Q1 2023 Childrens Place Inc Earnings Call
Speaker 1: What.
Speaker 1: There.
Speaker 2: Thank you for your patience in holding. We ask that you please continue to stand by. Our conference will begin momentarily.
Speaker 2: to the Children's Place First Quarter 2023 Earnings Conference call. On the call today are Jane Elfers, President and Chief Executive Officer, Seamus Toll, Chief Financial Officer, Megan Markey, Senior Vice President, Digital Marketing, and Josh Trupo.
Speaker 2: Vice President, Financial Planning and Analysis.
Speaker 2: After the prepared remarks, we will open the call up to your questions.
Speaker 2: press release earlier this morning, and a copy of the release and presentation materials have been posted to the Investor Relations section of the company's website.
Speaker 2: Before we begin, let me remind you that statements made on this conference call and in the company's earnings release and presentation materials about the company's outlooks, plans, and future performance are forward-looking statements.
Speaker 2: Actual results may differ materially from those projected.
Speaker 2: For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company's website.
Speaker 2: On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials.
Speaker 2: Also, today's call is being recorded.
Speaker 2: It is now my pleasure to turn the call over to Jane Elfers.
Speaker 3: Thank you and good morning everyone. Our Q1 results were negatively impacted by the ongoing macro tension, which resulted in outsized pressure on our core consumer by limiting their purchasing power. With respect to monthly cadence, February was the strongest month.
Speaker 3: March was below expectations and April further decelerated post-Easter.
Speaker 3: For Q1, our e-commerce top-line trend was significantly better than our store's trend.
Speaker 3: Quarter to date, top-line retail trends have decelerated from April , with continuing inflationary pressure on our lower-income consumer.
Speaker 3: Based on what we believe will continue to be a difficult macro environment, we have tempered both our top and bottom line expectations for the balance of the year.
Speaker 3: I'll provide more detail on how we're thinking about the back half of the year after I provide a brief update on our strategic pillars.
Speaker 3: Starting with our first Strategic Pillar product.
Speaker 3: Our Easter dress-up products across both TCP and Jimboree were the highlights of the quarter.
Speaker 3: No one in the kids' space compares to our assortment of family matching dress-up products for the holidays, and Easter was no exception.
Speaker 3: With respect to Jimboree, customer demand for our Easter dress-up product was outstanding.
Speaker 3: resulting in sellouts of many of the styles from our Mandy Moore Easter collection.
Speaker 3: which provided us with some excellent learning for next year, not only with respect to depth of ownership, but also with respect to the top line power of our spot on celebrity partnerships.
Speaker 3: Moving on to our second pillar, digital transformation. Digital represented 46% of our retail sales in Q1 versus 45% last year.
Speaker 3: After accounting for the artificially inflated February store sales and traffic compare.
Speaker 3: due to the Omicron surge from last year.
Speaker 3: Digital represented 49% of retail sales in March and April .
Speaker 3: We continue to deliver industry leading digital penetration in our highest operating margin channel, supported by marketing initiatives focused on optimizing our channel results.
Speaker 3: We are clearly the leader in the digital space among kids retailers and our customer continues to prove that she prefers shopping online versus traveling to stores.
Speaker 3: Approximately 56% of our acquisition came through our digital channel in Q1.
Speaker 3: further demonstrating how important digital is to our core millennial customer.
Speaker 3: Our Millennial Mom's clear preference for the ease and convenience of shopping for her kids online is here to stay.
Speaker 3: and we believe that our rapid and successful shift to digital as our number one acquisition channel puts us years ahead of our competition and gives us an important competitive advantage as we work to acquire and retain millennial moms and begin to market to the oldest of the Gen Z cohort.
Speaker 3: who are now starting to become our next generation of customers.
Speaker 3: As stores become less and less relevant to millennial customers.
Speaker 3: who continue their historic shift to online and mass channels.
Speaker 3: We are laser focused on digital growth opportunities and our highest operating margin channel. And based on the success of our digital transformation, the strength of our digital business, and our increased investments in our digital channel.
Speaker 3: Digital is projected to represent over $1 billion in sales by full year 2025.
Speaker 3: or over 60% of our total retail sales versus 33% of our retail sales in 2019.
Speaker 3: doubling our digital penetration in six years, and further cementing our successful transition to a digital-first retailer.
Speaker 3: Moving on to our third strategic pillar, alternate channels of distribution.
Speaker 3: Our Amazon business continued to outperform our projections in Q1.
Speaker 3: Amazon is a key growth engine and in Q1 we've further strengthened our Amazon partnership.
Speaker 3: Amazon is our second highest operating margin channel, a significant contributor to our top and bottom line.
Speaker 3: and an important customer acquisition vehicle.
Speaker 3: with many of these customers having higher income levels than our core customers.
Speaker 3: Amazon represents a major growth opportunity in 2023 and beyond.
Speaker 3: And with respect to our fourth and final pillar fleet optimization.
Speaker 3: As we shared on our last call, we are anticipating to close approximately 100 more stores, with the bulk of these store closures occurring in 2023.
Speaker 3: This will leave us with an optimized fleet of approximately 500 stores as we enter 2024.
Speaker 3: Our fleet optimization strategy has been a critical part of our company's structural reset and very clearly aligns with our current and future customers' digital shopping preferences.
Speaker 3: The data is clear. Millennials have a strong preference for online shopping.
Speaker 3: And this is only projected to continue to increase with Gen Z parents.
Speaker 3: I think it's important to note that we have a single digit penetration in our newborn and baby business.
Speaker 3: So our customers are overwhelmingly younger millennial and Gen Z self-purchasers.
Speaker 3: versus other retailers who still rely heavily on their stores for their customer acquisition.
Speaker 3: and who have a much larger share of GenX and Baby Boomer customers than we do.
Speaker 3: including grandparents and gifters.
Speaker 3: Many of whom, for example, still prefer an in-store experience.
Speaker 3: as they drive to the store to pick out the perfect baby gift.
Speaker 3: We believe that our projected fleet size of approximately 500 stores. We believe that our projected fleet size of approximately 500 stores.
Speaker 3: will help us to avoid the costly mistakes that come with having too many stores at a time when millennial and Gen Z customers have been aggressively migrating to the online and mass channels since the beginning of the pandemic. The 1st Fourth century 17th century 8th century 8th century 9th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8th century 8TH century 8th century 8th century 8th
Speaker 3: We believe that our optimized fleet will allow us to maximize our omni-channel capabilities while growing our industry-leading digital penetration and servicing our young, digitally savvy customers where they prefer to shop with us.
Speaker 3: which is online in our highest operating margin channel.
Speaker 3: As I mentioned earlier, I think it's important to share more detail regarding our underlying assumptions for the back half.
Speaker 3: We anticipate that Q3 and Q4 top-line net trends will improve from first half levels.
Speaker 3: driven by growth in digital and Amazon.
Speaker 3: supported by strong marketing and branding initiatives.
Speaker 3: with stores continuing their secular declines in both sales and traffic for the balance of the year.
Speaker 3: So let's focus on our digital and wholesale opportunities.
Speaker 3: From a traffic perspective, our e-commerce traffic was a blow double digits in Q1.
Speaker 3: and we anticipate traffic will continue to grow as we progress throughout the year.
Speaker 3: We have been very successful in driving e-commerce traffic through our marketing initiatives. And we believe this will continue. Thank you.
Speaker 3: AUR. Our ecommerce AUR was up slightly in Q1.
Speaker 3: Driven by very strong customer acceptance of our Easter dress up assortment.
Speaker 3: We are leaders in the holiday family dress up category, and we anticipate that our upcoming Q4 holiday assortments will be equally well received.
Speaker 3: We are not counting on any list in e-commerce AUR versus Q1 for the bounds of the year based on the ongoing inflationary pressures on our core customer. We are not counting on any list in e-commerce AUR versus Q1 for the bounds of the year based on the ongoing inflationary pressures on our core customer.
Speaker 3: We've made significant progress in raising AUR since the start of the pandemic.
Speaker 3: And we believe that this is a permanent structural change.
Speaker 3: and will be one of the key drivers of improved profitability as cotton costs come down.
Speaker 3: Conversion.
Speaker 3: due to an historically low conversion rate in Q4 of 2022.
Speaker 3: which we believe resulted from the impact of record inflation on our core customer, and stock outs online in key highly marketed categories across both TCP and Jimboree post Black Friday last year.
Speaker 3: As we have discussed, we have higher levels of top of funnel marketing plans for the back of this year versus 2022.
Speaker 3: And based on last year's learnings, we believe our strategic inventory investments
Speaker 3: will result in a meaningful improvement in digital conversion as upcoming holiday season.
With respect to our Amazon business, we are well-positioned and are planning for significant growth with Amazon in both Q3 and Q4. We are well-positioned and are planning for significant growth with Amazon in both Q3 and Q4.
On the bottom line, we anticipate a significant improvement in our results versus last year due to the abating cost pressures and the progress we are making in inventory and expense management.
Thank you and now I'll turn it over to Megan to discuss our progress with respect to marketing and Amazon.
Thank you, Jane, and good morning, everyone.
Since the start of our marketing transformation, we've been focused on three key strategies.
First, the accelerated growth of our ecommerce footprint.
Second, our fully integrated marketing and media mix with an emphasis on top-of-funnel brand awareness.
And third, new customer acquisition via our compelling and differentiated family of brands.
Let's recap our encouraging results across these key strategies, beginning with accelerated ecommerce growth.
Consolidated e-commerce traffic in Q1 was up low double digits versus Q1 of 2022.
our increased media spend and top of funnel brand campaigns.
Consolidated E-Com traffic across our family of brands represented 77% of our total traffic, up from 74% in 2022, and 60% in 2019.
Making digital our largest traffic channel. Digital represented 46% of our retail sales in Q1, up from 45% in 2022 and 33% in 2019.
Mobile continues to be the cornerstone of our digital strategy.
In Q1, 76% of our US digital transactions occurred on a mobile device.
Our targeted mobile app strategies have driven a significant increase in mobile app transactions and mobile app users.
In Q1, our mobile app accounted for 19% of our US digital transactions, versus 15% in Q1 of 2022, and 7% in Q1 of 2019.
Fueled by an impressive 32% increase in mobile app customers versus last year. Our mobile app customers spend 75% more than non-APP users and shop 61% more than non-APP users.
Our mobile app continues to drive strong customer engagement, especially amongst our loyalty members who represent over 97% of our mobile app transactions. We're very proud of our industry leading digital penetration.
And we're planning for continued growth in this channel throughout the balance of 2023. Fueled by our increased media spend and top of funnel brand campaigns in the back half of the year.
Now let's move on to our brand awareness and marketing initiatives and the successful results from Q1. Our top of funnel brand work has been a key focus for us over recent years.
This spring we launched two brand campaigns highlighting our expansive full-family Easter assortment for the Children's Place and Jimboree brands featuring Eli Manning and Mandy Moore.
We continued our disruptive strategy in featuring a star-studded millennial focus cast, including Olivia Colpo and her sisters, Cody Riggsby, Remi Bader, and more, for our PJ Place brand.
Across our spring campaigns for the children's place, Jimbery and PJ Place, we garnered over 25 billion impressions across our earned and made paid media efforts.
These disruptive brand campaigns also translated to positive top line results.
For every dollar we invested, we made close to five times back in top line revenue. And our blended return on ad spend is well above the industry benchmark for top of funnel performance.
In addition to driving a healthy return, these brand campaigns have a meaningful impact on traffic.
Further positioning us for success in the back half of the year with our back to school and holiday campaigns.
Our successful top of funnel media, brand activations, also heavily influence our third strategy, customer growth through new customer acquisition. Our ongoing brand work coupled with our fully integrated media strategies have fueled our acquisition.
US acquisition during the first quarter of 2023 was up 21% versus last year, with 56% of those acquisitions coming through digital.
Even more impressive, when compared to Q1 of 2019, total acquisition is up 7% despite having significantly fewer stores.
which further validates our successful digital acquisition strategy.
With these results, we've shown consistent acquisition growth over the past several quarters.
Leaving us with an active and healthy pool of newly acquired customers that we will be marketing to in the back half of this year. And so what we will be prepared Okay.
We believe that this not only sets us up for success for the remainder of this year, but our future e-commerce growth. Our loyalty and private label credit programs continue to be strong retention vehicles for our brands. road India and Indonesia will continue reinstate the 80% of silicone-free patents by universal organization.
Much like last quarter, our customer continues to feel the pain of inflation, and this is apparent in our overall customer spend. Customer spend in Q1 was down 8% versus Q1 of 2022, making it that much more important for us to focus on driving new customers to trial our brand. Even through this incredibly challenging environment.
We have proven that we now have the ability to drive meaningful reach.
Drive incremental, qualified traffic, capitalize on this traffic and scale our digital penetration, and acquire net new audiences to our family of brands.
which is going to be key to propelling our future results.
We hold a leadership position in the children's apparel industry, providing market differentiation through our unique and trend-right product disortment.
We have a very clear vision and a love for our customer.
We know who she is, we know where she is, and we know how to efficiently and effectively invite her to trial our family of brands. Amen.
Now let's move on to Amazon.
The significant time and resources that we have dedicated towards building our Amazon Marketplace have resulted in another strong quarter.
Our Q1 Amazon site sales were up 124% versus Q1 of 2022, fueled by a 214% increase in traffic and an 81% increase in customers over Q1 of 2022.
Our Easter dressy assortment was particularly strong during Q1, with our fashion penetration growing over 1000 basis points compared to Q1 of 2022.
Marketing continues to be a key component to driving the Amazon business, and our successful marketing strategies are driving the significant year-over-year increases in traffic. Ad-attributed sales were 51% of total Amazon channel sales for Q1 of 2023, up 145%.
versus 2022, with a strong double digit return on ad spend.
Our top performing ads for the time period featured our NFL Celebrity campaign, which garnered over 18 million impressions on Amazon during Q1.
Last fall, we launched our iconic Jimboree brand on Amazon, and the Amazon business has built consistently since our launch and exceeded our expectations for Q1 of 2023.
The momentum behind the jimberry launch continues to be fueled by an enhanced advertising strategy built around maximizing the brand's visibility and high impact placements.
Add attributed sales for the quarter were 49% of total sales at a very healthy return on ad spend, which signals the significant opportunity ahead to drive incremental sales through increased marketing investment.
Easter collection ad units featuring Mandy Moore drove a 25% conversion rate increase birth non-Easter creative.
In addition, the Mandy Moore ad units continued to be a strong acquisition driver with new to brand customers generating 43% of total orders during Q1.
We anticipate that our partnership with Amazon will continue to strengthen and plan for the business to grow significantly in the back half of this year.
We'll talk more about future opportunities as the year progresses, but we continue to see opportunity to pursue expanding our family of brands through the Amazon channel, as well as Amazon International Growth Opportunities. We'll talk more about future opportunities as the year progresses, but we continue to see opportunity to pursue expanding our family of brands through the Amazon channel, as well as Amazon International Growth Opportunities.
Now, I'll turn it over to Shamus. Thank you, Megan, and good morning, everyone.
As Jane discussed, the first quarter proved to be a difficult period from a top line perspective due to a challenging macro environment which continued to impact demand from our core customer. While sales were negatively impacted, we continued to make significant progress on our inventory levels with Q1 ending inventory down 8% year over year. We took advantage of the cooler weather and we continued to make significant progress on our inventory levels.
to liquidate more of our fall winter inventory than originally planned, enabling us to work through some additional higher AUC goods. Net sales for the first quarter decreased $40.8 million, or 11.2% to $321.6 million. $40.8 million.
primarily driven by the continued macroeconomic challenges, including inflation, lack of government stimulus, and a decrease in tax refunds.
Our US net sales decreased by $39.5 million or 13% to $268.2 million and our Canadian net sales decreased by $6 million or 20% to $24.5 million.
Comparable store sales decreased 8.2% for the core.
Our comparable store traffic was up approximately 3%.
while our e-commerce traffic was up low double digits.
Our comp store traffic was driven by a double digit increase in February , in which we lapped the COVID surge from last year. While our consolidated AUR declined by approximately 2% driven by the liquidation of prior season merchandise,
Our AUR on Go Forward Spring and Summer product was flat. Importantly, AURs remain significantly higher than pre-pandemic levels, validating the success of our restructured pricing strategies, which we believe will continue to pay significant dividends as input and transactional costs.
come down as we move into the back half of 2023. And our AUC is decline as we continue to liquidate goods purchased after the surge in supply chain costs in 2022.
Gross profit margin for the first quarter decreased to 30% of net sales as compared to 39.2% of net sales in the prior year. This was better than our prior guidance but still reflected the combination of an unprecedented increase in input cost.
including cotton and supply chain costs and the impact of a highly promotional retail environment.
Adjusted SG&A was $109.2 million for the first quarter as compared to $108.2 million in the comparable period last year.
This modest increase was primarily a result of planned investments in marketing initiatives as Megan detailed and was mostly offset by a reduction in store expenses and a reduction in equity compensation. Our net interest expense was $5.9 million for the quarter.
versus adjusted net interest expense of $1.7 million in the prior years first quarter.
The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the revolving credit facility and term loan due to increases in our variable rate based upon market rate increases.
Our adjusted tax rate for the quarter decreased to approximately 19% as compared to 23.5% in the prior year, reflecting a shift in certain taxable income.
For the first quarter, we reflected an adjusted net loss of $24.7 million, or $2 per share, as compared to an adjusted net profit of $14.5 million, or $1.05 per diluted share in the comparable period last year. Moving to the balance sheet.
We ended the quarter with cash and short-term investments of $18.2 million, and with $300.8 million of borrowings under our revolving credit facility, and a modest amount of long-term debt, which remains unchanged at $50 million.
During the quarter, we continued to make significant progress in our inventory reduction efforts.
As we previously discussed, our inventory still includes certain higher average unit cost inventory that was purchased in 2022 when input costs were at their peak.
Nonetheless, we are pleased that we were able to liquidate a significant portion of this inventory in Q1 and importantly ended the quarter with lower levels of seasonal fall and holiday inventory.
Inventory levels which had been up 4% as we entered the year were down approximately 8% as we ended the quarter, enabling us to end in a healthy unit position despite the higher carrying costs.
As previously disclosed, we experienced an increase in the average unit cost of inventory in recent periods due to the higher input costs, including cotton and supply chain costs, which increased our inventory investments, but we have reduced units, which are down double digits versus the prior year first quarter.
Our basic inventory, which includes several key high volume categories, with limited to no markdown risk, accounted for over 50% of our on-hand inventory at the end of the first quarter. This is a larger portion of inventory dedicated to basics.
Then in prior periods, which helps mitigate inventory risk in a low AUR category. We expect inventory investments to be down throughout fiscal 2023, providing a significant opportunity to expand free cash flow.
Moving on to cash flow and liquidity. We generated $5 million in cash from operations in Q1 versus a use of $19 million last year.
As we will discuss in our outlook, our digital first model positions us well to generate free cash flow, which we expect will ramp up in the second half of the year.
Capital expenditures in Q1 were $11 million. As we have previously discussed as part of our operating plan for 2023, we remain focused on inventory management and has significantly reduced our purchases throughout 2023.
which will result in a reduced level of inventory investment throughout the year as compared to the prior year. While inventory levels are down versus the prior year, we are currently building inventory to support our critical back to school selling period, which requires a significant use of working capital. We are pleased to be near the end of this peak working capital period.
the next few weeks and we project that we will then begin to generate significant cash flow which we plan to use to reduce debt.
As we progress through the back half of the year, when free cash flow is expected to expand significantly due to the combination of sequential reductions in inventory and our return to profitability, we intend to reduce that.
We continue to expect to decrease borrowings by more than $100 million by the end of the year, further positioning us for long-term sustainable growth.
During the first quarter, we closed 14 locations, ending the quarter with 599 stores. We continue to carefully evaluate our store fleet and close lower volume, unprofitable stores.
With over 75% of our fleet coming up for lease action in the next 24 months, we are maintaining meaningful financial flexibility in our lease portfolio. ChrisSiq proposed this help. Benim
Moving to our outlook. Given the significant macroeconomic headwinds, which have an outsized impact on our lower income customers' purchasing power, including the continuation of record inflation and tempered sentiment, we now have a more cautious consumer outlook.
As a result, the company believes it is prudent to take a more conservative approach, and as a result, we have tempered both our top line and bottom line expectations for the remainder of the year.
As we have reduced top line expectations, we have further reduced our planned inventory and capital investments as well as our expenses.
These strategies are designed to reduce risk while helping position us to achieve double digit operating margins in the back half of the year.
Now, let me take you through our outlook for Q2 and the back half of the year.
As the company has previously indicated, the first six months of 2023 will be negatively impacted by several temporary input cost headwinds, most notably cotton. These high input costs, which are embedded in our spring and summer inventory in the first half of 2023.
will continue to negatively impact margin rates in Q2. For Q2, the company expects.
Net sales to be in the range of $340 million to $345 million, representing a decrease in the high single digits to low double digit percentage range as compared to the prior year second quarter. Adjusted operating loss is expected to be approximately 8% of net sales. The tax rate for Q2 is expected to be similar to the rate experienced in Q1.
Adjusted net loss per share is expected to be approximately $2.15 to $2.20 per share.
We anticipate that the Q2 2023 gross margin rate will decline by approximately 200 basis points reflecting higher input costs on goods expected to be sold during the quarter. Selling general administrative expenses are expected to be in line with last year reflecting planned increase in marketing investments.
Offset by reductions in store payroll due to lower store count and our expense rationalization initiatives.
However, on a rate basis, these expenses are expected to deleverage due to the impact of lower revenue. At the end of the second quarter, inventory is expected to continue to be down in the high single digit percentage range versus the prior year second quarter.
In the back half of 2023, despite continued macro pressures on top line, the company expects to drive increases in wholesale revenue with an acceleration in Q4, experience the softening of the pressures from high input costs which year over year represents an estimated annualized impact of more than $100 million.
benefit from clean and appropriately sized inventory investments which are expected to reduce the need to liquidate seasonal goods and reduce expenses with a more optimized expense structure.
All of which is expected to enable us to achieve double digit operating margins and adjusted net EPS of over $5 in the back half of 2023.
For the full year, the company now expects the following. Net sales are expected to be in the range of $1.57 billion to $1.59 billion, representing a decrease in the high single digit percentage range as compared to the prior fiscal year. The company now expects the following.
Adjusted operating profit is expected to be approximately 2.5 to 2.9% of net sales. The consolidated tax rate for the full fiscal year is now expected to be in the low 20% range.
Adjusted net earnings per diluted share is expected to be in the range of $1 to $1.50 per share. These results include the impact of the 53rd week in 2023 based upon our retail calendar. This week occurs during a low volume non-peak clearance.
range of 20 to $25 million. Primarily to support our DC expansion, digital initiatives, and enhancement of our fulfillment capabilities.
We anticipate closing 100 stores as part of our ongoing fleet optimization initiative with the bulk of the closures happening in 2023, leaving us with an optimized fleet of approximately 500 stores.
Thank you, and now we will open up the call to your questions. Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad.
You may remove yourself from the queue at any time by pressing star 2.
Once again to ask a question, please press star one. We'll pause just a moment to allow questions to queue.
Thank you. Once again to ask a question, please press star one. We'll go first to Jim Tartier with Monas Presby Heart. Hi, good morning.
Thank you. Once again, to ask a question, please press star one. We'll go first to Jim Tartier with Monas Presby Heart. Hi, good morning.
I was wondering if you could first talk about the gross margin in the first quarter. What were the biggest drivers of the declines that can quantify the impact of the freight and con costs there? How would the inventory, how are you going to manage promotional activity in the second quarter given the sale shortfall?
And then if you could provide an update on the cost structure and any additional cost savings that you've seen with a little bit more time with the company. Thank you.
Yeah, absolutely. Thanks, Gemma. I appreciate the question. First, in terms of Q1, as we discussed in our prepared remarks, Q1's gross margin rate came in slightly better than we had expected. I think our original guidance was to be down approximately 1,000 basis points when we came in a little bit better than that.
As we talked when we gave the original guidance and in various discussions previously, that impact in terms of gross margin was largely driven by the higher input costs in terms of the higher AUCs that had built up in our inventories given
the supply chain pressures and cotton pressures that we experienced last year in our purchasing activity. As we look at, you know, kind of bifurcating the most significant pieces of that, in Q1, it was clearly a combination of both cotton as well as high supply chain costs that were embedded in the supply chain.
the inventory, it was almost exclusively those higher input costs. As we move into Q2, as we guided, we're still anticipating some level of pressure on margins as compared to last year, certainly much less than we experienced in Q1.
cotton because the the higher freight costs have dissipated and the inventory associated with with those higher freight costs has also largely been liquidated. So the impact in Q2 is is more so related to cotton still a little bit of higher freight cost
And then also a little bit of a shift in terms of as we penetrate higher in terms of wholesale, it is a lower gross margin business for us. However, we don't incur the same cost, so it is a strongly profitable operating margin business for us. So there is some shift in terms of geography.
As we look to the final part of the question, the expenses, I think in my first few months here, we definitely have spent a lot of time analyzing the expense structure, and as we hinted in some of our commentary, we do believe and have implemented
some of our home office activities, all geared towards understanding and believing that we do need to invest more in digital marketing. As we've become a digitally dominant retailer, we do need to invest more dollars there. So we've definitely...
save dollars in terms of, you know, expense structure across the board, diverted some of those dollars into marketing initiatives, and we believe that positions us well for future success and future growth. So it moves us more in line with where we should have been in terms of marketing investment.
growth and more sustainable growth, expansion of margins, as well as generating significant free cash flow.
And Jim I think from the promotional question you asked we placed we had mentioned before that we placed summer fashion receipts down significantly versus last year due to the pressure we had on AUC. So as Seamus says we plan to end the border down with inventory down high singles and we anticipate that the
fashion element of the high AUC spring and summer goods will be completely behind us and then we'll end with a Healthy position in basics, which sets us up for back to school Thank you our next question comes from Jeff Lick with the Be Riley financial
you see spring and summer goods will be completely behind us and then we'll end with a healthy position in basics which sets us up for back to school. Thank you. Our next question comes from Jeff Lick with the Be Riley financial.
Hi guys, thanks for taking the question. Jane, I was wondering if you maybe could elaborate a little, you know, typically in this quarter's call, you know, when you have a weak weather period, you know, the May deterioration that you talked about, and generally there you show some signs of picking up that didn't happen this year. So I was wondering if you could elaborate a little on that and then just
juxtapose that against all the good things you kind of have going on with the digital traffic up, you know, getting in to keep the back half also, you know, Amazon. I'm just wondering, you know, there seems like there'll be this kind of, you know, aha moment where those good factors kind of overwhelmed.
the bad factors and just kind of curious how you're thinking about that. Yeah, I think we had, thank you. I think we had mentioned in our last call that we really wanted to see a weather break because we didn't get a weather break the whole quarter during first quarter and so that would allow us to see how much of what was happening in Q1 was weather versus how much was the consumer. So to your point, we did get a break in the weather in early May and we did not see that change our trajectory as we mentioned on the.
budget. From a marketing perspective, remember that Q2 is our usually our you know least profitable quarter. We don't have a marketing campaign per se in Q2 until we get the very end of July where we start up our back to school in mid July . So when you think about you know what marketing is doing for us currently
continuation of that. And then when we get to July , remember that you know we have a bit of a different cadence than others. 40% of our quarter comes from the month of July and about 60% of that comes from the last two weeks. So that is a very important period for us and like I said we'll be ramping up marketing. From an Amazon point of view you know I'm going to turn it over to Megan to talk about it. I think she can you know provide.
It's really not impacting that business our results and the investment that we've made in marketing Obviously, you know resulted in a very strong quarter and when we think about the back half of the year There's a lot that we're planning for from an Amazon perspective in terms of significant growth and it's really based on The current trends that we've been seeing quarter over quarter consistently for the past year are
that we see as we head into Q4 specifically with holiday. So there's a lot of kind of really good happening there in terms of what we feel like we're gonna see for the balance of the year. Along with what we're already seeing in book sales as we head into one of our biggest time periods as we head into back to school with Amazon. So there's a lot of momentum.
that's planned for the significant growth we're seeing in the back half of the business, in the back half of the year for that business. And then from a marketing perspective, as Jane had mentioned, we really start to ramp up significantly in the July time period as we head into back to school with our back to school brand campaign and then the same into holiday. There's a lot when we think about kind of what's fueling that digital growth. And as we had mentioned in some of our
in our conversion trend as Jane had mentioned. And really that's based on being up against last year and Q4 specifically our lowest converting quarter historically as it relates to our digital business. And that was based on obviously the macro environment, the impact of inflation really.
Coming up in a big way in Q4 of last year as well as some out of stocks that we saw on key marketing looks all of which we feel like we've really right size in terms of a, the marketing investment that we're laying on top of this year. And then the investment we made in from a product perspective to really make sure we're covering all those key marketing looks. So we feel like we're really positioned. Well, I would also say really the third kind of driver is that acquisition growth that we've been talking about and we've seen.
acquisition has a longer tail in terms of really seeing meaningful impact to top line. So when we think about, you know, when we're anticipating to see the growth and the impact to the top line from the past several quarters of really positive acquisition trends, we're assuming we're going to start to see a lot of that in the back half of this year and then into 2024. Our next question comes from Jay Sol with UBS.
Great, thank you so much. We just talked a lot about MSN there, but if you can just maybe talk a little bit about, I know you said you'd give some more numbers to come maybe later in the year, but just a big picture of the last 90 days, what gives you confidence that the Amazon business continues to develop? And if you can give us an idea of like,
how big this business can be over time and how profitable it can be, that would be helpful. Thank you. Yeah, I think as far as, and I'll take this question, just as far as, again, where we're really seeing the growth and why we feel confident in the back half of the year from an Amazon perspective, we're looking at, as we head into the back to school time period, what we already have in terms of book sales. We're also looking at, again, a scaled marketing investment, the trends we're continuing to see, the trends coming off of Q1, and then again, when we just look at those past 90 days.
we have not seen the slowdown in that business. We've continued to build coming out of the Q1 time period and feel like we're in a significantly better position from both an inventory and an investment perspective for the Q3 and Q4 time period of this year than we've ever been historically with the Amazon business specifically. So I think that's really what you know, those kind of levers are what really make us feel confident in the continued growth. I think the other thing I would add to that is you know for us the Amazon business is certainly a big and important
So we believe that there's tremendous growth opportunity. You know, I think it's important to put it in perspective as well. You know, while the first half of the year was certainly a difficult time period for us or anticipated to be a difficult time period for us due to macro pressures and a high input cost as we move into the back half of the year and into 2024, we really believe that we're establishing a new base for go forward growth.
And part of that new base is that Amazon business, that Megan described, and we're expecting an acceleration of that business as we move into the back half of the year and in Q4. We're also going to benefit as part of that new base from a stabilization in terms of cost. So the input costs are dissipating as we've talked.
We're going to benefit from clean inventories. We're going to benefit from reduced expense structure that we're diverting into marketing. And then also a stabilized store base as we're nearing the end of our store closure initiatives that we believe we're going to settle in it around.
is certainly an important part of that go forward strategy.
Thank you for joining us today. If you have further questions, please contact Investor Relations at 201-558-2400, extension 14500.
You may now disconnect your lines and have a wonderful day.
The.
I.
Good morning and welcome to the Children's Place first quarter 2023 earnings conference call. On the call today are Jane Elfers, President and Chief Executive Officer, Sheamus Toll, Chief Financial Officer, Megan Markey, Senior Vice President, Digital Marketing, and Josh Trupo.
Vice President, Financial Planning and Analysis. After the prepared remarks, we will open the call up to your questions. The Children's Place issued its first quarter 2023 earnings press release earlier this morning, and a copy of the release and presentation materials have been posted to the Investor Relations section of the company's website.
Before we begin, let me remind you that statements made on this conference call and in the company's earnings release and presentation materials about the company's outlooks, plans, and future performance are forward-looking statements.
Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company's website. On this call, the company will reference various non-GAAP results.
financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. It is now my pleasure to turn the call over to Jane Elfers. Thank you and good morning, everyone. Our Q1 results were negatively impacted by the ongoing macro tension.
which resulted in outsized pressure on our core consumer by limiting their purchasing power. With respect to monthly cadence, February was the strongest month, March was below expectations, and April further decelerated post-Easter. For Q1, our e-commerce top-line trend was significantly better than our store's trend. Quarter to date, top-line retail trends have decelerated from April .
with continuing inflationary pressure on our lower income consumer. Based on what we believe will continue to be a difficult macro environment, we have tempered both our top and bottom line expectations for the balance of the year.
I'll provide more detail on how we're thinking about the back half of the year after I provide a brief update on our strategic pillars. Starting with our first strategic pillar product, our Easter dress-up products across both TCP and Jimboree were the highlights of the quarter. Starting with TCP.
No one in the kids' space compares to our assortment of family matching dress-up products for the holidays, and Easter was no exception. With respect to Jimboree, customer demand for our Easter dress-up product was outstanding, resulting in sell-outs of many of the styles from our Mandy Moore Easter collection, which provided us with some excellent learnings for next year, not only with respect to depth of ownership.
but also with respect to the top line power of our spot on celebrity partnerships. Moving on to our second pillar, digital transformation. Digital represented 46% of our retail sales in Q1 versus 45% last year. After accounting for the artificially inflated February store sales and traffic compare due to the Omicron surge from last year, digital represented 49% of retail sales in March and April .
in Q1, further demonstrating how important digital is to our core Millennial customer. Our Millennial mom's clear preference for the ease and convenience of shopping for her kids online is here to stay. And we believe that our rapid and successful shift to digital as our number one acquisition channel puts us years ahead of our competition and gives us an important competitive advantage that our stalls not be unable to limit. Our integrate system abundancesiba.com with a generalized
as we work to acquire and retain Millennial Moms and begin to market to the oldest of the Gen Z cohort, who are now starting to become our next generation of customers. As stores become less and less relevant to Millennial customers.
who continue their historic shift to online and mass channels, we are laser focused on digital growth opportunities and our highest operating margin channel. And based on the success of our digital transformation, the strength of our digital business, and our increased investments in our digital channel.
Digital is projected to represent over $1 billion in sales by full year 2025, or over 60% of our total retail sales versus 33% of our retail sales in 2019, doubling our digital penetration in six years.
further cementing our successful transition to a digital-first retailer. Moving on to our third strategic pillar, alternate channels of distribution.
Our Amazon business continued to outperform our projections in Q1. Amazon is a key growth engine and in Q1 we've further strengthened our Amazon partnership.
Amazon is our second highest operating margin channel, a significant contributor to our top and bottom lines, and an important customer acquisition vehicle, with many of these customers having higher income levels than our core customers. Amazon represents a major growth opportunity in 2023 and beyond.
And with respect to our fourth and final pillar, fleet optimization. As we shared on our last call, we are anticipating to close approximately 100 more stores, with the bulk of these store closures occurring in 2023.
This will leave us with an optimized fleet of approximately 500 stores as we enter 2024. Our fleet optimization strategy has been a critical part of our company's structural reset and very clearly aligns with our current and future customers' digital shopping preferences.
The data is clear. Millennials have a strong preference for online shopping, and this is only projected to continue to increase with Gen Z parents.
I think it's important to note that we have a single digit penetration in our newborn and baby business. So our customers are overwhelmingly younger millennial and Gen Z self purchasers versus other retailers who still rely heavily on their stores for their customer acquisition and who have a much larger share of Gen X and Baby Boomer customers than we do.
including grandparents and gifters, many of whom, for example, still prefer an in-store experience as they drive to the store to pick out the perfect baby gift. We believe that our projected fleet size of approximately 500 stores is about 1,000 feet.
will help us to avoid the costly mistakes that come with having too many stores at a time when millennial and Gen Z customers have been aggressively migrating to the online and mass channels since the beginning of the pandemic. We believe that our optimized fleet will allow us to maximize our omni-channel capabilities.
while growing our industry leading digital penetration and servicing our young digitally savvy customers where they prefer to shop with us, which is online in our highest operating margin channel.
from first half levels driven by growth in digital and Amazon.
supported by strong marketing and branding initiatives, with stores continuing their secular declines in both sales and traffic for the balance of the year.
So let's focus on our digital and wholesale opportunities. From a traffic perspective, our e-commerce traffic was up low double digits in Q1, and we anticipate traffic will continue to grow as we progress throughout the year. We have been very successful in driving e-commerce traffic through our marketing initiatives.
and we believe this will continue. AUR. Our e-commerce AUR was up slightly in Q1, driven by very strong customer acceptance of our Easter dress-up assortments. We are leaders in the holiday family dress-up category.
and we anticipate that our upcoming Q4 holiday assortments will be equally well received. We are not counting on any list in e-commerce AUR versus Q1 for the balance of the year based on the ongoing inflationary pressures on our core customer. We've made significant progress in raising AUR since the start of the pandemic, and we hope that the COVID-19 pandemic will be able to increase our response to the pandemic. And that is why we are not counting on any list in e-commerce AUR for the balance of the year based on the ongoing inflationary pressures on our core customer. We are not counting on any list in e-commerce AUR to help our customers. We are not counting on any list in e-commerce AUR
and we believe that this is a permanent structural change and will be one of the key drivers of improved profitability as cotton costs come down. Conversion.
We are planning for conversion in our e-commerce channel to improve in Q4 due to an historically low conversion rate in Q4 of 2022.
which we believe resulted from the impact of record inflation on our core customer, and stock outs online in key highly marketed categories across both TCP and Jim Buree post Black Friday last year.
As we have discussed, we have higher levels of top-of-funnel marketing plans for the back half of this year versus 2022. And based on last year's learnings, we believe our strategic inventory investments will result in a meaningful improvement in digital conversion this upcoming holiday season.
With respect to our Amazon business, we are well positioned and are planning for significant growth with Amazon in both Q3 and Q4. On the bottom line, we anticipate a significant improvement in our results versus last year due to the abating cost pressures and the progress we are making in inventory and expense management. We hope to see a significant improvement in our results versus last year due to the abating cost pressures and the progress we are making in inventory and expense management.
Thank you, and now I'll turn it over to Meghan to discuss our progress with respect to marketing and Amazon. Thank you, Jane, and good morning, everyone. Since the start of our marketing transformation, we've been focused on three key strategies.
First, the accelerated growth of our ecommerce footprint. Second, our fully integrated marketing and media mix with an emphasis on top-of-funnel brand awareness. And third, new customer acquisition via our compelling and differentiated family of brands. Let's recap our encouraging results across...
These key strategies beginning with accelerated e-commerce growth. Consolidated e-commerce traffic in Q1 was up low double digits versus Q1 of 2022, fueled by our increased media spend and top of funnel brand campaigns. Consolidated e-comm traffic across our family of brands represented 77% of our total traffic. Joining us next, Melanie
up from 74% in 2022 and 60% in 2019, making digital our largest traffic channel. Digital represented 46% of our retail sales in Q1, up from 45% in 2022 and 33% in 2019. Mobile continues to be the cornerstone of our digital strategy.
In Q1, 76% of our US digital transactions occurred on a mobile device. Our targeted mobile app strategies have driven a significant increase in mobile app transactions and mobile app users. We are several hundred and fifty thousand people through this
In Q1, our mobile app accounted for 19% of our US digital transactions, versus 15% in Q1 of 2022 and 7% in Q1 of 2019.
fueled by an impressive 32% increase in mobile app customers versus last year. Our mobile app customers spend 75% more than non-app users and shop 61% more than non-app users. Our mobile app continues to drive strong customer engagement, especially amongst our loyalty members.
who represent over 97% of our mobile app transactions. We're very proud of our industry-leading digital penetration, and we're planning for continued growth in this channel throughout the balance of 2023.
fueled by our increased media spend and top-of-funnel brand campaigns in the back half of the year. Now let's move on to our brand awareness and marketing initiatives and the successful results from Q1. Our top-of-funnel brand work has been a key focus for us over recent years.
This spring we launched two brand campaigns highlighting our expansive full family Easter assortment for the Children's Place and Gymboree brands featuring Eli Manning and Mandy Moore. We continued our disruptive strategy in featuring a star-studded millennial-focused cast including Olivia Culpo and her sisters, Cody Rigsby, Remy Bader and more for our PJ Place brand.
Across our spring campaigns for the Children's Place, Jimbury, and PJ Place, we garnered over 25 billion impressions across our earned and paid media efforts. These disruptive brand campaigns also translated to positive top line results.
For every dollar we invested, we made close to five times back in top line revenue. And our blended return on ad spend is well above the industry benchmark for top of funnel performance. In addition to driving a healthy return, these brand campaigns have a meaningful impact on traffic, further positioning us for success in the back half of the year with our back to school and holiday campaigns..
Our successful top of funnel media brand activations also heavily influence our third strategy, customer growth through new customer acquisition. Our ongoing brand work coupled with our fully integrated media strategies have fueled our China!
US acquisition during the first quarter of 2023 was up 21% versus last year, with 56% of those acquisitions coming through digital. Even more impressive, when compared to Q1 of 2019, total acquisition is up 7% despite having significantly fewer stores.
which further validates our successful digital acquisition strategy. With these results, we've shown consistent acquisition growth over the past several quarters, leaving us with an active and healthy pool of newly acquired customers that we will be marketing to in the back half of this year. We believe that this not only sets us up for success for the remainder of 2020,
8% versus Q1 of 2022, making it that much more important for us to focus on driving new customers to trial our brand.
Even through this incredibly challenging environment, we have proven that we now have the ability to drive meaningful reach,
drive incremental qualified traffic, capitalize on this traffic and scale our digital penetration. And acquire net new audiences to our family of brands, which is going to be key to propelling our future results.
We hold a leadership position in the children's apparel industry, providing market differentiation through our unique and Trend-Right product assortment.
We have a very clear vision and a love for our customer. We know who she is, we know where she is, and we know how to efficiently and effectively invite her to trial our family of brands.
We have a very clear vision and a love for our customer. We know who she is, we know where she is, and we know how to efficiently and effectively invite her to trial our family of brands. Now, let's move on to Amazon.
The significant time and resources that we have dedicated towards building our Amazon marketplace have resulted in another strong quarter. Our Q1 Amazon site sales were up 124% vs Q1 of 2022, fueled by a 214% increase in traffic and an 81% increase in customers over Q1 of 2022. Our Easter dressy assortment was particularly strong during Q1, with our fashion penetration growing over 1000 basis points compared to Q1 of 2022.
Marketing continues to be a key component to driving the Amazon business, and our successful marketing strategies are driving the significant year-over-year increases in traffic. Ad-attributed sales were 51% of total Amazon channel sales for Q1 of 2023, up 145% versus 2022, with a strong double-digit return on ad spend. For more information, visit www.austincosmetic.com
Our top performing ads for the time period featured our NFL Celebrity campaign, which garnered over 18 million impressions on Amazon during Q1. Last fall, we launched our iconic Jimboree brand on Amazon, and the Amazon business has built consistently since our launch and exceeded our expectations for Q1 of 2023.
The momentum behind the Gymboree launch continues to be fueled by an enhanced advertising strategy built around maximizing the brand's visibility and high impact placements. Ad attributed sales for the quarter were 49% of total sales at a very healthy return on ad spend, which signals the significant opportunity ahead to drive incremental sales through increased marketing investment. Easter Collection ad units featuring Mandy Moore drove a 25% conversion.
as the year progresses, but we continue to see opportunity to pursue expanding our family of brands through the Amazon channel, as well as Amazon international growth opportunities. Now, I'll turn it over to Seamus.
Thank you, Meghan, and good morning, everyone.
As Jane discussed, the first quarter proved to be a difficult period from a top line perspective due to a challenging macro environment which continued to impact demand from our core customer.
While sales were negatively impacted, we continued to make significant progress on our inventory levels with Q1 ending inventory down 8% year over year. We took advantage of the cooler weather to liquidate more of our fall-winter inventory than originally planned, enabling us to work through some additional higher AUC goods.
Net sales for the first quarter decreased $40.8 million or 11.2% to $321.6 million primarily driven by the continued macroeconomic challenges including inflation, lack of government stimulus, and a decrease in tax refunds. Our US net sales decreased by $39.5 million or 13%.
to 268.2 million dollars and our Canadian net sales decreased by six million dollars or 20% to 24.5 million dollars. Comparable store sales decreased 8.2% for the quarter. Our comparable store traffic was up approximately 3%.
while our e-commerce traffic was up low double digits. Our comp store traffic was driven by a double digit increase in February , in which we lapped the COVID surge from last year. While our consolidated AUR declined by approximately 2%, driven by the liquidation of prior season merchandise.
Our AUR on Go Forward's spring and summer product was flattened. Importantly, AURs remain significantly higher than pre-pandemic levels, validating the success of our restructured pricing strategies, which we believe will continue to pay significant dividends as input and transactional costs come down as we move into the back half of 2023.
and our AUCs decline as we continue to liquidate goods purchased after the surge in supply chain costs in 2022. Gross profit margin for the first quarter decreased to 30% of net sales as compared to 39.2% of net sales in the prior year. This was better than our prior guidance but still reflected the combination of an unprecedented increase in input costs.
including cotton and supply chain costs and the impact of a highly promotional retail environment. Adjusted SG&A was $109.2 million for the first quarter as compared to $108.2 million in the comparable period last year.
This modest increase was primarily a result of planned investments in marketing initiatives, as Meghan detailed, and was mostly offset by a reduction in store expenses and a reduction in equity compensation.
Our net interest expense was $5.9 million for the quarter versus adjusted net interest expense of $1.7 million in the prior year's first quarter. The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the revolving credit facility and term loan due to increases in our variable rate based upon market rate increases.
Our adjusted tax rate for the quarter decreased to approximately 19% as compared to 23.5% in the prior year, reflecting a shift in certain taxable income.
For the first quarter, we reflected an adjusted net loss of $24.7 million or $2 per share as compared to an adjusted net profit of $14.5 million or $1.05 per diluted share in the comparable period last year.
Moving to the balance sheet, we ended the quarter with cash and short-term investments of $18.2 million and with $300.8 million of borrowings under our revolving credit facility and a modest amount of long-term debt which remains unchanged at $50 million.
During the quarter, we continued to make significant progress in our inventory reduction efforts. As we previously discussed, our inventory still includes certain higher average unit cost inventory that was purchased in 2022 when input costs were at their peak. Nonetheless, we are pleased that we were able to liquidate a significant portion of this inventory.
in a healthy unit position despite the higher carrying costs.
As previously disclosed, we experienced an increase in the average unit cost of inventory in recent periods due to the higher input costs, including cotton and supply chain costs, which increased our inventory investments.
but we have reduced units which are down double digits versus the prior year first quarter. Our basic inventory, which includes several key high volume categories with limited to no markdown risk, accounted for over 50% of our on-hand inventory at the end of the first quarter. This is a larger portion of inventory dedicated to basics.
than in prior periods, which helps mitigate inventory risk in a low AUR category. We expect inventory investments to be down throughout fiscal 2023, providing a significant opportunity to expand free cash flow. Moving on to cash flow and liquidity.
we generated $5 million in cash from operations in Q1 versus a use of $19 million last year. As we will discuss in our outlook, our digital first model positions us well to generate free cash flow, which we expect will ramp up in the second half of the year.
Capital expenditures in Q1 were $11 million. As we have previously discussed as part of our operating plan for 2023, we remain focused on inventory management and have significantly reduced our purchases throughout 2023, which will result in a reduced supply of goods and services.
level of inventory investment throughout the year as compared to the prior year. While inventory levels are down versus the prior year, we are currently building inventory to support our critical back-to-school selling period, which requires a significant use of working capital. We are pleased to be near the end of this...
peak working capital period in the next few weeks, and we project that we will then begin to generate significant cash flow, which we plan to use to reduce debt. As we progress through the back half of the year, when free cash flow is expected to expand significantly due to the combination of sequential reductions in inventory and our return to profitability, we intend to reduce that.
We continue to expect to decrease borrowings by more than a hundred million dollars by the end of the year, further positioning us for long-term sustainable growth. During the first quarter, we closed 14 locations, ending the quarter with 599 stores. We continue to carefully evaluate our store fleet and close lower volume unprofitable stores. With over 75% of our fleet coming up for lease action in the next 24 months,
we are maintaining meaningful financial flexibility in our lease portfolio. Moving to our outlook. Given the significant macroeconomic headwinds which have an outsized impact on our lower income customers purchasing power, including the continuation of record inflation and tempered consumer sentiment, we now have a more cautious consumer outlook. As a result, the company believes it is prudent to take a more conservative approach.
And as a result, we have tempered both our top line and bottom line expectations for the remainder of the year. As we have reduced top line expectations, we have further reduced our planned inventory and capital investments, as well as our expenses. These strategies are designed to reduce risk while helping position us and reduce our risk.
to achieve double-digit operating margins in the back half of the year. Now let me take you through our outlook for Q2 and the back half of the year. As the company has previously indicated, the first six months of 2023 will be negatively impacted by several temporary input cost headwinds, most notably cotton. These high input costs which are embedded in our spring and summer inventory in the first half of 2023.
will continue to negatively impact margin rates in Q2. For Q2, the company expects net sales to be in the range of $340 million to $345 million, representing a decrease in the high single digits to low double digit percentage range as compared to the prior year second quarter.
Adjusted operating loss is expected to be approximately 8% of net sales. The tax rate for Q2 is expected to be similar to the rate experienced in Q1. Adjusted net loss per share is expected to be approximately $2.15 to $2.20 per share. We anticipate that the Q2 2023 gross margin rate will decline by approximately 200 basis points.
leverage due to the impact of lower revenue. At the end of the second quarter, inventory is expected to continue to be down in the high single digit percentage range versus the prior year second quarter. In the back half of 2023, despite continued macro pressures on top line, the company expects to drive increases in wholesale revenue with an acceleration in Q4.
experience a softening of the pressures from high input costs which year over year represents an estimated annualized impact of more than a hundred million dollars, benefit from clean and appropriately sized inventory investments which are expected to reduce the need to liquidate seasonal goods and reduce expenses with a more optimized expense structure. All of which is expected to enable us to achieve double-digit operating margins
adjusted net EPS of over $5 in the back half of 2023. For the full year the company now expects the following. Net sales are expected to be in the range of 1.57 billion dollars to 1.59 billion dollars representing a decrease in the high single digit percentage range as compared to the prior fiscal year.
Adjusted operating profit is expected to be approximately 2.5 to 2.9 percent of net sales. The consolidated tax rate for the full fiscal year is now expected to be in the low 20 percent range. Adjusted net earnings per diluted share is expected to be in the range of $1 to $1.50 per share. These results include the impact of the 53rd week in 2023.
based upon our retail calendar. This week occurs during a low-volume, non-peak clearance period, and as a result is expected to have a very modest impact on revenue and an insignificant impact on operating results. We have also significantly reduced our planned capital expenditures for the full fiscal year, which are now expected to be in the range of $20 to $25 million, primarily to support our DC expansion, digital initiatives, and enhancement of our fulfillment capabilities. We anticipate closing 100 stores in the next few weeks.
as part of our ongoing fleet optimization initiative with the bulk of the closures happening in 2023, leaving us with an optimized fleet of approximately 500 stores. Thank you. And now we will open up the call to your questions. Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad.
You may remove yourself from the queue at any time by pressing star 2. Once again, to ask a question, please press star 1. We'll pause just a moment to allow questions to queue. Thank you. Once again, to ask a question, please press star 1. We'll go first to Jim Tartiere with Monis Crespi Heart.
Hi, good morning. Shane, I was wondering if you could first talk about the gross margin in the first quarter. What were the biggest drivers of the declines that can quantify the impact of the freight and cost there? How would the inventory, how are you going to manage promotional activity in the second quarter given the sales shortfall? And then if you could provide an update on the...
a thousand basis points when we came in a little bit better than that. As we talked when we gave the original guidance and in various discussions previously that impact in terms of gross margin was largely driven by the higher input costs in terms of the higher AUCs that had built up in our
a combination of both cotton as well as high supply chain costs that were embedded in inventory that was receded towards the end of 2022, with cotton probably being a higher penetration of that deterioration. The anticipated….
margin impact was not as a result of incremental promotional activities or liquidation of inventory. It was almost exclusively those higher input costs. As we move into Q2, as we guided, we're still anticipating some level of pressure on margins as compared to last year. Certainly much less than we experienced in Q1, but nonetheless, we are anticipating about a 200 basis point decline in margin in Q2.
That decrease in margin is primarily the result of again higher input costs, but in this case almost exclusively cotton because the higher freight costs have dissipated and the inventory associated with those higher freight costs has also largely been liquidated.
So the impact in Q2 is more so related to cotton. Still a little bit of higher freight cost. And then also a little bit of a shift in terms of as we penetrate higher in terms of wholesale, it is a lower gross margin business for us. However, we don't incur the same cost, so it is a strongly profitable operating margin business for us. So there is some shift in terms of geography.
expense structure as we penetrate higher and higher in terms of wholesale. It is a strong profitable business for us but it does shift around a little bit the margin and the gross margin and operating margin. As we look to the final part of your question expenses I think you know in my in my first few months here we definitely have spent a lot of time analyzing the expense structure and as we hinted in some of our commentary.
We do believe and have implemented a number of changes to rationalize expenses across the board, starting with our real estate initiatives, our store operation initiatives, as well as some of our home office activities. All geared towards understanding and believing that we do need to invest more in digital marketing as we've become a digitally dominant retailer. We do need to invest more dollars there. So we've definitely.
saved dollars in terms of expense structure across the board, diverted some of those dollars into marketing initiatives, and we believe that positions us well for future success and future growth. So it moves us more in line with where we should have been in terms of marketing investment. So we're pleased with those activities and believe that that will serve us well and pay dividends as we move into, particularly the back half of the year.
and beyond where you know we'll start to see growth and you know more sustainable growth, expansion of margins, as well as you know generating significant free cash flow. And Jim I think from the promotional question you asked we placed we had mentioned before that we placed summer fashion receipts down significantly versus last year due to the pressure we had on AUC so as Shayma says we plan to end the border down with inventory down high singles and we anticipate that the fashion element of the high AUC spring and summer goods will be completely behind us and then we'll end with a...
healthy position and basics, which sets us up for back-to-school. Thank you. Our next question comes from Jeff Lick with B. Reilly Financial.
us up for back to school. Thank you. Our next question comes from Jeff Lick with B Riley Financial.
Hi guys, thanks for taking the question. Jane, I was wondering if you maybe could elaborate a little, you know, typically in this quarter's call, you know, when you have a weak weather period, you know, the May deterioration that you talked about, generally you show some signs of picking up that didn't happen this year. So I was wondering if you could elaborate a little on that and then just juxtapose that against all the good things you kind of have going on with the digital traffic up, you know, getting in to keep the back half.
also Amazon. I'm just wondering, it seems like there'll be this kind of aha moment where those good factors kind of overwhelm the bad factors. I'm just kind of curious how you're thinking about that. Yeah, I think we had mentioned in our last call that we really wanted to see a weather break because we didn't get a weather break the whole quarter during first quarter. And so that would allow us to see how much of what was happening in Q1 was weather versus how much was the consumer.
credit card debt is up, and so she's being very, very cautious with her budget. From a marketing perspective, remember that Q2 is our, usually our, you know, least profitable quarter. We don't have a marketing campaign per se in Q2 until we get the very end of July where we start up our back to school.
in mid-July. So when you think about, you know, what marketing is doing for us currently, it's not doing what it did for us in Q1, which Meghan outlined, and it's certainly not doing for us what we anticipated to do in Q3 and Q4 and what we saw from last year. So we anticipate May is going to continue to be tough, the store business is going to continue to be tough, June is going to be a continuation of that.
And then when we get to July , remember that, you know, we have a bit of a different cadence than others. 40% of our quarter comes from the month of July and about 60% of that comes from the last two weeks. So that is a very important period for us. And like I said, we'll be ramping up marketing. From an Amazon point of view, you know, I'm gonna turn it over to Megan to talk about it. I think she can, you know, provide some more detail on, as we shift into back to school in mid July on both the marketing front and the Amazon front to kind of round out your question about how we see the low right now and then how we see that improvement in the back half.
Yeah, so certainly from an Amazon perspective, you know, despite the slowdown that we're seeing in consumer demand caused by inflation, it's really not impacting that business. Our results and the investment that we've made in marketing. Obviously, you know, resulted in a very strong quarter and when we think about. The back half of the year, there's a lot that we're planning for from an Amazon perspective in terms of significant growth and it's really based on the current trends that we've been seeing quarter over quarter consistently for the past year. So, we're continuing to scale that as we head into Q3.
as we head into one of our biggest time periods as we head into back to school with Amazon. So there's a lot of momentum that's planned for the significant growth we're seeing in the back half of the business, in the back half of the year for that business. And then from a marketing perspective, as Jane had mentioned, we really start to ramp up significantly in the July time period as we head into back to school with our back to school brand campaign, and then the same into holiday. There's a lot, when we think about kind of what's fueling that digital.
a slight change in our conversion trend as Jane had mentioned. And really that's based on being up against last year in Q4 specifically, our lowest converting quarter historically as it relates to our digital business. And that was based on obviously the macro environment, the impact of inflation really.
coming up in a big way in Q4 of last year, as well as some out of stocks that we saw in key marketing looks, all of which we feel like we've really right sized in terms of A, the marketing investment that we're layering on top of this year, and then the investment we made in, from a product perspective, to really make sure we're covering all those key marketing looks. So we feel like we're really positioned well. I would also say, really the third kind of driver is that acquisition growth that we've been talking about and we've seen. Acquisition has a longer tail in terms of really seeing meaningful impact to top line.
much. James, you know, we just talked a lot about Amazon there. But if you can just maybe talk a little bit about, you know, I know you said you'd give some more numbers to come maybe later in the year, but just big picture over the last 90 days, like what gives you confidence that the Amazon business continues to develop and if you can give us an idea of like, where how big this business can be over time and how profitable it can be, that would be helpful. Thank you.
Yeah, I think as far as, and I'll take this question, just as far as again where we're really seeing the growth and why we feel confident in the back half of the year from an Amazon perspective, we're looking at as we head into the back to school time period, what we already have in terms of book sales. We're also looking at again a scaled marketing investment, the trends we're continuing to see, the trends coming off of Q1. And then again, when we just look at those past 90 days, we have not seen the slowdown in that business. We continue to build coming out of the Q1 time period and feel.
like we're in a significantly better position from both an inventory and an investment perspective for the Q3 and Q4 time period of this year than we've ever been historically with the Amazon business specifically. So I think that's really what, those kind of levers are what really make us feel confident in the continued growth. I think the other thing I would add to that is, for us, the Amazon business is certainly a big and important business. And we anticipate that not only are we going to expect growth in the back half of the year, but we're really expecting that business to grow significantly as we move into 24 and 25. We believe we have opportunities within that business, both in the TCP brand, as well as our recent launch of Jim Baree.
on Amazon, so we believe that there's tremendous growth opportunity. You know, I think it's important to put it in perspective as well. You know, while the first half of the year was certainly a difficult time period for us, or anticipated to be a difficult time period for us due to macro pressures and high input costs, as we move into the back half of the year and into 2024,
new base from a stabilization in terms of cost. So the input costs are dissipating as we've talked. We're going to benefit from clean inventories. We're going to benefit from reduced expense structure that we're diverting into into marketing.
And then also a stabilized store base, as we're nearing the end of our store closure, initiatives that we believe we're gonna settle in at around 500 stores. All of this adds up to, really establishing a new base for the company in terms of growth for the future, that'll enable us to not only grow top line, but expand margins and generate significant free cashflow. So we think Amazon is certainly an important part of that go forward strategy.
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