Q2 2023 Childrens Place Inc Earnings Call
Marketing attribution optimization and simulation solution that captures a holistic range of Omnichannel business drivers.
This platform delivers real time optimization across all marketing touch points, providing us with accurate results and validated sales product predictions, enabling us to generate measurable incremental sales and profit to help us to more strategically deploy every marketing dollar and to measure in real time.
Effectiveness of those dollars.
Both our measurement and media partners to support our in house team on marketing strategy and media execution on a daily basis, which leads to our third initiative marketing spend.
In 2019, our total marketing spend was less than 2% of revenue versus the industry average for multichannel brands, a 5% to 7%.
Our marketing spend as reported includes not only digital marketing advertising celebrity partnerships and creative for our site. It also includes the costs associated with our loyalty program as well as our store signage and print materials.
As we complete our fleet optimization initiative at the end of this year, our ability to expose customers to our brand has shifted from high cost traditional brick and mortar billboards, which were effectively part of rent expense to digital first acquisition strategy.
Our incremental marketing investment in 2023, and beyond which we have self funded through efficiencies in our digital first operating model are anticipated to be in the mid single digit range in line with our specialty peers.
Our working media investment is now focused on full funnel marketing, which is made up of top of funnel mid funnel and lower funnel tactics.
Unlike lower funnel tactics, which are aimed at speaking to shoppers who have already expressed purchase intent.
The funnel marketing serves to spread awareness educate prospects and cultivate brand buzz.
Lastly, our fourth initiative traditional versus nontraditional marketing.
In 2019, our budget was almost solely focused on traditional marketing investments of E mail and retail signage.
Shortly after the onset of the pandemic when our core millennial customers behavior rapidly shifted to mass and online consumption. We made the strategic decision to significantly accelerate our store closures.
These accelerated shifts in consumer behavior and.
And company strategy demanded and accelerated marketing transformation with significantly different marketing investments it.
It was critical that our marketing strategy and investment.
<unk> were rooted in accurate customer data, which led us to commission a deep enterprise customer segmentation analysis at the start of the pandemic as the first important step to inform our digital marketing transformation strategy.
As the result of our segmentation work, we are now focused on investing in non traditional marketing, which simply put is any strategic marketing activity or tactic that uses innovative methods to reach a target audience.
Laser focused on meeting and serving our millennial mom wherever whenever and however, she wants to interact with our brands, whether that's on social media in her E mail through celebrity and Influencer. She is inspired by or streaming a video on Hulu or Youtube.
We need to be everywhere that she is.
Since launching our revamped marketing strategies in the back half of 2022 supported by our best in class partners and state of the art marketing tools, we have significantly shifted the way we utilize media and we've seen great success in our results.
Now, let's review some of those results starting with acquisition.
As we've discussed on several occasions, a robust digital Akron acquisition strategy is critical to our success as a digital first retailer.
We're pleased to share that during an incredibly challenging retail environment Q2 was our fourth consecutive quarter of increased acquisition with <unk> U S acquisition up 8% to last year.
Even more impressive when you consider that our Q2 acquisition was approximately flat to 2019 with more than 350 or approximately 40% less stores.
Our positive acquisition trend is the direct result of our transform marketing and media mix strategies that strategically target. The total addressable market in order to drive new customer acquisition.
Those new strategies combined with our digital first strategy have resulted in a 57% of our acquisition coming through our digital channels versus 37% pre pandemic.
This is a significant shift and one that we believe puts us substantially ahead of our competition as we work to acquire millennial and Gen Z customers into our family of brands.
Next brand Buzz, which is an incredibly exciting and important initiative for us as we transform to a digital first operating model.
Our brand work, specifically has been transformative pre versus post pandemic.
Pre pandemic top of funnel brand awareness from both an earned and paid perspective was not a focus.
We relied on our legacy store operating model to generate brand awareness and new customer acquisition.
With our core millennial customers significant migration to mass and online channels since the start of the pandemic, we can no longer rely on the store channel to generate the majority of our brand awareness and customer acquisition.
We needed to apply a customer centric lens to every customer touch point and that starts with an engaging and noise cutting content strategy that serve to Mam via digital media mediums, we know that she consumes.
Since launching our branding initiatives in the back half of 2022, we've garnered over 159 billion earned and paid media impressions.
Our business relied on our store presence to drive brand awareness and engagement pre pandemic. So all of these brand Activations are net new and have transformed our brand awareness.
In tandem driven by our incredibly loyal communities. During the same time period, the growth of our social media presence and our social engagement has been explosive.
Since the back half of 2022, our brands drove over three 4 million social interactions, which represents a 3000% increase over pre pandemic levels.
Our social strategy has bolted the children's place brands into the leadership position across social media impressions with our brand representing 62% of total impressions and 60% of social interactions across our children's competitive set making the children's place the dominant player on social.
Media for 2022 and for 2023 year to date.
Lastly, marketing contribution pre and post pandemic.
Marketing contribution as a percentage of total revenue directly attributed to marketing efforts.
In 2019 marketing contributed approximately 13% of digital sales.
In Q2 of 2023 marketing contribution has grown to over 20% of digital sales.
During this time period promotions and promotional activity experienced a 300 basis point decrease in contribution to digital sales.
Our growth in digital marketing contribution has allowed us to reduce our reliability on promotional activity to drive digital sales as compared to pre pandemic further validating the sustainability of our structural pricing reset.
Even in one of the most challenging retail environment.
We have ever experienced the success of our post pandemic marketing transformation is clear.
Our marketing transformation has been a critically important element to our overall transformation from a legacy store operating model to a digital first retailer.
We now have the right partners the right tools and the right team to drive meaningful reach to drive qualified traffic to scale, our digital penetration and to acquire net new audiences into our family of brands through a full funnel marketing strategy.
And the most exciting part is that we're just getting started and we have significant opportunity ahead of us to continue to leverage our partners and our learnings.
Now, let's briefly review our Q2 marketing results.
As a leader in the digital space, we know that our core digitally savvy millennial customer browses and purchases for all of the special and emotional events in their children's lives earlier than our in store shopper does.
Combining this behavioral shopper knowledge with our leadership position in back to school, we launched a first to market back to school brand campaign, approximately one month earlier than our historical launch date with the goal of capturing in market demand and market share.
Our intentional pull up strategy was our curtains up moment across every aspect of our business and supported by our strong product launches, our multi pronged full funnel media strategies, our buzzworthy creative and our strategic targeting <unk>.
Importantly, we saw a positive inflection in our business immediately following the launch.
Our first to market back to school campaign launch included headliners in global pop Superstars to Jonas brothers and was strategically timed to coincide with the bands comeback reunion and highly anticipated debut of their newest album tips.
Typically brand campaigns of this sort have long tail impact however, as expected our first to market back to school campaign impacted our business day one.
We delivered positive single digit e-commerce comps for both the month of June and the month of July fueled by low double digit e-commerce traffic increases for the quarter, which we believe puts us significantly ahead of our competition with respect to our digital results.
Since the launch of our first to market back to school campaign, we have delivered over 15 billion impressions across our earned and paid media efforts and further supported by our continued dominance on social media with the children's place taking the number one ranked amongst our children's competitive set.
We have shared with you many times that mobile is the cornerstone of our digital first strategy due to how important mobile is to the core millennial customer and.
And as Jane covered in her prepared remarks mobile is exponentially more important to our emerging Gen Z customers.
So it is critical that we stay ahead of this important cohort.
80% of our U S digital transactions occurred on a mobile device during the second quarter.
New quarterly record for us.
Now, let's move onto mobile App.
The mobile App is a very important part of our overall mobile strategy since our mobile app customers spend approximately 100% more than non app users and shop, approximately 80% more than non app users.
Since kicking off our back to school launch with our mobile App tie in we've experienced a 48% lift in mobile app downloads.
Our targeted mobile app strategies have driven a significant increase in mobile app transactions and mobile app users.
In Q2, our mobile App accounted for 20% of our U S. Digital transactions grew 16% in Q2 of 2022.
And 7% in Q2 of 2019.
Fueled by an impressive 21% increase in mobile app customers versus last year.
I'll finish with an update on our growing Amazon business.
The significant time and resources that we have dedicated towards building our Amazon marketplace. Since the beginning of the pandemic have resulted in another outstanding quarter.
Amazon site sales and traffic were both up triple digits in Q2 versus Q2 of 2022.
We participated in July Prime day event, resulting in TCP as largest week on Amazon in our history.
It's really incredible when we compare our relationship with Amazon today versus pre pandemic.
The progress that we have made on both sides has been transformational and again the exciting part is that we believe we have significant opportunity for continued wholesale growth in the back half of this year and beyond with this important partner.
Thank you and now I will turn it over to Seamus.
Thank you Megan and good morning, everyone.
We were pleased that despite the continued macroeconomic pressures the second quarter exceeded our guidance from both a top and bottom line perspective, we continued to make significant progress on our inventory levels during the quarter, we liquidated more of our spring and summer product during the second quarter then.
We originally planned to ensure that we started the back half and even a cleaner inventory position.
Due to our efforts are high AUC spring summer inventory is down 27% versus last year and our total Q2, ending inventory is down 13% year over year significantly better than our guidance of down high single digits.
Importantly, we believe that inventory strategies that we have in place going forward will result in continued improvement in our inventory position versus last year throughout the back half of 2023 and beyond.
Net sales for the second quarter decreased $35 million or 9% to $346 million, which exceeded our guidance. This better than expected result was primarily driven by our strong E Commerce performance and a strong start to back to school.
These favorable results were in the face of continued macroeconomic challenges, including persistent inflation, a highly promotional retail environment and concerns over the resumption of student loan payments.
Our U S net sales decreased by $41 million or 13% to $275 million and our Canadian net sales decreased by $6 million or 18% to $29 million comparable store sales decreased 9% for the quarter.
Our comparable store traffic was down approximately 4%, while our e-commerce traffic was up low double digits.
Our comp store traffic decline was driven by pressure in the month of May with an improvement as we entered the key back to school selling period How's.
However, our comp store traffic versus 2019 continues to be down more than 30%.
Yeah.
While our consolidated AUR declined approximately 5% for the quarter driven by the liquidation of spring and summer season merchandise. Our AUR on go forward basics and back to school product was up year over year.
Importantly, <unk> remains significantly higher than pre pandemic levels validating the success of our restructured pricing strategies, which we believe will pay significant dividends as input and transactional cost continue to come down in the back half of 2023.
Gross profit margin for the second quarter decreased to 25, 4% of net sales as compared to 32% of net sales in the prior year.
This reflects the combination of an unprecedented increase in input costs, including cotton and supply chain costs the impact of accelerating our spring summer liquidation starting in early June in order to enter Q3, and a stronger inventory position and the significant growth of our wholesale business.
<unk>, which operates at lower gross margins, but also operates at lower SG&A expenses and is accretive to our operating margin.
Adjusted SG&A was $102 million for the second quarter as compared to $114 million in the comparable period last year.
This decrease was primarily a result of reductions in store expenses home office payroll and equity compensation.
As you heard from Meghan marketing is a critical part of our digital transformation strategy and we are pleased to be able to self fund our incremental marketing needs for the balance of the year through efficiencies from our transformation to a digital first operating model.
Our net interest expense was $7 $6 million for the quarter versus adjusted net interest expense of $2 6 million in the prior year's 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 was approximately 19% as compared to 19% in the prior year.
For the second quarter, we reflected adjusted net loss of $26 $5 million or $2 12 per share as compared to an adjusted net loss of $11 $7 million or <unk> 89 per share in the comparable period last year.
As the business has transformed from a legacy store operating model to a digital first model as previously announced we implemented several planned actions, which resulted in non operating charges totaling approximately $12 million consisting.
<unk> of approximately $6 million of employee severance.
<unk> costs and professional fees associated with a workforce reduction and approximately $5 million consisting of a lease termination payment accelerated depreciation and other costs associated with the early termination of our corporate headquarter lease.
Moving to the balance sheet, we ended the quarter with cash and short term investments of $19 million and with $348 million of borrowings on our recently expanded revolving credit facility and a modest amount of long term debt, which remains unchanged at $50 million.
We continue to expect to decreased borrowings by more than $100 million by the end of 2023 versus at the end of 2022 further positioning us for long term sustainable growth.
As I previously noted during the quarter, we continued to make progress in our inventory reduction efforts Q2, ending inventory levels were down approximately 13%.
Head of our expectations, enabling us to end in a healthier unit and cost position as we enter the important back to school selling period, we expect inventory levels to continue to be down versus last year throughout the balance of 2023, providing a significant opportunity to expand free.
Cash flow.
Moving on to cash flow and liquidity, we used $38 million of cash from operations in Q2 versus a use of $34 million last year.
As we will discuss in our outlook are digital first model better positions us to generate free cash flow, which we expect will be considerable in the second half of the year capital expenditures in Q2 were $7 million.
During the second quarter, we closed three locations ending the quarter with 596 stores, we continue to carefully evaluate our store fleet and close lower volume underperforming stores with over 75% of our fleet coming up for lease action in the next 24 months we maintain.
Meaningful financial flexibility and our lease portfolio.
As we look to the future we remain confident that based upon our accelerated transformation to a digital first retailer. We can operate the company with significantly less than we were able to do prior to the pandemic less.
Less stores less inventory less people and less expense, resulting in more consistent and sustainable results and more operating margin.
Let me cover these topics in greater detail.
I will reference 2019, where appropriate as 2019 represents the most recent pre pandemic year and for the children's place specifically 2019 represents the best comparison pre our accelerated digital transformation.
First less stores.
While we've talked at length about our real estate portfolio and our accelerated store closings strategy I wanted to provide some hard facts that illustrate the significant financial benefits of our store closure strategy.
Since 2016, we have closed 495 stores and since 2019, we've closed 392 stores.
With the expected 80 to 100 store closures. This year, we will have closed almost 600 stores since 2016.
We estimate that traffic to these stores that we have closed since 2019 would have been down over 30% versus 2019, resulting in significantly lower store productivity, which when combined with higher occupancy cost higher wage rates significantly higher shrink and retail.
<unk> and the inflationary pressures on corporate overhead would have resulted in these stores, losing tens of millions of dollars on an annualized basis.
We have historically transferred more than 30% of the revenue from closed stores to adjacent locations and to our digital channel, which clearly helps mitigate the loss of revenue and provide a vehicle to retain customers.
Additionally, the closed stores were significantly less effective and liquidating inventory, creating margin pressure as compared to our digital channel. We estimate that had these stores remained open they would've required in excess of $50 million of working capital to fund our full inventory.
Creating a significant strain on our working capital availability.
Importantly, while the store rationalization program has resulted in the closure of underperforming stores that no longer strategically aligned with our core customer our fleet optimization strategy has enabled us to establish a new go forward target base of approximately 500 stores.
Ending for the full year 2023.
The composition of our new 500 store base is much more heavily weighted towards outlets versus pre pandemic.
Outlets are our most productive and profitable store type and entering 2024, we expect that outlets will represent approximately 22% of our stores versus 14% in 2019, and approximately 30% of our store sales versus 20% of sales.
In 2019.
Throughout our decade long fleet optimization initiative. The company has been laser focused on the significant shifts taking place with respect to the demographics.
Birth rates have been on a decline for 15 years and over the last decade population shifts out of the northeast and Midwest and into the markets in the southeast and southwest have been significant.
It is important that our brick and mortar stores are positioned in markets with a population to support our product pre pandemic, 60% of our U S stores were in the northeast Midwest and West and entering 2024 that number will be in the low 50% range.
Additionally, since the pandemic many of our core millennial customers have taken advantage of work remote capabilities and migrated south and west for a better quality of life.
The data is very clear had we not close them. These underperforming stores would have been an untenable burden on the company and because we closed them. We are significantly better positioned going forward from a top and bottom line perspective.
For the past decade, we have been focused on transforming to a digital first digital dominant retailer because unlike many other omnichannel retailers digital is our most profitable channel and our customer clearly prefers shopping for her kids online.
Looking at other omnichannel retailers across our peer group.
The average digital penetration is approximately 30%.
We have an industry, leading digital penetration in excess of 50% and growing and our most profitable channel, which we believe is a significant competitive advantage that now allows us to be more flexible and more profitable versus pre pandemic as the millennial and Gen Z.
Moms continue their historic migration to the mass and online channels.
Yes.
Next less inventory.
Following the pandemic, we experienced a significant spike in input costs, including cotton and supply chain costs. As we have discussed at length. These factors combined with a challenging external environment resulted in inflated inventory levels throughout fiscal 2022.
And into the first half of 2023 and.
And in response, we have taken several strategic steps with respect to inventory management.
We liquidated seasonal inventory in Q4 of 2022 to reduce risk and enter 2023 and a stronger inventory position.
During the first six months of 2023, we have continued our focus on liquidating our high AUC inventory and because of those efforts. We are entering the important back half of the year in a much cleaner inventory position with carryover seasonal inventory down 26% versus last year.
In light of the reductions of input costs combined with the current macro environment and in support of our transition from a legacy store model into a digital first model, we have significantly pulled back on our inventory investments for the balance of 2023 and into 2024.
Finally <unk>.
Based upon the impressive results we have seen in the back half of 2022 with our with respect to our celebrity and Influencer marketing campaigns, we have increase the inventory investments devoted to these campaigns.
Next less people as part of our structural transformation from a legacy store operating model to a digital first retailer, we recently implemented a planned workforce reduction.
This initiative resulted in a 17% reduction of our salaried workforce, representing 181 positions. The substantial majority of which were located at our corporate office.
While our prior and current guidance reflect the financial benefit of this reduction. This was an important step that we were able to take as a direct result of our transformation, enabling us to operate our company with less head count versus pre pandemic.
Now, let's discuss less expense.
We believe the permanent structural efficiencies, we have gained by moving away from our legacy store operating model combined with our strong focus on expense optimization will enable us to continue to operate in a significantly more effective and efficient manner.
A recent example of this is the announcement of our corporate office lease termination.
After right sizing our head count we can now operate with significantly less space and we were not willing to accept the above market rent escalations that were built into our previously previous lease and we are now in the process of determining alternative solutions before the exploration of our rich.
<unk> lease term, which expires in may of 2024.
Our expense reduction initiatives will be further bolstered by our ongoing and rapid expansion of our second most profitable business wholesale driven by Amazon, which operates at a lower gross margin rate than our retail business, but at a significantly lower SG&A rate than our retail business and as <unk>.
Creative to our operating margins.
We anticipate that the 300 plus percent increase in our wholesale business. Since 2019 will have an approximate 250 basis point negative impact on our gross margin rates in 2023 versus 2019, however, the minimal fixed costs.
Associated to run that business more than offsets the gross margin loss and is accretive to our operating margins.
Looking ahead to 2020 for our wholesale growth is expected to outpace our retail growth.
So the dynamic between gross margin and SG&A will continue to positively impact our operating margins.
Margins.
Going forward, we believe the combined effects of these initiatives will enable us to operate the business with a significantly lower permanent fixed expense structure than we were able to do pre pandemic and will provide us with the opportunity to deliver improved profitability with more.
Consistent and sustainable operating margins.
Yes.
Finally left that in more operating margin, while we recently announced the expansion of our revolving credit facility, which strengthens our financial position supports our seasonal working capital needs and reduces downside risk the combination of our reduced store fleet decreased inventory inverse.
<unk>.
Cost savings initiatives and the expected return to profitability significantly provides us the opportunity to generate meaningful free cash flow in the back half of 2023, we.
We expect to utilize this free cash flow to pay down debt in the back half and we continue to plan to have lower debt levels by over $100 million.
At the end of 2023 versus 2022.
As we enter 2024, we believe the improved balance sheet positioning will help us produce more sustainable operating margins and more consistent free cash flow throughout 2024 and beyond.
As the company has previously indicated the first six months of 2023 were negatively impacted by several temporary headwinds.
Most notably cotton.
These high input cost embedded in our spring and summer fashion inventory in the first half of 2023 have now largely been liquidated.
And as we have previously indicated we expect significant gross margin and operating margin expansion in the back half of 2023.
Now let me take you through our outlook. The company is providing guidance for the back half of 2023 and for the third quarter of 2023 and is narrowing its previously provided guidance for the full year.
For the back half of 2023, the company continues to expect to deliver double digit operating margins driven by strong product offerings decreased input cost embedded in inventory the benefit of reduced inventory levels and strong expense discipline.
Net sales for the combined third and fourth quarters are expected to be in the range of $910 million to $920 million, representing a decrease in the mid single digit percentage range as compared to the prior fiscal year.
Adjusted operating income for the six month period is expected to be approximately 10% of net sales.
Interest for the combined six month period is expected to be approximately $13 million, reflecting higher average borrowings in the prior year and the impact of increased rates due to the increase in interest rates over the past year.
Our effective tax rate is expected to be approximately 20% to 21%.
Adjusted net earnings per diluted share are expected to be in the range of $5 to $5 25.
For the third quarter of fiscal 2023, the company expects the following.
Net sales are expected to be in the range of $470 million to $475 million, representing an approximate 7% decrease as compared to the prior year third quarter.
Adjusted operating profit for the third quarter is expected to be approximately 13, 5% of net sales.
Interest expense for the third quarter is expected to be approximately 7 million to seven $5 million again, reflecting higher average borrowings and the impact of increased rates due to the increase in interest rates over the past year.
<unk>.
Our effective tax rate for the third quarter is expected to be approximately 20% to 21%.
Adjusted net earnings per diluted share for the third quarter are expected to be in the range of $3 55 to $3 65.
We anticipate that Q3 2023 gross margin rate will increase by approximately 200 to 300 basis points versus last year, reflecting the anticipated decrease in input cost on cost on goods is expected to be sold during the quarter.
Partially offset by a decrease of approximately 100 basis points due to the significant growth of our wholesale business, which operates at lower gross margins.
SG&A expenses are expected to be down slightly versus last year, reflecting reductions in store payroll due to lower store count reduced home office payroll and other expense rationalization initiatives, partially offset by planned increases in marketing expense and an increase in incentive compensation.
<unk>.
At the end of the third quarter inventory is expected to be down in the low double digit percentage range versus the prior year third quarter.
To provide some color on the fourth quarter, we expect the fourth quarter SG&A dollars to be down significantly versus last year and will be down versus Q3, which reflects the impact of our expense reduction initiatives.
We expect our fourth quarter gross profit margin will expand by 1300 to 14 100 basis points compared to last year.
Our gross margin projections take into account the significant expansion of our wholesale business, which we estimate will negatively impact our Q4 gross margin rate by more than 100 basis points versus last year's fourth quarter, but as we previously discussed this business operates at lower SG&A.
And is accretive to our operating margin.
In addition, we expect our margins will also be negatively impacted by the continuation of the challenging macroeconomic environment as our core customers are expected to continue to feel the impact of inflation for the remainder of the year.
The company is narrowing its previously provided guidance for the full year 2023, and now expect net sales to be in the range of $1 $5 75 billion to $1 $5 85 billion.
Adjusted operating profit ranging from two 7% to 3% of net sales and net earnings per diluted share expected to be in the range of $1 to $1 25 per share.
Okay.
These projections include the impact of the 50 <unk> week in 2023 based upon our retail calendar.
This week occurs during our low volume non peak clearance period and as a result is expected to have a very modest impact on revenues and an insignificant impact on operating results.
We have also significantly reduced our planned capital expenditures for the full year, which are now expected to be in the range of $20 million to $25 million, primarily to support our digital initiatives and the enhancement of our fulfillment capabilities.
We anticipate closing 80 to 100 stores as part of our ongoing fleet optimization initiative with the bulk of the closures happening at the end of 2023, leaving us with approximately 500 stores.
Thank you and we will now open the call to your questions.
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Our first question comes from Jim Chartier with modest Crespi Hardt. Please go ahead.
Hi, good morning, Thanks for taking my question.
I just wanted to talk about the guidance for a second.
So.
It looks like by my math.
At the midpoint your operating income guidance is actually up a little bit from before.
So could you just talk about whats changed in terms of your outlook for interest expense for the tax rate.
Yes, Hi, Jim.
I think you're generally correct.
I think in terms of our operating profit guidance.
We do feel as strongly about obviously, the 10% operating margin.
We continue to believe that we'll be able to achieve in the back half of the year driven by.
Our margin expectations on a gross margin level, which as we talked in my prepared comments.
We did experience some pulse.
Paul forward of some clearance merchandise into July , which will benefit us versus our expectations in the back half of the year.
And then obviously our cost controls and initiatives that we continue to accelerate our helping us from an SG&A perspective.
Which are all helping us to improve operating profits slightly.
Slightly versus our previous guidance.
We did experience.
An increase in interest rate.
And interest costs associated with borrowings so that partially offset some of those increases.
So thats what youre seeing in terms of the bottom line result, I think tax rate is generally where we would have expected.
But essentially you're seeing some of the operating profit improvements that we've been able to.
Two project.
Slightly offset by.
Increased interest rates due to higher borrowings and higher.
Market based rates.
Great.
Could I ask a follow up.
Just you've moved up to the marketing campaign by months for back to school.
Others have kind of talked about the back to school studying it to September this year, how are you thinking about the back to school season.
Are you continuing to invest in marketing in August and September at the same rate as last year and that just overall are you seeing some kind of back to school in August to date. Thanks.
Yes, Jim It's Jane I think clearly based on our prepared remarks, we're very excited about back to school. We launched early we were first to market and I think that you can tell through our results, particularly digital that that was a successful strategy.
Just to refresh everyone. The lion share of the back to school business happens between $7 15 in 2015, so 60% of our back to school business is between that time period, and I am sure its Daimler for others.
I'm always a little surprised when people talk about extending back to school to September we don't have the back to college business, but considering all the kids are pretty majority back on campus I would assume that business is heavily frontloaded as it is for us and when you think about our business at TCP by $8 28, which is a week and a half from <unk>.
Now, 80% of our kids and our markets are back in school, so like I said.
August is really where this happens for us in August as you all know who follow us as an outsized month and represents usually historically about 40% in the quarter and so what's happening now is really the big businesses in uniform denim graphics, that's what's really driving the sales in that 7%.
15 to 91 time period, if you will fashion business has been very strong for us in stores as well as on our digital channels that we're happy to see that and also Halloween has been we always launch that around seven one that has been particularly strong for us and I think as Megan mentioned in her prepared remarks are.
Digital shopper shops earlier than our store shopper and so we're seeing really positive response to that and we will continue to spend on marketing as we discussed in our prepared remarks through.
The balance of the season, but I just want to make it clear that as we leave August behind we quickly move into selling.
Seasonal products and the startup holiday and really leave factors will behind.
Thank you we'll take our next question from Jeff <unk> with B Riley financial.
Hey, guys congrats on a great quarter.
By my math here you Seamus.
Data with U S and Canada appears your digital business.
It was down mid single digits. Obviously, you said it was up for June July , which implies a pretty significant acceleration.
I'm just wondering I'm, assuming your guidance imply digital will be up for the year or for the second half and I'm just kind of wondering do you are.
Are there things with regards to the marketing.
You're seeing that kind of gives you even more confidence in that guidance.
The digital guidance.
Yes, Hi, Jeff Chen.
I think first from a trend perspective, I think you're generally in the ballpark our digital businesses.
In Q2.
It was in the low single digit percentage range.
And as you said and as we've talked about in our prepared remarks that was.
An improving trend throughout the quarter, where we saw that flip to positive.
In the last two months of the quarter.
I think as we look at our guidance and our expectations for the back half of the year.
I think we have some different perspective by channel and it's probably best to understand it by looking at the different channels.
I think first as we look at the wholesale business as we've discussed and comment that on a number of occasions, we expect the wholesale business to be up significantly in the back half of the year <unk>.
Contributing to positive results on the top line and helping US obviously from a comp perspective.
Secondarily from a brick and mortar standpoint, given the macro pressures coupled with continued expectations on our part for declines in mall traffic.
We do expect.
The brick and mortar business to continue to be challenged during the back half of the year and I'm really not anticipating any improvement in that trend.
At all.
And then finally in the back half of the year to the point of your question.
With respect to e-commerce.
We're expecting a slight improvement in trend due to a combination of factors, obviously, we've experienced positive traffic trends.
Upon the success of our marketing strategies.
We're not anticipating that those trends will dramatically improve from where we are now but they are positive.
So we're still anticipating the success of those marketing investments as we move into the back half of the year.
And then I think we see some opportunity.
For increased or improved conversion.
As we move into the back half of the year as we're better positioned in certain key items for the holiday season.
And those key items importantly are further supported by.
Some of our marketing initiatives. So I think that gives us an opportunity in the back half of the year relative to last year.
And even more improved trend.
E Commerce business versus what we saw in Q2, I think from an AUR perspective.
We're anticipating still a challenging environments are not really anticipating an improvement in the trend.
In terms of AUR.
But overall, our digital business is.
Expected to improve slightly based upon.
The improvement in conversion and that continued success of the marketing investment in terms of driving traffic.
Thank you. Our next question comes from Dana Telsey with Telsey group.
Hi, nice to see the progress as you think about the business model shifting to digital and in certainly every indication as it becomes a more efficient business model. How do you think of the expense structure going forward and does it get leaner than what it is given obviously the balancing.
Active marketing investments driving customer growth.
Transaction, but also the expense structure internally.
And then Jane you just announced the hiring of Mary Beth on the Chief merchant side.
What do you see that opportunity.
Enhancing the merchandise assortment, whether through the children's place brand or the other brands. Thank you.
Sure Mary Beth is a very seasoned merchant and has worked in a lot of different channels and a lot of different businesses and so she's only been here a couple of weeks, but she has immediately hit the ground running which is not surprising as I had mentioned in the press release I'd worked with Mary Beth in the past, so I think she's going to bring a level of discipline and.
A level of urgency.
Around the opportunities in the brands and to your point not just TCP, but how do we continue to get the momentum going and gymboree, how do we breakthrough and sugar and Jade and really make that business more important as we look to 2024 and beyond and like I said she's worked in a lot of different businesses. So I think that she can look across the brands.
Think about incremental <unk> I think what it also does is it really frees Meg enough to really focus our energies on marketing and on our wholesale business directly.
Mostly from Amazon, So, having megan be able to spend a lot more focus time on growing the Amazon business and the potential offshoots of that Amazon business.
International or what have you and then also to see what Megan and her team have been able to do on the marketing front is just absolutely incredible when you think about where we were pre pandemic and where we are now and you look at just things like our digital business Comping positive in June and July and double digit traffic increases we haven't heard a lot of reports so far.
But.
From the ones, we have we are certainly.
<unk> outlier and how strong our digital results are and obviously.
That's where our eggs are in the basket and continue to move on that so I think that that will really free making up for that as well and the rest of it I'll turn it over to Seamus, yes. So.
In terms of the first part of your question.
As far as our digital acceleration, we do see the opportunity to have a permanent reduction in our expense structure.
As I commented and Jane commented in our prepared remarks.
In terms of operating efficiencies, we believe that the digital acceleration and it will enable us to obviously as we comment that have less stores less inventory less people less expense less debt less interest as a result of that debt.
So there's a whole host of efficiencies on the expense side.
We've obviously executed a number of <unk>.
Initiatives this year, which are reducing expenses. We've commented in our guidance in terms of expectations for expense reductions relative to last year and those are not a one time thing that are temporary benefits.
We believe that's a resetting of the expense structure.
As we shift to a more digital business.
As we layer in more wholesale which as I commented earlier comes with.
SG&A expense and I think it's also important to note.
Within that SG&A expense as we've talked on numerous occasions.
We're also investing in marketing so we're able to achieve SG&A expense reductions. Despite the fact that we're making.
Investments in marketing to drive our digital business, which are extremely important to our growth initiatives, but we are in essence able to self fund those marketing investments with the restructuring of our business and the expense reductions that we see.
Across across the business.
And some of that.
Hits in SG&A expense some of it is also coming through occupancy cost reductions as as.
As Meg talked about in her comments, where we're shifting from billboards are nameplates on brick and mortar locations to more digital marketing initiatives.
That digital marketing ends up in an SG&A expense, where some of that occupancy cost was actually in our margin structure.
I think we're certainly getting more efficient more effective.
With our expense structure.
And thats not a temporary benefit that's an ongoing benefit that will cascade into 2024 and beyond.
Enabling us to have.
More sustainable growth and more.
Sustainable increases in terms of operating profits.
Thank you we'll take our next question Jay sole with UBS.
Great. Thank you so much.
Jane I wanted to ask just about third quarter versus fourth quarter, and just how the businesses evolve because the guidance for third quarter sales. It looks like it's implying sales for <unk> would be a lot bigger than they will be for fourth quarter. Although if you go pre pandemic in the past fourth quarter was always bigger than third quarter. Given its holiday is the change just around the wholesale business and its growth or is there something.
That was going on that we'd really made structurally third quarter bigger now and then if you can maybe just talk about gymboree and as that business grows how that should impact fourth quarter that would be super helpful. Thank you.
Yes, I'll turn it over to Seamus for the first part and then I'll take it back for agenda.
As James said earlier in terms of.
The importance of back to school is a critically important time period for us where we do see.
A significant amount of.
Revenue uptick in Q3.
So that has definitely driven more.
More revenue and a disproportionate amount of revenue into Q3, so it's it's a critically important.
For us because of that.
I think thats, what youre seeing in our expectations in.
In terms of the performance split between the costs.
And then from a Jim Murray perspective, I can take that part of the question Jim Murray, We're planning when we think about Q3 and into Q4 Gymboree. We've talked about before is a very holiday centric business. So we're going to continue to see really exciting growth from the gymboree brand as we head into Q4 and a lot of that is going to be surrounded by an incredible marketing.
We had announced Mandy Moore, we've continued to see really positive success with higher throughout the year and really where it kicks into gear as the tail end of Q3 heading into Q4 as we bring in our expanded holiday assortment. This is where we had a lot of opportunity last year, where we saw very early selling we oversold our inventory. So when we head into December we have a law.
A lot of opportunity in the November December time period. So we're very optimistic about the continued growth of gymboree, especially as we kick into the key holiday selling time period.
I think the last thing I would just add to the first part of that as stores have.
Become a less penetration for us I think that in earlier years when stores were a higher penetration.
They do have a slightly better performance relative.
Between Q3, and Q4 because of some of the events.
And a longer.
A longer time period, but as we've shifted to more digital we do see a little bit more volume.
Volume in Q3 versus Q4.
Okay.
Thank you for joining us today.
If you have further questions.
Please contact Investor Relations at 2015582400 extension 14500, you may now disconnect your lines.
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Good morning, and welcome to the children's place second quarter 2023 earnings Conference call.
On the call today are Jane Elfers, President and Chief Executive Officer.
Megan marquee brand President.
MS toll Chief operating officer, and Chief Financial Officer, and Josh Trupo, Vice President financial planning and analysis.
After their prepared remarks, we will open the call up to your questions.
The children's place issued its second 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 outlook 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 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 before we get started I want to congratulate Megan and Seamus on their recent promotion and welcome Mary Beth Sharon into our team I'm looking forward to partnering with them as we continue to advance the company digital first strategy.
Our Q2 results exceeded our guidance on both the top and bottom line.
The top line beat was the result of our strong digital performance fueled.
Fueled by our strong start to back to school.
Driven by our successful first to market back to school digital marketing strategy and are on trend product assortment.
In addition, Amazon delivered another outstanding quarter.
Bottom line beat was the result of our continued focus on expense management.
With respect to monthly sales cadence may was our weakest month June improved significantly with the kickoff of our back to school campaign and July was our strongest month of the quarter.
Our E Commerce sales were up low single digits for both the month of June and the month of July .
Driven by a low double digit increase in e-commerce traffic for the quarter.
Our E Commerce channel represented an industry, leading 51% of our retail sales in Q2.
Up from 47% last year and 30% in 2019.
We haven't touched on birth rates for awhile. So I wanted to take a moment to update you on how we think about birth rates within the context of our digital first strategy.
As we've said for the past decade, we do not anticipate birth rate increases when we plan our business and it's a good thing we don't.
Just to refresh everyone Harrison facts on birth rates pre versus post pandemic.
First rates hit their peak at $4 3 million in 2008 and have never recovered.
In 2019, pre pandemic birth worth $3 $75 million.
In 2020, they dipped to $3 6 million, a 40 year record low.
And stayed at those approximate levels for 2021 and 2022.
And for 2023 birth rates are projected to remain flat to 2022.
We believe that market share gains not hoping for a baby boom is what will move the needle for our business and we believe that in order to gain share in the future digital needs to be our top priority.
The digital channels are aware, our current core millennial customer prefers to shop for her kids.
And based on the data.
Digital is where our future Gen Z bonds will overwhelmingly prefer to transact.
Almost all new digital buyers will come from Gen Z.
Gen Z digital buyers will surge from 45 million today to over $61 million in 2027, only four short years away.
Mobile or M. Commerce is where gen Z overwhelmingly prefers to do their digital shopping.
So as Gen Z becomes our next generation of core customers. It is critical that we make sure we are ready for them.
The importance of the digitally native Gen Z demographic to our future business cannot be underestimated and that is why we prioritized mobile first as the cornerstone of our digital transformation several years ago.
Megan will provide more detail on our progress in this area in her prepared remarks.
Moving on we have previously shared our expectation that once we were past the pandemic and the historic supply chain upheaval and unprecedented cost we would be in a better position to assess our accelerated strategic transformation.
From a legacy store operating model to a digital first model and to capitalize on the efficiencies of the new model.
We've learned a lot since 2019, and it's clear to us that because we accelerated our digital transformation and our fleet optimization strategies, we are more efficient and streamlined and can now operate the company more effectively with less resources.
Less stores.
Less inventory less people and less expense.
Resulting in what we believe will translate to more consistent and sustainable results and more operating profit.
In his prepared remarks, Sheamus will cover the following topics and how they are planned to positively impact our financial performance in the short term and beyond.
Less stores.
Our accelerated store closure strategy and its critically important impact on our future performance as we trade off low quality store sales for higher margin E Commerce and wholesale revenue.
Less inventory as we move beyond 2023, and the high costs embedded in our inventory we have the ability to operate the company at lower inventory levels versus pre pandemic as a direct result of our transformation from a legacy store operating model to a ditch.
The first model.
Less people the ability to operate the company with a lower corporate head count versus pre pandemic as a direct result of our transformation from a legacy store operating model to a digital first model.
And less expense.
Our ability to operate the company with a lower permanent fixed expense structure as a direct result of our transformation from a legacy store operating model to a digital first model with significantly expanded digital and wholesale businesses.
All leading to more consistent and sustainable results and the opportunity for expanded operating margin versus pre pandemic level.
But before we get to Seamus I will turn it over to Meghan to discuss the significant progress we have made pre versus post pandemic with respect to our marketing transformation and marketings impact on our business pre and post pandemic.
Megan.
Thank you Jane and good morning, everyone I will focus my remarks today on the four key initiatives that have propelled our marketing transformation and the impact of transformation has had on our results pre versus post pandemic.
It's clear from our conversations that a lot of you are not familiar with and would like to learn more about the award winning partners. We work with the state of the art.
Proprietary marketing tools that we leverage every day to measure and maximize our results.
The effectiveness of our marketing spend and the results of our significant shift to non traditional media since the start of the pandemic.
The four key initiatives that I'll cover today that underpin our successful marketing transformation are our partners.
Real time optimize media measurement.
Marketing spend and traditional versus nontraditional marketing.
First our best in class partners, who support us behind the scenes.
Prior to the pandemic the marketing organization with Siloed.
The Siloed approach did not allow us to effectively and efficiently plan execute optimize and ultimately measure the effectiveness of our investments.
Since then we've centralized our partners teams and budgets.
And onboard a data and measurement solutions that allow us in real time to strategically drive our business Kpis.
Our partners.
Ipsos MMA supports us across multi touch attribution marketing mix modeling and incrementally measurement.
Ipsos MMA has been evaluated and scored as a leader by Forrester for its unified customer attribution approach and activate marketing planning and optimization platform.
We leveraged the activate platform daily within our organization.