The Children's Place, Inc. (PLCE) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to The Children’s Place First Quarter 2015 Conference Call. Thank you for joining us this morning. With us here today are Jane Elfers, President and Chief Executive Officer; Mike Scarpa, Chief Operating Officer; and Anurup Pruthi, Chief Financial Officer. A copy of the press release can be found on the company’s website. 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. 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 revision to these forward-looking statements to reflect the events or circumstances after the date hereof. After the prepared remarks, we will open the call to questions. We ask that each of you limit yourself to one question so that everyone will have an opportunity. I will now turn the call over to Jane Elfers.

Thank you, Paula, and good morning, everyone. A very strong first quarter result reflect the significant progress we are making across our multiple strategic growth initiatives. Some highlights for the quarter includes comp sales increased 0.7%, our fourth quarter consecutive quarter of positive comps. U.S. comp sales increased 0.5% in the quarter. Canada comp sales were up 2.3%, adjusted growth margin increased by 150 basis points in the quarter compared to last year, significantly above our guidance. These results reflect merchandise margin leverage and a higher AUR compared to last year driven by strong product acceptance and well-managed inventory which were down 8% at the end of Q1. Adjusted EPS was $0.83 versus our guidance range of $0.60 to $0.65. This compares to adjusted EPS of $0.68 in the first quarter of 2014. As a result of our strong performance, we increased our fiscal 2015 adjusted EPS guidance range to $3.30 to $3.45, reflecting our confidence in our outlook for the balance of the year. Starting with product, our customer response to our spring product was extremely positive with our investments in fashion and seasonally appropriate product generating a higher AUR and significantly higher margin. On our March 12th earnings call, we discussed the Q1 sales to-date were significantly impacted by the record cold and storms across most of the country. However once the weather improved, we saw a comp trend improved from the negative mid single digit at the time of our call to a positive 0.7 for the quarter. Unlike most of specialty retailing, we successfully navigated the recent year-long labor disruption at the West Coast port without incurring any additional costs, while ensuring 100% on-time delivery of our merchandise. We experienced zero disruption to our inventory flow due to the foresight and experience of our logistics team. And importantly, our inventories are in excellent shape, we ended the first quarter with total inventory down 8% and carryover inventory down 14%. We increased the pace of our share repurchase program in Q1 returning $43 million to shareholders to the repurchase of approximately 648,000 shares and dividend payment. Importantly, we have $100 million remaining on our share buyback authorization. This provides us with the flexibility to continue to return capital to shareholders at a significant rate as part of our overall capital allocation strategy. Since 2009, we’ve returned over a $0.5 billion to our investors through share repurchases. Furthermore, last year we instituted the company’s first ever common dividend and increased the dividend by 13% to $0.15 per share in the first quarter. We’ve been strategic in our use of capital making significant investments in our system, while we continue to return capital to shareholders. We are on track with these investments and have delivered all of our major systems milestones on schedule. Some examples of systems milestones achieved include the launch of our core merchandising and pricing modules for our ERP system, the successful implementation of a global sourcing portal and the implementation of our assortment planning tool. In addition, upgrade to our e-commerce website and mobile site permit advanced functionality and capabilities on our US and Canadian website. And enhancement to our CRM capabilities allows to focus on customer segmentation to increase acquisition, retention and engagement. Moving on, I want to update you on the five targeted initiatives that I discussed with you on our last call. First, expand our Fleet Optimization Program. We remain on track to close to 200 stores to 2017. In the first quarter we opened two stores and closed seven. For the full year, we plan to open five stores and close approximately 30. As discussed on the last call this program should ultimately result in operating margin accretion in excess of 100 basis points due to sales transfer and the elimination of the underperforming locations. We are focusing our real estate efforts for the balance of 2015 on ensuring a smooth execution of this expanded opportunity. Two, accelerate new customer acquisition. We are on track to accelerate the deployment of new tools that will allow us to significantly increase our ability to add new customers to our file, starting with the back half of 2015. This effort will coincide with our peak back-to-school traffic and we expect this will start to positively impact sales in Q4 of 2015. Three, further SG&A leverage. We have made great strides in reducing SG&A in the last two years and we're committed to further leveraging SG&A in 2015, despite making investments throughout the year to support our systems transformation initiatives. In 2013, we reduced SG&A spent by 25 million and 60 basis points year-over-year and in 2014 we reduced SG&A another 20 million or 110 basis points. Our ability to deliver SG&A leverage while making the critical investments required for our companywide transformation, speaks to the strengthened focus of our entire management team. Four, inventory management and receipt discipline. Our new assortment planning tool continues to indicate further inventory reduction. After reductions in unit receipts in our back-to-school and fall-buys, we expect mid single-digit reductions in our unit buys for holiday 2015. The results from this new tool have enabled us to significantly improve our inventory management discipline by adding enhanced data driven analytical rigor to our internal processes. In addition, our state-of-the-art inventory allocation and replenishment tool is on track to go live for back-to-school 2015. This has resulted in improved inventory metric with total inventory down 8% at quarter end on top of an 8% decline last quarter while we continue to drive double-digit decline in carryover inventory. And five, our Canadian approach. Our Canadian business performed significantly better than expected in Q1 achieving a positive comp. But we will continue to approach our business in Canada very conservatively for the balance of 2015 with tightened controls on expense and reduced receipts for the balance of the year as we continue to save significant FX headwinds in that market. In closing, our transformational plan is delivering significant shareholder value. This is the result of a best in class management team strategically and methodically pursuing a multi-year transformation plan involving every aspect of the company, product, system, process and talent. I want to thank the team for their persistence and tenacity and I want to thank our board, particularly our Chairman Norman Matthews for their guidance and support during this complex transformation. As we look to the balance of 2015 and beyond, we are confident that we will continue to embark substantial value for our shareholders through the continued strong execution of our transformation plan. Now I’ll turn it over to Mike.

Thank you, Jane, and good morning, everyone. I will provide an update on our transformation and other operating initiatives. Fleet Optimization. We remain on track to close a total of 200 stores through 2017 including the 76 stores we closed in 2013 and 2014. We continue to see sales transferee in excess of 20% to nearby stores or to e-commerce as a result of the store closures. In those markets where we have closed stores, we are seeing the neighboring stores along with e-comp become more productive for both the comp sales and profitability perspective. These results further our commitment to executing this optimization program or dramatically slowing down new store openings. Channel Expansion. We are confident about the long-term growth potential associated with our expansion into all alternative channels of distribution. We are further developing our relationships with our international and wholesale partners and at the same time, we are making the necessary investments in technology to enable us to accelerate our channel expansion grew our international wholesale and e-commerce channels. These investments will fully automate key processes supporting inventory receipts and deliveries with our partners including full EDI integration. In addition, it will enable the movement of inventory between channels as well as better align our product calendar with our partner requirements. Inventory management initiatives. Our assortment planning tool leverages historic data by storing SKU to optimize our overall buys and better match breadth of assortment with depth of inventory. We piloted this tool with our Summer 2015 buying outlets or we saw double-digit reduction in our unit buy. We realized some of that benefit in Q1 as our gross margin and outlet was significantly higher compared to last year driven in part by our success with this tool. We follow this by rolling this tool out with back to school and fall 2015 buys for all channels, where we saw high single digit reduction in unit. Early indications on our holiday 2015 buy, a point to a mid single digit reduction in overall unit receipts. Moving onto our new allocation and replenishment tool, this module drive initial store allocation using dynamic data and algorithms to forecast demand by store. Based on initial sales receipts, it flows product back to stores in appropriate quantity, maximizing margin opportunities. This tool on track to go live for back to school 2015. In addition to our assortment planning and allocation tools, work will be initiated in the third quarter of this year on a company-wide Markdown Optimization Tool to complete the three major pillars of our inventory management efforts. Digital capabilities, the continued development of our digital capabilities will be critical to our continued success. Our digital efforts are focused on number one: customer acquisition, examples include implementing EBC capabilities for the second half of the year and improvements to our search engine optimization which are already in progress. Two: customer retention. Our recently completed work on the strategic segmentation of our customers enables us to deliver more relevant content and messaging based upon our customers unique behaviors. Three: customer engagement. We made changes to our loyalty program to significantly improve customer ease of online account creation and access the points and rewards. We now have enhanced life cycle marketing capabilities enabling us to target those customers best suited to be loyalty members. And finally four cross-channel fulfillment. We are implementing a new order management system which will facilitate cross-channel fulfillment capabilities beginning in 2016. Utilization of overseas cash, we are working to utilize the significant cash balances we have outside in the United States while enhancing vendor management. In the first quarter and making vendor payments deploying our cash in Asia improving U.S. and Canada cash flow and reducing the outstanding debt balance on our revolver. Balance sheet inventory. Inventory at the end of the quarter was down $23 million versus last year or 8% better than our guidance of a low-single digit decrease. Carryover inventory was down 14% versus last year. We are very pleased with these results and with the help of our new systems we will continue to tightly manage our inventory levels. Now, I'll turn it over to Anurup who will take you through our first quarter results. He will then review second quarter and full-year 2015 guidance.

Thank you, Mike. Good morning, everyone. In the first quarter we delivered adjusted earnings per share of $0.83 which is $0.18 about the high end of our guidance range on a positive sales comp, 0.7%. Details for the first quarter are as follows. Net sales were $405 million. The comparison to the first quarter of 2014 was negatively impacted by foreign exchange of $4.7 million. Comparable retail sales increased 0.7% compared to a negative 3.6% comp last year. The positive comp for the quarter was a result of an increase in AUR an average transaction value. This is our fourth consecutive quarter of positive comparable retail sales. E-commerce accounted for 18% of net sales in the quarter compared to 16% in the same quarter last year. Adjusted gross margin rate for the quarter increased 150 basis points versus last year to 37.7%, well above our guidance range of down 20 to up 10 basis points, as we benefited from strong product acceptance and well-managed inventories. This increase was primarily driven by a mid-single digit increase in AUR partially offset by slight increase in AEC compared to last year. Adjusted SG&A deleveraged 30 basis points compared to last year. SG&A spending was essentially flat to last year. We actually spend slightly more than anticipated as we advanced some spending related to our transformational efforts. Adjusted operating income leveraged 110 basis points to 6.6% of sales. Adjusted income per share was $0.83 compared to adjusted income per share of $0.68 last year. The comparison to the first quarter of 2014 was negatively impacted by $0.01 due to foreign exchange. Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $201 million compared to $195 million last year. We ended the quarter with $11 million outstanding on our revolver. Now let me take you to our guidance. Second quarter guidance; we project second quarter adjusted EPS to be in the range of negative $0.36 to negative $0.32 compared to negative $0.37 in the second quarter of 2014. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.02 in the second quarter. Our second quarter guidance assumes that comparable retail sales will increase by approximately 1%. We expect adjusted gross margin to be up 60 to 80 basis points compared to last year. We expect adjusted SG&A to be flat to up 20 basis points as a percentage of sales compared to last year. Our second quarter guidance assumes the depreciation will be approximately $16 million. We are guiding inventory to be down mid-single digits at the end of the second quarter compared to last year. We project adjusted operating margin to leverage 40 basis points to 70 basis points compared to last year. Now onto full-year 2015 guidance. We project fiscal 2015 adjusted EPS guidance to be in the range of $3.30 to $3.45 inclusive of a $0.15 negative EPS impact for the full year due to FX, assuming the currency exchange rates remain consistent with today's rates for the balance of the year. We expect comparable retail sales for the year to increase by approximately 1%. We expect adjusted gross margin to leverage 80 basis points to 100 basis points compared to 2014. We expect adjusted SG&A to be flat to down 10 basis points as a percentage of sales compared to last year. We expect depreciation for the full year 2015 to be in the range of $63 million to $65 million. This is approximately an $0.11 negative impact in EPS compared to 2014. We project adjusted operating margin leverage 40 to 70 basis points compared to 2014. This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments. Additional guidance for fiscal 2015. We expect our tax rate to be approximately 33.5% for the year. We are forecasting another year of strong cash from operations in 2015. Our CapEx is now expected to be approximately $70 million to $75 million for the year versus our previously guidance of $75 million to $80 million. This reflects our ongoing efforts to drive efficient season spent as well as savings associated with building in total capabilities to deliver certain aspects of the transformational initiatives. We plan to open 5 stores and close 30 stores in 2015. At this point, we’ll open the call to your questions.

The floor is now open for your questions. [Operator Instructions] Your first question comes from Dorothy Lakner of Topeka Capital Markets.

Thanks and good morning everyone. Congratulations on the strength in the quarter and a better outlook for the year. You showed some nice progress in the outlet business in the quarter. And I just wondered if you could speak a little bit more to the opportunity there as you move forward and particularly as you continue to implement the new systems?

Well, we were very pleased with the progress we’ve made in the outlet business. Obviously at the beginning of the quarter, we were definitely hurt by the overall weather and the traffic to the stores. But we ended up with strong AUR and margin performance in the quarter. With the launch of SAP that we did in the second half of last year, we have a much broader array of pricing tools and the ability to offer more robust and compelling promotions. We’ve also piloted our inventory management and pricing tools within this channel. So we’re pretty optimistic about the future of this outlet business and being able to close the gap between the margin of play stores and outlet.

Your next question comes from Betty Chen of Mizuho Securities.

Good morning, everyone. I’d like to add my congratulations as well, very nice quarter. I’m saying or Mike, can you talk a little bit about some of the new schools, we’ve definitely more personalization in terms of the messaging that seems to be much more actionable. Can you speak a little bit more to that and whether while early in the process you’ve had any sort of release or earnings? And then my second question was regarding the upcoming markdown optimization tool. In the past retailers have spoken quite favorably of the margin opportunity. From such capabilities, is it comfort for you to maybe quantify what that benefit maybe in the timing of that? Thanks.

As far as the personalization is concern, we spent last year working with our outside partners on segmentation and with segmented our customer file, we finish that work at the end of last year. And we’ve also now retained a new e-mail service provider, who has the capability to take that segmentation analysis and focuses as you mentioned into much more personalization. So we’ve started that work in Q1, you will continue to see that expand into the back half of the year and forward into 2016. As we work with our new e-mail service provider on acquisition, retention and engagement. From a retention and engagement point of view, the ability to work with the segmentation and to understand what customers buys, this is [technical difficulty] growth, how older are they, do they have incense, so we can tell the message in the product offerings. And then also most importantly, we can tell the promotional offers as well as we further understand which customers respond to promotions, which customers respond to regular pricing so on and so forth. So it's been very eye-opening and very enlightening and we are encouraged by the early results. As far as markdown optimization, and the margin opportunity, I'll turn that over to Mike.

Sure, as we indicated, what will be initiated in the third quarter of this year on a companywide markdown optimization tool and this will complete the three major pillars of our inventory management efforts, we piloted some analytics around pricing optimization in our outlet business and so a nice increase in our overall gross margin. But at this point it's too early to comment on the margin gains that we can expect.

Your next question comes from Susan Anderson of FBR Capital Markets.

I was wondering if you just dig a little bit deeper in AUR, that the performance was really good. Did you guys see anything else driving that, are just like pricing or just a better promotional environment?

I think the strength in the AUR in the quarter was really driven by the strong product acceptance particularly around the Easter time period. We had an outstanding result in March to our spring offering particularly around our Easter assortments which really drove much higher AURs than last year. I think the wear-now factor was also a big help in the quarter. And then when you look at what that did to drive the much margins, and then the gross margins, I think that's really where it has, also as far as inventory. As we said we came into the quarter with inventories down 8%. And that certainly helped us having a clean inventory position.

Your next question comes from Anna Andreeva of Oppenheimer.

We had a near-term and a longer-term question. First, maybe talk to the cadence of the first quarter by month a little bit more. How was April versus your expectations, and how are things trending so far in May? And then I guess, to Mike, now that you are seeing top-line upside with margin upside like this and it has been a while since that Children Place experienced this, maybe talk about some of the bridge to get to double-digit margin goal over time?

Sure, as we have said on the call, we were down mid single digits on [technical difficulty] at the time of our call. We had an outstanding March period after that with the response to the product as we said, and then in April we certainly saw the low that everyone else saw with the shift in Easter. As far as May is concerned, the weather has been very favorable for the first part of May, and you know we don't give monthly guidance obviously, but I would tell you that we are off to a very nice start.

Sure, from a long-term operating margin perspective, we stated that our goal is to achieve an operating margin of 10% over the long-term. We look at this in three buckets, one is systems transformation; to is optimizing our store, real estate portfolio, fleet optimization; three is really the expansion of the alternative channels of distribution. So we are well along the way in our systems transformation. SAP foundation implemented in 2014, we have added our assortment planning tool. We go live with our allocation and replenishment tool for back-to-school and we'll begin pricing in the third quarter. We will begin work on the pricing tool in the third quarter. Obviously the digital work we have completed so far with customer segmentation and this is allowing us to acquire, retain and engage our customer a little more fully. We announced last earnings call that we were expanding our fleet optimization to 200 stores through 2017. We are seeing a great transfer rate there. And then obviously with the alternative channels of distribution, we are pleased with the results of wholesale and international. Obviously we are making the investments we need from a technology perspective to help really grow quite significantly in those channels. Of course, SG&A is also a component and obviously product is number one here and we have been able to maintain our market share over the past five years and so even without the systems we have done a great job on product, and we are quite optimistic going forward.

Your next question comes from John Morris of BMO Capital Markets.

Jane probably question for you, if you look ahead in the back half in terms of the product and the merchandising and especially since you’ve been so much more actively involved, tell us a little bit about the opportunity you see ahead into back-to-school from a product perspective et cetera? Thanks.

Sure. As we mentioned at the third quarter of last year, I taken over, reporting responsibility for design and we also announced that Jennifer Groves had joined us as our new Head of Design. Her product will start to come online for back-to-school and that really in the August, July, August time period, she was able to hook back some of the back-to-school product and then fully affect the line from September forward. She has a very, very strong kids design background, understands the customer inside and also understands moms very well. So I think that you guys will be extremely pleased to see her products come on, there is not a major departure from what we’re dealing, she understands the DNA of the Children Place, she understands what we’re all about. So I think it’s more of an enhancement of product versus a revolution. As Mike had mentioned we kept our market share in kids for the last five year or so even without systems our product has been our strength and really has resonated with mom. I think when you think it some of the opportunities in the back half of the year, I think that there is opportunity certainly around owning the classification better as we continue to learn every single year, we continue to fine tune that, I think that there is opportunity to cut CCs back, there is opportunities with our new tools to get much more focused on inventory and understanding buy items what’s going to produce and what CC that we can cut out to the mix in order to improved profitability. So I think the combination of that product that Jennifer brings plus the systems and our ability to continue to flow units on a consistent basis which has been one of the things that has helped us over the last couple of years. I think all those three things combined or going to bode well for the second half of the year.

Your next question comes from Janet Kloppenberg of JJK Research.

Hi everybody and congratulations on a good quarter. Jane I was wondering if you could talk a little bit about the categories of strength that you witnessed in the first quarter and if there is any category that you see an opportunity for as we go through the rest of the year? I also wondered if the gross margin guidance for the year incorporated any cotton pricing benefit particularly in the back half of the year? And just lastly, is this deprecation step-up associated with the IT investment or some e-commerce systems investments, I’d like to better understand that? Thank you.

I would tell you that the performance in the quarter was very, very consistent. There is really not a lot of ups and downs to report. The only thing that I would add to that is around the Eastern time period, as we have said the response to the fashion product was outstanding and we’ve really had quite an outstanding quarter in dresses. I guess that would be the one category that I would highlight.

This is Anurup, in relation to the depreciation question. Yes, the step-up is directly related to our investments in our ongoing transformational initiatives, both in terms of hardware and software.

And from a gross margin perspective, we increased our guidance from 20 to 50 basis points that we gave back in March and increased it to 80 to 100. We’re seeing inventories in excellent shape seeing as our assortment planning tool indicating the clients and unit purchases in the high-single-digit range for back-to-school and fall and holiday is looking for decline in the mid-single-digit range. So inventory seem to be in good shape, we go live with our allocation replenishment tool for back-to-school. And we are starting to see some cotton price benefit with the apparel you see is down slightly in the back half of the year. So all of that gives us the confidence to guide to an increase in the 80 to 100 basis points range.

Our final question comes from Marni Shapiro of The Retail Tracker.

Can you talk a little bit about we hear a lot about the girls business and each dresses in the fashion. Just a little update on the boys business if trended as well strongly and a little update on the license business, you had some nice launches in those quarters, especially on the boy side and Superheroes. If you can just talk a little bit about that?

Sure, as far as the boys business is concerned we had as I said, we had a very consistent quarter. The boys business was good. There was a lot of newness I think that we've got into the boy's business early in the quarter in the Easter. Things that I would highlight would be the skinny chinos, the colored skinny chinos were outstanding for us. And then a lot of our short programs, we upgraded with Shipley's and designs and patterns versus -- maybe the more simple basic shorts that we had had last year. Those were excellent. So I think the fashion pieces that mom is responding to on the boys side is exciting and with Jen, as I said coming on board, you'll continue to see more of that. From a license point of view, we had an outstanding Avengers launch. We were in that in early April and that was really exciting. Brian who is front merchandise for us is very strong in the licensed market and is spending a lot of his time making sure that we are on top of feature events that are coming up, movies, et cetera. So you're going to continue to see more of that come up.