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Children’s Place Fights Through Freight, Climbing Costs to Post Profit, Sales Gains

The Children’s Place overcame higher costs and freight delays to achieve gains in sales and income in the second quarter.

In a Nutshell: The Children’s Place Inc. has launched a $1 million “School is Back Giveaway” in an effort to help families manage, Jane Elfers, president and CEO, said Thursday on a conference call with analysts.

In addition, the company is donating $1 million of back-to-school product to Baby2Baby, a non-profit organization that provides children living in poverty with basic necessities.

Elfers said the retailer’s digital business continues to grow on top and bottom lines. Digital sales represented 43 percent of total net sales for the quarter versus 29 percent in the same period in 2019, with more than 70 percent of Children’s Place digital business now coming through a mobile device.

“We continue to see a shift toward mobile and our mobile app results continue to exceed our expectations,” she said on the call. “Over 70 percent of our digital transactions come through a mobile device and our active mobile users are up double digits on top of the significant file increases we saw during the pandemic in the first half of 2020.”

The new Gymboree line is seeing strong customer response to August back-to-school offerings, Elfers noted, and the company anticipates that as families are able to begin to resume more normal activities, it will continue to see increased momentum.

“We’re focused on our partnership with Amazon and they are seeing very strong sell-throughs on our back-to-school assortments,” she said. “We recently launched a new storefront on Amazon and we are investing in brand marketing with strong results to-date. We are now projecting accelerated growth with Amazon for the balance of 2021 and beyond.”

Rob Helm, chief financial officer, told analysts that the company continues to experience late deliveries and factory delays resulting from the continued disruption in the global supply chain, due to the pandemic, as well as increased costs for inbound ocean freight, due to equipment and container shortages.

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“We are pulling up product receipts where possible and have been able to keep air freight costs to-date to a minimum,” Helm said. “We anticipate that we will continue to see disruption in the environment at least until the end of 2021.”

He said raw material input costs are also rising, but the company has been able to successfully mitigate these increased costs to-date. However, he said Children’s Place is planning that starting with spring 2022, “we will see…increases, due to higher raw material costs in inputs such as cotton and polyester, as well as general wage inflation in the countries in which we source our products.”

Sales: Net sales for the second quarter ended July 3 increased 12.2 percent to $413.9 million from $368.9 million in the three months ended Aug. 1, 2020, primarily driven by strong customer response to product assortment, a reset of pricing and promotional strategy, strong back-to-school sales inspired by the anticipated return to in-person learning and the enhanced child tax credit payments starting in mid-July.

Net sales in the period were negatively impacted by permanent and temporary store closures and the impact of reduced operating hours in mall stores, as mandated by mall owners. In fiscal 2020, second quarter net sales were negatively impacted by the government lockdowns due to the Covid-19 pandemic.

Earnings: Net income in the quarter increased $70.7 million to $24.1 million, or $1.60 per diluted share, compared to a net loss of $46.6 million, or negative $3.19 per diluted share in the comparable period last year. Adjusted net income increased $65.0 million to $25.7 million, or $1.71 per diluted share, compared to an adjusted net loss of $39.3 million, or negative $2.68 per diluted share, in the comparable period last year.

As a result of the continued uncertainty created by the pandemic, the company said it was not providing EPS guidance.

Gross profit increased $100.8 million to $167.9 million in the three months compared to $67.1 million in the year-earlier period. Adjusted gross profit increased $98.3 million to $168.1 million in the period and leveraged 2,168 basis points to 40.6 percent of net sales, compared to 18.9 percent of net sales last year, primarily due to significantly higher merchandise margins in digital and stores channels as a result of strategic pricing and promotional changes, lower occupancy expenses due to favorable lease negotiations and permanent store closures, and leverage of fixed expenses resulting from the increase in net sales.

Consistent with the company’s accelerated store fleet optimization initiative, Children’s Place permanently closed 42 stores in the six months ended July 31, 2021. The company is planning to close an additional 81 stores in fiscal 2021 bringing total closures to its previously announced target of 300 closures. The children’s specialty retailer ended the quarter with 708 stores and square footage of 3.4 million, a decrease of 13.7 percent compared to the prior year.

Operating income increased $102.3 million to $37.8 million in the quarter compared to an operating loss of $64.5 million in the three months ended Aug. 1, 2020.

CEO’s Take: Elfers said, “We delivered another outstanding quarter with gross margin, operating margin and EPS all at record levels. The significant structural changes we made to our business in 2020, including an accelerated fleet optimization strategy to close 300 stores, or a third of our fleet, in less than 20 months, an occupancy cost reset of our remaining stores, optimization of our e-commerce fulfillment costs, the introduction of Gymboree into our portfolio of brands and a restructuring of our P&L to support our digital-first business model, combined with the accelerated digital investments we made pre-pandemic, continue to propel our results. Importantly, we are now able to add another significant margin driver to the list. With the pandemic-driven acceleration of competitor liquidations and store closures, the competitive landscape now enables us to reset our pricing and promotional strategy, which we believe will be another key driver of accelerated operating margin expansion.”

“We experienced a significant acceleration in back-to-school sales during the last two weeks of July and the third quarter is off to an outstanding start,” Elfers added. “We continue to operate at a high level, while navigating the ever-changing COVID landscape. We remain firmly on offense and we look forward to continuing to deliver accelerated operating margin expansion for 2021 and beyond.”