Childrens Place, Inc. Q4 FY2021 earnings call

• Digital growth: Digital sales increased 11% in Q4 2021, customer transfer rate improved to 32% in 2021, and the company invested in marketing and technology for digital expansion. - Store fleet optimization: Closed 78 stores in 2021, with a target of closing approximately 40 stores in 2022, and over 75% of stores have lease actions within the next 24 months. - Gymboree progress: Made progress towards the $140 million sales opportunity for Gymboree. - Sugar & Jade launch: New digital-only brand for the tween market, with initial learnings from the 2021 holiday launch. - Amazon partnership: Significant marketing investments with Amazon, aiming for accelerated growth in 2022.

In fiscal 2021, the company's digital business was a key driver, with digital sales accounting for 48% of Q4 2021 sales and targeting a 50% annual digital penetration in 2022. Store net sales in Q4 2021 were $249 million, representing approximately 76% of Q4 2019 store net sales. Gymboree had strong holiday deliveries, Sugar & Jade, a new digital-only brand for the tween market, launched in November 2021 with 4 million names in the marketing file, and the wholesale business with Amazon continued to grow strongly with robust sell-throughs.

• Store closures: Target to close approximately 40 stores in 2022. - Full-year net sales: Plan for full-year 2022 consolidated net sales to increase by approximately 1% compared to 2021. - Q1 outlook: Anticipates total Q1 2022 net sales to decline by mid-single to high single-digits versus the previous year due to lapping stimulus, inflation, store closures, supply chain issues, and the Omicron variant. - Q2-Q4 outlook: Expects Q2 sales to be higher than last year, Q3 net sales to be lower than last year due to the record back-to-school season in 2021, and Q4 net sales to be higher than 2021. - Gross margin: Full-year 2022 gross margin is anticipated to be approximately 200-300 basis points lower than in 2021, with lower margins in the first half compared to the back half. - SG&A: Planned to be slightly higher than in 2021 due to brand marketing investments and wage increases in stores. - Cash flow: Expected to have significantly higher operating cash flow in 2022, projecting $250 million for the year.

• High raw material costs: Impact of cotton prices and other raw material increases on margins. - Inflation: Surge in oil and gasoline prices affecting the core consumer. - Global supply chain disruptions: Prolonged disruptions leading to late deliveries and higher transportation costs. - AGOA trade preferences loss: Significant impact on margins if not reinstated, projected to be a $15 million headwind in 2022.

Q: Good morning, everyone. Thank you for giving all the information. As you think about this upcoming year, the brand marketing, what should we be watching for? Is there a difference in the cadence of the year of what you're looking at in the first half? I mean, Kardashians thing was very impactful in the fourth quarter, any new things like that planned? And on the AUCs that still, uncertainties and all the cotton costs and all, whether it's Gymboree, whether it's the new Sugar & Jade, does it impact one business more than another? And is there any difference in price increase that you're planning to take?

A: Sure. I think, on the AUC impact across, we're a big user of cotton in all three brands. We've taken, obviously, Sugar & Jade is new, but we've taken pricing increases throughout the past year in TCP and in Gymboree. And as Rob outlined on the call, we are planning on mitigating, the full impact of the AUC increases with AUR increases in 2022. So I would say that, there really isn't one brand that sticks out. From a marketing strategy point of view, I think that's a little bit more of a complicated answer. I think, we've really have a big lever in marketing. We've done a lot of work on personalization over the last several years. But in the last, I'd say 18 months, last year-and-a-half, we've really been able to move to a much more strategic marketing lens on our business. We've gotten some significant, outside help on segmenting our file, and really understanding who our customer is. And so I think we really think about marketing from four pillars, if you will, the first one's really customer centric marketing. And like I said, we had an outside partner come in their name is Merkel, who really helped us there. And what they helped us really do is take audience profiles, they at least define exactly who our customers are, they took the consumer demographics, psychographics, attitudinal behavioral data all across multiple platforms, and all the touch points and really helped us journey map, and then create customer plans for acquisition, retention, and reactivation by channel and brand based on those journey maps. And then we align our specific marketing tactics against those journey map. So that is a really big change for us. And a really important change for us is to be able to get to that level with our customer on the profiles and the journey mapping. And then, I think really the second pillar is probably brand building. So we then go and create 360 degree campaigns that tell our different product stories throughout our three brands and throughout all our customer touch points. And then we invest that kind of in all points of the journey, but we really are emphasizing and Rob mentioned it on the call the top of funnel awareness media. And then we really to your point about the Kardashians are doubling down on our efforts with influencers and celebrities to really shift brand perception, away from more promotional, and to build awareness around the brand and really the values of the brand. And ultimately monetize those learnings obviously. And then there's the other big change for us this year, which is really marketing mix optimization. And again, we had an outsider come in and help us with this. So I've mentioned in my remarks, we have a, what we call a multi-touch attribution tool. And that really is going to help us spend our dollars where they count. So we're strategically shifting our mix to more top of funnel and more brand awareness and acquisition tactics. And what does multi attribution tool fancy name, but what it does is it enables us to measure and optimize and forecast the different marketing investments and then implement like a statistical look back, really like a look back model to identify incrementality of our marketing spend, and really makes us much more nimble, and able to move that spend around much better as to where our customer is really finding us. And then all those three really lead obviously to the fourth, which is a best-in-class digital experience. And that includes all the things we've been working on site enhancements, digital marketing channels focused on customer acquisition, personalization, new technology. And then clearly the focus on mobile and building out the app experience. So we're really excited about the marketing strategy we have going forward. We've seen some great early results, and think that'll be a powerful lever in 2022.

Q: Good morning. Thanks for taking my questions. Could you talk about the promotional environment what you saw in fourth quarter, and then kind of how are you planning for 2022 and then for first quarter, how impactful is the return of Easter dressy business in first quarter after not really having that business for a couple of years?

A: Sure. Yes, I think that from what we see in our competitor base, everything is really, kind of benign, very rationale, I think people are still having some issues getting product in. And so I think that we're going to see, continue to see a rationale promotional environment. I think we are firm believers that we can get more for our product. And I think some of our competitors feel the same way. So I think everyone's at least currently on the same page as to holding on to these price increases, and getting discipline around inventory management. So I see the promotional environment, relatively calm. From I know, you didn't ask this, but the Easter dress -- the Christmas dress up business was strong, and that should bode well for having a much stronger Easter dressy business this year than we did last year. But I will remind you, and we've said this many times before, we're pretty much the students of the Easter business in kids. Easter is not the greatest date for us, Easter 4/17 this year. And as we said, a lot of times, we don't love a late Easter. And the reason why is, with a late March or an early April Easter, you get mom to come in in March, whether the weather's favorable or not, she has to shop for Easter. And not only does she buy Easter dress up, but she starts to look at what's available to stock up for Spring at the same time. And then when the weather changes, which it usually does, at some point in April, you get a second chance to have mom back in the quarter. So that's really the perfect timing for us late March or early April, with a late April unless you get a weather change in March, there's really no strong impetus for mom to come out in March, and she'll wait until April. So when we really think about it and Rob talked about Q1 which we think is going to be our toughest compare when you look at the fact that we're up against such a tremendous amount of stimulus from last year, and we have a later Easter, we really believe that that's going to combine together to, as Rob said, produce our toughest compare. But from a product point of view, and a positioning point of view and an inventory point of view we're -- we feel good that we'll do well with our dressy products, when mom comes out.

Q: Great, thank you so much. Rob, if you could sort of explain two things. One, could you give us an idea of the incremental benefits of sales in 2022 from Gymboree, Sugar & Jade and Amazon. And then maybe can you clarify in gross margin, you said gross margin down 200, 300 bps for the year lowering the first half and the second half. Did you mean that in terms of the year-over-year change will be lower in Q1 versus Q2 or the overall level of gross margin will be lower in Q1 versus Q2, sorry, the first half versus the second half?

A: Sure. From a gross margin perspective, I call that 200 to 300 basis points down for the year versus 2021. The overall decline in Q1 and Q2 will be more pronounced than the declines in Q3 and Q4. And we expect a moderation in gross margin as we get to the back half of the year; we have the year-over-year comparison of the freight that I talked about this quarter. From a Sugar & Jade, Gymboree and Amazon perspective, we didn't call it amounts in terms of sales increases, but they're included within our 1% increase of consolidated net sales for the year. We continue to be excited about the Gymboree brands and the long-term opportunity for a $140 million. Sugar & Jade is early days. But it's a big addressable market for us in terms of $8 billion in the tween market. And Amazon is Amazon. So we're excited about that opportunity and we see significant growth in 2022 over the significant growth we saw in 2021.

Q: Hey, thanks, guys. Jane, curious about your view on the growth in the Children's apparel market for FY 2022 in units and dollars. And would you expect to grow market share in the year ahead? Here's just curious if it's something that you set as a goal. And how much of that sales growth in FY 2022 you assume is units versus pricing?

A: Paul, I can answer your question. From a unit perspective we were up this year versus last year. And we also had significant double-digit gains in AUR. As we pivot to an e-commerce business and had decidedly higher digital penetrations we're more focused on order value. And our order value was also up significant double-digits. The increases in the order value really provide for tremendous leverage on our fulfillment costs in our e-comm business, and is driven our highest operating margin channel even at much higher. We expect to continue benefits for next year as we continue to optimize the fulfillment cost structure.

Q: Hi, good morning, nice to have on the call. Thanks for all the details. Just curious, based on your top-line guide for the first quarter, I guess does that entail are you currently comping in line with the guide? Are you assuming that sales kind of falloff in March and April is [ph] use like all those tough compares? And then it looks like based on the guide for the full-year, you're expecting sales and stabilized in the back half. So I'm assuming you guys still have the child tax credit wasn't as big of a benefit into stimulus in March last year?

A: Yes, Susan, we did not, obviously the child tax credit helped us and I think that's why Rob said, we expect Q3 to be lower this year than last year because of the pent-up demand with return to in-person learning and the child tax credit. And we expect to see a more balanced Q3 to Q4. As in response to your initial question, obviously January was a really tough month for us. We had a great November and December. And as Rob detailed when Omicron hit, we really took a dive in sales and traffic. We saw a nice rebound in February. We were up mid-single-digits comp through the end of February. But as we know, February is a small month and wasn't really up against stimulus. So we do expect a significant drop off in the month of March as we anniversary the stimulus which was about exactly one year ago today. So you know March and April really make up the bulk of the quarter and that's where we see the significant drop off.