Q3 2020 Children's Place Inc Earnings Call
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Good morning, and welcome to the children's place third quarter 2020 earnings conference call on the call today are Jane Elfers, President and Chief Executive Officer, Mike Scarpa, Chief Financial Officer, and Rob Helm Senior Vice President Finance.
Yeah.
The children's place issued its third quarter 2020 earnings press release earlier this morning.
A copy of the release and presentation materials for today's call have been posted to the Investor Relations section of the company's website.
This call is being recorded.
If you object to on a recording of this call. Please disconnect at this time.
All participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.
After the speakers remarks, there will be questions as time allows.
Before we begin I would like to remind participants that any forward looking statements made today are subject to the safe Harbor statements found in this mornings press release as well as in the company's FCC filings, including the risk factor section of the Companys annual report on form 10-K for its most recent fiscal years.
Sure.
These forward looking statements involve risks and uncertainties that could cause actual results to 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 will have an opportunity.
It is now my pleasure to turn the floor over to Jane Elfers.
Thank you and good morning, everyone on.
Back to school sales were significantly impacted by the move to remote and hybrid learning models across the country in a response to the COVID-19 endemic per.
On the back to school peak, when our Assortments converted to more casual options and the weather turned cooler our sales improved and for the quarter, we returned to profitability and generated positive cash flow from operations.
Starting with our accelerated digital transformation.
Increased digital adoption accelerated by COVID-19, and supported by our digital transformation and Omni Channel initiative continues to drive online sales to an increasingly greater share of our overall sales.
Digital sales accounted for 44% of our Q3 sales and year to date digital sales represented 55% of our total sales.
Importantly, our continued digital growth is coming from both existing and new customers.
Since March we have increased the number of new digital customers versus last year by approximately 100%.
Converted over 800000 store only customers to omni channel customers and increased our mobile app downloads by over 60%.
The customers accelerated shift to digital provides the children's place with continued market share opportunities as we leverage our recent digital transformation investment and our foundational personalization of initiatives to continue to acquire new customers into our omni channel ecosystem.
Moving onto our accelerated store closure plan.
As we close doors, a key measure of the success of our digital transformation and fleet optimization strategy is our ability to retain transfer and convert our store only customers to E commerce and omni channel customers.
Our E commerce, and omni channel customers, our best customers, they shop with us more often and spend approximately three times more our non omni channel customers.
Today, we have some very important metrics to share with you regarding our customer transfer rate.
Year to date through the end of September which allows for one year post door closure tracking our transfer rate has increased to 31 per cent for.
First is our full year 2019 transfer rate of 20%.
This substantial transfer rate increase further reinforces the decision we made back in March to significantly accelerate store closures by giving us even greater confidence in our ability to continue to shift a substantial portion of our stores revenue toward digital channel.
Looking ahead to Q4.
We're approaching the fourth quarter with heightened caution and expect both sales and profitability to be under pressure due to the numerous headwinds created by the pandemic study the meaningfully reduced demand for dress a product sales.
Significantly reduce store traffic there.
The recent nationwide Spike in Cobot, 19 cases, resulting in additional temporary store closures.
Social distancing requirements and reduced mall operating hours.
With respect to our digital business.
To ensure on time holiday delivery, we have already been advised by our major carriers to move our standard shipping cut off up by three days from our original date of 12 18 to 12 15 due to the compacted he can strength across the domestic transportation network. In addition, the retail.
Weighted freight surcharges imposed by our major carriers will put additional pressure on E commerce margin during the quarter.
Lastly, and most importantly, our business model is driven by occasions and events in the lives of our customers.
Historically, the multiple holiday events that occurred during Q4 made Q4, the highest sales quarter of the year.
Similar to the significant negative impact we experienced from the lack of an Easter or a back to school catalyst. We are experiencing the same negative impact from the lack of holiday dress up catalyst.
We reduced our dress up receipts at the time of the holiday by last April, but we now expect Q4 to represent historically low demand for dress a product.
This is due to the pandemic driven cancellation of nearly all school related social events, including in person holiday parties parades in concert combined with the holiday season that provides for limited socializing through strict social distancing requirements limited family gathering.
And mandated cancellations of large in person social events.
Well, we continue to manage through the many short term challenges brought on by the pandemic, we remain focused on the opportunities.
We estimate that the pandemic has accelerated our longstanding transformation strategy by approximately five years with respect to store closures and digital penetration.
The good news is that due to the accelerated investments we made in digital transformation prior to the pandemic and the work we had done on fleet optimization over the past decade, we were prepared.
We believe that our focus on scaling our digital transformation investments and accelerating store closures.
Further bolstered by or increased sales transfer rate.
Positions the company for accelerated operating margin expansion in a post coven environment.
And now I will turn it over to Mike.
Thank you Jane and good morning, everyone.
I'll start by reviewing our Q3 results.
He will then provide an update on our progress on the strategic actions taken to significantly accelerate our store closures.
I will then provide insight on how we are approaching the fourth quarter.
Starting with our Q3 results.
In the fiscal third quarter, we return to profitability generated positive operating cash flow and delivered adjusted EPS of $1.44.
Net sales decreased approximately 19% to $426 million versus last year's $525 million.
Our sales for the first five weeks of the quarter were significantly impacted by a decrease in back to school sales across all channels due to schools adopting remote and hybrid learning models.
From the beginning of August through Labor day, we.
We dropped over 40 per se in total net sales.
Sales were also negatively impacted by the 151 permanent store closures during the past 12 months as well as the extended temporary store closures in New York, and California, which impacted 52 stores for a significant portion of the quarter.
Immediately following labor day when.
When we passed the peak back to school selling period.
Our assortments converted to more casual options the weather current cooler and on.
Our sales improved.
After we passed the peak back to school selling period, we experienced productivity at over 90% of last year's levels for our stores that reopened.
Post Labor day, our E Commerce channel rebounded and saw sales increase of approximately 20%.
Despite the negative impact from back to school.
Commerce penetration increased to approximately 44% of total net sales.
Our U.S. sales decreased approximately 20% versus last year.
Well, Canada sales only decreased approximately 5%.
Canada performed better than the United States due to almost 90% of Canadian schools, utilizing 100 per se in person learning.
Adjusted gross margin.
Adjusted gross margin decreased 210 basis points to 35.7 per cent of net sales.
Significant improvement versus the margin declines we experienced in the first half of the year.
Merchandise margin expanded in the quarter in both the digital and stores channel.
The overall gross margin decrease was the result of the increased penetration of our E Commerce business, which operates at a lower gross margin.
And the de leverage of fixed cost due to lower sales.
Adjusted EPS DNA.
Adjusted EBITDA was approximately $104 million versus $117 million last year.
De leveraged 210 basis points to 24.3% of net sales.
The 210 basis point decline was a result of the de leverage of fixed expenses, resulting from the decline in sales and higher incentive compensation accruals per.
Partially offset by a reduction in store expenses, resulting from more permanent store closures as well as a reduction in operating expenses associated with actions taken in response to the COVID-19 pandemic.
Adjusted operating income.
Adjusted operating income for the quarter was $33 million versus operating income of $63 million last year and de leveraged 430 basis points to 7.8% of sales.
Tax rate, our adjusted tax rate was 30% versus 23% last year.
Moving on to the balance sheet.
Our cash and short term investments ended the quarter at $64 million as compared to $36 million in Q2.
We ended the quarter with 179 million.
Dollars outstanding on our revolving credit facility compared to $251 million outstanding on our revolving credit facility in Q2.
The decrease in the revolving credit facility and the increase in cash was due in large part to the $80 million term loan financing, we completed in the third quarter as well as our positive operating cash flow.
The term loan provides us with additional capital and further strengthens our financial position provides us with increased financial flexibility.
We ended the quarter with total inventory up 9.7 per cent versus last year, driven by sales declines in key back to school categories, which accounted for the entire increase in inventory.
We will continue to carry this inventory to support back to school demand whenever schools can safely reopened for in person learning.
This product is basic Sellable go forward product that is visible in our stores and on our website.
Or seasonal carryover inventories are down approximately 45 per se.
Moving on to cash flow and liquidity.
We returned to positive cash flow in Q3 and generated approximately $32 million in cash flow from operations as compared to 77 million in cash generated in Q3 last year.
Between our cash position and revolving credit facility.
We have ample liquidity to support the needs of our business for the foreseeable future.
Capital expenditures in Q3 were approximately $9 million.
I'll now provide a brief update on our store activity in the quarter along with planned actions, we are taking to accelerate our fleet optimization initiative.
We permanently closed 16 locations in the quarter, which brings our total store closures to 118 for the first three quarters of fiscal 2020.
As E commerce them in us accelerated year to date we.
We have seen a significant migration of our store only customers converting to omni channel customers supported by the meaningful increase in our transfer rate.
This data gives us continued confidence in our accelerated store closure plans, where we are targeting 300 store closures between fiscal 2020 and 2021.
We remain on track to close 200 store locations in fiscal 2020, which includes the 118 locations closed during the first nine months of the year.
The roughly 80 remaining closures are targeted for January closure post holiday.
We are targeting 100 store closures at the end of fiscal 2021, which will result in a store fleet of approximately 625 locations entering fiscal 2022.
By the end of fiscal year 2021.
We will have reduced our reliance on our brick and mortar channel, resulting in a leaner more profitable store footprint.
This will position us to enter fiscal 2022.
With 75% of our total revenues generated outside of traditional malls.
[noise] outlook.
Due to the continued level of uncertainty in the current business environment, we are not providing EPS guidance for 2020.
However, we will provide our current thinking as to the pandemics potential impact on our business in Q4.
Based on the numerous headwinds Jane outlined earlier on the call combined with the impact of the 151 permanent store closures over the past 12 months.
We would expect Q4 net sales to be at or slightly lower than Q3 levels.
Due to the pandemic gross margins will continue to be under pressure in Q4.
In addition to the factors that resulted in a 210 basis point decrease in Q3 there were.
Our two additional factors that will further deteriorate gross margin.
One.
We anticipate roughly a 150 basis points in additional gross margin dilution in the quarter due to incremental freight surcharges and capacity constraints.
From our major carriers.
And two we also anticipate that store closures.
On the related inventory liquidation will reduce gross margins by roughly 50 basis points.
Similar to what we saw in our Q2, when we close 98 stores.
We expect this street and $8 to be moderately lower than last year.
As a reminder, Sps day was reduced in Q4 last year by the reversal of an incentive compensation accrual, which represents a headwind of approximately $10 million or 200 basis points to the current year expense base.
[noise] inventory levels will remain elevated due to the back to school and basics product that we do not plan to liquidate and that we will continue to carry to support back to school demand for whenever schools can safely reopened for in person learning.
We expect to continue to generate positive cash flow from operations in Q4.
Lastly for 2021, we believe that we will be able to take advantage of what has been a favorable you see environment, so far with respect to orders.
Driven by lower input cost and excess manufacturing capacity.
At this point, we will open the call to your questions.
Thank you at this time I would like to remind everyone. If you would like to ask a 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 queue press the pound key.
Net you limit yourself to one question. So that everyone will have an opportunity. Our first question comes from the line of Dana Telsey of Telsey Advisory group.
Good morning, everyone and certainly nice to see the progress Jane as you think about post back to school season, and the pickup in sales that you saw.
Any difference in terms of categories that you saw what you saw on digital on on line, what's the average order value dipped French and how you're thinking about planning for the first half a 2021 given the holiday season is it on certainly as we've ever seen it. Thank you.
Sure. Thanks, Dana on on Q3 first to start there.
You know as predicted we didn't see a meaningful improvement in these key back to school category Post Labor day on when you when I refer to those categories I'm, referring to things like pillows and uniforms you know they just didnt pick up we didn't see a meaningful improvement and we didnt see a meaningful improvement in 100% in per.
Person learning either we as I think we had mentioned on the last call. We don't see a significant catalyst for these key back to school categories until really back to school 21, you know these these vaccines aren't approved yet and they're not planned to be widely distributed.
Probably until late spring or early summer. So we don't think its prudent from our side to plan you know a meaningful return to in person learning prior to that time period, having said that we did see some big positive post the back to school peak notable categories would be anything net anything we have that's net or gross.
I think T long sleeve net a lagging.
You know anything active anything that's cozy uncomfortable really really fight post labor day and in addition, our outerwear business really turned on when the weather got colder also sleep, where I think we might have mentioned sleepwear on the last call. We made a really really big bet on sleep where last year.
Sure when we place it and [laughter] at decision has proved to be a very good one, especially considering the impact of the pandemic and how kids are dressing. So that has really been a shining star in our business you know since it hit in Q3, and then certainly you know into Q4, you know obviously, we're hoping some day sooner versus later kids.
Get out of their pj's and go back to school and start moving their lives again, so without giving away any trade secrets I can safely say that will not be relying in the back half of next year on sleep wear to drive our business.
I guess the second part of your question was how are we thinking about the first half of 21.
Oh, no we don't have a crystal ball, obviously, there's good news out there as.
As far as these vaccines are concerned so help us hope is on the way, but as we said you know we do not see a meaningful return to school until next back to school and I would also tell you that we were very very conservative when we place to Easter because you were you know much deeper into the pan.
Demick by then.
And you know the talk was really not to assume that there would have been a really return to normalcy in the first quarter. So we think that will definitely have a smaller business and in Q1 with respect to address that product and then I think we'll start to see things hopefully open up as we get into Q2 of next year, you know what I would.
I'd tell you is you know to give you guys. Some insight of kind of how we think of the whole thing as it relates to our business you know the good news is that we as we mentioned in the prepared remarks that the the pandemic has accelerated our transformation strategy by by really by five years. When you look at where our digital is penetrating right now.
And when you look at the amount of store closures 300 that will be done on the next 14 months or so.
And then the other good news, which we really haven't really talked about is that it's also accelerated our competitors.
Liquidation through a massive store closure programs and bankruptcies and the positive to that for US is not having to live through a drawn out liquidations and store closures for the next several years a lot of that is getting behind us this year, which is not something we expected to happen in.
Such a compressed time period and I think when you take you know you take that in mind and you remember that our core customer is the dream customer currently she is a millennial but very soon she is going to be Gen day, and after that she's going to be always the most current kinda desirable thought after customer there is due to the fact that she never.
Our agents and then when you think about that you know the majority of our customers grew up wearing our close so we don't have those relevancy burden on some of the other retailers have you know she already knows us share any loved us in charity Trust us.
So you know we've got ample liquidity, we are going to get through the pandemic in the short term pain that comes with it and we're going to stay focused on the store closures and the E com acceleration and when the virus is gone hopefully in the first half of next year, we're going to merge with a vastly reduced brick and mortar present presence you know market leading pet.
On a trailing in digital were 55% year to date, which I don't think is anyone can come close to that we're going to have a much smaller competitor base much.
Much earlier than we thought which are going to drive market share opportunities also earlier than we thought we will have done a ton of work on Rightsizing RPM now and you know importantly, we can't forget we're going to have a second chance to effectively launch Jim Barry and I think all of this is really positioning us to drive accelerated operating margin expansion.
On starting in the back half at 21.
Your next question comes from the line of Jim Chartier of Monness Crespi Hardt.
Hi, sorry, thanks for taking my question.
Sure.
You mentioned that the share opportunities yeah, I think last quarter, you mentioned that justice there wasn't a significant overlap for back to school from a product standpoint, what are you seeing kind of post back to school in terms of EBITDA.
On from market share gains from Justice and what do you expect deal for for holiday in terms of market share opportunity.
Yeah, I think thanks, Jim I think from adjusted his point of view, they're down to 85 stores now were 59% up on more co located and they announced they plan to close all of them post holiday. So that really is you know they were 800 or 900 stores. So that is a major opportunity for us its on the girl's side of the business. It's on the older side of the busy.
In US you know a size is four to 20, which is really our sweet spot and a lot of their business is driven off knits and dress up type product as well. So I think we do have the big opportunity. There. They were 1.7 per cent of the market share in 2019 about a $450 million business. So I think that we can pick up a good share of that in the store.
Where's that will be remaining as we exit 21 with the 625 locations a lot of those will have been locations, where justice was and I also think there's a big on line opportunity there as well on the girl's side of the business in those categories like dress up and net.
They didn't really have a big business in Canada, and basics, you know that wasn't there thing uniforms, Paul as things like that so it's really coming out of the more casual category.
[noise] [noise] good morning.
Nice nice work on the progress from my from our side as well on.
I was actually wondering if you can actually delve a little bit deeper into the gym very commentary and then from Mike on you know on the merch margin or the gross margin can you give us some color on into the three components of it that much margin expansion and the pressure from E Commerce.
And then the kinda component of what creates do you leverage that you left where is your breakeven on that kind of broad line or the six caused gross margin line and then if we kind of drill down on that on.
I know you've talked about ecommerce actually being op margin EBIT margin accretive. So I think more importantly, as you shift to E commerce, what that what we really want to know the dynamics.
How much accretion we can expect from ecommerce. Thank you.
Sure. Thanks, Adrian on uptake the gymboree part and then I'll hand, it back to Mike on you know, we all talked about it a lot that Jim Barry launch to three weeks prior to the pandemic Gymboree has a built business that like no. Other is built on occasion. So every day special occasion, and our young customers lives is what.
That business is built on and we have not obviously had that catalyst, though we didn't have the catalyst around Easter time, we weren't able to celebrate fourth of July and parades, and we certainly weren't able to celebrate Halloween and now a very important quarter in their history, as Billy dressed up and and all the holiday catalyst they come during Q.
So.
Mom is extremely loyal [laughter]. She is really loving our product sales. So we feel very strongly about that we are getting very positive reactions from her on social media I think we mentioned on the last call that we launched underwear, we launched on Jimmy's, which was extremely well received both of those and really what were looking.
I'm thrilled with we're looking through Q1 again of the next year, because we're not planning on having a a robust Easter business and TCP or Jim Barry and we're really looking to the back half of 21 to kind of quote unquote relaunch, Jim Barry we still believe in it as much if not more so than we did before we launched it because now we have the credibility.
From on that we hit the product you know they hit the nail on the head with the product and we've learned a lot. We have made some adjustments in our assortments based on her response to their their response to selling and also to her commentary and I think we had mentioned before that we thought it was a eventually 140 million dot on.
From 40 million dollar opportunity so nothing has changed as far as our confidence in that brand.
And from a GAAP gross margin perspective, we saw merch margins up in both hard.
Our store channel and our ecommerce channel.
I'll probably to the tune of.
About 100 basis points or so so meaning that our of E com penetration and de leverage on fixed expense was slightly in excess of about 300 basis points as.
As you think about the fixed component.
And.
Our gross margin on the keys the occupancy on line, which is the biggest the biggest number there and that continues to be refined and adjusted EPS. We continue to shut stores and negotiate with our landlord. So at this point I'm not comfortable giving us any type of like a formula out in terms of how to how to think about the leverage of fixed.
Based on penetration.
Just based on that occupancy fluctuations.
[noise] question comes from Davis on Lee Thanks.
Hi, guys. Good morning, Mike just to clarify on us on the fourth quarter gross margin or are you planning from merged margin expansion there and then.
Just on the E Com channel in the third quarter looks like growth slowed up a little bit versus the first half of the year was there anything specific supply chain wise or otherwise in terms of headwinds to the channel this quarter on anything that we're potentially carryover into the fourth quarter.
[noise] from again from a gross margin perspective for the fourth quarter, we indicated that.
In addition to the factors that took place on the third quarter, which was a positive merge margin.
Income penetration into leverage of fixed that we'd have that roughly 150 basis points and additional gross margin dilution due to the freight surcharges and.
Some capacity constraints from our major carriers.
Also as we experienced in Q2 of this year when we liquidated 98 stores. Obviously, we have about 80 plus stores from liquidating the fourth quarter, we expect the gross.
Gross margin dilution of roughly 50 basis points. So.
Yes, we are expecting positive merch margins.
Q4.
And then the only thing on out I'd add to that David is on the E. Commerce Channel you know we mentioned that in your prepared remarks that you know.
The major carriers have already advice that shipping cut us by three days, which were.
We're doing so that will certainly impact on E com, yeah, and we didnt really from a comp perspective, [noise] pre and post.
Back to school. It was the tale of two cities, because we were down 20% and basically puts it was no demand for for our back to school clothing.
Post labor day, though.
As we shifted more cash flow.
Merchandise, where they've got a little cooler we saw our E com business snapped back very nicely up into the Twentys. So we're pretty pleased overall with where we ended up on income.
Your next question comes from the line of Susan Anderson with B. Riley.
[noise] Hi, good morning, nice job on the progress in the quarter.
I guess just to touch a little bit more on the E. Com margin can you talk a little bit about the operating margin differences between the stores is it still is E com still higher on the op margin line I guess versus the stores, even with the higher shipping and then as you look to use your threepl on fourth quarter.
There are you expecting a significant impact from ship from store at all.
Yeah. So you know year to date E. Com is still a accretive to our operating margin on you continue to expect it to be accretive into the future.
Obviously, we're.
We're seeing some price surcharges built in in Q4, but we still expect the overall margins to be accretive in our E com business.
From a from a radio perspective, we'll be utilizing them in Q4, though probably represent close to 40% or so the demand.
That we need to ship for Q4, and we would expect a share.
Ship from store to be a them at a normalized range, which is you know call. It.
On the high single digit range.
Sales of shipping for demand.
No last question will come from the line of Marni Shapiro with retail tracker.
Hey, guys. Congrats on the progress here pretty impressive considering on we didnt have back to school.
Can you just [laughter] can you talk a little bit I know you have relatively low returns and I'm curious if you've seen that change at all with the significant shifts down nine and if you can also talk about just the the habits of your customer on nine as far as average basket or you know transaction size and how frequently she visits on line versus.
In store not in store today in store in the past I guess.
Yeah, well as we could well first of all on the returns no. We have not seen an increase in returns, which as you know a huge positive to our brand. We've always had a very low return rate and to continue to see that with the outsized digital increases. We've seen is certainly a positive to the piano as far as visiting on line, we have seen higher.
Units, we have seen higher transactions from our customer our traffic has been very very strong since the beginning on the pandemic and we've had a very very strong conversion metrics online as well I think all this bodes well.
Well for the foundational chief.
Changes that are happening in 2021, what we're doing now is a lot of work as far as keeping these new customer to have come into our digital ecosystem, we need to keep them on.
As we mentioned, we picked up a 100% over last year and new customers and we converted 800000 of our store only customers. So a big focus is retaining all those new digital customers that we've acquired since the onset of the pandemic.
On the timing again works really well for US you know we've talked about our digital transformation a lot and we have the tools in place now to welcome these customers into our brand and importantly, the tools to engage and retain them. So over the past year Weve been.
And working very hard to.
Really get if you will that behavioral and lifecycle data into our messaging. So we've enhanced the email segmentation. We've added purchase activity. We've launched dedicated email program with curated product we've launched a new trigger program, which is working really well for us that targets the customer I think we took.
How about on the last call potentially it targets the customer at every stage of their lifecycle with respect to brand and the purchase funnel on their seven stages. You would have heard of most of them you know abandoned cart abandoned browse welcome to an end step up see ally confirmed opt in and there's 266 touch points across it so it really brings and all the fans.
Additional capabilities that we've invested in and then working on so we feel really really good you know we're now armed with a 31 per cent transfer rate, which is the huge huge positive for us in a really exciting metric and we feel like we have the tools in our tool kit to keep these customers long term as we continue to ramp up and accelerate.
Digital transformation.
Thank you for joining us today, if you have further questions. Please call Investor Relations. She was zero one I 582 floors Drams hero extension, one four 500.
Okay.
This does conclude the children's place third quarter 2020 earnings Conference call. You May now disconnect your lines and have a wonderful day.
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