Q2 2022 Children's Place Inc Earnings Call

August 17, 2022

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Good morning, and welcome to the children's place second quarter 2022 earnings Conference call.

On the call today are Jane Elfers, President and Chief Executive Officer, Rob Helm, Chief Financial Officer, and Josh Trupo, Vice President financial planning and analysis.

At this time all participants are in a listen only mode.

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.

As a reminder, this conference is being recorded.

The children's place issued its second quarter 2022 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.

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.

It is now my pleasure to turn the call over to Jane Elfers.

Thank you and good morning, everyone, our Q2 sales and profitability fell well short of our internal expectations due to a significant miss to our retail sales projections in the period from early June through early July .

The combination of an unexpected and meaningful increase in promotional activity from our key competitors and the widely reported inflation driven consumer slowdown put significant downward pressure on our fashion AUR and margin during the quarter.

AUR ended the quarter flat versus our projection of up mid single digits.

Our fashion AUR was down negative mid single digits, a significant miss from our internal projections, while our basics AUR was that positive low teens as planned.

In addition, a $6 million unplanned expense late in the quarter further pressured our margins.

This expense was required to address unplanned inbound supply chain disruption.

We had to address a significant imbalance in our channel inventory caused by this disruption.

The majority of which stemmed from the rapid backup of our east coast ports as other retailers scrambled to move their shipments from the West coast.

Rob will cover these two issues in more detail during his prepared remarks.

Moving on to digital digital represented 47% of our retail sales in Q2 versus 45% in 2021 and 30% in 2019.

U S e-commerce traffic held up well during the quarter at positive <unk>, 7% versus last year.

As planned candidate ecommerce traffic was down due to the lapping of the temporary store closures last year.

We continue to deliver industry, leading digital results supported by the combination of our structural reset since the pandemic, our increased marketing investments and our focus on optimizing our channel results.

Digital is our highest operating margin channel and based on the strength of our digital business and our increased investments in this channel digital is projected to represent 50% of our 2022 retail sales.

Looking ahead, we are projecting digital to represent approximately 60% of our total retail sales by the end of full year 'twenty four versus 33% of retail sales in 2019.

Almost doubling our digital penetration in only five years.

And when you factor in our growth expectations for Amazon.

Our projected digital penetration and growth beyond 60% of total consolidated revenue by the end of full year 'twenty four.

With respect to digital marketing, we are focused on investing in top of funnel brand awareness. We are realizing positive early results with a 4% increase across the customer base and acquisition retention and reactivation for the second quarter.

Acquisition was particularly strong with digital acquisition of positive, 13% and store acquisition a positive 1%.

Despite the lower store base versus last year.

76% of our transactions occurred on a mobile device during Q2.

Our mobile App continues to drive strong customer engagement, especially among our loyalty members, who represent 95% of our mobile app transactions.

Our mobile app customers spend frequency.

Is 10% higher than non app customers and.

And basket sizes of customers transacting on our App is 15% higher than our non app customers.

Our current back to school campaign is focused on fostering children's education, and making important resources acceptable.

We partnered with actor author and philanthropist, Kevin Hart for our back to school campaign.

Since our launch on July 26.

We have garnered over 33 billion impressions.

Cross almost 500 print broadcast and digital outlets.

This campaign is packed with rich photo and video content that is being syndicated and amplified across both earned and paid digital media.

In addition, early results showed robust engagement with over $9 8 million completed video views.

And strong clicks to site.

We continue to see strength in partnering with celebrities and Influencers, both micro and macro to drive brand awareness.

And consideration across key product categories.

With respect to Q3, we have already seen positive search trend increases for our holiday and special moments Assortments.

Results quarter to date show, a 92% increase over last year in site searches across our Halloween and holiday Christmas Sleepwear Assortments.

Our consistently superior merchandise offering and our ongoing brand campaign targeted at these special product Assortments have established the childrens place as a market leader and holiday product offerings further driving brand loyalty and traffic.

We believe that our increased and targeted back to school marketing efforts are already having a positive impact on our third quarter sales.

Our quarter to date sales trend is above trend for the last two weeks of July .

Total retail sales are running down 11% versus 2021 and up 11% versus 2019.

And our AUR is currently running up positive high single digits high.

Higher than our back half AUR outlook now assumes based on the uncertain environment.

Our basics business continues to be very strong and with respect to our fashion assortment our customers responding to the combination of our significantly increased back to school marketing efforts and our curated back to school fashion Assortments.

Digital traffic is up over 5% quarter to date versus last year.

And quarter to date digital sales are running down 5% versus last year higher than we had anticipated considering our record shattering August last year.

As we have shared August historically represented about 35% of our Q3 retail sales.

Last year August represented just over 40% of our sales and outsized percentage to the typical third quarter due to the combination of pent up demand the return to in person learning and the child tax credit stimulus.

This year, we're projecting August sales to represent about 38% of the quarter.

Due to the continued growth in our ecommerce business, which generates significantly higher basket sizes.

Moving on to Amazon or Amazon business was outstanding in the second quarter Amazon is delivering very strong results from the inventory and marketing investments. We have made in our partnership continues to strengthen.

As I mentioned due.

Due to the East coast Port congestion late in the quarter, we had to overspend in our DC to provide Amazon with the necessary inventory to continue to support their outsized trend coming into and out of Prime day.

We had outstanding Prime day results and our sales have continued to build every week since prime day.

We believe that the Amazon customer is a higher income customer and advantage as our core TCP customer is feeling significant pressure from the unprecedented inflationary environment.

Amazon launched our iconic gymboree brand on their web site in late July .

Amazon supported the Gymboree brand launch with several key traffic driving placements across Amazon Dot com, including the back to school.

Amazon fashion kids fashion, and new arrivals landing pages as well as the Amazon homepage gateway.

Early results are encouraging and we look forward to building this exclusive partnership for years to come.

Moving on to Jim Murray in addition to launching gymboree on Amazon in Q2, we are very pleased with the early reads on our gymboree back to school product launches for.

For the second quarter, we experienced an 18% increase in spend per customer versus last year.

We also know that the gymboree customer is the higher income customer than our core TCP customer, which we believe will be an advantage as we continue to scale. This brand.

We introduce gymboree uniform product for the first time in Q2, which drove significant revenue site search volume strong social sentiment and AD click engagements that continue to grow each week.

The gymboree customer, let us know last year that she wanted holiday product earlier in the season. So we launched our first holiday collection on July 28.

Since launch this holiday collection drove a three times increase in search terms year over year and it was the top visited collection on our homepage.

We are confident that gymboree will continue to be an increasingly important part of our growth strategy.

In closing Rob will walk you through our Q3 and full year 2002 outlook during his prepared remarks.

From a high level perspective, when compared to 2019 pre pandemic levels.

Although we are now anticipating that consolidated sales will be down approximately 8% versus 2019. We also anticipate that operating income will be a positive mid teens versus 2019, and EPS will be up approximately 30% versus 2019.

With the multiple headwinds we are currently facing these results would only be possible due to the structural reset to our business model since the start of the pandemic.

We have a clear focus on continuing to maintain the significant double digit AUR increases we have realized since the start of the pandemic.

Which will benefit our gross margin when cotton costs normalized.

We will continue to build upon our E. Comm freight optimization strategies will continue to secure occupancy savings as their leases expire and our top priority will remain growth in digital our highest operating margin channel.

Now I'll turn it over to Rob.

Thank you Jane and good morning, everyone.

After I review, our Q2 results I will provide our Q3 and full year 2000 to outlook for.

For the fiscal second quarter, our operating results fell short of our expectations and we delivered an adjusted loss per share of <unk>.

Versus earnings per share of $1 71 in 2021, and <unk> 19 in 2019.

Net sales decreased by $33 million or 8% to $381 million versus $414 million in Q2, 2021, and decreased $39 million or 9% versus $420 million in Q2 2019.

Our U S net sales decreased by $48 million or 13% to $313 million versus $361 million last year, and our Canadian net sales decreased by $2 million or 5% to $35 million versus $37 million last year.

Comparable retail sales were negative eight 7% versus Q2 2021.

Positive two 2% versus Q2 2019.

Our Q2 net sales were negatively impacted by the slowdown in consumer demand driven by the unprecedented levels of inflation, particularly with respect to the significant increases in fuel and food prices combined with increased promotions across our competitive set.

As we shared on our last call our AUR plan for the second quarter was up mid single digits to offset AUC increases.

However, starting in June the combination of the consumer slowdown and the elevated promotional activity across the sector led to significant unplanned AUR pressure in our actual EUR for the quarter was flat.

The combination of the lost sales, resulting from the consumer slowdown and the heightened promotional environment represented the topline impact of approximately $22 million and our retail sales channels for the quarter versus our internal projections.

And as we had planned sales in the quarter were also negatively impacted by lapping the impact of the enhanced child tax credits, which started last July combined with the pent up demand from last year's return to in person learning and the impact of permanent store closures represent representing approximately $14 million for the quarter.

Our net sales were positively impacted by our outsized sales growth in our wholesale channel with Amazon.

Looking at sales by month for the quarter.

As we discussed on our last call our sales trend improved in May versus Q1, as we lap the outsized impact of stimulus of unseasonably cold weather.

For June sales trends further improve but were driven by the heavy promotions necessary to address our competitive set to clear through our summer fashion inventories.

And in July as expected, our sales were meaningfully lower than last year as we lap the impact of the combination of pent up demand to return to in person learning and the enhanced child tax credit stimulus.

In terms of sales by channel consolidated digital sales decreased 7% versus Q2, 2021, with our digital penetration growing to 47% of our total retail sales versus 45% in 2021 and 30% of retail sales in 2019.

Jordan net sales were down 14% versus Q2 2021.

Our comp store traffic was down 4% versus Q2, 2021, however, as a point of reference store traffic remained significantly below pre pandemic levels with comp store traffic down 32% for Q2 2022 versus Q2 2019.

Adjusted gross margin adjusted gross margin decreased 1046 basis points to 32% of net sales compared to 46% in Q2, 2021 and 33% in Q2 2019.

Approximately 610 basis points of this decrease was unplanned versus our internal projections.

The 610 basis point unplanned decrease in gross margin breaks down as follows.

First the slowdown in consumer demand combined with the unexpected increase in promotional activity from our key competitors pressured our top line sales and fashion aur's, resulting in lower than planned merchandise margins in both channels versus our internal projections.

The lower merchandise margin, coupled with the deleveraging of fixed expenses, resulting from the lower net sales deleverage our gross margin rate by 460 basis points versus our original plans.

Second we experienced significant unplanned inbound supply chain delays, most notably from the rapid buildup in congestion at the east coast ports as well as the impact of further vendor delays.

Supply chain disruptions forced us to have to rebalance our basics inventory primarily.

Primarily uniform in denim across our channels, we had to ship large amounts of basics inventory between our channels within our D C and our domestic supply chain to support our strong Amazon and digital businesses and to properly position us to deliver the significant level of basis revenue plan for Q3.

Well delays resulted in an additional $6 million of incremental costs in our DC in domestic supply chain, which further impacted our gross margin by an additional 150 basis points versus airplanes.

While our second quarter operating results fell well short of our expectations. The combination of selling through our late spring and summer products and getting the cost to balance our channel inventory behind us enabled us to exit the second quarter in a strong seasonal inventory position and better positioned for success in Q3.

We respect to our key back to school basics in both our digital and wholesale channels.

As expected the following items also impacted our gross margin in the quarter.

The sales mix shift to wholesale which operates at a lower gross margin.

We had planned for outsized growth with Amazon in Q2, but we significantly over achieved our internal Amazon sales plans for the quarter driven by the strong customer response to our back to school basics programs.

And as a reminder, while our Amazon business operates at a lower gross margin. It is accretive to our overall consolidated operating margin delivering operating margins nearly as high as our owned digital setup.

The impact of elevated inbound freight transportation costs, driven by significantly higher levels of airfreight in the higher container rates and lastly, incremental duty, resulting from the loss of the <unk>.

European go with trade benefits.

Adjusted SG&A.

Adjusted SG&A was $114 million flat to last year and versus the $150 million in 2019 and de leveraged 223 basis points to 29, 8% of net sales.

Baird to 27, 6% of net sales last year the.

The deleverage was primarily the result of the decline in net sales on our fixed expenses.

As planned marketing spend was higher in the quarter inclusive of investments in brand marketing.

Adjusted depreciation and amortization was $13 million in the quarter versus $14 million last year, an $18 million in 2019.

Adjusted operating loss adjusted operating loss for the quarter was $12 million.

Decrease of $52 million versus $40 million of operating income last year, and Deleveraged 1277 basis points to negative three 1% of net sales.

Compared to nine 7% of net sales in Q2, 2021, and one 4% of net sales in Q2 2019.

Interest expense, our adjusted interest expense for the quarter was $2 6 million versus $4 7 million last year the.

The decrease in interest expense was driven by lower interest rates due to our refinancing in Q4 last year and a lower term loan balance outstanding this quarter.

Tax rate.

Adjusted tax rate was 18%.

Moving on to the balance sheet, our cash and short term investments ended the quarter at $28 million. We ended the quarter with 284 million outstanding on our revolving credit facility.

Inventories ended the quarter up 34% versus last year and the increase breaks down as follows.

42% of the increase was due to higher AUC is driven by higher input costs.

24% of the increase was due to higher inbound freight costs.

18% of the increase resulted from the elevated transit times, including the impact of the worsening port disruption on the East coast.

And the remaining 16% of the increase was driven by our investments in inventory to support our strategic strategic growth initiatives with unit growth in place to support Amazon Gymboree instrument Jade.

Despite the slowdown in consumer demand, we were able to exit the quarter in a strong seasonal inventory position with spring and summer inventory units down 45% versus last year better positioning us for the back half of the year or.

Our basics inventory, which includes several key high volume categories with limited to no markdown risk accounted for over 50% of our on hand inventory at quarter end, which positions us for what we will believe could be a continuation of the current environment throughout the back half of the year.

Moving on to cash flow and liquidity, we used $34 million in cash from operations in Q2 versus cash provided of $30 million last year.

Capital expenditures in Q2 were $8 million.

During the second quarter, we repurchased 484000 shares for $23 million, leaving 196 million outstanding on our current authorization.

Now I will provide an update on our store activity in the quarter.

We closed seven locations in the second quarter, and we plan to close a total of 40 stores for full year 2022.

With over 75% of our store.

<unk> coming up for lease action in the next 24 months, we continue to maintain meaningful financial flexibility and our lease portfolio.

These short term leases will continue to provide us with the flexibility to optimize our occupancy costs.

We ended the quarter with 658 stores in total square footage of $3 1 million square feet, a decrease of 8% compared to Q2, 2021, and 31% versus Q2 2019.

With respect to our fleet optimization strategy. It's important to continue to highlight that for 2022, we're planning for 50% of our retail sales to come from our stores with 50% of our store sales coming from traditional malls and 50% coming from off mall.

With our digital business also plan, an industry, leading 50% of total retail sales.

We're planning for 75% of our retail sales from off mall strongly supporting our structural reset to a digital first retailer.

Moving onto our outlook based on the current environment. We are now planning for a decline of approximately 10% of net sales versus 2021 for the year.

Our inventories are now better positioned by channel to meet the current demand trends. However, we anticipate that promotions will remain elevated for the back half of the year.

Continuing to proactively manage our inventory levels.

We continue to benefit from our pricing and promotion reset.

<unk> is our plan to remain significantly higher than pre pandemic levels.

However, based on the current environment our outlook now assumes positive low single digit AUR increase for the back half of the year versus our original projections of positive high single digit AUR increases.

Our outlook assumes that our Amazon business continues to outperform supported by our significant investments in both inventory and marketing.

Starting with our Q3 outlook the company expects net sales for the quarter to be approximately $500 million, representing a low double digit decrease in comparable retail sales versus Q3, 2021, and a positive mid single digit comp increase versus Q3 2019.

Adjusted operating income is expected to be approximately 14% of net sales as compared to 29% in Q3 2021.

Primarily driven by the decrease in sales.

This compares to 12, 1% in Q3 2019.

We anticipate third quarter adjusted earnings per diluted share to be approximately 395 as compared to adjusted earnings per diluted share of $5 43 in Q3, 2021 and 303 in 2019.

Our total inventories at the end of Q3 2022 are anticipated to remain elevated primarily.

Primarily driven by higher raw material input costs and higher inbound transportation costs.

Moving onto our full year outlook for fiscal 2022, the company expects net sales to be approximately $1 75 billion, reflecting a low double digit decrease in comparable retail sales versus fiscal 'twenty, one and a positive mid single digit comp increase versus full year 2019.

We projected ecommerce penetration will increase to 50% of total retail sales for full year 2022 versus <unk>, 46% in full year, 'twenty, one and 33% and full year 2019.

Adjusted operating income is expected to be approximately seven 5% of net sales as compared to 15, 1% and 21, 6% in 2019, we.

We anticipate fiscal 2022 adjusted earnings per diluted share to be approximately $7 as compared to adjusted earnings per diluted share of $13 40 in 'twenty, one and $5 36 in 2019 our.

Our inventories at the end of Q4 2022 are anticipated to moderate from current levels. We are planning for our full year tax rate in the range of 23% to 24%.

Our outlook for the balance of year assumes lower occupancy costs versus last year due to the impact of our Permian store closures as well as the benefit of favorable lease negotiations and lower variable occupancy expense, resulting from the lower planned sales.

Although there has been some moderation of inbound container and transportation costs, our full year outlook does not contemplate significant improvement from current levels how.

However, we are planning for a significantly lower airfreight cost in the back half of the year versus the first half of the year.

We anticipate that the full year 'twenty, two SG&A will be slightly lower than full year 2021, with SG&A planned to be approximately $450 million for the year due to the combination of the actions. We're taking in response to the current environment the benefits from our fleet optimization program and lower incentive compensation expense.

We're planning significant marketing investments for the back half of the year, which we believe will continue to support our PCB sales and acquisition goals as well as support the continued momentum in our gymboree and Amazon businesses.

We're planning for lower interest expense in the back half of the year, resulting from the favorable interest rates, we secured as part of the refinancing of our revolving credit facility and term loan in the fourth quarter for 2021.

In line with historic norms, we expect to generate significant operating cash flow in the back half of the year, providing us with the ability to continue to return capital to our shareholders and reinvest in our business.

Lastly, we are planning for capital expenditures of approximately 45 million for fiscal year 2022, with $26 million remaining for the balance of the year, the majority being allocated to support digital and supply chain fulfillment initiatives.

Thank you and now we will open the call to your questions.

At this time, if you would like to ask a question. Please press star one now on your telephone keypad to.

To withdraw yourself from the queue you May press star two once again that is star one on your telephone keypad, one moment, while we queue.

We will take our first question from Jay sole of UBS.

Great. Thank you so much I wanted to ask you about just AUR and sort of the context of this.

This quarter second quarter was sort of unusual quarter as you think about the AUR gains that you've been able to maintain how would you think about just at a high level I know youre not giving guidance for fiscal 'twenty three but how do you think about what the gross margin should look like in a normalized environment. Once some of the supply chain stuff and maybe some of the unusual promotions from some of these competitors.

It gets back to a regular levels.

Yeah, Let me take the first part of that and then I'll turn it over to Rob.

Just from it from the AUR question on Q2, we covered in the script, but I think it's worth diving a little bit deeper into it.

We have the industry wide slowdown in June , particularly in soft lines and discretionary product, which we've all read about but what what we had and what surprised us was the unexpected and meaningful ramp up in the promotional activity from our two main competitors, which really started in early June and really ramped up.

In mid June through the end of the quarter.

From our chair, it's frustrating, we all experienced firsthand the benefits of tightly controlled inventories in 2021, and CRE version back to bloated mismatch inventories in the sector at less than a year later it's.

It's tough to watch.

On top of that what I think made it even more frustrating for us in Q2 was that it wasn't kids specific issues that our competitors add it appeared to be a hard hard goods issue with one of them and you had another adult apparel missed that for the other but in the end it really didn't matter.

There are two very large retailers with a wide reach and our two biggest competitors and so when they have a fire sale in one area to this degree it's going to draw mom N and while she is there. She is clearly going to shop for her kids. So when you have promotional events as large as these running left us with no choice, but to compete on price.

And then when you look at what happens in our Q2 offerings in our product offerings Q2 has historically been our lowest quarter of EPS and operating margin and the fact that our summer fashion product is really commodity product much more so than any other quarter, because theres no differentiated or theres really no holiday product in Q2.

Like there is in Q1 Q3 and Q4, so the vast majority of our fashion product in the second quarter is made up of commodity categories of short mix and match and graphic Tees, which we always say, which is the lion's share of what we carry and what we sell in Q2 up until we get to the second week in July where we really convert to back to school.

So when you have competitors offering these commodity categories.

Fire sale prices and your AUC as are a decade high decade highs it really doesn't leave any room. So our total AUR for the quarter as we had said with planned up mid singles and the breakout with fashion was planned up low singles the lowest of the year with our fashion plan because it is commodity product.

And basic AUR with planned up low teens, and we hit our AUR plan in basics and we Miss fashion by a wide margin and when you put the AUR Miss against the retail sales.

Our internal projections you get.

500 basis points of margin Miss that Rob mentioned for the quarter.

As you look forward to Q3 and Q4, we feel like we've de risked those two quarters.

By lowering our AUR projections for the back half so we've taken our what it where our previous AUR projections, which were up high singles to up low singles and what we've done is we've kept our basics AUR plan intact, because were delivering against that and continued to deliver against it and have delivered against at all.

Year.

It's kind of markdown immune product if you will that has.

Net zero liability, if you will and what we've done is we've taken our fashion AUR for Q3, and Q4 down significantly from where they were.

And so as I mentioned as we look forward into the balance of this year from a margin point of view and certainly into 'twenty three.

We're only three weeks into the quarter, but our AUR is holding up much better at the high single digits, both basics and fashion AUR are holding up well and what we attribute that to is certainly the marketing efforts that we spoke about on the call, but also the fashion Assortments and Q3 are very different than the fashion assortments.

Q2, which are really commodity based so I think that the customer is clearly responding to some of the differentiated fashion product that we brought in and some of the early holiday product that we brought in with respect to like Halloween and Christmas and I think that as we look forward that just further reinforces that we need to continue.

To strategically diversify our offerings with respect to things like our initiatives around gymboree, our initiatives around Amazon and our initiatives around sugar and Jade, which we continue to focus on so I think when you look into Q3, and I mean into 2023 and I'll turn it over to Rob for some more thoughts on that.

Cotton is certainly a huge huge problem for us this year at decade highs and as those costs start to moderate particularly in the back half of the year. There is significant growth margin.

Opportunity for us because as you pointed out.

Double digit AUR and we've never really given the number but they are significant significant double digit AUR, we still hold on to those even through a tough Q2, we ended flat so.

Our intention and our goal is to continue to hold onto those significant AUR increases we got during the pandemic and when the cotton prices normalize that.

As I said that is a huge huge lift behind gross margin thats coming for us.

Which we anticipate will start to see in the back half of 'twenty three.

James is exactly right on the gross margin, there's really four components first the cotton costs those impacted our gross our AUC is by high single digits.

Right now we're in the middle of our summer buys that we would expect some moderation in the back half of the year and benefit as those cotton cost come down. The second component is inbound transportation costs, we don't expect expedited airfreight costs that weighed on our first half margins this year.

To the degree next year and we've seen recent moderation in container cost that we expect to for that to continue.

The third component is the occupancy cost we've done really well on that over the last couple of years and we still maintain a significant amount of financial flexibility with 75% of our leases coming up for the next 24 months and with soft traffic, we think that positions us well for future negotiation savings and the last piece is our focus on continuing to improve.

Our e-commerce fulfillment.

Got it if I can ask one more Jane just because you mentioned the importance of continuing to focus on Amazon and the other strategic initiatives. It sounds like that Amazon business continues to evolve and improve can you just give us maybe dive in a little bit more and elaborate on what you saw on Amazon in the quarter and what's giving you confidence about that business as you move into the back half of the year and next year.

Yes, I mean, we had pretty significant increases in Amazon in 2021, and we came into 2022 with a very aggressive plan and we're beating it every quarter. So we've increased again, our plan and Amazon in the back half.

Have really made a lot of strides with them as far as the partnership is concerned and they are working very closely together with us to try to sell a lot of the white space voice they have on their site.

They really have a very fragmented big kids business and I think they clearly now see the opportunity now that they are in a much different inventory position than they've been in that children's places a key partner in order to help them fill that fill that white space and so we had a great like I said, we had an outstanding Prime day.

300% versus last year, but I think more importantly, our business has continued to build every week. So we just keep doing more and more and more sales with them and beating our projections for them and beating their own internal projections. So we worked really hard in the second quarter, we had to overspend, but we worked hard to.

<unk> some of the supply chain issues, we saw in our east coast ports to be able to get them the inventory to fill them back into Prime day, and also to be able to do this significant business. We see in basics for August and September but going forward. They continue to get into new categories. All the time, we really started out with a basic business, we've now gotten into.

Our fashion business, they hadn't really strong business last year in holiday Sleepwear, and the Christmas and Halloween sleep. They have much much stronger positions in that this year. They never had outerwear before they have that coming in this year footwear is another thing that we're just scratching the surface with them on but what they've been able to have and it's really basically in uniform has.

Been very very successful so we keep strategically adding fashion categories on top of that.

Big base of the basic business, we have so that's.

We anticipate that will continue to build and grow as we get into 'twenty three and beyond.

Really exciting partnership and then as we talked about we launched on Jimbo range. It very recently and excited to be partners exclusively with them as well.

We will take our next question from Dana Telsey of Telsey Advisory Group. Your line is open.

Good morning, and good morning, everyone. Jane as you think about back to school Hi, as you think about back to school to holiday.

Anything any learnings from the macro pressures on the consumer from back to school of how you're preparing for holiday whether it's.

Timing, whether it's promotions any of it and then just on the storefront versus online what do you see as you went through the quarter in terms of traffic did it did it change at all versus online and when you talk about other initiatives.

Sugar and Jade progressing relative to your plan. Thank you.

Sure well sugar and Jade small and so the plan is very very very small as we have said we are testing through the four quarters of the year to see what they want and so we learned what they wanted and holiday and we then get our holiday 23 by based on that we learned a lot in spring and summer about the.

Is that they want it's not really about outfitting with sugar and Jade its really about the commodity categories and saw some significant learnings from spring and summer that we're able to go back into for next spring and summer and now for back to school, we're kind of seeing the same thing strengthen backpacks strength in fashion denim and it continue.

<unk> strengthened like lounge.

Slash sleepwear for them.

So we're happy with what we're learning, but like as I said it was a very small planned to start with so we feel good about how we planted in <unk>.

What's happening with it as.

As far as traffic store traffic was a little bit better than it has been in second quarter. When you compare it to 2021.

Down like 4%, but when you compare it to 2019 and pre pandemic levels, it's still down in the mid <unk>. So that's as far as we're concerned thats not great and so we'll continue to watch that we are very pleased in a very tough quarter.

We're disappointed with our results in Q2, we were pleased with where E. Com traffic held up at up 7% and so we thought that that was pretty good, particularly with the amount of E. Comm penetration in those last two weeks of July and as we mentioned on the call E. Comm traffic in Q3 is up 5%, which surprises me quite frankly based on that.

Historically.

Record shattering if you will August that we had last year. So digital digital digital continues obviously is our focus your question about the difference between back to school and holiday we are delivering.

Christmas I'll just call it Christmas for ease of this conversation earlier than we did last year, we had some supply chain problems in TCP and we didn't launch a lot of our Christmas product until the end of September and the beginning of October which was late for US. This year, we're planning on launching it the lion's share of it I think a 25% or a 28.

So we're looking to accelerate that business as I mentioned on the call. We already launched the Gymboree Holiday Christmas collection, which was our number one traffic site visit it on the site I think that the.

The work that we've done behind emotional product and what we saw in Q1, our strongest business in Q1 was by far east or people, who are addressing up again and then even if you take it through Q2, even though it's a tiny part of our business things like woven tops and delays and like key item dresses and girls continued to be stronger while the customer it was kind of.

Shunning if you will the net categories I think the consumer had stocked up on so many nets over the pandemic be it sleepwear or T shirts are mixed and matched knits and things like that which is necessitated us clearing them in Q2, where you really see her buying again is in those dress up categories and so we are I think are really.

Well positioned currently right now, which is I think why we're seeing the bounce back in AUR in that emotional product pumpkin picking our harvest or Apple picking and then all the way through Q4, we have.

Like I said in earlier launch on holiday, we have more receipts behind dress up than we did last year, because we anticipated when we saw what happened in Easter that continuation would happen for Christmas and then we also have I think the opportunity in Q4, where we were kind of shut down if you will December week five through the end of January in stores from Omicron I think thats.

<unk>.

Part of the reason why our key we are anticipating our Q3 trend will improve I'm, sorry, our Q4 trend will improve over our Q3 trend.

So we're definitely in a woven cycle, we're definitely an address that cycle and I think our inventories are positioned for that in Q4.

Thank you.

And once again to ask a question that is star one on your telephone keypad. We will go next to Susan Anderson of B Riley.

Hi, good morning.

Wanted to maybe follow up just on the promotions. It sounds like you feel really good about the basics and it's being it's pretty rational out there you feel like you don't.

Bill is a need to permanently I guess, what's the risk there if your competitors do get promotion on basic products during back to school would you have to I guess follow suit and then also I'm curious.

It sounds like you feel like kids inventory at those competitors is still.

Pretty good it's the other categories that may be driving the traffic to the store and purchasing there.

So I guess.

I'm curious how you feel about just the competitor inventory and that's.

Having to promote more in the quarter and then lastly, just on supply chain it sounds like the issues.

What's the risk of that coming back in third quarter, and then if you could talk about freight and shipping costs in third quarter year over year expectation. Thanks.

Sure as far as the basics and the competitors I think when you look at us versus our two main competitors I think we're well in line on our basics and Thats clearly a strength of ours has been for years and when you look at where we are price versus them.

Very much in the pocket of being competitive and in some cases were lower than them. So I feel confident that we're going to continue to be okay. In the basics AUR as we kind of have been all year and if we could stay okay and what was.

Very irrational environment in Q2, and we've seen what we've seen through almost three weeks in August which is really where the bulk of our back to school business happens from $7 15 to $8 15, I think we'll continue to be able to keep that AUR, where we need it.

If you look at Q3, we originally had our AUR planned up about 9% basics continues to be low teens and fashion was mid singles. We've kept the Q3 AUR plan in basics in the low teens and we've taken the fashion AUR down from up mid singles to down mid singles for a total AUR plan of two.

And so we think that we have appropriately derisked the fashion from the over promotions.

Promotions at the competitors, yes, as I said that I don't think that the kids inventory and our competitors is in a state where it needs to be promoted I think that.

Just from what we see and obviously, we don't have complete visibility into our competitors' inventories.

From what we see in stores and what we see online that doesn't seem to be where their issues are stemming from and certainly when you listen to them speak.

Speak about the issues. They have they don't talk about kids. They talk about one of them talks about hard goods and the other talks about women's apparel. So.

I think that what happened in Q2 is the entire box got competitive for them and so they over promoted in kids as well to drive as you said to drive that traffic in and bring mom and in <unk>. We will see was there. So we saw a lot of prices like two and $3 tanks and things like that on that commodity.

Pricing and so I think by taking the AUR down in fashion from up mid singles to down mid singles is to your question Derisking. It.

From an AUR perspective, what we saw on supply chain issues in Q2, which was specific to US which was unplanned is that we have used.

I would tell you very strategically the east coast ports.

Almost exclusively for the better part of a decade and it served us very well over the years with all the problems that we've heard and seen and read about in the west coast, particularly during the pandemic when they were backed up for literally months.

<unk>.

As you May remember, we did had probably less disruption than most in our supply chain in 2021, and our merchandize flowed better as we as I mentioned strategically use the east coast Port.

Again, Unfortunately for US we got caught up with the competitors, who scrambled to move their receipts from the West Coast Port.

And to the left what was the less crowded east coast ports, and then that caused an unprecedented backup and I'm, particularly talking about savanna, which is our most important part and that stranded a lot of our large July basic delivery. So we have those stranded for over four weeks and some of them haven't even arrived yet.

So that's what caused us to have to spend a lot more than we had planned to in our Dcs to rebalance. The inventory. We did have so we had to take a lot of inventory and move it around to channels like Amazon and digital to support the trend and we also had additional DC cost of freight and labor moving more.

E comm shipments at a lower AUR, which put pressure on the basket sizes, which all goes back to the over promoting so I think when you think about why arent you going to have those supply chain cost reoccur in Q3 or Q4 are.

Clearly our merchandise is going to come in we don't know everything about the port, but we certainly our logistics team talk to them every single day and as of yesterday I don't know it might be too much information, but.

35 vessels that anchor at Savannah, which is a major improvement from where we've been and then the Georgia Port Authority says that by the mid to the end of September they should be back to normal quote unquote and that we should not see that increase in Q4 again, they have obviously, great visibility into what's coming in and we have projections.

From them through week 39, and they all look manageable. So we don't anticipate having to.

Scramble again in our DC as those east coast ports kind of go back to normal as the other retailers to go back to the West Coast now that things have calmed down.

Our next question is from Kelly Cracow of Citi. Your line is open.

Hi. Thanks. This is Kelly on for Paul just curious if we could circle back on the composition of your inventory I think you said spring summer units are down 45% versus last year does that mean, you do not have much.

Carryover excess spring some regulatory to get through at this point.

In other words youre sort of entered the back to school season pretty clean from an inventory perspective and.

And sorry, if I missed this how much are your total units up year over year.

Yes, that's exactly what it means Kelly our spring summer is down 45%.

The predominant driver in our inventory increases are increased auc's at higher cost.

That accounted for nearly.

Just over 60% of the increase.

From a unit inventory perspective, we have a small amount of tiny amount of growth and that's really relative to our strategic growth initiatives Amazon gymboree instrument.

And we'll take a question from Marni Shapiro of retail tracker. Your line is open.

Hey, guys.

Good morning, I, just wanted to clarify Jane.

You've talked a lot about.

The basics business versus the fashion business versus the dressy three different things in your store.

It sounds like your customer is responding to those.

Neither need pockets so back to school.

Uniforms or emotional pockets, so holidays or family events.

Could you just talk about her resistance or pension to come in or be online and buy those items versus the other and I guess what falls in that other pocket. Because you then clarify the difference between woven and knit. So it doesn't sound like it's across the board on the fashion. It sounds like she is being very specific and mindful and what she's shopping for.

If I could put it that way.

Yes, 100% agree that she has been very specific and mindful from a basic point of view of 100% agreement. She still stocking up on those who need them for back to school they've been a very strong part of our business from July 15th onward. They always are a much bigger part of our business. This time of year and we've been.

Very happy with what we've seen we mentioned the AUR.

Feel very good about where were planned where we're actually coming in and the <unk>.

<unk> associated with that when you go uniform opposite would be included in that uniform denim backpacks those types of things when you look at the emotional product and you know you go online and you see things like Apple picking in harvest and the plans that we bring in and the family looks and all those things. She is clearly responding to those as well, which.

Why I think that the fashion AUR is holding up a lot better in Q3 than it did in Q2, and then you get to the resistance category and so what I would call. The resistance categories and this has been year to date, we will have to see what happens in the back half would be the knit categories and so.

T shirts, the mix and match those types of things sleepwear have all been.

Subpar performers in the first half of the year because when you saw how they outperformed in 2021 I think that there would naturally be a pullback until you'd think about as you move into Q3 and Q4 for US what are those categories and the things that come to mind right away for me is the long sleeve knits and active bottoms, which are two big big categories.

For us in Q3, and Q4 and so those are the types of things that we have to watch it carefully and we have to watch to make sure that we're not over promising ourselves on AUR.

Those are categories that we have to wait and see if mom is going to start to buy those again or if she's going to still think that she's got enough knits to laughter and she is going to continue to go for woven tops and into Weldon bottoms I think the other thing that is going to have to happen before those specific net categories that I'm talking about.

Get back.

Back on track again is definitely a weather change I do not anticipate the mom is going to start stocking up on any type of knit category until she needs to and so I think when we see the weather change, which will hopefully see in mid September mid to late September we'll really have a much better idea of how knits in general as a category is going to perform.

Through Q4 in the back half of the year.

Thank you for joining us today, if you have further questions. Please call Investor Relations at area Code 2015582400.

Pension 14500, you may now disconnect your lines and have a wonderful day.

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Good morning, and welcome to the children's place second quarter 2022 earnings Conference call.

On the call today are Jane Elfers, President and Chief Executive Officer, Rob Helm, Chief Financial Officer, and Josh Trupo, Vice President financial planning and analysis.

At this time all participants are in a listen only mode.

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

I ask that each of you limit yourself to one question. So that everyone will have an opportunity.

As a reminder, this conference is being recorded.

The children's place issued its second quarter 2022 earnings press release earlier this morning a.

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.

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.

It is now my pleasure to turn the call over to Jane Elfers.

Thank you and good morning, everyone.

Our Q2 sales and profitability fell well short of our internal expectations due to a significant miss to our retail sales projections in the period from early June through early July .

AUR ended the quarter flat versus our projection of up mid single digits our.

Our fashion AUR was down negative mid single digits.

Significant miss from our internal projections, while our basics AUR was up positive low teens as plant.

In addition.

$6 million unplanned expense late in the quarter further pressured our margins.

This expense was required to address unplanned inbound supply chain disruptions.

We had to address a significant imbalance in our channel inventories caused by this disruption.

The majority of which stemmed from the rapid backup of our east coast ports as other retailers scrambled to move their shipments from the West coast.

Rob will cover these two issues in more detail during his prepared remarks.

Moving on to digital digital represented 47% of our retail sales in Q2 versus 45% in 2021 and 30% in 2019.

U S e-commerce traffic held up well during the quarter at positive <unk>, 7% versus last year.

As planned Canada E Commerce traffic was down due to the lapping of the temporary store closures last year.

We continue to deliver industry, leading digital results.

Ported by the combination of our structural reset since the pandemic, our increased marketing investments and our focus on optimizing our channel results.

Looking ahead, we are projecting digital to represent approximately 60% of our total retail sales by the end of full year 'twenty four versus 33% of retail sales in 2019.

Almost doubling our digital penetration in only five years.

And when you factor in our growth expectations for Amazon.

Our projected digital penetration and growth beyond 60% of total consolidated revenue by the end of full year 'twenty four.

Acquisition was particularly strong with digital acquisition of positive 13%.

And store acquisition, a positive 1% despite.

Despite the lower store base versus last year.

76% of our transactions occurred on a mobile device during Q2.

Our mobile App continues to drive strong customer engagement, especially among our loyalty members, who represent 95% of our mobile app transactions.

Our mobile app customer spend frequency is.

Is 10% higher than non app customers and basket sizes of customers transacting on our App is 15% higher than our non app customers.

Our current back to school campaign is focused on fostering children's education, and making important resources acceptable.

We partnered with actor author and philanthropist, Kevin Hart for our back to school campaign.

Since our launch on July 26.

We have garnered over 33 billion impressions.

Across almost 500 print broadcast and digital outlets.

This campaign is packed with rich photo and video content that is being syndicated and amplified across both earned and paid digital media.

In addition, early results showed robust engagement with over $9 8 million completed video views.

Strong clicks to site.

We continue to see strength in partnering with celebrities and Influencers.

<unk> micro and macro to drive brand awareness and consideration.

<unk> across key product categories.

With respect to Q3, we have already seen positive search trend increases for our holiday and special moments Assortments.

Results quarter to date show, a 92% increase over last year in site searches across our Halloween and holiday Christmas Sleepwear Assortments.

Our consistently superior merchandise offering and our ongoing brand campaign targeted at the special product Assortments have established the childrens place as a market leader and holiday product offerings further driving brand loyalty and traffic.

We believe that our increased and targeted back to school marketing efforts are already having a positive impact on our third quarter sales.

Our quarter to date sales trend is above trend for the last two weeks of July .

Total retail sales are running down 11% versus 2021 and up 11% versus 2019.

And our AUR is currently running up positive high single digits high.

Higher than our back half AUR outlook now assumes based on the uncertain environment.

Our basics business continues to be very strong.

With respect to our fashion assortment, our customers responding to the combination of our significantly increased back to school marketing efforts and our curated back to school fashion Assortments.

Digital traffic is up over 5% quarter to date versus last year.

And quarter to date digital sales are running down 5% versus last year higher than we had anticipated considering our record shattering August last year.

As we have shared August historically represented about 35% of our Q3 retail sales.

Last year August represented just over 40% of our sales and outsized percentage to the typical third quarter due to the combination of pent up demand to return to in person learning.

And the child tax credit stimulus.

This year, we're projecting August sales to represent about 38% of the quarter due to the continued growth in our ecommerce business, which generates significantly higher basket sizes.

As I mentioned due.

We had outstanding Prime day results and our sales have continued to build every week since prime day.

We believe that the Amazon customer has a higher income customer and advantage as our core TCP customer is feeling significant pressure from the unprecedented inflationary environment.

Amazon launched our iconic gymboree brand on their web site in late July .

Amazon supported the Gymboree brand launch with several key traffic driving placements across Amazon Dot com, including the back to school.

<unk> fashion kids fashion, and new arrivals landing pages as well as the Amazon homepage gateway.

Early results are encouraging and we look forward to building this exclusive partnership for years to come.

Moving on to Jim Murray.

In addition to launching gymboree on Amazon in Q2, we are very pleased with the early reads on our gymboree back to school product launches for.

For the second quarter, we experienced an 18% increase in spend per customer versus last year.

We also know that the gymboree customer its a higher income customer than our core TCP customer, which we believe will be an advantage as we continue to scale. This brand.

We introduce gymboree uniform product for the first time in Q2, which drove significant revenue site search volume strong social sentiment and added click engagements that continue to grow each week.

The gymboree customer, let us know last year that she wanted holiday product earlier in the season. So we launched our first holiday collection on July 28.

<unk> launch this holiday collection drove a three times increase in search terms year over year and it was the top visited collection on our homepage.

We are confident that gymboree will continue to be an increasingly important part of our growth strategy.

In closing Rob will walk you through our Q3 and full year 'twenty two outlook during his prepared remarks.

From a high level perspective, when compared to 2019 pre pandemic levels.

Although we are now anticipating that consolidated sales will be down approximately 8% versus 2019.

Also anticipate that operating income will be a positive mid teens versus 2019, and EPS will be up approximately 30% versus 2019.

With the multiple headwinds we are currently facing these results would only be possible due to the structural reset to our business model since the start of the pandemic.

We have a clear focus on continuing to maintain the significant double digit AUR increases we have realized since the start of the pandemic.

Which will benefit our gross margin when cotton costs normalize.

We will continue to build upon our E. Comm freight optimization strategies, we will continue to secure occupancy savings as our leases expire and our top priority will remain growth in digital our highest operating margin channel.

Now I'll turn it over to Rob.

Thank you Jane and good morning, everyone.

After I review, our Q2 results I will provide our Q3 and full year 2000 to outlook for.

For the fiscal second quarter, our operating results fell short of our expectations and we delivered an adjusted loss per share of <unk> versus earnings per share of $1 71 in 2021, and <unk> 19 in 2019.

Net sales decreased by $33 million or 8% to $381 million versus $414 million in Q2, 2021, and decreased $39 million or 9% versus $420 million in Q2 2019.

Our U S net sales decreased by $48 million or 13% to $313 million versus $361 million last year, and our Canadian net sales decreased by $2 million or 5% to $35 million versus $37 million last year.

Comparable retail sales were negative eight 7% versus Q2, 2021 and positive two 2% versus Q2 2019.

As we shared on our last call our AUR plan for the second quarter was up mid single digits to offset AUC increases.

Our net sales were positively impacted by our outsized sales growth in our wholesale channel with Amazon.

Looking at sales by month for the quarter as we discussed on our last call. Our sales trend improved in May versus Q1, as we lapped the outsized impact of stimulus of unseasonably cold weather.

For June sales trends further improve but were driven by the heavy promotions necessary to address our competitive set to clear through our summer fashion inventories.

In July as expected our sales were meaningfully lower than last year as we lap the impact of the combination of pent up demand the return to in person learning and enhanced child tax credit stimulus.

Jordan net sales were down 14% versus Q2 2021.

Our comp store traffic was down 4% versus Q2 2021.

However, as a point of reference store traffic remained significantly below pre pandemic levels with comp store traffic down 32% for Q2 2022 versus Q2 2019.

Adjusted gross margin adjusted gross margin decreased 1046 basis points to 32% of net sales compared to 46% in Q2, 2021 and 33% in Q2 2019.

Approximately 610 basis points of this decrease was unplanned versus our internal projections.

The 610 basis point unplanned decrease in gross margin breaks down as follows.

First the slowdown in consumer demand combined with the unexpected increase in promotional activity from our key competitors pressured our top line sales and fashion AUR is resulting in lower than planned merchandize margins in both channels versus our internal projections.

The lower merchandise margin, coupled with the deleveraging of fixed expenses, resulting from the lower net sales deleverage our gross margin rate by 460 basis points versus our original plans.

Second we experienced significant unplanned inbound supply chain delays, most notably from the rapid buildup in congestion at the east coast ports as well as the impact of further vendor delays.

Supply chain disruptions forced us to have to rebalance our basics inventory primarily.

Primarily uniform in denim across our channels, we had to ship large amounts of basics inventory between our channels within our DC and our domestic supply chain to support our strong Amazon and digital businesses and to properly position us to deliver the significant level of basis revenue plan for Q3.

Well delays resulted in an additional 6 million of incremental costs in our DC in domestic supply chain, which further impacted our gross margin by an additional 150 basis points versus airplanes.

<unk> respect to our key back to school basics in both our digital and wholesale channels.

As expected the following items also impacted our gross margin in the quarter.

The sales mix shift to wholesale which operates at a lower gross margin.

The impact of elevated inbound freight transportation costs, driven by significantly higher levels of airfreight in the higher container risks and.

And lastly, incremental duties, resulting from the loss of the Ethiopian or go with trade benefits.

Adjusted SG&A adjust.

Adjusted SG&A was $114 million flat to last year and versus the $150 million in 2019 and de leveraged two.

223 basis points to 29, 8% of net sales compared to 27, 6% of net sales last year.

The deleverage was primarily the result of the decline in net sales on our fixed expenses.

As planned marketing spend was higher in the quarter inclusive of investments in brand marketing.

Adjusted depreciation and amortization was $13 million in the quarter versus $14 million last year, an $18 million in 2019.

Adjusted operating loss adjusted operating loss for the quarter was $12 million.

A decrease of $52 million versus $40 million of operating income last year, and Deleveraged 1277 basis points to negative three 1% of net sales compared.

Compared to nine 7% of net sales in Q2, 2021, and one 4% of net sales in Q2 2019.

Interest expense, our adjusted interest expense for the quarter was $2 6 million versus $4 7 million last year.

The decrease in interest expense was driven by lower interest rates due to our refinancing in Q4 last year and a lower term loan balance outstanding this quarter.

Tax rate.

Our adjusted tax rate was 18%.

Moving on to the balance sheet, our cash and short term investments ended the quarter at $28 million. We ended the quarter with 284 million outstanding on our revolving credit facility.

Inventories ended the quarter up 34% versus last year and the increase breaks down as follows.

42% of the increase was due to higher fees driven by higher input costs.

4% of the increase was due to higher inbound freight costs.

18% of the increase resulted from the elevated transit times, including the impact of the worsening port disruption on the East coast.

Moving on to cash flow and liquidity, we used $34 million in cash from operations in Q2 versus cash provided of $30 million last year.

Capital expenditures in Q2 were $8 million.

During the second quarter, we repurchased 484000 shares for $23 million, leaving a 196 million outstanding on our current authorization.

Now I will provide an update on our store activity in the quarter.

We closed seven locations in the second quarter, and we plan to close a total of 40 stores for full year 2022.

With over 75% of our store.

Coming up for lease auction in the next 24 months.

We continue to maintain meaningful financial flexibility and our lease portfolio.

These short term leases will continue to provide us with the flexibility to optimize our occupancy costs.

We ended the quarter with 658 stores in total square footage of $3 1 million square feet, a decrease of 8% compared to Q2, 2021, and 31% versus Q2 2019.

With our digital business also plan, an industry, leading 50% of total retail sales.

We're planning for 75% of our retail sales from off mall strongly supporting our structural reset to a digital first retailer.

Moving onto our outlook based on the current environment. We are now planning for a decline of approximately 10% of net sales versus 2021 for the year.

Our inventories are now better positioned by channel to meet the current demand trends. However, we anticipate the promotions will remain elevated for the back half of the year.

Continuing to proactively manage our inventory levels.

We continue to benefit from our pricing and promotion reset.

<unk> is our plan to remain significantly higher than pre pandemic levels.

However, based on the current environment our outlook now assumes positive low single digit AUR increase for the back half of the year versus our original projection of positive high single digit AUR increases.

Our outlook assumes that our Amazon business continues to outperform supported by our significant investments in both inventory and marketing.

Starting with our Q3 outlook the company expects net sales for the quarter to be approximately $500 million, representing a low double digit decrease in comparable retail sales versus Q3 2021.

On a positive mid single digit comp increase versus Q3 2019.

Adjusted operating income is expected to be approximately 14% of net sales as compared to 29% in Q3 2021.

Primarily driven by the decrease in sales.

This compares to 12, 1% in Q3 2019.

We anticipate third quarter adjusted earnings per diluted share to be approximately 395 as compared to adjusted earnings per diluted share of $5 43 in Q3, 2021 and 303 in 2019.

Our total inventories at the end of Q3 2022 are anticipated to remain elevated primarily.

Primarily driven by higher raw material input costs and higher inbound transportation costs.

Moving onto our full year outlook for fiscal 2022, the company expects net sales to be approximately $1 75 billion.

Afflicting, a low double digit decrease in comparable retail sales versus fiscal 'twenty, one and a positive mid single digit comp increase versus full year 2019.

We projected e-commerce penetration will increase to 50% of total retail sales for full year 2022 versus <unk>, 46% in full year, 'twenty, one and 33% and full year 2019.

Adjusted operating income is expected to be approximately seven 5% of net sales as compared to 15, 1% and 21, 6% in 2019, we.

We anticipate fiscal 2022 adjusted earnings per diluted share to be approximately $7 as compared to adjusted earnings per diluted share of $13 40 in 'twenty one.

$5 36 in 2019, our inventories at the end of Q4 2022 are anticipated to moderate from current levels. We are planning for our full year tax rate in the range of 23% to 24%.

Although there has been some moderation of inbound container and transportation costs, our full year outlook does not contemplate significant improvement from current levels.

However, we are planning for a significantly lower airfreight cost in the back half of the year versus the first half of the year.

Lastly, we're planning for capital expenditures of approximately 45 million for fiscal year 2022, with $26 million remaining for the balance of the year, the majority being allocated to support digital and supply chain fulfillment initiatives.

Thank you and now we will open the call to your questions.

At this time, if you would like to ask a question. Please press star one now on your telephone keypad to.

Withdraw yourself from the queue you May press star two once again that is star one on your telephone keypad, one moment, while we queue.

We'll take our first question from Jay sole of UBS.

Great. Thank you so much Jim I wanted to ask you about just AUR and sort of the context of <unk>.

This quarter second quarter was sort of unusual quarter as you think about the AUR gains that you've been able to maintain how would you think about just at a high level I know, you're not giving guidance for fiscal 'twenty three but how do you think about what the gross margin should look like in a normalized environment. Once some of the supply chain stuff and maybe some of the unusual promotions from some of these competitors sort of.

And it gets back to a regular levels.

Yeah, Let me take the first part of that and then I'll turn it over to Rob.

Just from it from the AUR question on Q2, we covered in the script, but I think it's worth diving a little bit deeper into it.

In mid June through the end of the quarter.

I think from our chair, it's frustrating, we all experienced firsthand the benefits of tightly controlled inventories in 2021, and CRE version back to bloated mismatch inventories in the sector at less than a year later it's.

It's tough to watch.

There are two very large retailers with a wide reach and our two biggest competitors and so when they have a fire sale in one area to this degree it's going to draw them in and while she is there. She is clearly going to shop for her kids. So when you have promotional events as large as these running left us with no choice, but to compete on price.

And then when you look at what happens in our Q2 offerings in our product offerings here in Q2 has historically been our lowest quarter of EPS and operating margin and the fact that our summer fashion product is really commodity product much more so than any other quarter, because theres no differentiated or theres really no holiday product in Q2.

So when you have competitors offering these commodity categories.

Fire sale prices and your AUC or a decade high decade highs it really doesn't leave any room. So our total AUR for the quarter as we had said with planned up mid singles and.

And the breakout with fashion was planned up low singles the lowest of the year with our fashion plan because it is commodity product and basic AUR with planned up low teens, and we hit our AUR plan in basics and we Miss fashion by a wide margin and when you put the AUR Miss against the retail sales.

Our internal projections, you get the almost 500 basis points of margin Miss that Rob mentioned for the quarter.

As you look forward to Q3 and Q4, we feel like we've de risked those two quarters.

By lowering our AUR projections for the back half so we've taken our what it where our previous EUR projections, which were up high singles to up low singles and what we've done is we've kept our basics AUR plan intact, because we are delivering against that and continue to deliver against it and have delivered against that all year.

<unk>.

It's kind of markdown immune product if you will that has.

Net zero liability, if you will and what we've done is we've taken our fashion AUR for Q3, and Q4 down significantly from where they were.

And so as I mentioned as we look forward into the balance of this year from a margin point of view and certainly into 'twenty three.

Which are really commodity based so I think that the customer is clearly responding to some of the differentiated fashion product that we brought in and some of the early holiday product that we brought in with respect to like Halloween and Christmas and I think that as we look forward that just further reinforces that we need to continue to.

Strategically diversify our offerings with respect to things like our initiatives around gymboree, our initiatives around Amazon and our initiatives around sugar and Jade, which we continue to focus on so I think when you look into Q3 and into 2023 and I'll turn it over to Rob for some more thoughts on that.

Cotton is certainly a huge huge problem for us this year at decade highs and as those costs start to moderate particularly in the back half of the year. There is significant growth margin.

Opportunity for us because as you pointed out.

Double digit AUR, we've never really given the number but they are significant significant double digit AUR, we still hold on to those even through a tough Q2, we ended flat. So our intention and our goal is to continue to hold onto those significant AUR increases we got during the pandemic and when.

Cotton prices normalize that.

As I said that is a huge huge lift behind gross margin thats coming for us.

Which we anticipate will start to see in the back half of 'twenty three.

James is exactly right on the gross margin, there's really four components first their cotton costs those impacted our gross our AUC is by high single digits.

Right now we're in the middle of our summer buyers. So we would expect some moderation in the back half of the year and benefit as those cotton costs come down. The second component is inbound transportation costs, we don't expect expedited airfreight costs that weighed on our first half margins this year.

To the degree next year and we've seen recent moderation in container cost that we expect to for that to continue.

Our ecommerce fulfillment.

Fashion business, they had a really strong business last year in holiday Sleepwear, and the Christmas and Halloween fleet. They have much much stronger position than that this year. They never had outerwear before they have that coming in this year footwear is another thing that we're just scratching the surface with them on but what they've been able to have and it's really basically in uniform has.

Been very very successful so we keep strategically adding fashion categories on top of that.

Big base of the basic business, we have so that's.

We anticipate that will continue to build and grow as we get into 'twenty three and beyond so.

Really exciting partnership and then as we talked about we launched on Jimbo range, It's very recently and excited to be partners exclusively with them as well.

We will take our next question from Dana Telsey of Telsey Advisory Group. Your line is open.

Good morning, and good morning, everyone. Jane as you think about back to school Hi, as you think about back to school to holiday.

Anything any learnings from the macro pressures on the consumer from back to school of how you're preparing for holiday, whether it's timing, whether it's promotions any of it and then just on the storefront versus online what do you see as you went through the quarter in terms of traffic did it did it change at all versus online.

And when you talk about other initiatives.

Our sugar and Jade progressing relative to your plan. Thank you.

Sure well sugar and Jade small and so the plan is very very very small as we have said we are testing through the four quarters of the year to see what they want and so we learned what they wanted and holiday and we then did our holiday 23 by based on that we learned a lot in spring and summer about the commodity.

These that they want it's not really about outfitting with sugar and Jade its really about the commodity categories and saw some significant learnings from spring and summer that we're able to go back into for next spring and summer and now for back to school, we're kind of seeing the same thing strengthened backpacks strength in fashion denim and it continue.

Strength in like lounge.

Slash sleepwear for them so.

So we're happy with what we're learning, but like as I said it was a very small planned to start with so we feel good about how we planted in what's happening with it.

As far as traffic store traffic was a little bit better than it has been in second quarter. When you compare it to 2021 and it was down like 4%, but when you compare it to 2019 and pre pandemic levels, it's still down in the mid <unk>. So that's as far as we're concerned thats not great and so we'll continue to watch that we are.

Very pleased in a very tough quarter.

Very disappointed with our results in Q2, but we were pleased with where E. Com traffic held up at up 7% and so we thought that that was pretty good, particularly with the amount of E. Comm penetration in those last two weeks of July and as we mentioned on the call E. Comm traffic in Q3 is up 5%, which surprises me quite frankly based on.

Historically.

So we're looking to accelerate that business as I mentioned on the call. We already launched the Gymboree holiday Christmas collection, which was their number one traffic site visit it on the site I think.

The work that we've done behind emotional product and what we saw in Q1, our strongest business in Q1 was by far east or people are dressing up again, and then even if you take it through Q2, even though it's a tiny part of our business things like woven tops in boys and like key item dresses and girls continued to be stronger while the customer was kind of.

Shunning if you will the net categories I think the consumer had stocked up on so many nets over the pandemic be it sleepwear or.

T shirts are mixed and matched knits and things like that which is necessitated us clearing them in Q2, where you really see her buying again is in those dress up categories and so we I think are really well positioned currently right now which is I think why we're seeing the bounce back in AUR in that emotional product be it pumpkin picking our harvest or Apple.

Picking and then all the way through Q4, we have.

Like I said in earlier launch on holiday, we have more receipts behind dress up than we did last year, because we anticipated when we saw what happened in Easter that continuation what happened for Christmas and then we also have I think the opportunity in Q4, where we were kind of shut down if you will December week five through the end of January in stores from Omicron I think thats.

Probably.

Part of the reason why are we are anticipating our Q3 trend will improve I'm, sorry, our Q4 trend will improve over our Q3 trend.

So we're definitely in a woven cycle, we're definitely an address that cycle and I think our inventories are positioned for that in Q4.

Thank you.

And once again to ask a question that is star one on your telephone keypad will go next to Susan Anderson of B Riley.

Hi, good morning.

I wanted to maybe follow up just on the promotions. It sounds like you feel really good about the basics and it's being it's pretty rational out there or you feel like you don't.

Bill is a need to permanently I guess, what's the risk there if your competitors do get promotion on basic product during back to school would you have to I guess follow suit and then also I'm curious it sounds like you feel like.

Inventory at those competitors is still.

Pretty good it's the other categories that may be driving the traffic to the store and purchasing there.

So I guess.

I'm curious how you feel about just the competitor inventory in that risk to having to promote more in the quarter and then lastly, just on supply chain it sounds like the issues.

What's the risk of that coming back in third quarter, and then if you could talk about freight and shipping costs in third quarter year over year expectation. Thanks.

I feel confident that we're going to continue to be okay. In the basics AUR as we kind of have been all year and if we could stay okay and what was it.

<unk> continues to be low teens and fashion was mid singles. We've kept the Q3 AUR plan in basics in the low teens and we've taken the fashion AUR down from up mid singles to down mid singles for a total AUR plan of two and so we think that we have appropriately de risked the fashion.

And from the over.

Promotions of our competitors, yes, as I said that I don't think that the kids inventory and our competitors is in a state where it needs to be promoted I think that.

Just from what we see and obviously, we don't have complete visibility into our competitors' inventories.

From what we see in stores and what we see online that doesn't seem to be where their issues. There is stemming from and certainly when you listen to them speak.

Speak about the issues. They have they don't talk about kids. They talk about one of them talks about hard goods and the other talks about women's apparel. So.

I think that what happened in Q2 is the entire box got competitive for them and so they over promoted in kids as well to drive as you said to drive that traffic in and bring mom and in <unk>. We'll see was there. So we saw a lot of prices like two and $3 tanks and things like that on that commodity.

Pricing and so I think by taking the AUR down in fashion from up mid singles to down mid singles is to your question Derisking. It.

From an AUR perspective, what we saw on supply chain issues in Q2, which was specific to US which was unplanned is that we have used.

I would tell you very strategically the east coast ports FERC almost exclusively for the better part of a decade and it served us very well over the years with all the problems that we've heard seen and read about in the west coast, particularly during the pandemic when they were backed up for literally months.

And.

As you May remember, we didnt had probably less disruption than most in our supply chain in 2021, and our merchandize flowed better as we as I mentioned strategically use the east coast Port.

Again, Unfortunately for US we got caught up with the competitors, who scrambled to move their receipts from the West coast ports.

And to the <unk>, what was the less crowded east coast ports, and then that caused an unprecedented backup and I'm, particularly talking about savanna, which is our most important part and that stranded a lot of our large July basic delivery. So we have those stranded for over four weeks and some of them haven't even arrived yet.

Clearly our merchandise is going to come in we don't know everything about the port, but we certainly our logistics team talks to them every single day and as of yesterday I don't know it might be too much information, but.

From them through week 39, and they all look manageable. So we don't anticipate having to.

Scramble again in our DC as those east coast ports kind of go back to normal as the other retailers to go back to the West Coast now that things have calmed down.

Our next question is from Kelly Cracow of Citi. Your line is open.

Carryover excess spring summer inventory to get through at this point.

In other words youre sort of entered the back to school season pretty clean from an inventory perspective and.

And sorry, if I missed this how much are your total units up year over year.

Yes, that's exactly what it means Kelly our spring summer is down 45%.

The predominant driver of our inventory increases our increased <unk> and higher cost.

That accounted for nearly.

Just over 60% of the increase.

From a unit inventory perspective, we have a small amount of tiny amount of growth and that's really relative to our strategic growth initiatives Amazon gymboree instrument Jade.

And we will take a question from Marni Shapiro of retail tracker. Your line is open.

Hey, guys.

Good morning, I, just wanted to clarify Jane.

You've talked a lot about.

The basics business versus the fashion business versus the dressy three different things in your store.

But it sounds like your customer is responding to those.

Either need pockets so back to school.

Uniforms or emotional pockets, so holidays or family events.

If I could put it that way.

Yes, 100% agree that she has been very specific and mindful from a basic point of view of a 100% agreement she still stocking up on those who need them for back to school they've been a very strong part of our business from July 15. The onward. They always are a much bigger part of our business. This time of year and we've been.

Very happy with what we've seen we mentioned the AUR.

Feel very good about where were planned where we're actually coming in.

The AUR associated with that when you go uniform opposite would be included in that uniform denim backpacks those types of things. When you look at the emotional product you go online and you see things like Apple picking in harvest and the plan that we bring in and the family looks in all of those things. She is clearly responding.

Those as well, which is why I think that the fashion AUR is holding up a lot better in Q3 than it did in Q2, and then you get to the resistance categories and so what I would call. The resistance categories and this has been year to date, we'll have to see what happens in the back half would be the knit categories and so.

T shirts, the mix and match those types of things sleepwear have all been sub.

Subpar performers in the first half of the year because when you saw how they outperformed in 2021 I think that there would naturally be a pull back until you think about as you move into Q3 and Q4 for US what are those categories and the things that come to mind right away for me is the long sleeve knits and active bottoms, which are two big categories.

For us in Q3, and Q4 and so those are the types of things that we have to watch carefully and we have to watch to make sure that we're not over promising ourselves on AUR because those are categories that we have to wait and see if mom is going to start to buy those again or if she's going to still think that she's got enough knits to laughter.

She is going to continue to go for woven tops and into Weldon bottoms I think the other thing that is going to have to happen before those specific net categories that I'm talking about get back.

Through Q4 in the back half of the year.

Thank you for joining us today, if you have further questions. Please call Investor Relations at area Code 201.

582400.

Tension 14500, you may now disconnect your lines and have a wonderful day.

Q2 2022 Children's Place Inc Earnings Call

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