The Children's Place, Inc. (PLCE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to The Children’s Place First Quarter 2021 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer and Rob Helm, Chief Financial Officer. The Children’s Place issued its first quarter 2021 earnings press release earlier this morning. A copy of the release and presentation materials for today’s call, have been posted to the Investor Relations section of the company’s website. This call is being recorded. If you object to our recording of this call, please disconnect at this time. Before we begin, I would like to remind participants that any forward-looking statements made today are subject to the Safe Harbor statements found in this morning’s press release as well as in the company’s SEC filings, including the Risk Factors section of the company’s Annual Report on Form 10-K for its most recent fiscal year. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. The company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof. After the prepared remarks, we will open the call up for your questions. We ask that each of you limit yourself to one question, so that everyone will have an opportunity. Jane Elfers: Thank you and good morning, everyone. Following the March 11 Presidential address, which confirmed immediate stimulus payments, announced an accelerated vaccination timelines, and promised the country an earlier than anticipated return to normal, we experienced a significant and sustained sales lift. We delivered outstanding first quarter results, with gross margin, operating margin and EPS all at record levels. Our Q1 ‘21 net sales of $435 million exceeded our Q1 ‘19 net sales of $412 million, despite having $261 million or 27% fewer stores versus Q1 ‘19 and historically low demand for Easter dress-up product and a 15% reduction in mall operating hours versus 2019. All key metrics across both our digital and stores channels exceeded expectations. Our exceptional sales growth was driven by several factors, including double-digit increases in AUR versus Q1 2020, resulting from strong product acceptance, higher-priced realization, reduced promotional activity and unprecedented stimulus as well as an acceleration in back-to-school sales, our ability to retain new digital customers we acquired during the pandemic, and a significant reactivation of store customers that we had temporarily lost due to the government-mandated closure of all of our stores. Our record Q1 2021 gross margin was driven by significantly higher merchandise margins in both our digital and stores channels, significant occupancy savings from favorable lease negotiations and fewer stores as compared to Q1 2020 and meaningful e-commerce fulfillment optimization. Focusing on digital. Consolidated digital sales increased 37% in Q1 versus 2020, representing 42% of total sales. Digital sales increased 35% in the U.S. and 82% in Canada driven by a double-digit increase in traffic partly as a result of our ability to retain new customers acquired during the pandemic. Our digital business has always been our highest operating margin contributor due to its high UPT, low return rates and lower overhead costs versus our stores channel. And with the pandemic driven acceleration to a steady state annual digital revenue of approximately 50%, we are now gaining additional leverage on fixed overhead costs and driving higher digital operating margins. In addition, 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 in 2021, which should virtually eliminate the amount of supplemental ship from store required. Rob Helm: Thank you, Jane and good morning everyone. I will review the Q1 results and then I will provide some thoughts on Q2 and the balance of 2021. In the fiscal first quarter, we delivered a record adjusted EPS of $3.25. Net sales increased by $180 million or 71% to $435 million versus last year’s $255 million. Our U.S. net sales increased by $160 million or 71% to $384 million versus last year’s $224 million, while our Canadian net sales increased by $13 million or 76% to $30 million versus last year’s $17 million. Comparable retail sales were a positive 83% versus Q1 2020. As an additional point of reference, comparable retail sales were a positive 21.5% versus Q1 2019. Our net sales were positively impacted by several factors during the quarter. First, the significant majority of our U.S. stores were open for the entire quarter this year versus the temporary closures we experienced for approximately 50% of the quarter last year as a result of mandated government shutdowns; second, strong customer response to our casual product assortment; and third, the unprecedented level of stimulus payments resulting from the government pandemic relief legislation announced in mid-March. These factors, along with favorable weather and an easing of COVID related restrictions, resulted in consolidated net sales increases in both March and April of over 100% versus the prior year. These positive factors resulted in better-than-expected performance across all of our key retail metrics. Our Q1 net sales were negatively impacted by the impact of our 199 permanent store closures in the past 12 months, inclusive of 25 stores we closed during this quarter, and the 178 stores we closed during fiscal 2020. The impact of the government mandated temporary closures in Canada, with approximately 50% of our fleet closed for more than half of the quarter and the impact of an approximately 15% reduction in mall operating hours as mandated by our mall landlords. Adjusted gross margin, adjusted gross margin increased 2,571 basis points to 43.4% of net sales, a record Q1 gross margin. The gross margin increase was the result of one, the leverage of fixed expenses resulting from the increase in net sales as a result of anniversarying the temporary closure of our entire fleet in Q1 2020. Two, significantly higher merchandise margins in both our digital and stores channel, resulting from a double-digit AUR increase due to strong customer product acceptance, leading to higher price realization and reduced promotions. And three, a reduction of $21 million in occupancy expenses during the quarter due to rent abatements of $8 million, with the balance of the decrease coming from favorable lease negotiations and reductions in occupancy expenses for stores closed in the past 12 months. We anticipate occupancy savings for the balance of the year. These gross margin benefits were partially offset by higher inbound freight transportation costs driven by ocean carrier equipment shortages and higher container rates. Operator: Our first question comes from the line of Dana Telsey of Telsey Advisory Group. Dana Telsey: Good morning everyone and congratulation on the very nice progress. Jane Elfers: Thanks Dana. Dana Telsey: And all the investments you have made in the year are coming to fruition now in these results. Jane Elfers: Thank you. Dana Telsey: The benefit that you saw from stimulus and now frankly, we have the upcoming child tax credits that are going to – should be a benefit through the rest of the year also. How are you looking at that, whether it’s in product? How are you thinking about it in terms of the ability to generate full price sell-through and digital? Jane Elfers: Well, I think from a stimulus point of view, obviously, stimulus benefited everyone in the quarter. I think as we mentioned, both Rob and I, May is off to a very strong start. Stimulus over time will obviously be temporary. I think fundamentals are what is lasting, and we have been working at this for a long time. I think when you look at the results we had in Q1 and where we see the balance of the year, I think that comes from the hard strategic work and the structural work we have done with respect to occupancy, fleet optimization, SG&A, the digital penetration now at a steady state, 50% annual. All the work we have done in the last year on fulfillment costs. The competitive landscape is completely different now than it was a few years ago, what we have done in supply chain and then, of course, consistent product offering. We have fundamentally transformed the company. And really, as I said in my prepared remarks, leverage 2020, a really difficult period to really set ourselves up for expanded operating margin. I think when you look at what we talked about with back-to-school, we have got all states except 9 right now, reporting that they are going back to 100% learning. So, barring any reversal or recurrence of COVID or another setback, clearly, those child tax credit benefits starting in July and going through December at a minimum, I know they are talking about extending them, but right now, July to December, clearly, that will be a very large tailwind for us and back-to-school with kids not being in school for the last 2 years since they have been in school and you add in the child tax credit and you add in the fact that we have got our inventory. I know a lot of people are having trouble getting their inventory in, but our back-to-school inventory is in place, it really sets up quite nicely for an exciting back-to-school. So, I think that’s how I would answer that question. Thanks. Operator: Our next question comes from the line of Jim Chartier of Monness, Crespi, Hardt & Company. Jim Chartier: Hi, good morning. Thanks for taking my question. I just want to talk about the margin opportunity going forward. One, you talked about occupancy savings this year. Do those continue beyond this year? And then as you think about the structural changes that you have made, the lower distribution costs, lower occupancy costs, improved SG&A cost structure. It seems like your historical operating margin of 7% or 8% could be too conservative. Can you just talk about where that margin should be longer term? Thanks. Jane Elfers: Yes. Thanks, Jim. I am going to start off on the occupancy one, and then I will turn it over to Rob to talk about operating margin. With respect to occupancy, I think it’s really important for everyone to understand what actually transpired in 2020 that was different than in previous years. So, I would say in April of 2020, when I saw what was possible with respect to the power of our digital business and how much revenue we were generating with all of our stores closed, I made two important decisions. First, I made the decision to fully support the digital pivot by dramatically accelerating our store closure program, which well documented, targeted 300 permanent store closures in 20 months. And second, and as importantly, if not more importantly, I made the decision to leverage all the previous good work that had been done on flexible lease terms to reset the occupancy cost structure for the company. So Rob and I partnered on this. I guess, Rob, starting in Q2 of last year and the two of us have spent an enormous amount of time, strategizing and negotiating. We have over 200 landlords, as we’ve mentioned before, and the amount of time we’ve spent with them on the significant number of lease actions that were available to us. Rob mentioned in his prepared remarks that we’re still finalizing the last of our 2020 lease negotiations through Q2 of this year with the abatements he spoke about. So Rob and I accomplished what we set out to do, which was to target, plan and execute 300 permanent store closures and really leverage the flexibility of our lease term to reset our occupancy cost structure going forward for 2021 and beyond. And that really was as a result of partnering and making the decision to move forward collaboratively with the right landlords and part ways with the rest. And we anticipate that this occupancy work is going to be a significant contributor to our plan for accelerated operating margin expansion and well worth the time and effort, the two of us have put into it over the last year. Recognizing at the same time, we were navigating and leading the company through a pandemic. So with that, I’ll turn it over to Rob. Rob Helm: Jim, from an operating margin perspective, it’s a little bit of a long-winded answer because I have to go back a few years, just to give a little more detail on the trajectory of this business. But back in 2016 and ‘17, we had operating margins in the range, I believe it was 8.5% and 9.6% at that time. And we saw that our transformation strategy was really starting to gain hold and lock in at that time, we made the decision to accelerate $50 million of investments to accelerate – further accelerate our digital penetration of our business and our digital business overall. And clearly, with the pandemic and what happened last year and leveraging some of those abilities in terms of ship-from-store and the things that we did to move the needle overnight to a steady state of 50% digital penetration annually that was the right call. Also, the other piece that we have to call out is from – in 2018, 2019, we made the very visible decision to go after market share and take short-term margin pain for long-term margin gain, which negatively impacted both the gross margin line and our operating margin line. With the shrinking market in terms of less births and a smaller kids market overall, clearly, that was the right decision as well, and it’s positioned us to come out of this pandemic to gain that fragmented market share. So now with the accelerated investment behind us, and less competition and a considerably less cleared out competitive landscape, we’ve seized the opportunity to shift to digital to a steady state 50%. And with our work that we’ve done in the last year that Jane mentioned in terms of resetting our cost structure in terms of being digital-first from an SG&A footprint with less store expenses and less upper field and overhead and resetting our occupancy expenses, we’re now set for a resumption of that upward trajectory that we saw prior to 2018 in terms of operating margin. Operator: Our next question comes from the line of Jay Sole of UBS. Jay Sole: Great. Thanks so much for taking my question. So I want to follow-up on what you just said. You’re basically saying that if you look at the 8.5% and 9.5% margins that you did a couple of years ago, the differences today are, one, there is a bigger e-com mix, which is a better margin business. You’ve got lower rent in the remaining stores business. There is less competition, which is allowing you to raise AUR versus that time and there is lower overhead within the cost structure. And so – but I wasn’t sure I understood the conclusion, which is that you think the margins – the EBIT margins can be better than it was in the past or you say it’s going to be the same as it was in the past and maybe if you could first clarify that? And then the second thing is Gymboree. Can you us give us an idea on where the launch stands right now? Like what impact do you think you can have on sales and back to school? And just where the – give us an update on Gymboree that would be helpful. Thank you. Jane Elfers: Sure. Thanks, Jay. As far as Gymboree is concerned, we’ve talked about it a lot. We launched into a pandemic that business is highly dependent on events and holidays and occasions. Clearly, Easter was not a good – Q1 was not good for Gymboree from an Easter perspective. We feel very strongly in Gymboree. We feel very good about the customer response we’ve got, and we’ve spoken about it being north of $140 million opportunity we feel we have not changed our mind on that. We feel that it is north of $140 million opportunity. The same as we expect for TCP with the return to school and the return to occasions and the relaxing of social distancing. We expect Gymboree to have a strong back half, and we’re planning it that way, particularly as you get into the holiday period. I’ll turn it over to Rob for operating margin. I’m not sure he is going to bite on that one, but Rob? Rob Helm: In terms of operating margin, we haven’t given guidance, right? So I’m not going to give actual numbers relative to operating margin. My comments really are to clarify that we’ve made the structural changes, and we’re past our investments and have considerably cleared out competitive landscape. The operating margin is obviously contingent on sales levels returning, supply chain disruption and cost inflation, all those other factors that are macro factors that impact us in this environment. But we – the bottom line conclusion is we’ve made changes to reset our occupancy structure. We’ve reset our SG&A structure to be digital first. And we’ve set ourselves with e-commerce packaging and network optimization, where we should be able to drive operating margin expansion again in the future. Operator: Our next question comes from the line of Paul Lejuez of Citi. Unidentified Analyst: Hi, this is Kelly on for Paul. Thanks for taking my question. Just on the question on the gross margin, was there any benefit from any one-time inventory reserves in 1Q ‘21? And how do we think about the merchandise margin going forward? And then just second question as it relates to gross margin, thanks for the color on the occupancy line, but any chance you could provide any color on how much occupancy is down relative to 2019? And just how we should be thinking about that going forward? And then just lastly, just on SG&A, should we be using that 2Q guidance as sort of a proxy for SG&A for the remainder of this year as in being down kind of 5% versus 2019 levels? Thank you. Rob Helm: Thanks, Kelly. And I’ll unpack each of those one at a time. From a gross margin perspective, there were no one-time items within gross margin, no inventory reserve releases. Just the one-time abatement of $8 million, which contributed roughly 200 basis points of additional gross margin. We expect, obviously, a slightly less meaningful abatement in Q2, but the rest of it is merchandise margin net of delivery expenses for e-com, etcetera. The next piece of your question relative to SG&A, SG&A, we had an SG&A of roughly $104 million. We expect that to rise slightly to $110 million for the second quarter. We haven’t provided longer term guidance than that at this point. But we expect that’s a probably a pretty fair base to consider going forward considering the fact that we expect store hours to resume for our major mall landlords and eventually Canada to reopen completely and to be able to incur those store expenses. And then the last piece of your question, I think I missed the piece in between on occupancy expenses. Occupancy expenses were $21 million lower in the quarter than last year. $8 million of that was the one-time abatement. The remaining $13 million represents the impact of the permanent closures and our favorable lease negotiations. When you think about that relative to 2019, inclusive of the store closures since that time, occupancy expenses were roughly $25 million lower. Operator: Our next question comes from the line of Susan Anderson of B. Riley. Susan Anderson: Hi, good morning. Nice job on the quarter. Jane, I was wondering maybe if you could talk about the dressy product over Easter. Did you see the consumer returning at all to that type of product? I think you have less in store, though. And then just in terms of the boost that you mentioned as schools kind of reopen this spring and first quarter. I guess was that a significant benefit? And were you able to sell down some of that uniform inventory? And for back-to-school this year, are you planning inventories up? Jane Elfers: Thanks, Susan. With respect to Easter dress up, it was at a historical low in Q1. Things like dresses, ties, hats, tights, those types of products, very, very low demand. We had bought it down and thank goodness we did because it was very difficult. What we did see in Q1 was a pretty significant boost back-to-school product as compared to Q1 2019. And within that product, you saw some of the elements that we also do double duty with on Easter. So you saw things like polos and woven bottoms and boys pick up. But they were for back-to-school versus for dressy. So I think that bodes well for back-to-school and what we’re anticipating in Q3. And then as far as inventory levels, we pretty – we talked about them extensively since last back-to-school. Our carryover inventory, as Rob mentioned, is down almost 50%. And we are still carrying a nice amount of the same basics we’ve had since last year. We anticipate that as we get towards the end of Q3, you’ll see our inventories normalize with a normalized back-to-school. Operator: Ladies and gentlemen, we have time for one more question. Our final question comes from the line of Unidentified Analyst: Good morning. Jane Elfers: Okay, good morning. Well, thank you everyone. Unidentified Analyst: Hello? Jane Elfers: Morning, you there? Unidentified Analyst: Hi, I am here. Yes, that’s good. I can hear you guys. Maybe the connection was bad. So I was said congrats, amazing quarter, and welcome back. Jane Elfers: Thank you. Unidentified Analyst: I just want to dovetail on the back-to-school. I know you have all the uniform basics packed and held, so to speak, but what about the ancillary products? You do a nice back-to-school backpack business and even shoes. I know you always have a good shoe business there. And if you can talk a little bit about your marketing efforts and plans for marketing in the back half? And will you increase costs just to increase marketing in the back half? Jane Elfers: Yes. I think as far as back-to-school product is concerned, the uniform product is in pack and held. It’s on the floor, and it’s on the site. And so it’s available for mom whenever she needs it based on how schools were rolling with hybrid and remote learning models. So we’ve had that available to sell for the customer. Alongside of that, we’ve had a shoe assortment and a backpack assortment, which has also fared well in Q1 versus Q1 2019. When you think about the product that’s on the water and that’s coming for back-to-school, it’s more fashion and from a delivery point of view, we’re on track with that. The supply chain disruption is like a 2 to 4-week disruption that we’re seeing on the summer product, but for back-to-school so far, we’re looking good. Another element, big element of back-to-school is our graphic T program, which is also on time. So, all signs point to us being in a really good place with inventory for back-to-school. From a marketing point of view, certainly, we will be spending more money on marketing than we did last year because there wasn’t a back to school and marketing was pulled way back. So we anticipate being able to really go after, particularly on the digital side of the business as we’re now close to a 50% digital business. We will continue to support those acquisition retention, reactivation strategies throughout the back-to-school period. Operator: And thank you for joining us today. If you have further questions, please call Investor Relations at 201-558-2400, extension 14500. You may now disconnect your lines and have a wonderful day.PLCE Ratings Summary
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The Children's Place Price Target Slashed at Telsey
Telsey analysts reduced their price target for The Children's Place (NASDAQ:PLCE) to $9 from $13 while maintaining their Market Perform rating on the stock. Telsey noted that while the reported revenue met expectations, the better-than-expected margins were overshadowed by a significant tax drag, leading to a notable earnings miss.
The Children's Place secured additional financing and reduced its debt by over $100 million since the third quarter. However, due to the lack of fiscal 2024 guidance and the weaker-than-expected fourth-quarter results, Telsey anticipates potential short-term challenges ahead.
Although the company's improved balance sheet should mitigate immediate liquidity issues, Telsey sees it challenging to predict when growth and profitability will improve, which justifies maintaining the Market Perform rating. The price target reduction reflects a 4.9x multiple on the analyst's two-year forward EBITDA estimate of $77 million, slightly below the three-year historical average of 6.8x, to account for the continued earnings pressure.
