Q1 2021 Children's Place Inc Earnings Call

May 20, 2021

[music].

Good morning, and welcome to the childrens place first quarter 2021 earnings Conference call.

The call today are Jane Elfers, President and Chief Executive Officer.

And Rob Helm, Chief Financial Officer.

The childrens place issued its first quarter 2021 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 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.

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 Companys SEC filings, including the risk factors section of the company's annual report on form 10-K for its most recent fiscal year.

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 their prepared remarks, we will open the call up for your questions.

We ask that each of you limit yourself to 1 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.

Following the March 11 presidential address which confirmed immediate stimulus payments announced an accelerated vaccination timeline and promise of the country and earlier than anticipated returned to normal we experienced a significant and sustained sales lift.

We delivered outstanding first quarter results with gross margin operating margin and EPS all at record levels.

Our Q1 'twenty, 1 net sales of 435 million Inc.

Exceeded our Q1.19 net sales of $412 million, despite having 261 or 27% fewer stores versus Q1.19.

And historically low demand for Easter dress of product and a 15% reduction in mall operating hours versus 2019.

All key metrics across both our digital and stores channel exceeded expectations.

Our exceptional sales growth was driven by several factors, including double digit increases in AUR versus Q1.2020.

Resulting from strong product acceptance higher price realization.

Reduced promotional activity and unprecedented stimulus.

As well as an acceleration in back to school sales.

Our ability to retain new digital customers, we acquired during the pandemic.

And of significant reactivation of store customers that we had temporarily lost due to the government mandated closure of all of our stores.

Our record Q1, 2021 gross margin was driven by significantly higher merchandize margin in both our digital and stores channel Cigna.

Significant occupancy savings from favorable lease negotiation and fewer stores as compared to Q1.2020.

And meaningful e-commerce fulfillment optimization.

Focusing on digital.

Consolidated digital sales increased 37% in Q1 versus 2020.

Representing 42% of total sales.

Digital sales increased 35% in the U S and 82% in Canada.

Driven by a double digit increase in traffic.

Partly as a result of our ability to retain new customers acquired during the pandemic.

Our digital business has always been our highest operating margin contributor due to a tie U P. T low return rates and lower overhead costs versus our stores channel.

And with the pandemic driven acceleration.

2 of steady state annual digital revenue of approximately 50%.

We are now gaining additional leverage on fixed overhead cost and driving higher digital operating margin.

In addition, we continue to plan for reductions in our per order ecommerce fulfillment costs in 2021 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 2021.

It should virtually eliminate the amount of supplemental ship from store required.

With respect to our stores. It is important to note that our Q1 'twenty 1 store net sales of $231 million represent 85% of our Q1.19 store net sales, despite having 261 or 27% fewer.

Stores in Q1, 'twenty, 1 versus Q1.19.

U S store sales exceeded expectation driven by strong product acceptance.

Double digit AUR increases and higher <unk>.

Similar to what we saw in Q4 traffic levels remained under pressure down 36% versus 2019 levels.

Our outsized store performance.

Bolstered by our strong transfer rate further reinforces our strategic fleet optimization strategy.

Merchandise margins were up significantly in our stores channel driven by higher AUR due.

Due to strong product acceptance and reduced promotions.

Importantly, we were also pleased to see existing customers return to our stores and significant numbers from.

From the limited shopping options available to them last spring due.

Due to the government mandated closure of the vast majority of brick and mortar retailers.

Canada store sales were down 43% with traffic down 69% due to the continued impact of government mandated COVID-19 temporary closures.

Packaging, approximately 50% of our Canadian fleet during the quarter.

With respect to our fleet optimization initiative, we closed 25 stores during Q1.

And we plan to close 98 more stores in full year 'twenty 1 bringing.

Bringing our total 2 year store closures to our previously announced target of 300 stores.

As we covered extensively in our Q4 remarks.

Birth rates have been down trending for years and are not expected to rebound until at least the end of this decade.

As I am sure you all saw earlier this month the 2020 birth rate data was released and as we anticipated birth for 2020 were down dramatically to the lowest level since 1979 at just 361 million birth.

The data also revealed an 8% decline in births in the month of December.

The biggest drop for the month of December since $19.64.

Those December babies were conceived before the pandemic started to accelerate and <unk>.

Experts predict that birth rates will fall even further in 2021.

It is important to note that less than 5% of our revenue comes from newborn age zero to 2 so.

So we have multiple opportunities and ample time to offset the sustained birth rate drops.

As we indicated on our Q4 call we recognized a long time ago that U S birth rates, we're not going to be of tailwind. So our strategic focus has been on taking market share for the better part of the last decade.

Our purchase of Gymboree gives us a sizeable market share opportunity in our underpenetrated toddler space that more than makes up for the anticipated sales dropped from sustained birth rate declines over the next decade.

The Big Kid destination strategy that we put in place almost a decade ago continues to secure our leadership position in the Big Kids space.

We believed correctly that the big Kid space was overcrowded with too many retailers vying for a declining sales base without of positive catalysts with respect to birth rates.

The Big Kids competitive playing field has narrowed significantly in the last few years, which aligns with our well documented strategy of trading short term margin pain for long term margin gain.

It is important to note that among the kids retailers, who declared bankruptcy and liquidated thousands of stores in the last few years.

Justice and Crazy 8 did not carry any newborn size zero to 2 product.

And Jim Murray was almost completely out of their unprofitable newborn business at the time of their second bankruptcy.

My point is none of the large childrens retailers had newborn market share to seed because their mall based businesses like ours were targeted to the 4 year old and up age range, making TCP, our natural market share beneficiary of these large liquidation.

With respect to current business Q2 is off to a strong start.

We are not providing EPS guidance due to the uncertainty and volatility surrounding the pandemic, particularly as it pertains to the return to 100% in person learning.

As you May know July is our biggest month in Q2 and within July. The majority of sales are concentrated into the last 2 weeks of the month with the start of back to school shopping.

We believe that if the vast majority of elementary schools returned to 100% in person learning. This fall, we will be an outsized beneficiary of.

In addition.

We believe the expanded child tax credit benefit.

Outlined in the American rescue plan.

Which include our monthly payments to approximately 39 million families cut.

Covering 88% of all of the children in the United States.

Should provide an additional tailwind for our business just in time for our key back to school selling season.

These payments are scheduled to begin on July 15th.

And provide for monthly check of $300 for each child under age 6.

And $250 per each child between 6% and 17 years old.

Looking ahead of Q4 also presents an opportunity for TCP to regain our historical leadership position in the dress up category, assuming the vaccine rollout is successful.

And social distancing mandates continue to be removed leading up to the holidays.

We leveraged a very difficult period in 2020 to accelerate our strategic transformation and we believe we are now well positioned to deliver accelerated operating margin expansion in 2021 and beyond.

The acceleration of our digital business, our highest operating margin channel made possible by our pre pandemic digital transformation investments come.

Bind with the significant sales transfer rate we are achieving.

From our strategic decision to close 300, or a third of our stores in less than 20 months.

As of resulting in an industry, leading approximately 50% steady state annual digital penetration.

Our long standing fleet optimization strategy enables us to close to 300 stores without financial penalty and reset our occupancy cost.

These occupancy cost reductions should continue to be of significant operating margin tailwind throughout 2021 and beyond.

In addition by aligning our overhead cost structure in 2022, our digital first strategy, we have gained efficiencies and remove significant expense from our P&L.

These efficiencies will continue to benefit us in 2021 and beyond.

We anticipate further operational efficiencies and sales opportunities when social distancing and other restrictions such as limits on hours of operation or further removed and we are able to return to normal operations in both our stores and distribution.

Centers.

We continue to navigate the extraordinary complexity of the pandemic, while remaining firmly on offense.

Our long standing strategic plan has served us well.

We're a stronger company today than we were prior to the pandemic and.

And we look forward to continuing to deliver accelerated operating margin expansion.

For our shareholders in 2021 and beyond.

Now I'll turn it over to Rob.

Thank you Jane and good morning, everyone. I will review the Q1 results and then I'll provide some thoughts on Q2 and the balance of 2021.

In the fiscal first quarter, we delivered a record adjusted EPS of $3.25.

Net sales increased by $180 million or 71% to $435 million versus last year's $255 million.

Our U S. Net sales increased by 160 million or 71% to $384 million versus last year's $224 million.

While our Canadian net sales increased by $13 million or 76% to $30 million versus last year of $17 million.

Comparable retail sales were a positive 83% versus Q1.2020.

As an additional point of reference comparable retail sales were positive 21, 5% versus Q1.2019.

Our net sales were positively impacted by several factors during the quarter.

First the significant majority of our U S stores were opened for the entire quarter of this year versus the temporary closures, we experienced for approximately 50% of the quarter last year as a result of mandated government shutdowns.

Second <unk>.

Strong customer response to our casual product assortments.

And third the unprecedented level of stimulus payments, resulting from the government pandemic relief legislation announced in mid March.

These factors along with favorable weather and an easing of Covid related restrictions resulted in consolidated net sales increases.

In both March and April of over 100% versus the prior year.

These positive factors resulted in better than expected performance across all of our key retail metrics.

Our Q1 net sales were negatively impacted by the impact of all of our 190 non permanent store closures in the past 12 months includes.

Inclusive of 25 stores, we closed during this quarter.

The 178 stores, we closed during fiscal 2020.

The impact of the government mandated temporary closures in Canada with approximately 50% of our fleet closed for more than half of the quarter.

And the impact of an approximately 15% reduction in mall operating hours of mandated by our mall landlords.

Adjusted gross margin adjusted gross margin increased to 571 basis points to 43, 4% of net sales of record Q1 gross margin.

The gross margin increase was the result of <unk>.

1 of the leverage of fixed expenses, resulting from the increase of net sales.

As a result of reversing the temporary closure of our entire fleet in Q1.2020.

2 <unk>.

Significantly higher merchandize margins in both of our digital and stores channel, resulting from a double digit AUR increase due to strong customer product acceptance of <unk>.

Leading to a higher price realization and reduced promotions.

And 3 of <unk>.

Reduction of $21 million and occupancy expenses during the quarter due to renovations of $8 million with the balance of the decrease coming from favorable lease negotiations and reductions in occupancy expenses for stores closed in the past 12 months.

We anticipate occupancy savings for the balance of the of the year.

These gross margin benefits were partially offset by higher inbound freight transportation costs, driven by ocean carrier equipment shortages and higher container rates.

Sure.

Adjusted SG&A.

Adjusted SG&A was approximately $104 million versus $92 million last year, and leveraged 1231 basis points.

23, 9% of net sales.

The 1231 basis point of leverage was a result of the leverage on the higher net sales and cost savings, resulting from the significant store closures in Canada for the majority of the quarter, partially offset by higher incentive compensation accruals.

Adjusted operating income.

Adjusted operating income for the quarter increase of 136 million to $71 million or 16, 2% of sales.

Our record results versus an adjusted operating loss of $65 million last year, and leveraged 4160 basis points.

Interest expense are.

Our interest expense for the quarter was $4 million versus $2 million last year.

The increase in interest expense reflects the higher debt balance and the higher interest rate associated with our term loan.

Tax rate.

Our adjusted tax rate was 27%.

In part due to the anticipated higher incentive compensation accruals in the current year.

Moving on to the balance sheet.

Our cash and short term investments ended the quarter at $65 million.

We ended the quarter with $197 million outstanding on our revolving credit facility.

During the quarter, we extended our existing accordion feature of $35 million for 1 year, maintaining $360 million of total availability under our revolving credit facility.

We ended the quarter with total inventory of 24% versus last year.

It is important to note that our Q1.2020 of inventory included a provision of approximately $63 million last year.

If you remove the impact of the inventory provision our inventory increased 5% versus last year.

The entirety of this increase in inventory versus last year continues to be comprised of the back to school basics, we have been carrying since last June.

Our seasonal carryover inventories are down approximately 49%.

Moving onto cash flow and liquidity we.

We used approximately $17 million in cash from operations in Q1.

Due to the repayment of certain suspended 2020 rents net of repayments as well as other planned changes in working capital, which brought our vendor payables back in line with historical levels.

It is also important to note that we historically experienced negative cash flows in the first half of the year as the result of the seasonality of our business.

We remain confident that between our cash on hand cash.

Cash from operations and credit facility, we have the necessary liquidity to support our operations.

Capital expenditures in Q1 were approximately $7 million.

Now I'll provide an update on our store activity in the quarter of.

Along with planned actions, we are taking to continue to accelerate our fleet optimization initiative.

During the first quarter, we completed the balance of these agreements on our 2020 occupancy negotiations with our key go forward landlords.

We recognize that rent abatement of $8 million in Q1, bringing the total of payments on the account of $2000.20 million to $21 million to date.

We expect to recognize the remaining portion of our 2020 of abatements, and Q2, which will be meaningfully lower than Q1.

We also realized significant occupancy occupancy savings from favorable lease negotiations on our go forward store portfolio and from the 199 store closures in the past 12 months.

Inclusive of the 25 stores, we permanently closed in the quarter.

We ended the quarter with 724 stores and total square footage of $3.4 million.

Decrease of 20% compared to Q1 last year.

We are planning to close an additional 98 stores 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 due to the continued uncertainty and volatility caused by the pandemic. We wanted to provide you with some thoughts regarding Q2 and full year of 2021.

Starting with Q2 net sales.

As Jane mentioned, we are off to a strong start for the quarter.

With respect to the channel level sales, we would like to remind you that we experienced unprecedented levels of E. Commerce demand last year as we leverage our omnichannel capabilities to fulfill orders from our temporarily closed stores.

E Commerce represented over 70% of our sales in Q2 last year, but approximately half of those sales were filled from stores inventory.

We anticipate that our e-commerce sales will be lower in Q2, this year versus Q2 last year.

We also anticipate store sales will be significantly higher in Q2, as we anniversary of the shutdown of our entire store fleet for approximately 50% of the quarter last year.

Lastly, we're planning for lower sales in our Canadian stores business.

Given the ongoing ongoing government mandated lockdowns that had been in place since the beginning of March and are scheduled to be in place until sometime in June Inc.

<unk> approximately half of our Canadian fleet.

We expect that gross margin Q2 gross margin will moderate from Q1 levels as a result of several factors.

Including the deleverage of our fixed expenses on the lower net sales the larger Q1 agreement and the higher inbound transportation costs due to continued supply chain disruption.

SG&A is planned to be in the range of $110 million, which is higher than Q1 due to the anticipated reopening of the temporarily closed stores.

In Canada as well as the expected easing of the landlord reductions in store operating hours.

Higher than Q2 last year due to the Anniversarying of the COVID-19 closures as well as higher incentive compensation accruals.

Moving on to the balance of 2021.

For the second half of the year, we expect store sales to be flat to 2020 levels as increased store productivity should offset the impact of our permanent store closures over the previous 12 months.

We are planning to close an additional 98 stores during fiscal 2021 to achieve our accelerated store closure charges of 300 stores and.

And I expect approximately 75% of our total revenues to be generated outside of traditional malls in fiscal 2022.

We anticipate digital sales will represent approximately 50% of total sales, which puts our steady state annual digital revenue penetration significantly ahead of our competition supported by our digital investments strong transfer rate and fleet optimization initiatives.

We anticipate increased cost for inbound freight will continue to impact of our business.

Raw material input costs are also rising.

We have been able to successfully mitigate these increased costs to date.

With our 2021 AUC projected to be down low single digits through our holiday placements.

We are planning to return to positive operating cash flows for fiscal year 2021.

However, we expect the operating cash flow generation to be slightly lower than historical levels for the first half of the year due to the repayment of the suspended 2020 rents.

Net of abatements as well as other planned changes and changes in working capital.

As a reminder, we are planning to receive a tax refund in the range of $40 million as part of the benefits provided under the cares Act.

I've mentioned on our prior calls that our term loan provides us with the opportunity to use of significant portion of this refund to pay down the term loan without penalty.

We are planning for capital expenditures in the range of $50 million for the year 2021, with a large majority of allocated the digital and supply chain fulfillment initiatives.

Lastly, based on our current liquidity position and assuming a normal normalized back to school selling seasons.

We plan to resume our capital return program in the third quarter of 2021.

As a reminder, we currently have $91 million remaining of our $250 million authorization.

At this point.

We'll open the call to your questions.

Thank you the floor is now open for questions. If you wish to ask a question at this time simply press Star then the number 1 on your telephone keypad again net of Star 1.

Any point your question has been answered and you wish to remove yourself from the queue first of the turnkey.

Our first question comes from the line of Dana Telsey of Telsey Advisory group.

Good morning, everyone and congratulation on the very nice progress.

Dana the Bennett and all of the investments you've made in the year coming to fruition now in these results.

The benefit that you saw from stimulus and now frankly, we have the upcoming child tax credits that are going to should be of benefit through the rest of the year also how are you looking at that whether it's in product how you're thinking about it in terms of the ability to generate full price sell through and digital.

Well I think from of stimulus point of view, obviously stimulus benefited everyone in the quarter.

Thank you.

We mentioned, both Rob and I.

<unk> is off to 2 of very strong start.

The stimulus over time will obviously be temporary I think fundamentals are what is lasting and we've been working at this for a long time I think when you look at the results we had in Q1 and where we see the balance of the year I think that comes from the heart strategic work and the structural work we've done with respect to occupancy.

Fleet optimization SG&A, the digital penetration now at a steady state 50% annual all of the work we've done in the last year on fulfillment cost the competitive landscape is completely different now than it was a few years ago, what we've done on supply chain and then of course consistent product offering.

We have fundamentally transformed the company and.

Really as I said in my prepared remarks leverage 2020, a really difficult period to really set ourselves up for for our expanded operating margin I think when you look at what we talked about with back to school.

We've got all states, except 9 right now reporting that theyre going back to 100% learning so.

Barring any reversal of recurrence of COVID-19 or another set back.

Clearly those child tax credit benefits, starting in July and going through December at a minimum I know, they're talking about extending them, but right now July to December <unk>.

Clearly that will be a V.

Very large tailwind for us and back to school with the kids not being in school for the last.

2 years since they've been in flow and you add in the child tax credit and you add in the fact that we've got our inventory I know a lot of people are having trouble of getting their inventory in that our back to school inventories in place.

That really sets up quite nicely for us.

An exciting back to school, so I think thats, how I'd answer that question.

Our next question comes from the line of Jim Sorry, Kim of <unk>, Crespi, Hardt and company.

Hi, good morning, Thanks for taking my question.

So let's talk about the margin opportunity going forward.

You talked about occupancy savings this year do those continue beyond this year and then as you think about the structural changes that you've made to lower distribution costs lower occupancy costs improved SG&A cost structure. It seems like your historical operating margin of 7.3% could.

Could be too conservative of could you just talk about where that margin should be longer term. Thanks.

Yeah, Thanks, Jim I'm going to start off on the occupancy 1 and then ill turn it over to Rob to talk about operating margin.

With respect to occupancy I think it's really important for everyone to understand what actually transpired in 2020 that was different than in previous years. So I would say in April of 2020, when I saw what was possible with respect to the power of our digital business and how much revenue we were generating.

All of our stores closed.

<unk> made 2 important decisions first made the decision to fully support the digital pivot by dramatically accelerating our store closure program, which well documented targeted 300 permanent store closures in 20 months and second and as importantly, if not more importantly, I've made the decision to leverage all of the previous good work.

Work that had been done on flexible lease term to reset the occupancy cost structure for the company.

So Robyn I partnered on this I guess Robyn starting in Q2 of last year and the 2 of US have spent an enormous amount of time strategizing and negotiating we have over 200 landlords as we've mentioned before and the amount of time, we've spent with them on the significant number of lease actions that were available to us.

Rob mentioned in his prepared remarks that we're still finalizing the last of our 2020 lease negotiations through Q2 of this year.

The abatements he spoke about so Robyn I accomplished what we set out to do which was to target plan and execute 300 permanent store closures and really leverage the flexibility of our lease term to reset our occupancy cost structure going forward for 2021 and beyond and that really was as a result of partnering in.

Making the decision to move forward collaboratively with the REIT landlords.

And part ways with the rest.

And we anticipate that this occupancy work is going to be a significant contributor to our plan for accelerated operating margin expansion and well worth the time and effort. The 2 of us have put into it over the last year.

Recognizing at the same time, we were navigating in leading the company through the pandemic.

With that I'll turn it over to Rob.

Jim from an operating margin perspective, but it's a little bit of a long winded answer because I have to go back a few years just to give a little more detail on the trajectory of this business, but back in 2016 and 17, we had operating margins in the range I believe it was 8.5% to 96 at that time and we saw that our transformation strategy was really starting to gain.

Jane hold and lock in.

At that time, we made the decision to accelerated $50 million of investments to accelerate further accelerate our digital penetration of our business and our digital business overall, and clearly with the pandemic and what happened last year of leveraging some of those abilities in terms of ship from store and the things that we did move the needle overnight to a steady state of 50% digital penetration.

Patients annually that was the right call also the other piece that we have to call out is from in 2018.2019, we made the very.

Visible decision to go after market share and take short term margin pain for long term margin game, which negatively impacted both of gross margin line and our operating margin line with the shrinking market in terms of less burst in a smaller.

The market overall, clearly that was the right decision as well as has positioned us to come out of this pandemic to.

<unk> game that fragmented market share so now with the accelerated investment behind us and less competition.

Considerably less cleared out competitive landscape.

<unk> sees the opportunity to shift of digital to a steady state of 50%.

With our work that we've done in the last year that Jim mentioned in terms of.

Resetting our cost structure in terms of being digital first from SG&A footprint with less store expenses and less of a feel that overhead and resetting our occupancy occupancy expenses. We're now set for a resumption of that upward trajectory that we saw prior to 2018 in terms of operating margin.

Our next question comes from the line of Jay sole of UBS.

Great. Thanks, so much for taking my question. So I wanted to follow up on what you. Just said you are basically saying that if you look at the 8.5 and 9 of have margins that you did a couple of years ago. The differences today are 1 theres a bigger E. Comex wishes of better margin business, you've got lower rent in the remaining stores business Theres less competition, which is allowing you to raise AUR.

Our versus that time, and theres lower overhead within the cost structure.

And so but I wasn't sure I understood. The conclusion, which is that you think the margin the EBIT margins can be better than it was in the past where you say, it's kind of be at the same as it was in the past and maybe if you could just first clarify that and then the second thing is Jim Barry can you just give us an idea on where the launch stands right now.

Impact do you think it can have on sales in back to school and just where the give us an update on gymboree that'd be helpful. Thank you.

Sure. Thanks, Jay as far as Gymboree is concerned we've talked about it a lot we launched into a pandemic that business is highly dependent on events and holidays and occasions.

Clearly Easter was not.

Q1 was not good for gymboree from an Easter perspective, we feel very strongly and gymboree, we feel very good about the customer response, we've gotten really spoken about it being north of $140 million opportunity we feel.

We have not.

<unk> are of mind on that we feel that it is north of $140 million opportunity. The same as we expect for TCP with the return to school and the return to occasions and the relaxing social distancing, we expect <unk> to have a strong back half and we're planning it that way, particularly as you get into the holiday period in <unk>.

Turn it over Rob for operating margin Im not sure he is going to bite on that 1 that Rob.

Sorry in terms of operating margin, we havent given guidance range, so I'm not going to give actual numbers relative to operating margin.

My comments really are to clarify that we have made the structural changes.

And we are past, our investments and have considerably cleared out competitive landscape.

The operating margin is obviously contingent on sales levels returning.

Supply chain disruption and cost inflation all of those other factors that are macro factors that impact us in this environment, but.

The bottom line conclusion is we have made changes to reset our occupancy structure, we've reset our estimates structurally be digital first and we've set ourselves with e-commerce packaging of network optimization, where.

We should be able to.

Drive operating margin expansion again in the future.

Our next question comes from the line of Paul Lewis of Citi.

Hi, This is Kelly on for Paul Thanks for taking our questions.

Just on the question on the gross margin was there any benefit from from any 1 time inventory of reserves in <unk> 'twenty 1.

And how do we think about the merchandise margin going forward.

And just second question.

As it relates to gross margin. Thanks for the color on the occupancy line day any any chance you can provide.

Any color on how much occupancy is down relative to 2019, and just how we should be thinking about that going forward.

And then just lastly, just on SG&A should we be using that QQ.

Right.

Guidance is it sort of a proxy for SG&A for the remainder of this year being down kind of 5% versus 2019 levels. Thank you.

Thanks Kelly.

I'll unpack each of those.

1 of the time from.

Gross margin perspective, there were no onetime items within gross margin of inventory reserve releases.

Just the 1 time of payment of $8 million, which contributed roughly 200 basis points of.

Additional gross margin.

We expect to obviously of.

Slightly less meaningful of bema and.

In Q2.

But the rest of it is merchandise margin net of delivery expenses for E com et cetera.

The next piece of your question.

Relative to SG&A.

SG&A.

SG&A of of roughly $104 million, we expect us of rise slightly.

<unk> of $110 million for the second quarter.

We haven't provided longer term guidance from that at this point, but.

We expect that that's probably a pretty share base to consider going forward.

Considering the fact that we expect store hours to resume for a major mall landlords.

Our.

Eventually, Canada to reopen completely and to be able to incur those store expenses.

And then the last piece of your question I think I missed a few of them between occupancy expenses arguably occupancy expenses were $21 million lower in the quarter than last year $8 million of that was.

1 time of payment the remaining $13 million represents the impact of the permanent closures of our favorable lease negotiations when you think about that relative to 2019.

Inclusive of the store closures since that time occupancy expenses were roughly $25 million lower.

Our next question comes from the line of Susan Anderson of B Riley.

Hi, good morning, nice job on the quarter day.

I was wondering maybe if you could talk about the dressy product over Easter did you see that consumer of returning at all to that type of product.

I think you had lesson store, though and then just in terms of the piece that you mentioned as schools kind of reopened this spring in first quarter.

Was that a significant benefit and were you able to sell down some of that.

Form inventory and for back to school. This year are you planning inventories up.

Thanks, Susan with respect to Easter dress up it was at a historical low in Q1.

Things like dresses tie Tac tight those types of products very very low demand, we had bought it down and thank goodness. We did because it was it was very difficult. While we did see in Q1 was a pretty significant boost in back to school product as compared to Q1.2019.

And within that product you saw some of the elements that we also do double duty with an Easter. So you saw things like polo than woven bottoms and boys pick up but they were for back to school versus for dressy. So I think that bodes well for back to school and what we're anticipating in Q3, and then as far as.

Tori levels, we've pretty good of you talked about them extensively since last back to school, our carryover inventory as Rob mentioned is down almost 50%.

And we are still carrying.

A nice amount of the same basics, we've had since last year, we anticipate that as we get towards the end of Q3, you'll see our inventories normalized with a normalized back to school.

Ladies and gentlemen, we have time for 1 more question. Our final question comes from Deutsche Bank.

Okay.

Good morning.

Okay.

Good morning.

Well, thank you everyone Hello.

All morning here they are high.

Yes, I can hear you guys, maybe the connection was bad.

So I would said congrats amazing quarter and welcome back.

Thank you.

I just wanted to dovetail on the back to school I know you have all of the uniform basics packed and held so to speak but what about the ancillary products you do a nice back to school backpack business and even shoes I know you always have a good shoe business there and if you can talk a little bit about your marketing efforts and plans for marketing in the back half and will you increase.

Just to increase marketing in the back half.

Yes, I think as far as back to school products concerned the EBITDA uniform product is impact and how thats on the floor and it's on the site and so it's available for mom whenever she need debt based on how schools were rolling with hybrid and remote learning model that we've had that available to sell for the customer alongside of that we've had.

With the ointment and of backpack assortment, which is also fared well in Q1 versus Q1.2019.

When do you think about the product that's on the water and Thats coming from back to school, it's more fashion and from a delivery point of view, we're on track with that.

The supply chain disruption is like a 2 to 4 week disruption that we're seeing on the summer product, but for back to school. So far we're looking good another.

Another element <unk> element of back to school as our graphic Tee program, which should help the long time sell all signs point to us being in a really good place with inventory for back to school from a marketing point of view certainly we will be spending more money on marketing than we did last year, because there wasn't a back to school and marketing was pulled way.

Back.

So we anticipate being able to really go after particularly on the digital side of the business as we're now close to 50% digital business, we will continue to support those.

Acquisition retention and reactivation strategies throughout the back to school period.

And thank you for joining us today, if you have further questions. Please call Investor Relations at 201558400 extension 1.

4500, you may now disconnect your lines and have a wonderful day.

[music].

Average.

Moving on.

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

[music].

Space.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

[music].

Yes.

Okay.

Yeah.

Yes.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

[music], Inc.

Thanks.

True.

Thank you.

[music].

Sure.

Thank you.

Okay.

Yes.

Okay.

Yes.

Good day.

Okay.

Thanks.

Yes.

Okay.

Yes.

Okay.

Sure.

From.

Okay.

Yes.

[music].

Sure.

Okay.

Yeah.

Great.

[music].

Yeah.

Yes.

Thanks.

[music].

Okay.

Sure.

Okay.

Yes.

[music].

Okay.

Yeah.

Okay.

Sure.

Yes.

Okay.

Sure.

Thank you.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Sure.

Okay.

No.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

[music].

Okay.

Yes.

Please.

Great.

Okay.

Sure.

Okay.

Yes.

[music] expense.

Thank you.

Sure.

Okay.

Great.

Okay.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Great.

Good day.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

True.

Sure.

Okay.

Sure.

Okay.

Yes.

Thank you.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Right.

Okay.

Right.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Thank you.

Yes.

Okay.

Thanks.

Okay.

Yes.

Okay.

Thank you.

Yes.

Okay.

Thanks.

Right.

Sure.

Okay.

Yes.

Okay.

Thank you.

Yes.

Sure.

Okay.

Yes.

Okay.

Sure.

Thank you.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

And of course.

Yes.

Okay.

Yes.

Sure.

Yes.

Okay.

Sure.

Thanks.

Okay.

Yes.

Okay.

Yeah.

Yes.

Sure.

Yes.

Okay.

Thanks.

True.

Yes.

Okay.

Thanks.

Yes.

Okay.

Yes.

Right.

Okay.

Yes.

Okay.

Good morning, and welcome to the childrens place first quarter 2021 earnings Conference call.

On the call today are Jane Elfers, President and Chief Executive Officer.

And Rob Helm, Chief Financial Officer.

The childrens place issued its first quarter 2021 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.

I 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.

After the Speakers' remarks, we will take questions as time allows.

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 of heroes.

After the prepared remarks, we will open the call up for your questions.

We ask that each of you limit yourself to 1 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.

We delivered outstanding first quarter results with gross margin operating margin and EPS all at record levels.

Our Q1 'twenty, 1 net sales of 435 million Inc.

Exceeded our Q1.19 net sales of $412 million, despite having 261 or 27% fewer stores versus Q1.19.

And historically low demand for Easter dress of product and a 15% reduction in mall operating hours versus 2019.

All key metrics across both our digital and stores channel exceeded expectations.

Our exceptional sales growth was driven by several factors, including double digit increases in AUR versus Q1.2020.

The resulting from strong product acceptance higher price realization.

Reduced promotional activity and unprecedented stimulus as.

As well as an acceleration in back to school sales.

Our ability to retain new digital customers, we acquired during the pandemic.

And of significant reactivation of store customers that we had temporarily lost due to the government mandated closure of all of our stores.

Our record Q1, 2021 gross margin was driven by significantly higher merchandize margin in both our digital and stores channel.

Significant occupancy savings from favorable lease negotiation and fewer stores as compared to Q1.2020.

And meaningful ecommerce fulfillment optimization.

Focusing on digital.

Consolidated digital sales increased 37% in Q1 versus 2020.

Representing 42% of total sales.

Digital sales increased 35% in the U S and 82% in Canada.

Driven by a double digit increase in traffic.

Partly as a result of our ability to retain new customers acquired during the pandemic.

Our digital business has always been our highest operating margin contributor due to a tight <unk> low return rates and lower overhead costs versus our stores channel.

And with the pandemic driven acceleration.

2 of steady state annual digital revenue of approximately 50%.

We are now gaining additional leverage on fixed overhead cost and driving higher digital operating margin.

In addition, we continue to plan for reductions in our per order ecommerce fulfillment costs in 2021 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 2021.

Which should virtually eliminate the amount of supplemental ship from store are required.

With respect to our stores. It is important to note that our Q1 'twenty 1 store net sales of $231 million.

At present, 85% of our Q1.19 store net sales, despite having 261 or 27% fewer stores in Q1, 'twenty 1 versus Q1.19.

U S store sales exceeded expectations driven by strong product acceptance.

Double digit AUR increases and higher ABS.

Similar to what we saw in Q4 traffic levels remained under pressure down 36% versus 2019 level.

Our outsized store performance.

Bolstered by our strong transfer rate further.

Further reinforces our strategic fleet optimization strategy.

Merchandise margins were up significantly in our stores channel share.

And by higher AUR due to strong product acceptance and reduced promotion.

Importantly, we were also pleased to see existing customers return to our stores and significant numbers from.

From the limited shopping options available to them last spring due.

Due to the government mandated closure of the vast majority of brick and mortar retailers.

Canada store sales were down 43% with traffic down 69% due to the continued impact of government mandated COVID-19 temporary closures.

Impacting approximately 50% of our Canadian fleet during the quarter.

With respect to our fleet optimization initiative.

Closed 25 stores during Q1 and.

And we plan to close 98 more stores in full year 'twenty 1.

Bringing our total 2 year store closures to our previously announced target of 300 stores.

As we covered extensively in our Q4 remarks.

Birth rates have been down trending for years and are not expected to rebound until at least the end of this decade.

As I am sure you all saw earlier this month the 2020 birth rate data was released and as we anticipated birth for 2020 were down dramatically to the lowest level since 1979 at just 361 million birth.

The data also revealed an 8% decline in births in the month of December.

The biggest drop for the month of December since $19.64.

Those December babies were conceived before the pandemic started to accelerate and experts predict that birth rates will fall even further in 2021.

It's important to note that less than 5% of our revenue comes from newborn 8 zero day too so.

So we have multiple opportunities and ample time to offset the sustained birth rate drops.

As we indicated on our Q4 call we recognized a long time ago debt U S birth rates, we're not going to be of tailwind. So our strategic focus has been on taking market share for the better part of the last decade.

Our purchase of Jim Murray gives us a sizeable market share opportunity in our Underpenetrated toddler space that more than makes up for the anticipated sales dropped from sustained birth rate declines over the next decade.

The Big Kid destination strategy that we put in place almost a decade ago continues to secure a leadership position in the big Kid space.

We believed correctly that the big Kid space with overcrowded with too many retailers vying for a declining sales space without of positive catalysts with respect to birth rates.

The Big Kids competitive playing field has narrowed significantly in the last few years, which aligns with our well documented strategy of trading short term margin pain for long term margin gain.

It's important to note that among the kids retailers, who declared bankruptcy and liquidated thousands of stores in the last few years.

Justice and Crazy 8 did not carry any newborn side theory to 2 product.

And Jim Barry was almost completely out of their unprofitable newborn business at the time of their second bankruptcy.

And my point is none of the large childrens retailers had newborn market share to seed.

They are mall based businesses like ours were targeted to the 4 year old and up age range, making PCP, our natural market share beneficiary of these large liquidation.

With respect to current business Q2 is off to a strong start.

We are not providing EPS guidance due to the uncertainty and volatility surrounding the pandemic, particularly as it pertains to the return to 100% in person learning.

As you May know July is our biggest month in Q2 and within July. The majority of sales are concentrated into the last 2 weeks of the month with the start of back to school shopping.

We believe that if the vast majority of elementary schools return to 100% in person learning. This fall, we will be an outsized beneficiary.

In addition.

We believe the expanded child tax credit benefit.

Outlined in the American rescue plan.

Which include a monthly payment to approximately 39 million families cut.

Covering 88% of all of the children in the United States.

Should provide an additional tailwind for our business just in time for our key back to school selling season.

These payments are scheduled to begin on July 15th.

And provide from monthly check of $300 for each child under age 6.

And $250 per each child between 6% and 17 years old.

Looking ahead of Q4 also presents an opportunity for TCP to regain our historical leadership position in the dress up category, assuming the vaccine rollout of successful.

And social distancing mandates continue to be removed leading up to the holidays.

We leveraged a very difficult period in 2020 to accelerate our strategic transformation and we believe we are now well positioned to deliver accelerated operating margin expansion in 2021 and beyond.

The acceleration of our digital business, our highest operating margin channel made possible by our pre pandemic digital transformation investments.

Combined with the significant sales transfer rate, we are achieving from our strategic decision to close 300 or a third of our stores in less than 20 months is.

As of resulting in an industry, leading approximately 50% steady state annual digital penetration.

Our long standing fleet optimization strategy enables us to close to 300 stores without financial penalty and reset our occupancy cost.

These occupancy cost reductions should continue to be of significant operating margin tailwind throughout 2021 and beyond.

In addition by aligning our overhead cost structure in 2022, our digital first strategy, we have gained efficiencies and removed significant expense from our P&L.

These efficiencies will continue to benefit us in 2021 and beyond.

Centers.

We continue to navigate the extraordinary complexity of the pandemic, while remaining firmly on offense.

Our long standing strategic plan has served us well.

We're a stronger company today than we were prior to the pandemic and.

And we look forward to continuing to deliver accelerated operating margin expansion.

For our shareholders in 2021 and beyond.

Now I'll turn it over to Rob.

Thank you Jane and good morning, everyone. I will review the Q1 results and then I will provide some thoughts on Q2 and the balance of 2021.

In the fiscal first quarter, we delivered a record adjusted EPS of $3.25.

Net sales increased by $180 million or 71% to $435 million versus last year's $255 million.

Our U S. Net sales increased by 160 million or 71% to $384 million versus last year's $224 million.

While our Canadian net sales increased by $13 million or 76% to $30 million versus last year of $17 million.

Comparable retail sales were a positive 83% versus Q1.2020.

As an additional point of reference comparable retail sales were a positive 21, 5% versus Q1.2019.

Our net sales were positively impacted by several factors during the quarter.

Second strong customer response to our casual product assortments.

Third the unprecedented level of stimulus payments, resulting from the government pandemic relief legislation announced in mid March.

These factors along with favorable weather and an easing of Covid related restrictions resulted in consolidated net sales increases in.

In both March and April of over 100% versus the prior year.

These positive factors resulted in better than expected performance across all of our key retail metrics.

Our Q1 net sales were negatively impacted by the impact of all of our 199 permanent store closures in the past 12 months.

Inclusive of 25 stores, we closed during this quarter.

And of 178 stores, we closed during fiscal 2020.

The impact of the government mandated temporary closures in Canada with approximately 50% of our fleet closed for more than half of the quarter.

And the impact of an approximately 15% reduction in mall operating hours as mandated by our mall landlords.

Adjusted gross margin adjusted gross margin increased 2571 basis points to 43, 4% of net sales of record Q1 gross margin.

The gross margin increase was the result of <unk>.

1 of the leverage of fixed expenses, resulting from the increase of net sales.

As a result of Anniversarying the temporary closure of our entire fleet in Q1.2020.

2 <unk>.

Significantly higher merchandize margins in both of our digital and store channel, resulting from a double digit AUR increase due to strong customer product acceptance, leading to a higher price realization and reduced promotions.

And 3.

A reduction of $21 million and occupancy expenses during the quarter due to renovations of $8 million with the balance of the decrease coming from favorable lease negotiations and reductions in occupancy expenses for stores closed in the past 12 months.

We anticipate occupancy savings for the balance of the of the year.

These gross margin benefits were partially offset by higher inbound freight transportation costs, driven by ocean carrier equipment shortages and higher container rates.

Adjusted SG&A.

Adjusted SG&A was approximately $104 million versus $92 million last year, and leveraged 1231 basis points.

23, 9% of net sales.

The 1231 basis point of leverage was a result of the leverage on the higher net sales and cost savings, resulting from the significant store closures in Canada for the majority of the quarter.

Partially offset by higher incentive compensation accruals.

Adjusted operating income.

Adjusted operating income for the quarter increased of $136 million to $71 million or 16, 2% of sales.

Our record results versus an adjusted operating loss of $65 million last year, and leveraged 4168 basis points.

Interest expense are.

Of our interest expense for the quarter was $4 million versus $2 million last year.

The increase in interest expense reflects the higher debt balance and the higher interest rate associated with our term loan.

Tax rate.

Our adjusted tax rate was 27%.

In part due to the anticipated higher incentive compensation accruals in the current year.

Moving on to the balance sheet.

Our cash and short term investments ended the quarter at $65 million.

We ended the quarter with $197 million outstanding on our revolving credit facility.

During the quarter, we extended our existing accordion future of $35 million for 1 year, maintaining $360 million of total availability under our revolving credit facility.

We ended the quarter with total inventory of 24% versus last year.

It is important to note that our Q1.2020 of inventory included a provision of approximately $63 million last year.

If you remove the impact of the inventory provision our inventory increased 5% versus last year the.

The entirety of this increase in inventory versus last year continues to be comprised of the back to school basics, we have been carrying since last June.

Our seasonal carryover inventories are down approximately 49%.

Moving on to cash flow and liquidity we.

We used approximately $17 million in cash from operations in Q1 due.

Due to the repayment of certain suspended 2020 rents net of repayments as well as other planned changes in working capital, which brought our vendor payables back in line with historical levels.

It is also important to note that we historically experienced negative cash flow in the first half of the year as the result of the seasonality of our business.

We remain confident that between our cash on hand cash.

From operations and credit facility, we have been necessary liquidity to support our operations.

Capital expenditures in Q1 were approximately $7 million.

Now I'll provide an update on our store activity in the quarter of.

Along with planned actions, we are taking to continue to accelerate our fleet optimization initiative.

During the first quarter, we completed the balance of these agreements on our 2020 occupancy negotiations with our key go forward landlords.

We recognize that rent abatement of $8 million in Q1, bringing the total of payments on the account of $2000.20 million to $21 million per day.

We expect to recognize the remaining portion of our 2020 of payments in Q2, which will be meaningfully lower than Q1.

We also realized significant archeus occupancy savings from favorable lease negotiations on our go forward store portfolio and from the 199 store closures in the past 12 months.

<unk> of the 25 stores, we permanently closed in the quarter.

We ended the quarter with 724 stores and total square footage of $3.4 million a decrease of 20% compared to Q1 last year.

We are planning to close an additional 98 stores 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 due to the continued uncertainty and volatility caused by the pandemic. We wanted to provide you with some thoughts regarding Q2 and full year of 2021.

Okay.

Starting with Q2 net sales.

As Jane mentioned, we are off to a strong start for the quarter.

E Commerce represented over 70% of our sales in Q2 last year, but approximately half of those sales were filled from stores inventory.

We anticipate that our e-commerce sales will be lower in Q2, this year versus Q2 last year.

We also anticipate store sales will be significantly higher in Q2, as we anniversary of the shutdown of our entire store fleet for approximately 50% of the quarter last year.

Lastly, we're planning for lower sales in our Canadian stores business.

Given the ongoing ongoing government mandated David Lockdowns that had been in place since the beginning of March and are scheduled to be in place until sometime in June impacting approximately half of our Canadian fleet.

We expect that gross margin Q2 gross margin will moderate from Q1 levels as a result of several factors.

Including the deleverage of our fixed expenses on the lower net sales the larger Q1 of event.

The higher inbound transportation costs due to continued supply chain disruption.

SG&A is planned to be in the range of $110 million, which is higher than Q1 due to the anticipated reopening of the temporarily closed stores.

In Canada as well as the expected easing of the landlord reductions in store operating hours.

Higher than Q2 last year due to the Anniversarying of the COVID-19 closures as well as higher incentive compensation accruals.

Moving onto the balance of 2021.

For the second half of the year, we expect store sales to be flat to 2020 levels as increased store productivity should offset the impact of our permanent store closures over the previous 12 months.

We are planning to close an additional 19 new stores during fiscal 2021 to achieve our accelerated store closure charges of 300 stores and.

And I expect approximately 75% of our total revenues to be generated outside of traditional malls in fiscal 2022.

Yeah.

<unk> transfer rate and fleet optimization initiatives.

We anticipate increased cost for inbound freight will continue to impact of our business.

Raw material input costs are also rising.

We have been able to successfully mitigate these increased costs to date.

With our 2021 AUC projected to be down low single digits through our holiday placements.

We are planning to return to positive operating cash flows for fiscal year 2021.

We expect the operating cash flow generation to be slightly lower than historical levels for the first half of the year due to the repayment of the suspended 2020 rents.

Net of abatements as well as other planned changes and changes in working capital.

As a reminder, we are planning to receive a tax refund in the range of $40 million as part of the benefits provided under the cares Act.

I have mentioned on our prior calls that our term loan provides us with the opportunity to use of significant portion of this refund to pay down the term loan without penalty.

We are planning for capital expenditures in the range of $50 million for the year 2021, with a large majority of allocated with digital and supply chain fulfillment initiatives.

Lastly, based on our current liquidity position and assuming a normal normalized back to school selling season, we plan to resume our capital return program in the third quarter of 2021.

As a reminder, we currently have $91 million remaining of our $250 million authorization.

At this point, we will open the call to your questions.

Thank you the floor is now open for questions. If you wish to ask a question at this time simply press Star then the number 1 on your telephone keypad again net of Star 1.

If at any point of your question has been answered and you wish to remove yourself from the queue first of the turnkey.

Yes.

Our first question comes from the line of Dana Telsey of Telsey Advisory group.

Good morning, everyone and congratulation on the very nice progress.

Thanks Dana.

And all of the investments you've made in the year coming to fruition now in these results.

Benefit that you saw from stimulus and now frankly, we have the upcoming child tax credits that are going to should be of benefit through the rest of the year also how are you looking at that whether it's in product how you're thinking about it in terms of the ability to generate full price sell through and digital.

Well I think from of stimulus point of view, obviously stimulus benefited everyone in the quarter I think as we mentioned, both Rob and I.

May is off to 2 of very strong start.

Stimulus over time will obviously be temporary I think fundamentals are what is lasting and we've been working at this for a long time I think when you look at the results we had in Q1 and where we see the balance of the year I think that comes from the heart strategic work and the structural work we've done with respect to occupancy fleet.

<unk> optimization SG&A the digital penetration now at a steady state 50% annual all of the work we've done in the last year on fulfillment costs. The competitive landscape is completely different now than it was a few years ago, what we've done on supply chain and then of course consistent product offering.

We have fundamentally transformed the company and.

Really as I said in my prepared remarks leverage 2020, a really difficult period to really set ourselves up for for expanded operating margin I think when you look at what we talked about with back to school.

We've got all states, except 9 right now reporting that theyre going back to 100% learning so.

Barring any reversal or recurrence of COVID-19 or another setback clearly those child tax credit benefits starting in July and going through December at a minimum I know they are talking about extending them, but right now July to December.

Clearly that will be a V.

Very large tailwind for us and back to school with kids not being in school for the last.

2 years since they've been in flow and you add in the child tax credit and you add in the fact that we've got our inventory I know a lot of people are having trouble getting their inventory in that our back to school of inventories in place.

That really sets up quite nicely for us.

An exciting back to school, so I think thats, how I'd answer that question.

Our next question comes from the line of Jim Chartier of <unk> Crespi, Hardt <unk> company.

Hi, good morning, Thanks for taking my question.

We'll talk about the margin opportunity going forward.

1 you talked about occupancy savings this year do those continue beyond this year and then as you think about the structural changes that you've made to lower distribution costs lower occupancy costs improved SG&A cost structure. It seems like your historical operating margin of 7 or 8% could.

Could be too conservative can you just talk about where that margin should be longer term. Thanks.

Yeah, Thanks, Jim I'm going to start off on the occupancy 1 and then I'll turn it over to Rob to talk about operating margin.

All of our stores closed.

We made 2 important decision first I've made the decision to fully support.

Port the digital pivot by dramatically accelerating our store closure program, which well documented targeted 300 permanent store closures in 20 months.

Second and as importantly, if not more importantly, I made the decision to leverage all of the previous good work that had been done on flexible lease term to reset the occupancy cost structure for the company.

Rob and I partnered on this I guess Robyn starting in Q2 of last year and the 2 of US have spent an enormous amount of time strategizing of negotiating we have over 200 landlords as we've mentioned before and the amount of time, we've spent with them on the significant number of lease actions that were available to us.

Rob mentioned in his prepared remarks that we're still finalizing the last of our 2020 lease negotiations through Q2 of this year.

With the abatements he spoke about so Robyn I accomplished what we set out to do which was to target plan and execute 300 permanent store closures and really leverage the flexibility of our lease term to reset our occupancy cost structure going forward for 2021 and beyond and that really was as a result of partnering in.

Making the decision to move forward collaboratively with the REIT landlords and part ways with direct and.

And we anticipate that this occupancy work is going to be a significant contributor to our plan for accelerated operating margin expansion and well worth the time and effort the 2 of us put into it over the last year.

<unk> at the same time, we were navigating in leading the company through the pandemic, so with that I'll turn it over to Rob.

Jim from an operating margin perspective, but it's a little bit of a long winded answer because I have to go back a few years just to give a little more detail on the trajectory of this business, but back in 2016 and 17, we had operating margins in the range I believe was 8.5% to 96 at that time and we saw that our transformation strategy was really starting to.

Jane hold and lock in.

The ratio of annually that was the right call also the other piece that we of the callout is from in 2018.2019, we made the very.

Visible decision to go after market share and take short term margin pain for long term margin game, which negatively impacted both of gross margin line and our operating margin line.

With the shrinking market in terms of less burst in a smaller kids.

The market overall, clearly that was the right decision as well as has positioned us to come out of this pandemic to have.

To gain that fragmented market share so now with the accelerated investment behind us and less competition.

Considerably less cleared out competitive landscape.

<unk> sees the opportunity to shift of digital 2 of the steady state of 50%.

With our work that we've done in the last year that Jim mentioned in terms of.

Resetting our cost structure in terms of being digital first from SG&A footprint with less store expenses and less of the field and overhead and resetting our occupancy occupancy expenses. We are now set for a resumption of that upward trajectory that we saw prior to 2018 in terms of operating margin.

Our next question comes from the line of Jay sole of UBS.

Great. Thanks, so much for taking my question. So I wanted to follow up on what you just said Youre basically saying that if you look at the $8.5 million.

And of half margins that you did a couple of years ago. The differences today are 1 theres a bigger E. Comex wishes of better margin business, you've got lower rent in the remaining stores business Theres less competition, which is allowing you to raise AUR versus that time and theres lower overhead within the cost structure.

And so but I wasn't sure I understood. The conclusion, which is that you think the margin the EBIT margins can be better than it was from the past of where you say, it's kind of be at the same as it was in the past and maybe if you guys of first clarify that and then the second thing is Jim Barry can you just give us an idea on where the launch stands right now like what what impact you think it can have on sales in back to school and just where the give us an update on jewelry that'd be helpful. Thank you.

Sure. Thanks, Jay as far as Gymboree is concerned we've talked about it a lot we launched into a pandemic that business is highly dependent on events and holidays and occasions.

Clearly Easter was not good.

Q1 was not good for Jim Barry from the Easter perspective, we feel very strongly and Jim Murray, we feel very good about the customer response, we have guidance, we spoken about it being north of $140 million opportunity we feel.

We have not.

<unk> are of mind on that we feel that it is north of $140 million opportunity. The same as we expect for TCP with the return to school and the return to occasions, and the relaxing social distancing, we expect temporary to half of strong back half and we're planning it that way, particularly as you get into the holiday period, and I will turn.

It over Rob for operating margin I'm not sure he is going to bite on that 1 but rob.

Sorry in terms of operating margin, we havent given guidance range, so I'm not going to give actual numbers relative to operating margin.

My comments really are to clarify that we have made the structural changes.

And we are past, our investments and have considerably cleared out competitive landscape.

The operating margin is obviously contingent on sales levels returning.

Supply chain disruption in cost inflation and all of those other factors that are macro factors that impact us in this environment, but.

The bottom line conclusion, as we've made changes to reset our occupancy structure, we've reset our estimate of structurally be digital first and we've set ourselves with e-commerce packaging of network optimization, where we should be able to.

Drive operating margin expansion again in the future.

Our next question comes from the line of Paul Lewis of <unk>.

City.

Hi, This is Kelly on for Paul Thanks for taking my question.

Just on the.

Question on the gross margin was there any benefit from from any 1 time inventory of reserves in <unk> 'twenty 1 how.

How do we think about the merchandise margin going forward.

And then just second question.

As it relates to gross margin. Thanks for the color on the occupancy line of any any chance you can provide.

The color on how much occupancy is down relative to 2019, and just how we should be thinking about that going forward and then just lastly, just on SG&A.

Should we be using that QQ.

Guidance is sort of a proxy for SG&A for the remainder of this year, either net being down kind of 5% versus 2019 levels. Thank you.

Thanks Kelly.

I'll unpack each of those.

1 of the time.

From a gross margin perspective, there were no 1 time items within gross margin no inventory reserve releases.

Just the 1 time payment of $8 million, which contributed roughly 200 basis points of.

Additional gross margin.

We expect to obviously of.

Slightly less meaningful of bema in Q2.

But the rest of it is merchandise margin net of delivery expenses from E com et cetera.

The next piece of your question.

Relative to SG&A.

SG&A.

SG&A of of roughly 100 per million, we expect us of rise slightly.

2 of $110 million for the second quarter.

We haven't provided longer term guidance from that at this point, but.

We expect that that's probably a pretty share base to consider going forward.

Considering the fact that we expect store hours to resume for a major mall landlord.

Our.

Eventually, Canada to reopen completely and to be able to incur those.

Store expenses.

And then the last piece of your question I think I missed the piece of them between occupancy expenses arguably occupancy expenses were $21 million lower in the quarter than last year $8 million of that was the 1 time of payment the remaining $13 million represents the impact of the permanent closures of our favorable lease.

Patients when you think about that relative to 2019 include.

Inclusive of the store closures since that time occupancy expenses were roughly $25 million lower.

Our next question comes from the line of Susan Anderson of B Riley.

Hi, good morning, nice job on the quarter.

Jane I was wondering maybe if you could talk about the dressy product over Easter did you see that consumer of returning at all of that type of product.

I think you have lessons store, though and then just in terms of the piece that you mentioned as schools kind of reopen this spring in first quarter I guess was that a significant benefit and were you able to sell down some of that.

Form inventory and for back to school. This year are you planning inventories up.

Thanks, Susan with respect to Easter dress up it was at a historical low in Q1.

And within that product you saw some of the elements that we also do double duty with an Easter. So you saw things like Polo, then woven bottoms and boys pick up but they were for back to school versus for Dressy. So I think that bodes well for back to school and what we're anticipating in Q3, and then as far as.

Tori levels.

Pretty good of you talked about them extensively since last back to school, our carryover inventory as Rob mentioned is down almost 50% and we are still carrying.

A nice amount of the same basics, we've had since last year, we anticipate that as we get towards the end of Q3, you'll see our inventories normalized with a normalized back to school.

Ladies and gentlemen, we have time for 1 more question. Our final question comes from HP, Inc.

Yeah.

Okay.

Good morning.

Okay.

Morning.

Well, thank you everyone Hello.

All morning here they are high.

Thanks, that's all I have I can hear you guys, maybe the connection was bad.

So I would said congrats amazing quarter and welcome back.

Thank you.

I just wanted to dovetail on the back to school I know Youll have all of the uniform basics packed and held so to speak but what about the ancillary products you do a nice back to school backpack business and even shoes I know you always have a good shoe business there and if you can talk a little bit about your marketing efforts and plans from marketing in the back half and will you increase cash.

Just to increase marketing in the back half.

Yes, I think as far as back to school products concerned the eve of uniform product isn't pack and how thats on the floor and it's on the site and so it's available for mom whenever she needs. It based on how schools were rolling with hybrid and remote learning models. So we've had that available to sell for the customer alongside of that we've had issues.

With ointment and of backpack assortment, which is also fared well in Q1 versus Q1.2019.

When do you think about the product that's on the water and Thats coming from back to school, it's more fashion and from a delivery point of view, we're on track with that.

The supply chain disruption is like a 2 to 4 week disruption that we're seeing on the summer product, but for back to school. So far we're looking good.

Another element <unk> element of back to school as our graphic Tee program, which should help the longtime sell all signs point to us being in a really good place with inventory for back to school from a marketing point of view certainly we'll be spending more money on marketing than we did last year, because there wasn't a back of the hull and marketing was pulled way.

Back.

So we anticipate being able to really go after particularly on the digital side of the business as we're now close to 50% digital business will continue to support those.

Acquisition retention and reactivation strategies throughout the back to school period.

And thank you for joining us today, if you have further questions. Please call Investor relations at 2 zero of 1558400 extension 1.

4500.

You may now disconnect your lines and have a wonderful day.

Q1 2021 Children's Place Inc Earnings Call

Request a DemoDemo

PLCE

The Children's Place

Earnings