Q4 2020 Children's Place Inc Earnings Call
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Ladies and gentlemen, this is the operator of today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
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Good morning, and welcome to the childrens place fourth quarter and full year 'twenty 'twenty 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 the chip.
<unk> place issued its fourth quarter and full year 'twenty 'twenty earnings press release earlier this morning.
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.
You object to our 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 Act.
After the Speakers' remarks, we will take 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 morning's press release as well as in the company's SEC filings, including the risk factors section of the company's annual report on form 10-K for its most recent fiscal year.
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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.
I want to start by thanking each of our associates for their resilience. During this extraordinarily challenging year, our entire organization committed to delivering the best possible results for our customers and our shareholders and I cannot thank them enough for their hard work and dedication as we continue to navigate through the pandemic.
I'll start with Q4 highlights and then move into an update on our strategic transformation.
Starting with fourth quarter.
Fourth quarter results outperformed our expectations across all key metrics with sales significantly exceeding our expectations in both our digital and stores channel.
The two main drivers behind our better than anticipated sales results were one traffic levels were higher than we anticipated in both our stores and digital channel.
This was despite the significant number of government mandated COVID-19 temporary store closures in Canada, where approximately two thirds of our Canadian store fleet was closed for approximately 50% of the fourth quarter.
And two we had an outstanding customer response to our casual and expanded sleepwear assortments in Q4, however, as anticipated demand was at historical lows for holiday dress up apparel and accessories. We continued our support for children and families in need by donating.
Approximately 3 million units of holiday dress up of apparel and accessory product to our charitable partner delivering good whose mission is to connect retailers within need families and children.
Let's start with our digital results consolidated digital sales increased 38% in Q4, representing 46% of total sales for.
For the quarter digital sales increased 38% in the U S and 63% in Canada.
For full year 2020, consolidated digital sales increased 37% and achieved an industry, leading digital penetration of 53% of total sales.
We added $1 9 million, new digital customers in 2020 converted over $1 million of our store only customers to omni channel customers and increased our mobile app downloads by approximately 60% versus last year.
Our digital and omni channel.
At 57% of total in 2020 versus 37% in 2019.
With respect to our store sales with no significant mandated COVID-19 temporary store closures in the U S. During the quarter U S store sales were better than expected at 81% of last year's levels with traffic down approximately 35%.
Canada store sales performed at 52% of last year's levels with traffic down 62% due to the significant impact of the mandated COVID-19 closures impacting approximately two thirds of our Canadian fleet.
Now before I move into our progress on our strategic transformation.
I want to share with you, how we think about birth rate trends.
The size of the zero to 10 kids market and current market share dynamics and how these three factors on line with our strategy.
So starting with birth rate.
We have been keenly aware of birth rate declines since the great recession in 2008 and recently the declines have accelerated.
In 2019 U S birth rates were at their lowest in 35 years at.
At approximately $3 75 million birth at.
And that was pre COVID-19.
While 2020 data is not yet finalized birthrates are anticipated to drop even further to approximately $3 six 3 million birth.
Birth rates in 2021 are currently expected to plummet to approximately $3 4 million birth due to the pandemic.
And then rise to approximately $3 5 million births in 2022.
Before they fall below $3 5 million again in 2024 at.
They are not expected to increase until approximately the end of this decade.
While we recognize that projections can change over time.
We are clearly not anticipating at baby boom anytime in the near future.
So how do we think about these birth rate trends as they pertain to our business and our strategy.
First I'd remind you that less than 5% of our business comes from newborn which we define at zero to two.
So the sudden impact of these historically low birth rates.
Not impact us in the near term versus others with highly concentrated newborn share.
95% of our business is in the size to another segment.
And the competition and the two enough space houses significantly more struggling retailers and it's significantly more fragmented than the highly concentrated zero to two newborn space.
Therefore, we have multiple opportunities and more time to make up for the steep declines in birth rates through the following strategies.
One on.
Our purchase of Jim Murray and our Artful resurrection of this beloved brand give.
It gives us a sizeable market share opportunity in our underpenetrated toddler space and more than makes up for the anticipated sales impact from sustained birth rate declines.
Second our ability to continue to take market share from struggling retailers at.
And three the big Kids destination strategy that we put in place a decade ago, we will continue to secure our leadership position in the older Kids segment.
Now moving on to the zero to 10 market size.
For full year 2020, and P. D data reveals that the zero to 10 U S kids market experienced a $3 billion contraction in 2020.
To $23 5 billion versus $26 5 billion ending full year 19.
A decrease of 11%.
And remember this was on top of an approximately 5% decrease in 2019 pre COVID-19, which at the time was the largest decrease we'd seen in several years.
Driven largely by competitor closures and lower AUR.
For further context, when I started at TCP in 2010, the zero to 10 market was $28 5 billion.
So in 10 years during one of the longest bull markets in U S history.
The zero to 10 kids market has contracted by 18% due largely to the cumulative effects of persistent birth rate drops.
Lower AUR.
The liquidations enforced store closures of several struggling kids retailers over the past several years.
And most recently the abrupt revenue decline caused by the pandemic.
The NPD data shows that the $3 billion contraction in 2020 revenue was heavily weighted to the first half of the year.
With $1 9 billion lost in Q1, <unk> 6 billion in Q2.
<unk> 5 billion in Q3, and then at stabilization of revenue in Q4.
While we expect at the pandemic will continue to pressure traffic and top line in the zero to 10 kids market through at least the first half of 2021.
We expect that as the vaccine is widely distributed and the pandemic has brought under control the zero to 10 kids market will regain its historical pattern quarterly sales in full year 'twenty two.
Moving onto market share.
N P. G data is one of the few sources of childrens category sales thus.
For the full year 2020, NPD data shows that the only retailer to pick up incremental kit sales in 2020 versus 2019 was a large digital only retailer.
The NPD data reveals that the large retailers, who were deemed essential and who stores remained open and continue to sell childrens clothing throughout the entire pandemic, we're still not able to pick up incremental sales in the zero to 10 edge debt age segment in 2020 versus 2019.
With respect to TCP, we estimate that the combination of government mandated store closures and reduced operating hours as dictated by our landlord resulted in our stores being closed for almost 40% of 2020.
Considering our store base in 2019 was almost 70% of our total sales the math would suggest our market share would have declined approximately two times more than it actually did.
According to NPD, our market share declined in 2020 was only 38 basis points in a year where stores were closed for almost 40% of the time.
Our strong digital performance in 2020 was able to mitigate almost all of our market share decline and we expect once the pandemic is under control and we are back to a level playing field and are allowed to open all of our stores and operate them under their historical operating hours, we will expand our market share.
The revenue decline in the zero to 10 kids market over the past decade, driven largely by declining birth rates makes it clear that without a focused and consistent strategy in place to combat. These headwinds. It is very difficult if not impossible to successfully operate in the zero to 10 kids space we have.
<unk> seen this play out again, and again with struggling kids retailers resorting to bankruptcy <unk> forced liquidations and unplanned store closures over the past few years.
I think it's important to note that as we look back a key element of our strategy in 2018 and 2019 pre pandemic was to give up short term profitability in favor of long term market share gains as we believed that the zero to 10 kids space was overcrowded.
With too many retailers vying for a declining sales base without of positive catalysts with respect to future birth rates.
And that strategy clearly appears to have been spot on.
We have operated under a very consistent and longstanding strategic plan that has guided our decision making over the past decade the.
The strategies, we put in place years ago superior product digital transformation and fleet optimization, and our unwavering and consistent year over year execution and enhancement of those strategies has made us a stronger company.
So, let's discuss how we plan to leverage our strategies into accelerated operating margin expansion in this new environment.
Let's start with product.
As I mentioned earlier with the exception of the historically low demand we experienced this past year for address of product and the lack of in person learning the customer response to our casual apparel and expanded sleepwear offerings was very strong.
With respect to Gymboree, we've had a very positive response from our customers.
In spite of the moratorium the pandemic has put on occasion dressing.
At the Gymboree mom is fiercely loyal to the Gymboree brand.
We have gleaned some important insights this past year and of incorporated those learnings into our go forward strategies. We continue to believe strongly in the potential of the gymboree brand even more so in fact in light of the current birth rate trends brought on by the pandemic.
We are very proud of how quickly our team artfully resurrected this beloved kids brand, let alone doing so during one of the most difficult environment any of us has ever experienced.
Moving on to digital transformation as we have previously stated we believe that the pandemic has accelerated our digital transformation by approximately five years. We ended full year 19 at of 31% digital penetration and we ended full year 2020 at a 53% did.
Little penetration, which clearly puts us in a leadership position with respect to digital penetration and childrens retail.
Based on where our e-commerce CAGR was trending prior to the pandemic. It would have taken us approximately five years to reach of 50% digital penetration.
We are fortunate that we do not have to rebuild our business around digital our digital transformation strategy has always targeted of digital penetration in excess of 50%.
Which is why our $50 million accelerated digital transformation investment was made in 2017 to 2019 and was behind us prior to the onset of the pandemic.
And which is why we were able to move quickly to ship from store and all of our U S stores when the pandemic struck.
Our focus in 2021 will be on continuing to support and scale, our digital business as well as retaining the new digital customers. We gained in 2020 and acquiring new displaced customers from the 2020 and 2021 competitor liquidations and four store closures.
With respect to operating margin our digital business has always been our highest operating margin contributor due to a tie basket size low return rates and lower overhead costs versus our stores channel.
As a result of the pandemic driven acceleration in our digital revenue, we are gaining leverage on our fixed overhead costs, resulting in a higher digital operating margin.
We are planning for reductions in our per order ecommerce fulfillment costs in 'twenty, one versus 2020 due to a number of packaging and network optimization efforts combined with the ability of our third party fulfillment partner to service higher levels of demand in 'twenty one versus 'twenty.
Which reduces the amount of supplemental ship from store are required.
With respect to our fleet optimization initiative. There are two key components within this initiative one of our store closures and to occupancy cost reductions.
Both of these initiatives rely on our multi year strategic focus on lease term flexibility and both of these initiatives will be key contributors to our accelerated operating margin goals.
First store closures pri.
Prior to the pandemic, we were closing approximately 40 to 60 stores a year.
We are now plan to close 300 stores in less than two years, which accelerated our store closure plans by approximately five years.
Again due to our strategic foresight, we had positioned our real estate portfolio with maximum flexibility. So when the pandemic hit and we saw the unprecedented acceleration in our digital sales and the rapid deceleration of our stores channel. We were able to quickly formulate a plan to close 300 stores in less than two.
20 months without financial penalty.
I'd also remind you that our fleet optimization strategy has been in place since 2013 and for the better part of the past decade, we have stayed true to our original strategy.
We have not veered back and forth between the store opening and of store closing strategy, rather we have been consistent and that consistency is paying off as we mentioned on the last call. Our transfer rate is running at 30% versus 20% ending full year 2019, we.
We performed significant analysis to arrive at our transfer rate when done properly historical transfer rate is a fixed number it is not a range at as the result of thousands of key inputs and within that transfer of number of portion is calculated this transfer to stores and a portion is calculated is transferred to e-commerce.
Our 2020 transfer rate breaks out into 52% to remaining stores and 48% to our digital channel.
Transfer rate is of critical measurement of the success of our digital transformation initiatives as at measures our ability to retain transfer and convert our store only customers as we continue to right size, our brick and mortar fleet.
Our omni customers spend three times more than our non omni customers and we anticipate that our transfer rate will continue to increase as we close more stores and as the remaining stores productivity increases in the post COVID-19 environment.
To provide some revenue context, the 300 stores. We are closing by the end of 2021 represented approximately $270 million in store sales in 2019.
Factoring in our transfer rate of 30%, we expect of consolidated sales loss of approximately $190 million. After the completion of our accelerated store closure plan or only slightly less than 10% of our consolidated 2019 net sales.
While reducing our physical store fleet by approximately 30% since 2019.
We expect these accelerated closures will be accretive to our operating profit end margin.
Moving on to occupancy reductions.
We have an extensive real estate portfolio with more than 200 landlords.
Our multi year strategic focus on our lease portfolio positioned us with ultimate flexibility at the onset of the pandemic.
With average lease terms of less than two years and several hundred lease actions available to us the strategic setup allowed us to select our go forward and landlords wisely and to strategically negotiate for rent abatements for 2020 end or rent reductions on these lease actions.
This work represents a decrease in our occupancy expense for these lease actions and as a component of our accelerated operating margin expansion strategy.
And lastly, as we discussed earlier, an important component of our accelerated operating margin strategy is the market share opportunity afforded to us due to the unprecedented number of competitor bankruptcies.
<unk> liquidations and four store closures that occurred in 2020.
With more disruption anticipated in 2021.
This condensed disruption provides us additional opportunity to avoid costly multiyear competitor liquidation and store closure of events.
Another important benefit of the accelerated shift in competitor dynamics is the opportunity to increase merchandize margins in both of our stores and digital channel by selectively pulling back on promotions.
Petitor closures, coupled with our strategic sourcing abilities and disciplined inventory management should help us achieve higher merchandize margins in both our digital end stores channel.
In the past 12 months of the World has forever changed but the consistent execution of our long term strategic plan has prepared us for this change.
We believe that the combination of our consistently strong product offering.
At the resurrection of Gymboree, and the other market share opportunities and strategies, we have in place to continue to combat sustained birth rate declines.
The significantly reduced competitor base, which accelerated market share and merchandize margin opportunities.
At the five year acceleration of our store closure of initiatives, resulting in a more profitable fleet and positioning us with less than 25% of our revenue coming from traditional malls at the end of 2021.
And the five year acceleration of our digital transformation, resulting in an approximately 50% steady state digital penetration.
That strategically maps back directly to our core customer of digitally savvy millennial mom with even more digitally savvy Gen Z mom to be right behind her on.
All of these strategies worked together to provide a strong path to accelerated operating margin expansion and share gains.
I would like to close with a paragraph from our March 16th 2020 earnings released one year ago and I quote.
While we are in an uncertain period, the underlying fundamentals of our business are strong.
We are confident that our management team will continue to focus on and execute against our key strategic growth initiatives uniquely positioning us to continue to capture profitable market share generate strong cash flow increased returns on our invested capital and create value for our shareholders in the years.
Go ahead.
March 16th 2020 seems like a lifetime ago, but those words are of true now as they were a year ago.
To date, we have managed through this pandemic at a very high level and successfully avoided the fate of so many other retailers.
We are a stronger company today, and we are better prepared for the future due to the consistent execution of our strategic plan and the tireless efforts of this management team and all of our associates.
We remain confident in our strategic plan and we look forward to continuing to deliver for our shareholders.
Before I turn it over to Mike to discuss fourth quarter I know all of you saw our release in early February regarding mikes decision to retire from the childrens place after almost nine years with the company.
No how much all of you have appreciated your interactions with Mike and we have been fortunate to have Mike on our team is a key driver of our transformation from a north American brick and mortar retailer into the digital first global company. We are today. We are also fortunate that our strong focus on leadership develop.
<unk> and succession planning has enabled us to promote Rob helm as our next CFO of capable and engaged leader Rob has been with TCP since 2016, taking on roles of increasing responsibility Rob.
Rob has been deeply and actively engage with me in navigating the company through the pandemic over the past year end I anticipate a smooth transition to the CFO role for Rob.
We wish Mike the very best in his retirement and thank him for his dedicated service.
Mike.
Thank you Jane and good morning, everyone.
I will review of our fourth quarter results and then I will turn it over to Rob to discuss our thoughts on 2021.
In the fourth quarter, we modified our reporting regarding the use of non-GAAP measures.
As a result, we transitioned away from excluding the following COVID-19 related items from our non-GAAP measures of.
Occupancy charges of $49 million per rent at our stores when they were temporarily closed.
And payroll and benefits for certain store employees during the period of our stores were closed net of a payroll tax credit benefit resulting from cares act of $4 million. We include a full reconciliation of our press release posted this morning from the prior quarters in fiscal 2020, there was no impact to our.
The reported numbers on a GAAP basis.
In the fourth quarter, we delivered our second consecutive quarter of positive operating cash flow and profitability since the onset of the COVID-19 pandemic and delivered adjusted earnings per share of $1 and one channel.
Net sales decreased approximately 8% to $473 million versus last year's $513 million.
Significant improvement versus the 19% net sales decrease we reported in the third quarter.
Our U S net sales decreased approximately 6% versus last year.
Canada sales decreased approximately 24%.
Our comparable retail sales increased by 1%.
Our net sales were negatively impacted by three factors.
One of the impact of our permanent store closures inclusive of the 33 doors. We closed at the end of fiscal 2019, and 118 doors that we closed on the first three quarters of fiscal 2020.
To the negative impact of the government mandated COVID-19 temporary closures in Canada.
With two thirds of of our fleet closed for half of quarter three the negative impact of an approximately 15% reduction in mall operating hours as mandated by our mall landlords.
Our dress up sales were at an historic low. However, this was partially offset by strong customer acceptance and sell through on the balance of our casual apparel and sleepwear.
Adjusted gross margin.
Gross margin decreased 210 basis points to 34% of net sales.
The gross margin decrease was the result of the increased penetration of our E Commerce business, which operates at a lower gross margin increase.
Inclusive of the incremental freight surcharges and additional cost, resulting from actions taken to mitigate capacity constraints with our major carriers, including higher levels of ship from store than originally anticipated.
And a $14 million holiday dress up product donation to delivering good.
This was partially offset by lower occupancy costs due to rent abatements of approximately $13 million and lease negotiations.
Higher merchandize margins in both of our stores and digital channels.
Adjusted SG&A.
Adjusted SG&A was approximately $103 million.
Versus $113 million last year, and leveraged 30 basis points to 21, 7% of net sales.
The 30 basis point leverage was a result of a reduction in store expenses, resulting from our permanent store closures.
As well as the strategic reduction in overall operating expenses.
Associated with actions taken in response to the COVID-19 pandemic.
Partially offset by higher incentive compensation accruals.
Adjusted operating income.
Adjusted operating income for the quarter was $26 million versus.
Versus adjusted operating income of $35 million last year.
Deleveraged 140 basis points to five 5% of sales.
Our interest expense for the quarter was $4 million versus $2 million last year.
The increase in interest expense reflects a higher debt balance on the higher interest rate associated with our term loan.
Our adjusted tax rate in the quarter was 32% versus 17% last year.
Moving on to the balance sheet.
Our cash and short term investments ended the quarter at $64 million flow.
That to Q3 cash levels.
We ended the quarter with $170 million outstanding on our revolving credit facility debt.
$9 million versus our Q3 level.
We ended the quarter with total inventory up 19% versus last year.
The entire increase in our inventory versus last year.
It is comprised of at the same back to school basics, we have been carrying since June due.
Due to the lack of at back to school catalyst.
We expect our inventory levels will revert to historic norms. After the majority of the students return to 100% and personal learning.
Our seasonal carryover inventories are down approximately 30%.
Moving on to cash flow on liquidity.
We generated approximately $15 million on cash flow from operations as compared to $77 million in cash generated in Q4 last year.
We remain confident that between our cash position and our credit facility, we have the necessary liquidity to support our operations.
Capital expenditures in Q4 were approximately $7 million.
And now I'll turn it over to Rob to provide an update on our fleet optimization metrics and some thoughts on 2021.
Thanks, Mike and good morning, everyone.
During the fourth quarter, we finalized 2020 occupancy negotiations with our key go forward landlords.
We secured rent abatements for 2020 with a portion of reflected in our Q4 2020.
On a similar amount to be recognized on our Q1 2021.
We also negotiated rent reductions on the lease actions, we had available to us.
We permanently closed 60 stores in the quarter, which brings our total store closures to 178 for 2020.
We are now targeting of 122 store closures for fiscal 2021, including approximately 25 during the first quarter and approximately 97 by the end of fiscal 2021, which will bring our total store closures to our previously announced target of 300 stores.
While we are not providing EPS guidance for full year 2021 due.
Due to the continued uncertainty regarding the pandemic. We wanted to provide you with our current thinking regarding Q1 as well as some thoughts on our full year 2021.
Starting with Q1, while we anticipate the total net sales will be higher in Q1 this year versus last year as we anniversary of the complete closure of our store fleet for approximately half of the quarter.
We anticipate the total net sales will be lower than historical Q1 levels due to.
The lack of an Easter channel list, which historically accounts for approximately one third of our business in the first quarter.
The impact of the 170 of permanent store closures over the past 12 months and the 25 stores, we expect to permanently close this quarter.
The impact of the continuing pandemic disruption on our retail stores, including government mandated temporary store closures in Canada that impacted two thirds of our Canadian stores for 60% of February.
And the negative impact of at approximately 20% of reduction in the operating hours during Q1, and our mall stores as mandated by our landlords.
And lastly of the impact of product delays, resulting from port congestion.
Taking into account these multiple headwinds we anticipate net sales for Q1 of approximately $330 million.
We anticipate that gross margins will be significantly higher than last year due to our expectations at the majority of our stores will be opened for the entire quarter versus significant pandemic driven closures last year.
The impact of lower occupancy costs, including recognition of the remaining 2020 abatements and merchandise margin expansion.
However, we anticipate our Q1 gross margin will remain slightly lower than our historical Q1 gross margin levels due to the impact of the increased penetration of our E Commerce business.
<unk> operates at a lower gross margin.
And the deleverage of fixed costs due to lower sales.
SG&A is planned to be in the range of 100 million two of $105 million.
Which is higher than last year due to the anniversarying of the COVID-19 closures.
However, we expect SG&A to leverage last year due to the structural cost reductions we put in place during the pandemic.
Moving on to a full year of 2021.
While we do not have visibility as to when the pandemic will subside. We think it is fair to assume that our top line. We will continue to be pressured versus historical levels until the vaccine is widely distributed.
The vast majority of schools revert to full time in person learning.
On extended families. Once again gathered together to celebrate the important occasions and milestones initially from flows.
We expect a significant increase in the store sales for the first half of 2021 as we end.
Anniversary the temporary store closures during Q1 and Q2 2020.
For the second half of the year, we expect store sales to remain flat to 2020 levels as increased store productivity will be offset by the impact of our permanent store closures over the previous 12 months.
We are planning to close of 122 stores during fiscal 2021 at <unk>.
Expect to enter fiscal 2022 with 75% of our total revenues generated outside of traditional malls.
We anticipate digital sales will represent approximately 50% of our total consolidated sales for fiscal 2021.
Which puts our steady state digital revenue penetration significantly ahead of our competition supported by our digital investments increased transfer rate and fleet optimization initiatives.
The pandemic driven disruption in the global supply chain is impacting our receipt timing and we anticipate that this will continue through the first half of 2021.
We're well positioned for back to school since the majority of our key back to school inventory has been in place of bloodstream.
We are also experiencing increased cost for inbound freight due to equipment and container shortages.
Raw material input costs are also rising we have been able to mitigate these increased cost to date with our 2021 AUC projected to be down low single digits through our back to school placements.
We expect our full year tax rate to be in the range of 26%.
We are planning to return to operating cash flows for fiscal 2021.
We expect the operating cash flow generation to be slightly lower than historical levels due to the repayment of suspended 2020, <unk> minimum of abatements as well as other changes of working capital.
Partially offset by a tax refund in the range of $40 million to be received as part of the benefits provided under the cares Act.
As a reminder, our term loan provides us with the opportunity to use a significant portion of this refund to pay down the term loan without penalty.
Lastly, we are planning for capital expenditures in the range of $50 million with the majority of allocated to digital and supply chain fulfillment initiatives.
At this point, we will open the call to your questions.
Thank you at this time I would like to remind everyone. If you'd 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.
We ask that you. Please limit yourself to one question. So that everyone has an opportunity to participate on.
Our first question comes from the line of Dana Telsey of Telsey Advisory group.
Good morning, everyone and nice to see the progress as you think about the headwinds from port congestion.
More color in terms of what Youre seeing there either in terms of cost how long. It goes on and then Jane with digital sales from the new customers that debt you gathered the market share opportunities out there do you see that accelerating as we get through these.
Get to the second half of 2021, leading you to an even higher state of revenues in 2022, how are you thinking about it. Thank you.
Thanks, Dana first of all as far as Port congestion is concerned everyone is talking about at and everyone's experiencing at the <unk>.
Positive from our side is that we have.
Over the past decade head of strategy in place to get ourselves.
Reduced in Asia, and Thats, where youre seeing most of the infrastructure of most of the disruption come from and also Youre hearing a lot about the west coast ports and we don't go through the West Coast Port some of those to help.
To help to mitigate I would just give you as an example, really where we're seeing the congestion is on our summer delivery and at a high level I would tell you 40% of our summer delivery is running approximately two to three weeks late from our back to school point of view of <unk>.
Definitely of negative turned into a positive we've been carrying that back to school inventory since last June and the Great News is it's in our inventory. So we're not going to have to pay up to get at here and we're not going to have any worries that it's going to be late so.
That's really the good news for us as far as your question about digital sales and market share we picked up a lot of customers in 2020, and we talked about it.
Picked up $1 9 million customers last year end. So when you think about what our focus is going to be on in 2021.
It's always been on acquisition, but certainly our focus is going to be on retaining those new customers. When you think about at the <unk>.
Good news is is that we're so far ahead of our digital penetration goals, we spoke about being at a 50% steady state, which I think puts us squarely in a leadership position in kids retail.
Our digital and our omni customers spend more than our store customers and there are more productive customer. So we can really focus on retaining these new digital customers. It really puts less pressure on the acquisition number, particularly with the sudden drop in birth rates. So that's really a big positive for us and as far.
As market share gains I think Rob said it well in his prepared remarks, we think that kids is going to continue to be under pressure until the vast majority go back to school and holidays resume and we're very hopeful that with the pandemic end the vaccine rollout.
Sort of talk about early summer most people who want to be vaccinated could be vaccinated, we're really hoping that we can look for a more normalized back to school period, and I think of if we get a normalized back to school of certainly we're going to be an outsized beneficiary of a normalized back to school and we're also going to be an outsized beneficiary of the holiday star.
To come back so those two things will certainly be share gains for us on revenue gains.
I'm not going to say I'm going to get back to 2019 levels in 'twenty, two but what I will tell you is I don't need to get back to 2019 revenue levels to get back to historical levels of operating margin.
Your next question comes from the line of Jay sole of UBS.
Great. Thanks, So much of my question is just about the margins because the margins were stronger than expected in the quarter, but can you maybe highlight or maybe delineate what the impact of the surcharges were.
Commerce business some of the issues on Canada at the deleverage on the store costs.
Promotions.
The COVID-19 cost for operating stores.
Good day.
Deal with some of the <unk>.
Requirements to keep the stores clean at this time of it.
During the pandemic if you could just help us understand those headwinds of a little bit better that'd be super helpful.
Sure Jay.
Obviously, theres a number of moving parts around the 210 basis point reduction in gross margin in the quarter I think the first that we should highlight is the penetration of digital which had another outstanding quarter.
Growing 38% on increasing its penetration from 30% in the fourth quarter last year to 46% this year.
Along with the normal headwinds associated with the increase in digital penetration and its impact on the overall freight and logistics expense.
As you mentioned, we experienced the freight surcharges in capacity constraints imposed by our major carriers.
Also we saw higher demand than what we had anticipated.
And our digital World. So we increased our ship from store activities from roughly a planned 8% to about 15%.
Of which also had an impact on our costs.
When you look at all of these factors combined.
We anticipate.
We anticipate that.
It equates to roughly at 400 basis point hit to our gross margins.
Another big factor, obviously was the demand for dressy product and the fact that it was at an all time low.
You've got obviously significantly cut the buy of the dressy product when we placed our holiday orders, but obviously the demand was even lower than what we had expected.
We ended up donating about 3 million units or about $14 million at cost of delivering good.
To support families in need.
We spoke about fleet optimization.
We were able to negotiate abatements for at the time of our stores were closed and we recorded 13 million of abatement in the quarter, which basically offset the holiday dressing donation.
As Rob mentioned, we will be recording of similar amount of abatement in Q1.
Then force from a merchandise margin perspective, we saw increases at both stores and digital channels with AUR is up mid single digits in our store channel on up high teens and digital and this approximated of roughly 200 basis point increase in gross margin.
Finally, as you look at the deleverage of fixed expenses as a result of lower sales and the liquidation of the 60 stores. They were basically offset by offset by rate reductions on lease events that we had available to us. So all in all of that equates to about a 200 basis points at.
Your next question comes from the line of Jim Chartier of <unk> Crespi Hardt.
Hi, good morning, Thanks for taking my question.
Jane you mentioned getting back to historical margins.
From a wide range there I think youre at just under 10% in 2017 and up 6% from 2019 so.
What do you guys consider kind of a normal historical margin range and then whats the timeframe for getting back there.
Hey, Jim This is Rob so in terms of operating margin I would say that historical range as more of the seven to eight percentage range.
I think gene mentioned earlier in the call.
The good news about what we've done this year and the increase in the penetration of our E. Commerce businesses that we don't need to drive historical sales levels to be able to drive back to historical operating margin levels.
Higher digital penetration, which is our highest margin contributor of the business is going to help drive that higher operating margin.
Second.
From a fleet optimization perspective in lease negotiation perspective, the work that we did too.
Remove the underperforming stores from our fleet in the stores that were going to close next year as well as positively.
Negotiate on the lease actions available to us will help drive.
On the productivity of our stores business higher.
Third.
We see a lot of potential on the jimbo rebrand.
Debt launch and we didn't really have an opportunity to launch at in the way that of deserve to be into the pandemic. So we think that will help drive operating margin back to historical levels and lastly.
There has been a significant amount of progress around SG&A strategic cost reductions across all corporate areas and streamlining our organization as we move forward as a digital first retailer. So I think all four of those combined will get us back to <unk>.
Historical operating margins sooner, rather later, even even without a return to historical sales levels.
Your next question comes from the line of Susan Anderson of B Riley.
Hi, good morning, nice job on the quarter at Mike Let me add my congrats on your retirement.
I guess Jane just in terms of the Gymboree brand I'm curious.
If youre doing anything new or different with that brand versus when you first acquired at in terms of product and merchandising or of any learnings that you've seen since you've had the brand I think for about a year now and then also I'm curious have you gone a little bit more casual without brand during the pandemic or are you sticking with it.
Kind of historical dressy of luck. Thanks.
Sure. Thanks, Susan.
A couple of things on Jim Barry that I would day.
If you remember back pre pandemic before relaunch debt.
<unk> made the decision to start out with gymboree at a 60 40 split 60.
40 brick and mortar because I wanted to I had mentioned at the time I was trying to get five years ahead of myself. So that I didn't have to repeat what we did at TCP as far as digital at.
And what we're seeing now with the pandemic at closer to a 70 30 split 70 <unk> hundred 30 stores. So we are happy that we started aggressive and we've become even more aggressive on that so we've pared back some of the stores that we opened with we opened within our original 220 stores and leap pared that back about 50.
Doors from when we launched pre pandemic. So we feel really good about what's happening there from a digital point of view to answer your question on dressy versus casual we made significant changes during the pandemic based on what mom was buying and based on the lack of holidays. So we were able to make some nice.
Changes in <unk> for Q4, and certainly we're able to make some nice changes in the current business as we pretty much knew Easter was going to be tough. So we place dresses for this quarter down as well I do think however that the.
The true DNA of of Jim Barry is holidays, and I think that that is something that if you look across the span of kids retailers. There really are very very few retailers and hardly any strong retailers left that offer.
<unk> expanded our extensive presentation. So I think that that really is of white space out there and so we don't really have an intention of.
Dialing back of Dressy and Jim Murray.
As our strategy go forward at with this strategy built around the pandemic of short term strategy, but longer term, we think that that's one of the big positives of buying Jim Barry that it gives us kind of cornered the market on that business, there's really no one who can produce that product and as we've said.
Pretty fiercely loyal to the temporary brand. So we think as we get out of 'twenty, one and into 'twenty two will revert back to.
A large component of that business circled around important occasions, and milestones and that young customers life.
Your next question comes from the line of Paul Lajoie of Citi.
Hey, guys. Thanks couple of questions I'm curious on the higher merch margin does that included the 13 million of the product donation of for your kind of separating that out when you talk about merch margins.
Also on the $1 9 million customers digitally at picked up curious where you think they came from.
What are the foundry more on the first half of the year in the second half of the year of any anything you could add on on spending patterns of those customers and then just you mentioned that the.
At closing those 300 stores were accretive to operating profit just want to make sure I understand where those 300 stores collectively losing money.
As a group and.
Or are you, saying that they made money, but youre actually going to make more money out of there. Another closed assuming that sales transfer at comes in where you want.
Sure well I'll take the digital question and then I'll leave it to Rob and Mike to answer about merchandize margin and closing stores from a digital perspective, I think really when you think about our strategy.
We were ahead of it as far as of digital transformation investment, we made our of $50 million investment in 2007, and 2017 to 2019. So when the pandemic struck we were able to pivot quickly into ship from store.
And a lot of others Werent and so we were able to get a significant amount of customers and a significant amount of revenue from our ship from store.
Throughout the pandemic. So I would tell you that from a customer acquisition point of view, we got a lot of the customers in the first half of the year, but we are also able to continue to get customers in the second half of the year as well, albeit at a lower pace.
I will tell you that the Omnichannel and digital customers spend three times more so as I discussed earlier and when I was answering <unk> question I think that that's important to note that retaining those customers take some pressure off of the acquisition number and that's what we'll be focused on 2021 is continuing.
To retain those customers I think from an acquisition point of view when you look at how many people have gone out of business in kids retail and how many stores have been forced to close because of bankruptcies and financial issues that there is a significant amount, particularly in the size of two enough space to continue to take.
Customers from those struggling retailers into 'twenty, one and beyond.
Paul from a gross.
<unk> margin perspective of the $13 million of.
Donations were were outside of the the increase of.
200 basis points of merchandise margin.
Sure.
Part of that product never even made it to the to the selling floor.
We made the Opco, we made the decision to.
Donate as opposed to either pack and hold or liquidate through our stores.
And Paul around on your question on the store closures.
On the store closures.
Transfer from those store closures.
Between our E Commerce site and the remaining fleet actually.
We're more than fully offset the loss profit from closing of stores.
We have time for one more question. Your final question comes from the line of Marni Shapiro of the retail tracker.
Hey, guys. Congratulations on a really impressive job through the whole year end through all of this.
I guess.
So can you talk a little bit about the environment that you are now playing in it seems you know with a lot of the week of players gone or even some of them just closing stores.
And it feels much more rational out there of promotional Lee I know you guys are of promotional retailer, but can you talk about how youre thinking about your level of depth of promotions for 'twenty 'twenty. One is there an opportunity to play with that a little bit.
Continue to push either AUR or even just merchandise margins.
Yes, sure I think based on what Mike said and answered a couple of questions about merchandize margin were pretty excited about our merchandize margin increases Inc.
And I think of lot of that comes from a more rational environment as you're speaking about and I think theres opportunity for price realization. There is also opportunity to pull back selectively on promotions.
Mentioned in my prepared remarks at.
Debt in 2018 in 2019, we had a very public stated strategy.
Giving up short term profitability in order to get long term market share gains and like I said, not knowing about the pandemic even that.
That was at pretty great spot on strategy. So I think now that there is a lot less players out there in the third of 10 space, particularly ones that compete directly from us from a mall based perspective, we have an opportunity now to selectively as I said start to raise AUR, where appropriate end to pull back on.
Unnecessary, if you will or unneeded promotions, so I think that thats going to be a big part of our story going forward as we continue to make advances in there.
The merchandise margin not only in stores, but.
Importantly on the digital channel as well now that it represents approximately 50% steady state of our total.
Thank you for joining us today, if you have further questions. Please call Investor Relations to 015582 400 extension of one four 500, you may now disconnect your lines and have a wonderful day.
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