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Children’s Place Talks Amazon Launch, Pack-and-Hold Strategy

The Children’s Place tempered its sales outlook but said EPS and operating margin goals remain on track.

In a Nutshell: The Children’s Place Inc., in reporting first quarter financial results on Thursday, announced that starting in July, Amazon will launch its Gymboree brand on the e-commerce giant’s website. Chief financial officer Rob Helm told Wall Street investors that 7 percent of the company’s inventory is dedicated to Amazon.

Jane Elfers, president and CEO of Children’s Place, said the unprecedented levels of inflation, which are now projected to persist into 2023, “will continue to have an outsized impact on the lower income consumer, particularly due to significantly higher gasoline and food prices.”

“Due to these persistently high levels of inflation and the lack of visibility into its impact on the balance of the year, we are tempering our top line expectation for 2022 and we are now planning for a mid-single digit decline in sales for 2022,” Elfers said. “Despite these headwinds, and supported by the significant structural reset we have made to our business model over the past two years, we remain focused on our goal of delivering double digit operating margin and double digit EPS (earnings per share) for 2022 and beyond.”

Elfers offered some color commentary on the company’s elevated inventory levels.

“Certainly having 30 percent more inventory is clearly something we’re watching and we anticipate that those inventory levels … are going to continue to stay elevated, while we work through the supply chain issues,” she said. “And we’re doing a lot of pulling goods up. … Almost 25 percent of our inventory is in transit.”

The CEO clarified that The Children’s Place doesn’t currently have any pack-and-hold spring inventory “and we don’t anticipate putting anything in pack and hold from this current season.” It did, however, pack and hold some “holiday basics” and “seasonal” fall staples, which the company will “start to release throughout Q3 and Q4.”

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“And so from a fashion point of view of inventory that we would consider [in] jeopardy, we are feeling pretty good,” Elfers said. “Also, a big part of our in-transit is really starting to load up for back to school. We obviously had an amazing back to school last year and we depleted a lot of our inventory and basics. So that’s a big part of our inventory.”

The company’s accelerated digital investments, she noted, have led to the digital channel being the highest operating margin contributor, with investments in digital marketing now enabling Children’s Place to be “significantly more strategic and nimble with respect to marketing spend and tactics.”

In the quarter, selling, general, and administrative (SG&A) expenses were $109 million compared to $106.7 million in the three months ended May 1, 2021. Adjusted SG&A deleveraged 595 basis points to 29.9 percent of net sales versus the first quarter of 2021, primarily as a result of the deleverage of fixed expenses resulting from the decline in net sales, as well as planned higher marketing spend.

As of April 30, the company had $58.5 million of cash and cash equivalents and $249.5 million outstanding on its revolving credit facility. Inventories were $549.2 million as of April 30, with 24 percent, or $132.6 million, in-transit due to steps taken to mitigate global supply chain disruptions, compared to $417.8 million in the same period last year.

The company ended the first quarter with 665 stores compared to 971 stores pre-pandemic. Consistent with its store fleet optimization initiative, Children’s Place permanently closed seven stores during the quarter and has permanently closed 534 stores since 2013 and decreased total square footage by 2.1 million square feet or approximately 40 percent. The company is planning to close approximately 40 stores this year.

Sales: Net sales for the first quarter ended April 30 decreased 16.8 percent compared to the three months ended May 1, 2021, to $362.4 million.

The decline was attributed to lapping the Covid-19 stimulus relief program last year, the impact of unprecedented inflation on the customer, prolonged unseasonably cold temperatures through the end of the quarter in major markets and the impact of permanent store closures. Comparable retail sales decreased 16.9 percent for the period.

Earnings: Net income in the quarter fell 56.1 percent to $25.4 million, or $1.43 per diluted share, from $45.2 million, or $3.01 per diluted share, in the three months ended May 1.

Gross profit declined 24.6 percent to $141.9 million in the quarter year over year. Adjusted gross margin deleveraged 429 basis points to 39.2 percent of net sales versus the first quarter of 2021, primarily the result of higher inbound transportation expenses and the deleverage of fixed expenses resulting from the decline in net sales, partially offset by higher merchandise margins in both channels.

CEO’s Take: Elfers said: “Our Q1 results were negatively impacted by several factors, the largest being lapping the unprecedented stimulus released into the economy in March of 2021. March sales this year were extremely challenging, with sales down approximately 35 percent versus March 2021. We also believe that the combination of the unseasonably cold weather that lasted through the end of the quarter in most of our key markets, and the unprecedented levels of inflation, particularly with respect to gasoline and food prices, negatively impacted our Q1 results.”

“On a positive note, for the first time in three years families joined together to celebrate the Easter Holiday, and we were very pleased with the performance of our Easter Dressy Business across all three of our brands,” Elfers added. “Gymboree and TCP had standout performances across all dressy categories and Sugar & Jade delivered strong results in the categories where we had dressy ownership.”