Childrens Place, Inc. Q1 FY2022 earnings call

• Q1 results were negatively impacted by stimulus lap in March 2021, unseasonably cold weather, and inflation, but Easter dressy business was strong across brands. - Digital sales at 45% of total retail sales, with investments in marketing and tech. - Gymboree to launch on Amazon in July, TCP has strong sell-throughs on Amazon. - Structural reset shows Q1 2022 operating income up 211% vs Q1 '19 and EPS up 192% vs Q1 '19 despite fewer stores and lower sales. - Store fleet optimized with 40 stores planned to close in 2022, and short-term leases for flexibility.

In the first quarter, net sales decreased by $73 million or 17% to $362 million versus Q1 2021. US net sales decreased by $79 million or 21% to $306 million, while Canadian net sales increased by $1 million or 2% to $31 million. Digital sales represented 45% of total retail sales for Q1 versus 44% in Q1 '21.

• Tempering top-line expectations for 2022 with mid-single digit decline in sales. - No EPS guidance currently; sales trends expected to improve vs Q1. - Peak back-to-school sales this year likely lower than last year due to lack of pent-up demand and child tax credit. - Anticipating accelerated growth on Gymboree via Amazon launch and Sugar & Jade launch. - Structural changes to benefit operating margins with higher realized pricing, lower occupancy expenses, and lower interest expense.

• Persistent inflation into 2023 impacting lower-income consumers due to higher gasoline and food prices. - Cotton prices climbing significantly above projections. - Supply chain disruptions affecting inventory levels and transit times.

Q: Good morning, everyone. Definitely a challenging environment. As you think of the AUR increases that you got from the merchandise margin, how much of an AUR increase you're getting? What are your plans for price increases going forward and the level of acceptance? And we haven't seen inflation before given the guidance that you gave out of sales now down mid-single digits for the year, that implies an improvement as we go through the year. Any qualitative commentary on how you're thinking about the uptick in sales and of getting that from that lower income consumer and the margin opportunity from digital given that's the highest margin channel. And one other thing, any cost for Gymboree and Amazon?

A: Sure. Well, that's a lot of questions. So let me try to part them out, might not be in the same order you asked them, but let me give it a try. So I think when we look about what happened in Q1, as Rob mentioned on the call, February was a decent month. We clearly, clearly underestimated the stimulus impact to our business last March. And March was a really tough month. We were down 35%. When we went into April, it was significantly better than March, but that was really when you unpack it due to the Easter shift. In the first two weeks of the month, we had a nice trend, obviously, because of Easter. But as soon as Easter passed, the trend reverted right back to negative mid-teens and the month ended up as Rob said below expectations, I think down 7%. Moving into May, week one was still tough, still up against stimulus. We were still mid-teens negative. And then in the second month, like clockwork, with the arrival of warm weather across the whole country, the trend immediately reversed and sales were up positive low-single digits versus '21 and they were up in the low 20s. I think up 21% versus 2019. And so, there was a significant trend reversal, like I said, starting in May week two, which we are very encouraged by. So I think when you think about what happened in March with the big stimulus impact, we were able to start to see that wane which we always kind of believed we would in the second quarter and then we got the pop, obviously from the weather. When you think about going forward to your question about what's happening in the macro environment with respect to the inflation as you mentioned, lack of stimulus, all the supply chain mess and cost pressures, '21 is becoming somewhat less relevant in our opinion as a compare, which is why we mentioned that we are going to continue to compare throughout the balance of the year our progress towards our pre -- versus our pre-pandemic results in 2019. And so, using that lens, when you look at Q1, well, we really didn't deliver what we hoped. Our results against '19 were pretty impressive and like we had mentioned, a $1.5 in EPS versus $0.36 in '19. And we have $50 million less in top-line than '19 and 32% less stores and margin was 250 basis points higher and operating income was at mid-5 -- 5.6% or 5.7% versus '19's 1.6%. So we're looking at those results to be directly correlated, if you will, to the structural reset of our business model, which is why we are going to keep driving in 2022 to the $10 EPS and the $10 operating margin goal, because what we've been able to accomplish in the last couple of years has really been a pretty massive structural reset, and we have ended up with a much more resilient model that can kind of weather some of these storms, to your point, about taking the sales down mid singles is our latest projection. So if you look at the balance of '22 with the top line, what we're thinking about, we obviously don't think we're going to drop 16% again in any one of the quarters coming up, but we are going to be very, very careful at the end of this quarter and very, very careful in August, because we are not going to make the same mistake that we made in March by miscalculating the impact of stimulus and as we all know, we've got one category of business and it's kids clothes. And we were clearly an outsized beneficiary of stimulus in Q1 last year and we were clearly an outsized beneficiary as you go into the last two weeks of July and the period up until Labor Day. We have pent-up demand. There was no school for two years. We were in a really, really good stock position with basics and some of our competitors who are having trouble getting product in, but we really had a very good assortment. And then also, we had the child tax credit that started in July, and really was a positive for our business, at least for the first three months of it, so, July, August, September. I think maybe it could have waned a little bit in the latter half and holiday, but it was very meaningful when it first started. So the combination of that pent-up demand and the child tax credit really makes us wary of those last two weeks and also of the month of August. So we are going to take a more muted approach to what's going to happen this quarter because those last two weeks of July, as you know, are really, really big weeks for us to the total quarter. July is a really important month for us, and then obviously, August is an important month through Labor Day with back to school. So that's really the reason behind the top line and really taking that down from where we were before based on March. And then on the bottom line, as we kind of alluded to, there has been two significant and permanent changes to our P&L since the start of the pandemic, and the first is the real estate reset. So, between the store closures and the occupancy reset, that's a big deal for us, and you can obviously see it in our numbers and that's permanent. And that's not going to change and we have a ton of flexibility, a ton of leases coming up in the next two years. So we're going to continue to work with our landlords and continue to optimize real estate. And the other big one which you know is the digital reset where we're approaching 50% of our business in digital and that's our highest operating margin channel. So those are permanent and those are definitely going to be tailwinds for us in '22 and into the future. The other kind of -- if I can get to put them in, like a permanent bucket, the lower fixed cost base due to store closures and higher operating cash flows versus pre-pandemic, which are going to support, share repurchases, particularly at this price. And then we've got some year specific things, I think Rob had mentioned one is incentive comp and then a lower interest expense. I think the wildcard that a lot of people ask about is really pricing and how that impacts margin, obviously that the key margin lever and there's a lot of talk about that lately sales. I know that was part of your question. So on the pricing element, like, let's just recap where we are. We said for AUCs that the first half we’re up mid-singles, in the second half we’re up high singles and our plan was to cover those AUC increases this year with corresponding AUR increases. We also said that we are going to wait to see what happens with cotton before we made any further commitments on raising pricing. And unfortunately, as we mentioned, cotton continues to go up. So when you look at the AUR, what happened in Q1, we were very defined, pleased with our ability to grow AUR in line with our projections in Q1. When you look at where the AUR came from in Q1, it came from a combination of basics, which is obviously a big part of our business, which are priced at the same price they were, I would say, from the holiday time period, maybe October of last year is when we took some increases on basics. We haven't changed those prices. So those are similar to where they were last year. And where we really got AUR was from our Easter assortments, which is our fashion product, which was extremely well received as I had mentioned in my prepared remarks. We are really able to really have a nice Easter assortment and unfortunately ran out of a lot of styles, a little bit too early and left considerable money, I would say, on the table for Easter, so opportunity going forward, but that was a nice driver of AUR. When you look at May week two, which we had talked about where the trend turned positive, with respect to pricing, we were still right where we thought we would be with the mid-single digits with our projections. So at this point, we don't believe that pricing is an issue for our customer. We are still comfortably below our competitive set, and like I said, we have not changed our basic prices, when you look at our graphics, we're 4.99, when you look at our mix and match, we're 4.99 and 3.99. So the big programs in summer shorts or where they were basically last year. Those drivers are the same. I think where we can look to get AUR, as we look through the balance of the year is really in our fashion assortments and our dress up categories as kids start and family start to celebrate those holidays again. So I think that bodes well with what happened with Easter for us to think through those ticket prices. So we're going to reiterate that we're going to stay with what we thought we'd be able to do on AUR for the year. I will tell you I am not going to commit to raise prices, any further even if cotton continues to go up, because I don't think that's the right move in this inflationary environment. - Q: Good morning. Thanks for taking my question. Wanted to ask about how your inventory position is today? You talked about pricing, it sound pretty good, but any risk that you'll have to kind of promote to move through that? And kind of what's your ability to cut back on inventory units in the back half of the year?

A: Yeah. Well, with respect to inventory, certainly having 30% more inventory is clearly something we're watching and we anticipate that those inventory levels, I think, we have said it before are going to continue to stay elevated, while we work through the supply chain issues. And we're doing a lot of pulling goods up. There is a lot in our in-transit. Almost 25% of our inventory is in transit. But at this point, when you really unpack it, we're not concerned at this point about the health of our inventory. From a pack and hold perspective, we have no current Spring product on pack and hold and we don't anticipate on putting anything in pack and hold from this current season. And then as we had mentioned a couple of times before, we have pack and hold in some holiday basics, like some seasonal basics for fall, that we're going to start to release throughout Q3 and Q4. And so from a fashion point of view or inventory that we would consider jeopardy, we are feeling pretty good. 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. So not really concerned as far as your question about being able to get out of inventory and that hasn't been something we've done recently and it's not something we're looking to do. I think we're pretty happy with how we plan the fashion and the assortments and then like I said, coming off of the kind of business we have on Easter, I'm feeling good about the ability to not only get AUR from those fashion goods but to drive customers through -- resuming the activities that they're doing with families and celebration. So we're feeling okay where the inventory is for now. - Q: Great. Thanks so much. First, just a question on the P&L for Q2. Is there any commentary can you give us maybe on some thoughts, a little bit more color on your thoughts around gross margin and maybe just SG&A dollar guidance for Q2?

A: So obviously, there's a lot of uncertainty out there. When we had talked on the Q4 call, we had talked about our first half gross margin being under pressure for inbound -- incremental inbound freight expenses, the AGOA piece and the abatements that we have received in the prior year. That's still all remains true. What I would add to that is, we are tempering our sales expectations, so we would expect to see some incremental fixed cost deleverage beyond what we had kind of said at Q4. From an SG&A perspective, I think, Jane mentioned in her first question. The nice part about our SG&A base at this point is that, we are getting the benefit of the accelerated store closures that we had gone through in 2020 and 2021, which provides us for a much lower fixed cost base than we had in the past. So as the demand environment fluctuates, we are going to be able to cut down SG&A and leverage those costs as we navigate through the year. - Q: Hi, good morning. Thanks for all the details today. I was wondering just on -- you talked a little bit about the inventory, which you sound comfortable with, I guess. How do you feel about just the competitive landscape? I think some of your big box competitors mentioned they need to clear some excess apparel. So I guess what happens if they do get more promotional, will you guys also have to promote more? And then just on the double-digit earnings and EBIT margin guide, you talked -- you kind of talked about the buckets there that gives you confidence in that guide. Maybe if you could kind of quantify those buckets versus 2019 and the big drivers there that you think will continue to give you that double-digit despite the sales decline? And then if sales did decline further, is that double-digit still reachable? Thanks.

A: Okay. Well, I'll take the first part and then I'll pass the second part back over to Rob. From a promotional competitive set, I would tell you that particularly with one competitor, we have seen dramatically increased promotions since the last couple of months. I think, as I had mentioned in the answer to the first question, when you look at like where we're priced on our key basics, we are still below or at our competitive set. So I don't feel like that's going to be an issue for us. I don't think that we have inventory issues to any degree or go up or things that we need to clear. We are certainly keeping a very close eye on promotions. And I think based on some of the things we've even heard this week, there may be other two who might be promoting more, but at this point there is nothing to signal to us that we're going to have to do anything drastic as far as what our mix looks like. - Q: Hey, guys. I wanted to just start with one clarification. The interest rate for the quarter, is that a good look through for the rest of the year? And then I just had a bigger picture question for Jane.

A: From an interest expense perspective, I would say that the decrease year-over-year is probably a good bar. Seasonally, our inventory and working capital needs fluctuates, so we tend to peak in the revolver between Q2 and Q3. So I would play that into the calculation when you thinking about interest expense.