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Children’s Place CEO: Supply Chain Delays Could Continue Beyond BTS 2022

Fresh off the release of its 2020 ESG Report, The Children’s Place revealed that its third quarter delivered a net sales boost of 31.2 percent to $558.2 million and yielded net income of $78.9 million, or $5.30 per diluted share. The sales numbers narrowly beat Wall Street estimates of a 30.9 percent increase, and well exceeded earnings projections of $4.17 per share.

In a Nutshell: In an earnings call, CEO and president Jane Elfers referred to a recent NPD report indicating that the children’s apparel retailer increased its market share in the category by 17 percent for the third quarter, compared with 2020 totals.

As a result of what Elfers said were “favorable” lease negotiations, the retailer is now targeting 275 store closures since the beginning of fiscal 2020, versus the previously announced target of 300 closures.

“While we’ve realized significant occupancy savings to date, we remain well positioned with respect to lease flexibility with over 80 percent of our remaining stores having a lease action within the next 18 months,” said Elfers.

Inventories as of the end of the quarter were up slightly, at 3.3 percent, to $441.8 million compared with $427.6 million last year.

Gross profit increased to $244.8 million in the third quarter, well above the $146.1 million generated in the 2020 period. Gross margins totaled 43.9 percent, up from the 34.3 percent of sales taken in last year, totaling an approximate 9.6 percentage point increase (960 basis points). The gross margin boost was primarily as a result of significantly higher merchandise margins, resulting from double-digit average unit retail (AUR) increases and indicating that the company has been able to successfully elevate its price points.

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These gross margin benefits were partially offset by higher inbound freight transportation costs driven by higher container rates resulting from equipment shortages and capacity constraints, as well as additional air freight costs to a lesser degree.

Elfers expects the supply chain delays to continue through back-to-school 2022, “if not a little bit further.”

“Our sourcing team has done a fantastic job…we’ve done a good job limiting air freight and doing some early shipments to make sure that we have the product that we needed, obviously for back-to-school and now for holiday,” Elfers said. “I think we’re going to continue to see the disruption but I think we have a good handle on it and a good handle on our inventory.”

Given the supply chain issues, the Gymboree owner is now planning for capital expenditures in the range of $40 million for fiscal year 2021, with the large majority allocated to digital and supply chain fulfillment initiatives.

As of Oct. 30, the company had approximately $67.1 million of cash and cash equivalents and $174.4 million outstanding on its revolving credit facility. Additionally, the retailer generated approximately $70.7 million in operating cash flow in the three months ended Oct. 30, 2021.

The specialty apparel retailer also said it was refinancing the credit facility and term loan by a new lending group led by an affiliate of Wells Fargo. The new debt consists of a revolving credit facility with $350 million available and a $50 million term loan, both with five-year maturities, lower interest rates, reduced reporting requirements and increased flexibility under the terms.

Alongside the new loan terms, The Children’s Place introduced $250 million in additional stock buybacks. At the end of the third quarter, the company had approximately $48 million remaining on its current $250 million buyback program authorized by the board of directors in March 2017.

Net Sales: Net sales increased $132.6 million, or 31.2 percent, to $558.2 million in the three months ended Oct. 30 from $425.6 million in the year-ago quarter, primarily driven by strong customer response to product assortment and a “strategic reset” of pricing and promotions.  Comparable retail sales were up 36.2 percent for the quarter.

Digital sales represented 45 percent of total net sales at The Children’s Place for the quarter, up slightly from 44 percent in last year’s third quarter and 35 percent two years ago. In total, more than 71 percent of the retailer’s digital business now comes through a mobile device.

Net Earnings: Net income increased to $78.9 million, or $5.30 per diluted share, in the quarter, compared to a net income of $13.3 million, or 91 cents per diluted share in the comparable period last year.

Adjusted net income bumped up to $80.8 million, or $5.43 per diluted share, compared to an adjusted net income of $19.7 million, or $1.35 per diluted share, in the comparable period last year.

Operating income jumped to $113.8 million in the three-month period up from a total of $23.3 million in the three months ended Oct. 31, 2020. Adjusted operating income also increased accordingly to $116.5 million on a year-over-year basis, compared to adjusted operating income of $31.4 million in the comparable period of 2020. In kind, operating margins soared 1,349 basis points to 20.9 percent of net sales compared to 7.4 percent of net sales last year.

CEO’s Take: Elfers also commented on The Children’s Place’s launch of Sugar & Jade and the approach to expanding the new tween brand. “Our strategy is to launch it small across a lot of categories, so that we can use 2022 to understand what our tween girl is responding to each season,” Elfers said. “And then once we dial into what she is responding to, and what categories to stand behind, we’ll accelerate Sugar & Jade in 2023 and beyond. And we clearly believe this can be a meaningful contributor to add margin over time.”