Children's Place, Inc. (The)

Good morning and welcome to the Children's Place Fourth Quarter and Fiscal Full Year 2021 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer, and Rob Helm, Chief Financial Officer. At this time, all participants are in a listen-only mode. After the prepared remarks, we will open the call up to your questions. We ask that each of you limit yourself to one question so that everyone will have an opportunity. As a reminder, this call is being recorded. The Children's Place issued its fourth quarter and fiscal full year 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. Before we begin, I would like to remind everyone 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. It is now my pleasure to turn the call over to Jane Elvers.

Thank you and good morning, everyone. We delivered another outstanding quarter with growth margin, operating margin, and EPS all at record levels. Since the onset of the pandemic, our accelerated structural reset to a digital-first company has delivered impressive results. We delivered a 15.1% adjusted operating margin in 2021 versus 6% in 2019. we delivered a 41.6% gross margin, a 660 basis point improvement versus 35% in 2019. Our 2021 operating income was $289 million versus our full year 2019 adjusted operating income of $111 million, a $178 million increase. We delivered a 2% net sales increase in 2021 versus 2019, despite having 256 or 28% fewer stores. And our EPS was $13.40 in 2021 versus $5.36 in 2019. I want to thank all of our associates for their hard work in delivering these industry-leading results. particularly with all the challenges we've faced in the last 24 months. Starting with digital, our digital business has always been our highest operating margin contributor due to its high UPT, low single-digit return rates, and lower overhead costs versus our stores channel. And with the pandemic-driven acceleration of our digital business, we continue to gain additional leverage on fixed overhead costs and drive significantly higher digital margins. Our digital sales represented an industry-leading 48% of our Q4 sales versus 31% in Q4 2019, as we target a 50% annual digital penetration for full year 2022. Importantly, supporting our accelerated digital penetration our customer transfer rate further improved to an industry leading 32% in full year 2021 from 30% ending full year 2020. As our digital business continues to grow on both the top and bottom lines, we are making significant investments in marketing and technology to continue to support this growth. We're focused on investing in brand awareness, which continues to drive customer acquisition through our digital marketing channel. With respect to customer acquisition, we've leveraged our marketing tactics and focused our additional investments to achieve a 50-50 split between digital and store customer acquisition, which is in line with where our digital penetration is planned in the near term. In fiscal 2021, we attained a 16% increase in our new customer file, and with customer acquisition more balanced between our channels, we are benefiting from the improved channel mix, resulting in significantly higher average spend and higher margins per customer. As the shift to digital has accelerated over the past two years, we've benefited by being able to better identify our customers and use that data to drive higher cost efficiency on marketing spend. Entering 2022, we've established robust customer acquisition and retention targets by brand enabled by our customer segmentation data to deliver enhanced personalized content that resonates with each target audience. In addition, we've recently enabled a multi-touch attribution tool to help us better understand the incrementality of our investments and allow us to shift our budgets in support of the highest contributing marketing tactics in a much more efficient and nimble manner than we were previously capable of. The shift towards mobile and our mobile app continues to exceed our expectations. During Q4, we had our highest percentage ever of digital transactions come through a mobile device, at over 73% of transactions. And for the full year, over 70% of our transactions were converted using a mobile device. Our mobile app continues to drive strong customer acquisition and engagement with new mobile app users up 34% for full year 2021. And this is on top of the significant increases we saw during the pandemic in the first half of 2020. And importantly, our basket sizes for customers transacting on our mobile app are over 10% higher than our non-app mobile purchases. With respect to the launch of Afterpay, we're impressed with Afterpay's performance to date. Not only do our transactions on Afterpay run 65% higher AOVs than the average of our non-buy-now-pay-later tender options, Afterpay is already driving a high teens penetration of our digital acquisition. Afterpay is bringing new digitally native mobile first customers to our brands, resulting in Afterpay already delivering a low double digit penetration of our total digital transactions in just the six months since launch. As we highlighted in our Q3 investor deck, We partnered with Afterpay and the Kardashians on our Christmas Family PJ campaign, which resulted in 2.1 billion impressions for our brand over the course of the campaign. We continue to focus on leveraging Afterpay's ability to reach new millennial and Gen Z customers through our partnership. With respect to our fleet optimization strategy, we continue to secure very favorable lease terms throughout Q4 allowing us to reduce our closures to 78 stores for full year 2021, bringing the total closures for full year 20 and 21 to 256 stores versus our original target of 300 stores. For full year 2022, we are targeting to close approximately 40 stores. While we realized significant occupancy savings since the onset of the pandemic, we remain well positioned to continue to realize additional savings with over 75% of our stores having a lease action within the next 24 months. It's important to highlight that as we enter 2022, we're planning for approximately 50% of our retail sales to come from our stores with approximately 50% of our store sales coming from traditional malls and 50% coming from off mall. With our digital business also planned at an industry leading 50% of total retail sales, our plan for 2022 targets approximately 75% of our retail sales coming from off-mall, strongly supporting our structural reset to a digital-first retailer. With respect to Gymboree, we received an overwhelmingly positive response to our holiday deliveries. Clearly, many families joined together to celebrate the holidays and chose to dress their children in this unique brand. We're excited about our strong Gymboree momentum, and we're looking forward to building on this momentum in 2022 and beyond. On November 9th, we launched our newest brand, Sugar and Jade, targeted to the $8 billion US tween market. We're thrilled to be able to offer the tween customer a dedicated, digital only brand. Based on the strength of our big girls business, Sugar and Jade is a natural extension of our core competency and adds to our total addressable market opportunity. We currently have 4 million names in our file to whom we are actively marketing Sugar and Jade. And as we anticipated, we were able to capture significant learnings this past holiday from our initial Sugar and Jade launch. And armed with this information, we're well positioned to grow this brand for holiday 22. With respect to wholesale, we remain laser focused on growing our business with Amazon. They continue to experience very strong sell-throughs on our product, and we continue to significantly accelerate our investments with them in brand marketing. We are projecting significant growth with Amazon for 2022 and beyond. In closing, we have strong brands that offer considerable value and enjoy a very loyal following. We delivered record-breaking results in 2021 due to our accelerated structural reset to a digital-first company that has taken place since the start of the pandemic. We plan to resume providing EPS guidance during our Q1 earnings call in May after we have a clearer understanding of the top line impact of lapping the unprecedented stimulus released into the economy one year ago. Looking ahead at 2022, we are facing significant top and bottom line headwinds, including decade high cotton prices, surging inflation with a particular focus on rapidly rising oil and gasoline prices, as our core consumer is particularly impacted by these, lapping the stimulus from last year, continued global freight disruptions, and rising transportation costs. However, despite these many challenges, we are confident that our accelerated structural reset to a digital-first company, including our pricing and promotional reset, combined with our significantly enhanced data-driven ability to maximize marketing and our demonstrated successes with respect to inventory management, fleet optimization, fulfillment initiatives, and SG&A has reset the bar and positioned us to deliver double-digit EPS and double-digit operating margin as the new baseline for full year 2022 and beyond. And now I'll turn it over to Rob.

Thank you, Gene, and good morning, everyone. After I review our Q4 results, I will provide some additional remarks with respect to 2022. In the fiscal fourth quarter, we delivered a record Q4 adjusted EPS of $3.02. Net sales increased by 35 million, or 7%, to 508 million versus last year's 473 million, and decreased by 1% versus 2019. Our U.S. net sales increased by 29 million, or 7%, to 440 million versus last year's 411 million, while our Canadian net sales increased by 10 million, or 29%, to 47 million versus last year's 37 million. Comparable retail sales were a positive 13% versus Q4 2020. Our net sales were positively impacted by the strong customer response to our product assortment in our key holiday selling period of November and December, and significant increases in AUR in both our stores and digital channels due to the strategic reset of our pricing and promotions. Our net sales were negatively impacted by the impact of the surging Omicron variant in the month of January, which we estimate negatively impacted our sales by approximately $14 million for the quarter, and the impact of permanent store closures representing approximately $12 million for the quarter. Consolidated digital sales increased 11% in Q4 versus 2020, representing 48% of our total sales, versus 2019 consolidated digital sales increased by 53% in Q4. Store net sales were $249 million for the quarter, which represents approximately 76% of our Q4 2019 store net sales. Despite having 256 or 28% fewer stores in Q4 2021, versus Q4 2019, as well as a high single-digit percentage reduction in operating hours versus 2019, as dictated by the mall landlords. Our store traffic significantly improved versus Q4 2020, driven by 25% higher comp traffic in the key holiday selling weeks in November and December. However, store traffic remained below pre-pandemic levels, with US store traffic down 28% for Q4 2021 versus Q4 2019, and Canada down 15%. Traffic deteriorated in January as the Omicron variant surged, with store traffic down 34% in January versus January 2019. Adjusted gross margin. Adjusted gross margin increased 776 basis points to a record 38.2% of net sales compared to 30.4% of net sales in Q4 2020. The gross margin increase was the result of significantly higher consolidated merchandise margins resulting from double-digit AUR increases in our digital and store channel due to the impact of our strategic pricing and promotion reset and strong customer product acceptance. And leverage of fixed expenses, resulting from the increase in net sales, as well as strong expense leverage, resulting from our focus on e-commerce fulfillment and optimization, which virtually eliminated the amount of supplemental shift from store required to support our digital business in Q4, resulting in lower per order costs. Occupancy expenses were higher in the quarter versus Q4 2020 due to the lapping the one-time rent abatements of $13 million we recognized in Q4 last year. However, occupancy expenses were $13 million lower in Q4 2021 versus Q4 2019 due to favorable lease negotiations and reductions in an occupancy expense for permanent store closures. Supply chain challenges worsened in Q4, resulting in incremental inbound freight transportation costs driven by higher levels of air freight costs and higher container rates, impacting Q4 gross margin by approximately 200 basis points. Adjusted SG&A. Adjusted SG&A was $119 million versus $103 million last year and deleveraged 172 basis points to 23.4% of net sales, compared to 21.7% of net sales last year. The deleverage was the result of higher marketing spend, including to support the launch of Sugar and Jade, and higher incentive compensation accruals. Adjusted depreciation and amortization was $14 million in the quarter. Adjusted operating income. Adjusted operating income for the quarter increased $35 million to $61 million, or 12.1% of sales, a record Q4 results, versus an adjusted operating income of $26 million last year, and leveraged 656 basis points compared to 5.5% of net sales last year. Interest expense. Our adjusted interest expense for the quarter was $1.9 million versus $4.1 million last year. The decrease in interest expense reflects the lower interest rates as a result of the refinancing our credit facilities early in the quarter and the lower average debt balance. Tax rate. Our adjusted tax rate was 26% due to higher incentive compensation accruals in 2021. Moving on to the balance sheet. Our cash and short-term investments ended the quarter at $55 million. We ended the quarter with $175 million outstanding on our revolving credit facility. Inventories ended the quarter up 10% versus last year, with over 26% of our inventory in transit. Our inventory complexion is in good shape, and we have taken actions to mitigate the impact of the ongoing global supply chain disruption and elevated transit times, including receipt pull-ups and strategic pack-and-hold opportunities to mitigate late receipts. Moving on to cash flow and liquidity. We generated 66 million in cash from operations in Q4 versus $15 million last year. Capital expenditures in Q4 were $7 million. During the fourth quarter, we repurchased 507,000 shares for $41 million, leaving the company with 257 million outstanding on our current authorization, which was increased by 250 million in the quarter. For the full year of 2021, we've repurchased 1 million shares for $86 million. We refinanced both our revolving credit facility and our term loan in the fourth quarter, paying down our term loan facility by $29 million as part of the transaction. Now we'll provide an update on our store activity in the quarter. We closed 31 locations in the fourth quarter, bringing full-year 2021 closures to 78 and our two-year total store closures to 256. The 256 store closures are fewer than our original store closure target of 300 stores due to favorable lease negotiations. Between the closure of these underperforming locations and the benefits of our favorable lease negotiations over the past two years, we have significantly improved the profitability of our stores, with stores delivering four-wall margins of over 25% in 2021. With over 75% of our store fleet coming up for lease action in the next 24 months, we continue to maintain meaningful financial flexibility in our lease portfolio. These short-term leases will continue to provide us with the flexibility to optimize our occupancy costs and our store mix. We ended the quarter with 672 stores and total square footage of 3.2 million, a decrease of 10% compared to Q4 2021, and a decrease of 26% since the onset of the pandemic. As Jane mentioned, we're not planning on providing EPS guidance until our Q1 call in May. Given our limited top-line visibility in the near term, due to the lapping of the unprecedented stimulus released into the economy one year ago. But we want to provide you with our current thinking on 2022. The accelerated structural reset to a digital-first company we have accomplished since the start of the pandemic continues to benefit our operating margins. And due to these structural changes, we believe that despite the significant headwinds we are facing in 2022, we will be able to continue to deliver EPS and operating margins well above pre-pandemic levels. establishing double-digit EPS and double-digit operating margin as our new baseline for full year 22 and beyond. Starting with Q1, we believe that the first quarter will be our toughest quarterly compare as we are up against significant top and bottom line headwinds. We anticipate total Q1 net sales will be down mid-single to high single digits versus last year due to the combination of lapping the unprecedented government stimulus released into our economy one year ago today, which had its most pronounced impact on our Q1 net sales, the uncertainty surrounding 40-year high in inflation, particularly the volatility surrounding oil and gas prices, and its impact on our customer, the impact of the permanent store closure since Q1 last year, which contributed roughly 11 million in net sales in Q1 2021, late deliveries resulting from the prolonged disruption in the global supply chain, and the impact of the lingering Omicron variant. Our operating margins continue to benefit from the accelerated structural reset we made to our business since the onset of the pandemic. And while we anticipate that we will deliver Q1 operating margins well above pre-pandemic highs, we do not anticipate delivering double-digit operating margin for Q1 due to lapping the one-time rent abatements of $8 million we recognized in Q1 2021, the impact of higher inbound transportation costs than we experienced in the first half of last year, including air freight costs to mitigate the current supply chain disruption, representing an approximate incremental $12 million in Q1, and the loss of the AGOA trade preferences in Ethiopia, which was announced by the federal government on December 28th and will have a significant impact on our margins in 2022, and if not reinstated, represents an approximate $3 million headwind for Q1. While we were planning for lower sales in Q1 versus last year, These three items alone represent a 530 basis point gross margin impact in last year's sales. These gross margin headwinds will be partially offset by lower occupancy expenses and e-commerce fulfillment cost savings. SG&A is planned to be in the range of $112 million, which is higher than last year due to our incremental investments in brand marketing and the impact of lapping the temporary store closures in Canada last year. Adjusted depreciation and amortization is planned to be in the range of $14 million, We expect our tax rate to be in the range of 26%. Moving on to the balance of 2022, starting with the top line. We believe that the top line headwinds we are facing will be mitigated throughout the year by strategic actions we are focused on delivering in 2022. So we're planning for our full year 2022 consolidated net sales to be of approximately 1% versus 2021. Top line headwinds for 2022 include lapping the impact of the unprecedented stimulus in 2021, including the impact from the child tax credits in the back half of the year, the uncertainty surrounding inflation, particularly the oil and gas spikes, the impact of our permanent store closures in the past 12 months, which contributed roughly 40 million in net sales in 2021, the impact of late deliveries resulting from the prolonged disruption in the global supply chain, which we have been managing since the onset of the pandemic through the pull-up of deliveries, additional carrier and vessel options, and the use of air freight where necessary, and a record-setting back-to-school selling season last year, driven by pent-up demand and the return to in-person learning, and further supported by the rollout of the enhanced child tax credits. Strategic actions planned to offset these top-line headwinds include, we are planning for digital sales to grow in fiscal 2022, and we are projecting that digital sales will represent an industry-leading approximately 50% of our total consolidated net sales for fiscal 2022. with only 25% of our total retail sales coming from traditional brick and mortar malls. We are taking pricing actions to offset raw material cost increases, which will benefit us on both the top and bottom line. We are building on strong sales momentum from Gymboree, making meaningful progress towards the sales opportunity of 140 million we estimated when we acquired the brand. We are making significant marketing investments with Amazon and are planning for accelerated growth in 2022 on top of the significant gains we made in 2021. Our early positive results from our investments in Top of Funnel and brand awareness marketing are very encouraging, and we intend to build on these initiatives in 2022. And lastly, the incremental sales opportunity from our recent Sugar and Jade launch. With respect to quarterly top-line cadence for the year, while we're planning for lower net sales in Q1, as we lapped the impact of stimulus payments last year, we anticipate that Q2 sales will be higher than last year, as the year-over-year comparisons against the impact of stimulus payments last year becomes less pronounced. For the back half of 2022, we anticipate to return to a more balanced sales split between the third and fourth quarters. We anticipate that Q3 net sales will be lower than last year due to our record-setting back-to-school season last year and rollout of the enhanced child tax credits. And we anticipate that our Q4 net sales will be higher than 2021 as we lap the impact of the Omicron spikes and deliver organic sales growth from the strategic actions I just outlined. Moving on to the bottom line. Starting with gross margin. While we expect that our 2022 and beyond gross margins will continue to significantly exceed pre-pandemic highs, we anticipate our full-year 2022 gross margin will be down approximately 200 to 300 basis points, lower than our full-year 2021 results. We are planning for gross margins to be lower in the first half of 2022 versus the back half, largely driven by the Q1 headwinds I just outlined. Higher inbound transportation costs will continue to impact gross margin throughout the balance of fiscal 2022, resulting from the continued disruption in the global supply chain. We anticipate that these increased costs, particularly expedited air freight costs, will impact us to a greater degree in the first half of the year versus the second half. For the full year, we are planning for a high single digit increase to our COGS due to elevating cotton prices. which we are planning to mitigate with a corresponding high single digit increase in AUR. However, at this point, based on record levels of inflation, particularly surging oil prices, we do not yet have visibility on the full year 2022 AUC. So we believe it's prudent to wait until we have more clarity on how inflation may further impact our AUCs before we commit to mitigating any further AUC increases with further AUR increases. And the full year 2022 loss of AGOA trade preferences in Ethiopia is significant and is projected at $15 million. We are planning to partially offset these gross margin headwinds through higher realized pricing supported by our increased investment in top of funnel and brand awareness marketing, which we anticipate will continue to reduce promotions and markdowns. Lower occupancy costs in fiscal 2022 versus 2021 due to the impact of our permanent store closures. as well as the benefits of favorable lease negotiations, which will more than mitigate the impact of the one-time abatements of 12 million we've recognized in fiscal 2021. We continue to work on significant fulfillment optimization initiatives across our global supply chain and in our distribution centers and intend to build on the optimizations we already have in place to further reduce our fulfillment cost per order for 2022. Moving on to SG&A. We are planning for full-year SG&A to be slightly higher than in 2021. First, we are reinvesting some of the cost efficiencies and benefits from our fleet optimization program into incremental investments in brand marketing. In addition, we are planning for wage increases in our stores. These increases will be partially offset by lower incentive compensation accruals in 2022. We continue to see benefits from our fleet optimization program and accelerated store closures on the depreciation and amortization line. and are planning for depreciation and amortization to be lower in 2022 than 2021. We are planning for significantly lower interest expense in 2022, resulting from the favorable interest rates we secured as part of the refinancing of our revolving credit facility and term loan in the fourth quarter, as well as the $29 million decrease in our term loan. We expect our full year tax rate to be in the range of 26%. Given our accelerated digital transformation, and the structural reset to our business, we expect to generate significantly higher levels of operating cash flow for the full year 22 than we did pre-pandemic and project to deliver operating cash flows in the range of $250 million for 2022. Based on the historical seasonality of our business, we expect to generate a significant portion of these cash flows in the back half of next year. These strong operating cash flows combined with a much lower store count and the strategic decision to accelerate our digital transformation pre-pandemic Putting that investment behind us will result in significant levels of free cash flow for 2022 and beyond. These significant levels of free cash flow will provide us with the opportunity to continue to reinvest in our business and provide us with the opportunity to continue to return significant capital to our shareholders in 2022. We are planning for capital expenditures in the range of $55 million for the fiscal year 2022, with a large majority allocated to digital and supply chain fulfillment initiatives. At this point, we will open the call to your questions.