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The Children’s Place Expects ‘Normalized’ Inventory by Back-to-School

The Children’s Place generated record first-quarter revenues of $435 million despite operating 261 fewer stores than it did two years ago, illustrating that the retailer’s store fleet optimization strategy is headed in the right direction.

In a Nutshell: The children’s specialty apparel retailer is getting more bang for its buck in the stores that are open. While the company’s first-quarter brick-and-mortar net sales of $231 million represent 85 percent of net sales in stores in the first quarter of 2019, they hit that mark with 27 percent fewer stores.

As of May 1, the retailer had 679 of 724 stores open in the U.S., Canada, and Puerto Rico, with all of the temporarily closed stores located in Canada. The retailer is staying in line with its store fleet optimization initiative, permanently closing 25 stores in the first quarter.

The Children’s Place is planning to close an additional 98 stores in fiscal 2021, which would bring the retailer to its 2020 target of 300 store closures. The closures will also come without financial penalty, and reset the company’s occupancy costs.

E-commerce represented 42 percent of total sales as the retailer continues its digital transformation, but the company still anticipates it will reach its goal to get annual digital revenue of 50 percent total sales. This will be aided by a decrease in fixed overhead costs related to online fulfillment.

“We continue to plan for reductions in our per-order e-commerce fulfillment costs in 2021, due to a number of packaging and network optimization efforts combined with the ability of our third-party fulfillment partner to service higher levels of demand,” said CEO Jane Elfers in an earnings call.

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Inventories to close the quarter were $417.8 million, up 24.4 percent compared to inventories of $335.8 million a year ago, which included a Covid-19-related inventory reserve of $63.2 million. Without the provision, inventory increased approximately 5 percent, according to chief financial officer Robert Helm.

The company says the increase is primarily due to the absence of Covid-19-related inventory reserves today, as well as higher levels of back-to-school basics inventory. Seasonal carryover inventories were down approximately 49 percent.

“We’re still carrying a nice amount of the same basics we’ve had since last year,” said Elfers. “We anticipate that as we get towards the end of the third quarter, you’ll see our inventories normalized [as schools return in person for the] back-to-school season.”

Elfers said The Children’s Place is “on track” for back-to-school deliveries despite a “two-to-four-week disruption” that the company is seeing on its summer product.

Adjusted gross margin increased 2,571 basis points (25.7 percentage points) to 43.4 percent of net sales, a record first-quarter gross margin for The Children’s Place. The increase was primarily a result of higher merchandise margins in both the digital and stores channels, and lower occupancy expenses due to rent abatements of $8 million, favorable lease negotiations and permanent store closures.

The gross margin benefits were partially offset by higher inbound freight transportation costs, driven by ocean carrier equipment shortages.

The Children’s Place had approximately $65.4 million of cash and cash equivalents and $196.9 million outstanding on its revolving credit facility. Additionally, the company used approximately $16.6 million in operating cash flow in the quarter 2021.

Despite the improvements in the quarter, the Children’s Place is not providing guidance. But Helm said that the retailer expects store sales to be flat to 2020 levels, as increased store productivity should offset the impact of permanent store closures over the previous 12 months. The Children’s Place also anticipates digital sales will represent approximately 50 percent of total sales in 2021.

The specialty apparel retailer is planning for capital expenditures in the range of $50 million for 2021 with the large majority allocated to digital, and supply chain fulfillment initiatives.

“We anticipate increased costs for inbound freight will continue to impact our business, raw material input costs are also rising,” Helm said in the call. “We have been able to successfully mitigate these increased costs to date with our 2021 average unit cost projected to be down low single digits through our holiday placements.”

Assuming the vaccine effort is successful, and governments roll back social distancing mandates, Elfers anticipates that the fourth quarter in particular “presents an opportunity for TCP to regain our historical leadership position in the ‘dress-up’ category” leading up to the holidays.

Net Sales: First-quarter net sales increased 70.6 percent to $435.5 million, compared to $255.2 million, primarily driven by what the retailer called strong customer response to its product assortment and as well as the recent stimulus payments. Additionally, the sales boost occurs a year after the retailer experienced permanent and temporary store closures for approximately 50 percent of the first quarter of 2020.

Comparable retail sales were 83 percent for the quarter, and up 21.5 percent on a two-year basis.

Consolidated digital sales increased 37 percent in the first quarter, representing 42 percent of total sales. Digital sales increased 35 percent in the U.S., and 82 percent in Canada.

Net Earnings: Net income was $45.2 million, or $3.01 per diluted share. This was a $160 million improvement compared to the net loss of $114.8 million, a $7.86 per diluted share loss, in the 2020 first quarter.

Adjusted net income increased to $48.7 million, or $3.25 per diluted share, jumping $97.5 million from the $48.7 million net loss, $3.33 per diluted share loss, in the comparable period last year.

Operating income also swung into the positive, with $65.9 million in the first quarter compared to a loss of $173.1 million loss in the period last year. Adjusted operating income increased to $70.7 million in the three-month period, compared to an adjusted operating loss of $64.9 million in the first quarter of 2020.

CEO’s Take: “We believe the expanded child tax credit benefits outlined in the American Rescue Plan, which include a monthly payment to approximately 39 million families, covering 88 percent of all the children in the U.S., should provide an additional tailwind for our business.” Elfers said. “Just in time for our key back-to-school selling season. These payments are scheduled to begin on July 15 and provide for monthly checks of $300 for each child under age six and $250 for each child between six and 17 years old.”