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Cotton, Air Cargo and Containers Cost The Children’s Place $125M

The Children’s Place is getting out in front of a rough holiday quarter, with the specialty apparel retailer’s preliminary report projecting a fourth-quarter sales decline of 10.2 percent to 10.6 percent.

The Khloé Kardashian– and Kevin Hart-approved retailer said its total net sales are expected to be approximately $454 million to $456 million, which would miss the company’s prior low-end guidance of $460 million, for a decline of approximately $52 million to $54 million from the year prior.

Additionally, president and CEO Jane Elfers said in a statement that the specialty apparel retailer expects to report a net loss in the range of $52 million to $57 million for the quarter.

“This net loss was primarily due to a deterioration in gross margin for reasons not expected when we provided prior guidance, particularly a macro-economic environment in the fourth quarter that proved to be far more challenging for our core customers than we originally anticipated,” Elfers said. The company also cited the need for increased promotions as it worked to drive sales and reduce seasonal inventory levels.

The losses are an even bigger hit when comparing expected adjusted loss per share and adjusted operating losses for the quarter.

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Adjusted loss per share is expected to be in the range of -$4.02 to -$4.41 after excluding approximately $3.6 million of adjustments, primarily related to store-level asset impairments and fleet optimization costs to close certain retail locations. This range is well below the previous guidance calling for adjusted earnings per diluted share of 50 cents to 75 cents.

Adjusted operating loss is expected to be -13.4 percent to -14.8 percent of net sales after excluding the $3.6 million. Prior guidance called for adjusted operating loss in the range of 2.5 percent to 3.3 percent of net sales.

The results are still subject to the company’s detailed year-end closing process and its independent audit.

Elfers tied the 2022 operating results to $125 million in added costs from cotton prices, air freight and container fees.

The Children’s Place shelled out $65 million more alone due to spiking prices for cotton, which is the retailer’s largest product input cost. Elfers said another $30 million or so went to air freight costs while roughly the same amount was attributed to steep container costs. Overall, the company incurred higher levels of fulfillment expenses due to unplanned increases in both units shipped and split shipments.

Luckily for The Children’s Place, as well as other players in the retail space, the highs have leveled off for the most part, with Elfers noting that cotton prices have plummeted roughly 40 percent and container costs are approaching pre-pandemic rates. The company also has effectively eliminated the use of air freight in 2023 “as the worldwide supply chain moves back in line with historical norms.”

Beginning in the back half of this year, the combined impact of these three input cost reductions is expected to result in an annualized benefit of more than $100 million to the retailer’s operating results in 2023.

Elfers said that 2022’s higher input costs and the challenging economic environment led The Children’s Place to make several forward-looking strategic decisions regarding the level and composition of its inventory, “which negatively impacted short-term margins but significantly reduced higher cost, end-of-season merchandise, putting us in a much healthier inventory position as we enter 2023.”

If there’s anything the retailer can hang its hat on in the quarter, it was its ability to pare down inventory. Fourth quarter inventory is now expected to be up 5.5 percent to 6.5 percent versus last year, compared to a year-over-year increase of 24 percent ending the third quarter of 2022. Carryover inventory levels are expected to be “significantly lower” than the children’s wear retailer originally projected.

These strategic actions included the acceleration of inventory turns that enabled the company to liquidate units with higher built-in input and other supply chain costs. In addition, the retailer took a writedown of non-go-forward inventory and a donated a sizable charitable portion of inventory to its philanthropic partners at Delivering Good.

Additionally, Elfers noted that The Children’s Place still needs to offload inventory embedded with the higher input costs, and expects to do so in the first half of 2023.

“The significant reduction of input costs and the strong focus on expense and inventory management led by our new CFO, Sheamus Toal, position us well to deliver for investors in 2023,” Elfers said. “Combined with our industry-leading digital penetration as a result of our successful digital transformation that began several years ago and was completed during the pandemic, our strong stable of brands, the success of our fleet optimization strategy and our rapidly growing Amazon business, we expect to return to double-digit operating margins for the back half of 2023 and beyond.”

The company plans to provide further commentary on the fourth quarter and full-year 2022, as well as its 2023 outlook, in March as part of its scheduled earnings release and conference call.