The Children's Place, Inc. Q3 FY2023 earnings call

• Top line exceeded expectations driven by industry-leading digital performance with double-digit e-commerce traffic growth, strong back-to-school and seasonal category results, and strong wholesale channel led by Amazon. • Bottom line negatively impacted by higher-than-planned distribution costs including higher fulfillment, labor costs, and delay of freight and fulfillment savings. • Looking ahead, planning for increased distribution costs in Q4, with e-commerce as core, and Gen Z digital buyers surging. • Marketing highlights: Q3 digital traffic up double digits, successful brand campaigns like with Jonas Brothers and music icons, social media engagement explosive, wholesale business strong on Amazon.

For the third quarter, e-commerce sales were up low single digits, with the e-commerce channel representing 57% of retail sales in Q3, up from 50% last year and 37% in 2019. Wholesale channel led by Amazon delivered an outstanding quarter. U.S. net retail sales decreased by $37 million or 8.9% to $380.3 million, and Canadian net retail sales decreased by $10.2 million or 22.1% to $35.8 million. Q3 ending inventories were down 16%.

• Fourth quarter 2023: Net sales expected $460 million to $465 million (low-single digit increase vs prior year); adjusted operating profit expected 2%-3% of net sales; interest expense expected ~$6.5 million; adjusted net earnings per diluted share expected $0.25 to $0.45 per share. • Full fiscal year 2023: Net sales expected $1.605 billion to $1.61 billion; adjusted operating profit ranging 0.6%-0.8% of net sales; adjusted net loss per diluted share expected -$0.59 to -$0.39 per share. Planned capital expenditures $25 million to $30 million.

• Higher-than-planned distribution costs including increased fulfillment costs, labor costs, and delay of freight and fulfillment savings. • Macro-economic challenges like persistent inflation, promotional retail environment, student loan payment concerns impacting consumer confidence. • Tight labor market leading to higher labor costs.

Q: Could you help unpack the increased expenses and reconcile with incremental expenses, and distinguish permanent vs temporary changes?

A: Sheamus explained that while margin rate was disappointing, there were addressable operational challenges. Expenses were caused by factors like change in order profile, labor challenges, increased third-party utilization, and delayed contractual savings. Many factors are addressable, with wage rate increases possibly a permanent increase but others temporary.

Q: Could you give us elaboration on free cash flow outlook for the year and debt pay down plans, and about the debt covenant calculation?

A: Sheamus said there was a covenant issue earlier resolved, inventory reduction helped, and debt levels expected to decline by $100 million or more as inventory reduces.

Q: How different is shopper buying patterns and habits now, and difference between stores vs online and Amazon vs GCP?

A: Jane said shopper is buying slightly less but with high ADS online, back-to-school and seasonal categories sold well. Maegan said Amazon transactions have lower UPT and ADS as it's need-based, while owned and operated websites have stronger UPT and ADS.

Q: What do you see as the puts and takes for 2024?

A: Sheamus said strategic initiatives to drive digital and top line growth, stabilized store fleet, and expectation of dramatic improvement in first half of 2024 with fulfillment issues solved by back-to-school peak next year.