarter, which brings our total store closures to 102 for the first half of fiscal 2020.
We opened two locations in Q2 and into the group ended the quarter with 771 of our 824 locations open to the public.
With the remaining stores largely in California anticipated to open as local health guidelines allow.
As E Commerce demand has accelerated partly as a result of Kogut 19.
We have significantly increased our planned store closures and continue to target approximately 300 store locations to close in fiscal 2020 and 2021.
We remain on track with our target to close approximately 200 store locations in fiscal 2020, including the 102 locations closed in the first half of 2020.
And approximately 100 additional stores that we are targeting to close in fiscal 2021.
Resulting in approximately 625 store locations by year end fiscal 2021.
By the end of fiscal 2021 and.
We continue to expect to greatly reduce our reliance on our brick and mortar channel.
Resulting in a smaller more profitable store footprint.
And positioning us to enter fiscal 2022 with less than an estimated 25% of our total revenue in traditional malls.
Outlook.
Due to the continued level of uncertainty in the current business environment, we're not providing guidance for 2020.
However, we think it it's important to provide some insight with respect to our current business.
The company's providing total net sales in lieu of comparable retail sales metrics given the impact on the current business environment due to the continued number of store closures related to the cobot 19 pandemic.
With over 90% of our major U.S. markets.
Adopting either 100% remote or hybrid learning models for the start of the school year.
Our back to school sales have been significantly impacted.
Approximately 70% of our Q3 sales are normally generated in August and September with the majority of those sales coming from back to school apparel and accessories.
In addition to the significant negative impact on our sales from remote and hybrid learning models.
There are three other notable factors that are adversely impacting our total net sales in Q3 by an estimated 10% when combined.
First the 147 permanent store closures that we are still up against from 2019 and 2020.
Second.
Over 50 stores are still temporarily closed in California, and New York due to state and local mandates.
And third the majority of our stores are in malls that are subject to operating hours dictated by the mall owners.
In most of these locations we cannot opened before 11 am that we are required to close at seven P.M.
We normally generate approximately 15% of our sales after seven pm.
Taking all these factors into account we are anticipating our total net sales for the third quarter to be in the range of negative 25 to negative 30%.
To help put the loss of in person learning into perspective.
Our Canadian business is trending down single digits quarter to date.
With close to 90% of Canadian schools, returning to full time in person learning.
The opposite of the United States.
Looking ahead.
We're planning for our business to be adversely impacted in Q4.
Particularly as it pertains to the continuation.
I will significantly reduce store traffic.
And the expectations of a heightened and sustain promotional environment.
As retailer start their holiday events earlier and with more urgency.
At this point, we will open the call to your questions.
Thank you at this time I would like to remind everyone that you would like to ask your question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the Q press. The pound key we ask that you. Please limit yourself to one question only to allow time for his many quest.
This is possible.
First question comes from the line of Dana Telsey Telsey Advisory group.
Good morning, everyone hope, everyone is safe and healthy.
As you think of the upcoming third quarter and inventory planning like you said a build in inventory in uniform and basics, how do you think of that inventory.
Hello, how much should that be how you're thinking about the margins and Jane when you think about the shift to digital learning see a getting in terms of what consumers are buying anything different and how you're managing fulfillment and shipping costs is there a leverage point on that fulfillment and shipping cost. Thank you.
Sure. Thanks, Dana I hope, you're well as well from a digital perspective of what selling.
In Q2, we had a very strong performance in digital and I think when you look at our Assortments in Q2, they directly mirrored what mom was looking for she was looking for casual products. You is looking for comfortable product and I think we had spoken about it when we were.
The call on June that a lot of that business was driven by graphic Tees and mix and match in shorts and things that kids were wearing as they were.
At home and not in school and obviously with the weather change when you look at what happens to our inventory starting at saddened 15, both online and in stores.
They switch over to back to school with a heavy focus on basics and so.
I would say that while our online business is doing better than our brick and mortar business. Our online business is still very much struggling as the assortments are really pitch to the back to school basic.
And from an overall inventory perspective, we ended the quarter with inventories down about $5 million, a 1%, but our carryover inventory.
Were roughly half of what it was a year ago. So we entered Q3 in really good shape.
Based on current sales trends that we're seeing we do expect inventories to build during the quarter, primarily in uniform and basics.
You can see our inventories up low double digits at the end of Q3 based on our projection for sales.
We will be featuring our back to school Assortments for an extended period of time.
Which will permit parents to shop later certainty on the timing of the return to in person learning happens.
And we have no plans at this time to be in a position to mark that inventory.
Your next question comes from the line of Jim Chartier of Moness Crespi Hardt.
Good morning, Thanks for taking my question.
Mike can you just talked about the.
How your E commerce fulfillment looks for back to school and beyond and what your plan is for.
Ship from store going forward, and then how that should help improve the ecommerce margins.
For the back half thanks.
Sure.
Obviously, we pointed out that the major hit on our gross margin line. What's this ship from store fulfillment that we did in the second quarter of fulfilling.
Become demand from our store inventory.
We do roughly 55% of our E.
E Com shipping from a in the in them.
Perspective of ship from store, so obviously a very.
Unproductive way too to move that inventory, but obviously, we had the demand online to do that as we go into the third quarter, we see third fourth quarters, we see that.
The ship from store will be a much more reasonable percentage overall, we normally plan ship from store in the 3% to 5% range. So from the third quarter perspective.
We think our margins will continue to improve on a basis points differential versus last year similar to what happened in Q2.
But we think Q4 could be a different story Q4.
Particularly as it pertains to significantly reduce store traffic.
We will result in a higher penetration of our E com business and we believe this along with the establishment of surcharges.
On the shipping of ecommerce packages imposed by both us and Usbs will result, the pressure on margins in the fourth quarter.
Your next question comes from the line of Adrian Cighi of Barclays.
Good morning.
Everybody as well as well.
James a couple of questions for you so holiday.
Obviously, everybody is talking about on an earlier a shopping experience by the consumer.
More concentrated perhaps it big change in Black Friday can you talk about how you are.
Wrapping the stores planning store events and plenty of inventory flows show up for holiday.
And then number two could you also give us an update on the Jim Murray aspect and the launch there and and then Mike.
Just a couple of housekeeping question I assume you're seeing the Eightd size go up on the baskets go up on a few are shopping.
And counters and then on March margin I understand the pressure on the gross margin for shipping de leverage et cetera on the merchant margin given that you're expecting that you have left carryover inventory and are expecting to build that inventory into the third quarter. When do we see March margin flat or the positive inflection.
Thank you very much.
Sure, Okay, well, let me start off for Jim as far as timber Reits concern in the response to each new Gymboree collection that we've put out there has been very positive it's still a small part of the business.
We significantly de emphasize the amount of dressy product that we placed in the back half of 2020, particularly for holiday due to coven 19 on and as we now holiday dressed up as a key part of the temporary business. So we're not anticipating to see a big pop there, but they're very happy with the deliveries we.
I have had the feedback continues to be good from on and we'll be introducing mostly casual casual collection in early September.
From a children's place point of view from an inventory point of view to start with that with holiday. We did a significant significant pull back on dresses and drive that product when they placed our holiday by in anticipation that code. The 19 would continue and that social get-togethers would be minimized so that is.
I think a positive you know certainly from a margin point of view is that its fashion product and with a higher 80 or so that's a significant pull back I think from just looking at Q4 were being extraordinarily cautious as we think about Q4, we think that as you mentioned that the promotional environment will be heightened it'll be.
It will be sustained.
Throughout the entire quarter, we think that the holiday sales will start earlier.
And as retailers try to spread the demand out if you well.
There is definitely a customer aversion to shopping in store and I think that there is going to be significant pressure on black Friday that might not be well understood right. Now I think you're hearing a lot of people say that they're going to close on Thanksgiving, which we are as well, but I don't think that theyve really addressed black Friday itself.
As it paid that there will be a significantly reduced black Friday event.
We're not even sure if that will even be a traditional in store black Friday. This year, certainly not appropriate to have doorbusters that driving large amounts of traffic into the store and we think families will be very reticent to pack the malls on black Friday and in some of those Big December weekend. So we think thats definitely a jeopardy.
From a stores point of view you certainly have the freight surcharges that Mike spoke about so you're looking at an and naturally high percentage of online business in Q4, and you know that has been a rolling percentof our business, but like I said, it's going to be unnaturally high percentage of our business though.
That freight surcharges are going to hurt there on the margin line, we don't know about pull that spike there or are there going to be more temporary store closures throughout Q4, and then you throw on top of that the uncertainty around the presidential election. So ill just overall proceed with caution.
And just just from merchandise margin perspective, our merchandise margins in the second quarter were pretty much in line with our expectations. They were just down slightly and they were predominantly driven by the 98 stores that we liquidated in close in the quarter.
Along with a higher penetration of E com compared to last year margins actually merch margins actually increased in our E com business in the in the second.
In the third quarter we.
Our point of view is that we can continue to see.
Slightly elevated merge margins for both our retail and E com business, though when you look at the penetration of.
So we anticipate that it will be.
Higher than where it was a year ago. So that it's slightly dilute the the merch margins overall and then from an inventory perspective I did indicate that the build was in.
Uniform and basics and at this point in time as I mentioned, we do not have any plans to market down what we said at our normal selling price.
As we continue on through the quarter.
Your next question comes from the line of Jay sole yes.
Great. Thank you so much.
Asking about one of your.
Competitors, who caters more to an older older female.
His closing a whole lot of stores can you just talked about how that's impacting the business slightly more importantly.
Did you see an opportunity.
I have to take market share after those stores are gone and when you look into next year. Thank you.
Sure Jay I assume you're talking about justice and so.
As far as Justice is concerned they had 828 stores.
And their strategy was to liquidate 710 of those stores or 86%, which would leave them with 118 stores and a website.
All of those 710 liquidations are complete as of last week, so that liquidation is completely behind us.
From a co located perspective, we were co located with 464 of those justice stores or 56% of the stores and of those 464 stores 388 of them are now liquidated, which is 83% if I'm, leaving us with 76 remaining.
Co location from a market share point of view, obviously justice was focused on the side four to 20 girl, which is has a major overlap with us.
Particularly in the 40 attend Angel age range and their market share a in 2019, the total market share in zero to 10 in 2019 was about 26 and a half billion and they were 1.7% at that.
Your next question comes from the lineup Paul Lashway of Citi.
Hey, guys. Thanks.
Just curious if you could talk about the cost to get out of some of these stores, maybe the ones that you've already closed and first half what you've got coming second half I got on the way and F. 21, and then can you also talk about the stores that remained open are you trying to work down rent.
Rates. Please talk about any success that you might be having on on that front.
And and also just totally separate could you just remind us average basket size.
Online versus in stores on what your return rates look like online versus in store.
From a fleet perspective, weve built tremendous flexibility into the portfolio and we have basically lease about 65% of.
Of our fleet has lease actions by the end of 2021.
We have about 35%.
Lease events happening in the remainder of 2020 and about 30%.
Happening.
2021.
Further to this week, we have built in co tenancy.
Protections that we've negotiated and roughly half of our store leases. So.
That gives us a further opportunity to.
To potentially closed doors or for leverage.
Further rent reductions.
From an average basket size.
We've seen the average basket size from an E. Commerce perspective continue to increase through the second quarter versus a year ago and from a return rate perspective, we're in the low single digits as far as returns go.
Your next question comes from the line of Susan Anderson of B. Riley.
Hi, Good morning, Thanks for taking my question and Jane I'm, just curious on the uniform sales I think a lot a private schools are going back or at least the hybrid model I'm. Just curious if you've seen any less pressure there versus your regular back at school product and then I guess you know.
In the first half looking out to the back half I know you planned down the back half inventory just curious how much you originally did plan back to school down and we originally planning on schools returning and in person learning and then also is curious if you were able to mix in kind of more of a casual or basic assortment.
For back to school, that's more conducive to at home that home environment. Thanks.
Sure. Thanks, Susan from a back to school perspective, this or the inventory, where we pulled back was in fashion for back to school and again just like we did for holiday, we got out of a lot of the dressed up product for like first day outfits and things like that so that we could for attack the margin as Mike has mentioned a few times on the call. This morning the price.
I think that were carrying is basic driven and so it's not a margin risk it's not going to be product that we're going to liquidate we're going to sell that product when the catalyst for back to school com just as an aside.
I'd like you guys to know that we don't anticipate that there will be a catalyst to drive back any back to full meaningful business until spring 21 at the earliest so we're not looking for anything to happen in the later half of the or in fourth quarter to drive back to school sales. We think that this spring 21 event at the earliest as far as holiday product is can.
There and we had not placed holiday product at the started that Pandemics that we were able to pull way back as we mentioned earlier on the draft that product and we are able to focus on active wear and casual wear across our age ranges on our sizes and were also have a major major push this year, which you can see online around sleepwear and particularly.
Holiday Sleepwear, which is off to a very very strong start that we put a lot of money behind sleepwear and a lot of money behind holiday Sleepwear in particular from an end person learning on versus remote versus hybrid I'd like to just run you guys to how we came up with what our percentages are we went out to every one of our store.
And we went out to every one of our states and every one of our cities and canvassed every one of our store manager starting about six weeks ago, and we get a daily update on that and really what it's based on its like I said every state and then every major city with in every state and what we've come back with is that 40 that as of yesterday 43.
7% of our market there for a while 35% our hybrid model, 11%, our parents' choice and that parents' choice is either for Chello. Our hybrid parents' choice does not include going back full time in person. So we've got 93% of our market in either virtual hybrid our parents' choice we have in.
Person at 4% of our markets and we have TBD at 3% and that TBD includes Boston, Rhode Island, All cities and then some three cities in West Virginia is really what we're down to on the TB, Dave as far as your question about uniform most of our stores are a lot of our stores are located near major said.
Yes, and a lot of inner cities and those schools are very much uniform.
They schools and require uniforms and as I said, 93% of our of our markets are either in virtual or hybrid which is.
Having it obviously significant impact on our sales when you look at Canada, we're at almost 90% in person learning and when you look at our business there as Mike mentioned down only single digit it's a very different story up there with how we're selling back to full product.
Your next question comes from the line of David Buckley of Bank of America.
Good morning, Thanks for taking my questions, Mike how should we think about sinead levels in the second half of this year and then just given your cash burn increased in the second quarter can you discuss your outlooks for cash flow in the third quarter, which are currently liquidity position is there needs to increase your borrowing capacity. Thanks.
Sure. So from a an overall has seen a perspective, we continue to to look at.
[noise] structure both.
From a corporate perspective in a store perspective, and we expect that SGN a in those two buckets of payroll from stores and corporate will continue to to be down in the back half just like they were in the first half.
We also think that says we look at some of the activities that were doing around external consultants et cetera, we expect to have some savings on on that line also just just to note, though in the third fourth quarter last year.
We had some incentive compensation that we did a couple of reversals of accruals for over a long terms at the plant so thats going to comment someplace in the second half of the year versus the savings that you're seeing in the first there, but we do expect.
SGN a to b to be lower than the third quarter.
Okay.
A year ago from a liquidity perspective.
Mentioned, we use about.
43 million in operations versus last year, we had two.
For the first half of the year, we basically used about 83 million in cash.
Roughly about $100 million difference compared to where we were a year ago and where we were in the previous year.
Our expectations or that.
We're going to end Threeq, you, a similar cash and HBIO level, and we will generate cash in the fourth quarter. So we think we'll end the year in a better positioned than we ended the second quarter.
We have time for one more question. Your final question will come from the line of Marni Shapiro of the retail tracker.
Hey, guys.
A couple of quick ones, and then became maybe one broader one.
Would you guys can start shipping hurdles offset some of the cost to shipping for the back half of the especially around holiday to feel free shipping usually.
And could you just confirm the conversation around favorable you see in 2021 is that reflecting a decrease in demand generally and so on the ability to negotiate with factories.
Yeah, I think you know we've been had a C. Tailwinds for the last couple of years enriched Nicholson with looking into 21 with the demand where it's going to be in light of all the bankruptcies and uncertainty around co that were already seeing a favorable AC environment for 2020.
One and that's why we thought it was obviously very important for us to work through our inventories than our spring inventories that we wouldn't be carrying them on the balance sheet or sitting in overseas factories that we'd be able to provide our vendors not only with continue order flow, but also to take advantage of of that AC environment from a a shipping.
Point of view, we have no intention of changing our free shipping I think that you know certainly our customers under pressure with everything that's going on it's a major competitive advantage of ours. It has.
Allowed us to grow our digital business exponentially over the years.
We have a very high basket. So we don't really see an issue. There you know obviously the surcharges are.
You PS is taking advantage of the situation that they can take advantage of until we're gonna have to live with that for Q4, and hopefully we'll figure out as we get into Q4, if 2021 how to mitigate that.
Thank you for joining us today, if you have further questions. Please call Investor Relations at 014 or 536693. This does conclude the children's place second quarter 2020 earnings Conference call. You May now disconnect your lines and have a wonderful day.
[music].