The Children’s Place Plans Store Closures, Embraces Digital
Though still below historical levels, sales “significantly” exceeded expectations in the fourth quarter according to The Children’s Place CEO Jane Elfers.
Speaking on a call with investors Tuesday, Elfers attributed the retailer’s success to two main drivers: higher-than-anticipated store and digital traffic levels, despite mandated closures in Canada, and an “outstanding customer response” to the company’s casual and expanded sleepwear assortment.
Meanwhile, despite ordering less holiday dress apparel than usual, the segment still underperformed The Children’s Place’s forecast. Consequently, Elfers noted, the company ended up donating 3 million units, or about $14 million at cost, to children and families in need.
In a Nutshell: Consolidated digital sales increased 38 percent year-over-year in the fourth quarter, representing 46 percent of total sales. In fiscal 2020, consolidated digital sales grew 37 percent year-on-year and represented 53 percent of total sales.
The Children’s Place added 1.9 million new digital customers in 2020, converted more than 1 million store-only customers to omnichannel customers and increased mobile app downloads by approximately 60 percent versus last year.
With no significant Covid-related closures in the U.S. during the fourth quarter, Elfers said, domestic store sales performed better than expected, coming in at 81 percent of last year’s level. This decrease coincided with an approximately 35 percent decline in store traffic. Canadian stores, meanwhile, performed at 52 percent of last year’s level with traffic down 62 percent.
Elfers estimated that the pandemic, arriving almost immediately after The Children’s Place completed a $50 million digital transformation in 2019, accelerated the company’s shift to online and away from physical stores by about five years. In 2021, she added, its focus will center on continuing to support and scale the digital business, retaining new digital customers gained last year and acquiring shoppers displaced by competitor liquidation and forced store closures.
The acceleration of The Children’s Place’s digital sales penetration has coincided with accelerated store closures. As of Jan. 30, the company had closed 449 stores since it began its “fleet-optimization strategy” in 2013. This includes 178 locations in fiscal 2020 alone, with 122 more to follow in 2021 to bring it to its planned 300 closures. Prior to the pandemic, the retailer was closing 40 to 60 doors a year, Elfers noted. The company ended the fourth quarter with 749 stores.
As she mentioned in the company’s third-quarter call, The Children’s Place’s transfer rate—the percentage of shoppers who continue to shop with the company after a store closure, whether online or at another location—stands at 30 percent, compared to 20 percent a year ago. As more stores close and the remaining locations’ productivity increases in the post-Covid world, Elfers said the company anticipates the transfer rate will continue to rise.
The Children’s Place estimates the 300 stores it closed in 2020 and will close by the end of this fiscal year represented approximately $270 million in store sales in 2019. Given a transfer rate of 30 percent, Elfers said the company expects to see a decrease of approximately $190 million in revenue from these closures, or slightly less than 10 percent of its consolidated 2019 net sales, while reducing the physical store fleet by approximately 30 percent. Given this, she said the retailer believes the accelerated closures will be accretive to operating profit and margin.
The retailer ended the fourth quarter with total inventory up 19 percent versus last year. According to chief financial officer Mike Scarpa, the entire increase is comprised of the back-to-school basics The Children’s Place has been holding since June. If the majority of students return to 100 percent in-person learning, he added, the company anticipates inventory levels will return to historic norms.
As of Jan. 30, The Children’s Place had approximately $64 million of cash and cash equivalents and $170 million outstanding on its revolving credit facility. In the fourth quarter, it generated approximately $15 million in operating cash flow.
Robert Helm, senior vice president, finance and inventory management and The Children’s Place’s incoming chief financial officer as of April 1, said the company anticipates first-quarter net sales will grow compared with last year as it anniversaries last spring’s shutdown, but that they will remain below historic levels. Helm attributed the predicted decline to “the lack of an Easter catalyst, which historically accounts for approximately one third of our business in the first quarter;” the impact of permanent and temporary store closures; reduced mall hours; and product delays resulting from port congestion. Given all these headwinds, he said the company anticipates net sales for the first quarter to total approximately $330 million.
Gross margin, Helm added, is projected to be significantly higher than last year due to the expectation that the majority of stores will remain open and lower occupancy costs, while remaining lower than historical levels due to the increased penetration of the company’s e-commerce business, which operates at a lower gross margin.
Net Sales: Fourth-quarter net sales decreased 7.8 percent to $472.9 million compared with $513 million during the year-ago period, an improvement from the third quarter’s 19 percent decline. U.S. sales decreased approximately 6 percent year-over-year, while Canada sales dropped 24 percent. Comparable retail sales inched up 1 percent.
Scarpa attributed the year-on-year net sales decline to three factors: permanent store closures, inclusive of the 33 doors closed at the end of fiscal 2019 and 118 locations shuttered in the first three quarters of fiscal 2020; Covid-related temporary closures in Canada, where two-thirds of The Children’s Place’s fleet closed for half of the quarter; and the negative impact of an approximately 15 percent reduction in mall operating hours as mandated by landlords.
Net sales fell 18.6 percent year-on-year in fiscal 2020 to $1.52 billion, primarily as a result of permanent store closures, extensive temporary store closures and a significant decline in back-to-school demand due to schools adopting remote and hybrid models. Increased e-commerce sales partially offset this.
Net Earnings: The Children’s Place posted net income of $7.8 million, or 53 cents per diluted share, in the three months ended Jan. 30, compared with net income of $24.2 million, or $1.61 per diluted share, a year earlier. Adjusted net income totaled $14.9 million, or $1.01 per diluted share, versus $28 million, or $1.85 per diluted share, in the comparable period last year.
The company recorded a net loss of $140.4 million, or $9.59 per diluted share, in the twelve months ended Jan. 30, compared with net income of $73.3 million, or $4.68 per diluted share, in fiscal 2019. The retailer reported an adjusted net loss of $53.4 million, or $3.65 per diluted share, compared with adjusted net income of $83.8 million, or $5.36 per diluted share, in the prior year.
CEO’s Take: “In the past 12 months the world has forever changed, but the consistent execution of our long-term strategic plan has prepared us for this change,” Elfers said.
“The combination of our consistently strong product offering; the resurrection of Gymboree and the other market-share opportunities and strategies we have in place to continue to combat sustained birth rate declines; the significantly reduced competitor base, which accelerates market share and merchandise margin opportunity; the five-year acceleration of our store-closure initiative, resulting in a more profitable fleet and positioning us with less than 25 percent of our revenue coming from traditional malls at the end of 2021; and the five-year acceleration of our digital transformation, resulting in an approximately 50 percent steady-state digital penetration that strategically maps back directly to our core customer, a digitally savvy millennial mom with the even more digitally savvy Gen Z mom to-be right behind her—all of these strategies work together to provide a strong path to accelerated operating margin expansion and share gains.”