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Children’s Place CEO Blames Sales Slip on East Coast Port Congestion

The Children’s Place saw net sales drop 8 percent to $380.9 million in second quarter, reporting a net loss of $13.3 million as the specialty apparel retailer still battles port congestion on the East Coast.

In a Nutshell: The Children’s Place CEO Jane Elfers said in an earnings call that the retailer currently has a “significant imbalance in our channel inventories,” which combined with slowing consumer demand to pressure average unit retail (AUR) and margins in the quarter.

AUR, which calculates the average selling price for items, remained flat, instead of the projected mid-single-digit growth the retailer initially expected, Elfers said. The miss came from fashion products, where AUR was down in the “negative mid-single-digits,” while basic AUR was up in the positive low-teens as planned.

Elfers pointed to ongoing supply chain issues, particularly East Coast port congestion as more companies reroute imports away from the West Coast, as the chief reason for its current inventory imbalance.

Inventories were $616.4 million as of July 30, 2022, increased 33.6 percent versus last year’s $461.4 million. Twenty-two percent of the retailer’s inventory, or approximately $135.2 million, is in transit due to steps taken to mitigate global supply chain disruptions.

Chief financial officer Rob Helm said the company has had to rebalance its basics inventory—primarily denim and uniforms—which currently represents about 50 percent of the children’s wear retailer’s on-hand merchandise, supporting several key categories with little to no markdown risk.

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“We had to ship large amounts of basics inventory between our channels within our DC and our domestic supply chain to support our strong Amazon and digital businesses, and to properly position us to deliver the significant level of basics revenue planned for Q3,” Helm said.

These inbound delays resulted in $6 million in incremental costs in the company’s distribution centers and domestic supply chain, he said.

The Children’s Place, like Walmart and Target, has since reduced inventory on order in the back half of the year. Inventories are anticipated to remain elevated for the third quarter, before moderating by the fourth quarter.

With that said, the company said seasonal inventories were well positioned for the upcoming back-to-school period, with spring and summer units down 45 percent to last year.

The retailer has since taken actions including moving more inventory into the Amazon channel to accelerate growth on the marketplace, both pre- and post-Prime Day. Prime Day 2022 sales jumped 305 percent over last year’s event.

“Due to the East Coast port congestion late in the quarter, we had to overspend in our DC to provide Amazon with the necessary inventory to continue to support their outsized trend, coming into and out of Prime Day,” Elfers said.

Gymboree, which The Children’s Place acquired in April 2019 for $76 million, launched on Amazon with a dedicated brand store in July, ahead of the 2022 back-to-school season.

Gross margin at The Children’s Place was 30.3 percent of net sales, down approximately 1,020 basis points (10.2 percentage points) from the 40.5 gross margin in the second quarter of 2021.

Adjusted gross margin decreased more than 1,040 basis points (10.4 percentage points) to 30.2 percent of net sales versus the year-ago period’s adjusted gross margin of 40.7 percent. The large decrease was attributed to multiple reasons, including the demand slowdown, which put unplanned pressure on average unit retail (AUR) and led to lower merchandise margins. Additionally, the retailer cited increased sectorwide promotional activity, higher domestic supply chain costs, increased wholesale penetration and higher inbound transportation expenses.

Consistent with its store fleet optimization initiative, the company permanently closed seven stores in the quarter, and is planning to close about 40 stores altogether this year. The retailer ended the period with 658 stores and square footage of 3.1 million, a decrease of 8 percent compared to the prior year.

As the brick-and-mortar footprint dwindles, The Children’s Place is seeing its digital sales tick up in kind. Digital represented 47 percent of retail sales in second quarter, versus 45 percent in 2021 and 30 percent in 2019, prior to the Covid-19 pandemic.

According to Elfers, the retailer is projecting digital revenue to represent 50 percent of total retail sales in 2022. By the end of the 2024 fiscal year, The Children’s Place plans for digital to represent approximately 60 percent of retail sales, versus 33 percent of retail sales in the 2019 fiscal year.

For the current third quarter-to-date, digital sales are down 5 percent compared to last year.

For the first time in 2022, The Children’s Place offered guidance for both an individual quarter and the full year.

Full-year net sales are expected to decline 9.9 percent to approximately $1.725 billion, down from $1.915 billion in 2021.The retailer anticipates a low-double-digit decrease in comparable retail sales.

The Children’s Place also forecasts adjusted operating income of approximately 7.5 percent of net sales, and adjusted earnings per diluted share of approximately $7.00.

And for the third quarter, the retailer projects net sales of approximately $500 million, a 10.4 percent dip from a year ago. The Children’s Place also expects a low-double-digit decrease in comparable retail sales, adjusted operating income of approximately 14 percent of net sales and adjusted earnings per diluted share of approximately $3.95.

At the end of the quarter, the company had $28.2 million of cash and cash equivalents and $283.9 million outstanding on its revolving credit facility.

Net Sales: Net sales at The Children’s Place decreased 8 percent to $380.9 million in second quarter, compared to $413.9 million in the year-ago period. The retailer attributed the net sales decline to inflation, increased promotional activity, the impact of store closures and last summer’s enhanced child tax credit.

Comparable retail sales decreased 8.7 percent for the quarter. 

Net Earnings: Net loss was $13.3 million, or a $1.01 net loss per diluted share, compared to net income of $24.1 million, or $1.60 per diluted share, in the three-month period last year.

Adjusted net loss was $11.7 million, or an 89-cent adjusted net loss per diluted share, compared to adjusted net income of $25.7 million, or $1.71 per diluted share, in the comparable period last year.

Operating loss was $13.8 million in the quarter, compared to operating income of $37.8 million in the year-ago period. Adjusted operating loss was $11.7 million in the three months ended July 30, 2022, compared to adjusted operating income of $40.1 million in the comparable period last year.

CEO’s Take: Elfers said the rise in competitors’ promotions caught the retailer off guard.

“What surprised us was the unexpected and meaningful ramp-up in the promotional activity from our two main competitors, which started in early June and really ramped up in mid-June through the end of the quarter,” Elfers said. “From our chair, it’s frustrating. We all experienced firsthand the benefits of tightly controlled inventories in 2021. To see a reversion back to bloated and mismatched inventories in the sector less than a year later, it’s tough to watch…When you have promotional events as large as these running, it left us with no choice but to compete on price.”