Good morning and welcome to The Children's Place Second Quarter 2022 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; Rob Helm, Chief Financial Officer; and Josh Truppo, Vice President, Financial Planning and Analysis. 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 conference is being recorded. The Children's Place issued its second quarter 2022 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 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. It is now my pleasure to turn the call over to Jane Elfers.

Thank you and good morning, everyone. Our Q2 sales and profitability fell well short of our internal expectations due to a significant miss to our retail sales projections in the period from early June through early July. The combination of an unexpected and meaningful increase in promotional activity from our key competitors and the widely reported inflation-driven consumer slowdown put significant downward pressure on our fashion AURs and margins during the quarter. AUR ended the quarter flat versus our projection of up mid-single digits. Our fashion AUR was down negative mid-single digits, a significant miss from our internal projections, while our basics AUR was a positive low teens as planned. In addition, a $6 million unplanned expense late in the quarter further pressured our margins. This expense was required to address unplanned inbound supply chain disruptions. We had to address a significant imbalance in our channel inventories caused by this disruption. The majority of which stemmed from the rapid backup of our East Coast ports, as other retailers scrambled to move their shipments from the West Coast. Rob will cover these two issues in more detail during his prepared remarks. Moving on to Digital. Digital represented 47% of our retail sales in Q2 versus 45% in 2021 and 30% in 2019. US e-commerce traffic held up well during the quarter at positive 7% versus last year. As planned, Canada e-commerce traffic was down due to the lapping of the temporary store closures last year. We continue to deliver industry-leading Digital results supported by the combination of our structural reset since the pandemic, our increased marketing investments and our focus on optimizing our channel results. Digital is our highest operating margin channel and based on the strength of our Digital business and our increased investments in this channel, Digital is projected…

Thank you, Jane and good morning, everyone. After I review our Q2 results I will provide our Q3 and full year '22 outlook. For the fiscal second quarter, our operating results fell short of our expectations and we delivered an adjusted loss per share of $0.89 versus earnings per share of $1.71 in 2021 and $0.19 in 2019. Net sales decreased by $33 million or 8% to $381 million versus $414 million in Q2 2021 and decreased $39 million or 9% versus $420 million in Q2, 2019. Our US net sales decreased by $48 million or 13% to $313 million versus $361 million last year and our Canadian net sales decreased by $2 million or 5% to $35 million versus $37 million last year. Comparable retail sales were negative 8.7% versus Q2, 2021 and positive 2.2% versus Q2, 2019. Our Q2 net sales were negatively impacted by the slowdown in consumer demand driven by the unprecedented levels of inflation particularly with respect to the significant increases in fuel and food prices, combined with increased promotions across our competitive set. As we shared on our last call, our AUR plan for the second quarter, was up mid-single digits to offset AUC increases. However, starting in June, the combination of the consumer slowdown and the elevated promotional activity across the sector, led to significant unplanned AUR pressure and our actual AUR for the quarter was flat. The combination of the lost sales resulting from the consumer slowdown and the heightened promotional environment, represented a top line impact of approximately $22 million in our retail sales channels for the quarter versus our internal projections. And as we had planned, sales in the quarter were also negatively impacted by lapping the impact of the enhanced child tax credits, which started last July combined with…

[Operator Instructions] We'll take our first question from Jay Sole of UBS.

Great. Thank you so much. Jane, I want to ask you about just AUR in sort of the context of this quarter, second quarter was sort of an unusual quarter. As you think about the AUR gains that you've been able to maintain, how would you think about just at a high level? I know you're not giving guidance for fiscal 2023, but how do you think about what the gross margin should look like in a normalized environment, once some of the supply chain stuff and maybe some of the unusual promotions from some of these competitors sort of gets back to regular levels?

Yeah. I'm going to take the first part of that and then I'll turn it over to Rob. Just from the AUR question on Q2, we covered it in the script, but I think it's worth diving a little bit deeper into it. We had the industry-wide slowdown in June, particularly in softlines and discretionary product, which we've all read about. But what we had and what surprised us was the unexpected and meaningful ramp-up in the promotional activity from our two main competitors, which really started in early June and really ramped up in mid-June through the end of the quarter. I think from our chair it's frustrating. We all experienced first-hand the benefits of tightly controlled inventories in 2021. And to see a reversion back to bloated and missed inventories in the sector less than a year later it's tough to watch. On top of that, what I think made it even more frustrating for us in Q2 was that it wasn't kid’s specific issues that our competitors had. It appeared to be a hard goods issue with one of them and you had another adult apparel missed up for the other. But in the end it really didn't matter since they're two very large retailers with a wide reach and our two biggest competitors. And so when they have a firesale in one area to this degree, it's going to draw a mom in. And while she's there she's clearly going to shop for her kids. So when you have promotional events as large as these running, it left us with no choice but to compete on price. And then when you look at what happens in our Q2 offerings and our product offerings, Q2 has historically been our lowest quarter of EPS and operating margin. And…

Jane is exactly right in the gross margin. There's, really four components. First the cotton costs, those impact our gross AUCs by high-single digits. Right now we're in the middle of our summer buy. So we'd expect some moderation in the back half of the year and benefit as those cotton costs come down. The second component is inbound transportation costs. We don't expect expedited air freight and the cost that weighed on our first half margins this year, to the degree next year. And we've seen recent moderation in container costs so we expect that -- for that to continue. The third component is occupancy costs. We've done really well on that over the last couple of years. And we still maintain a significant amount of financial flexibility with 75% of our leases coming up in the next 24 months. And with soft traffic we think that that positions us well for future negotiation savings. And the last piece is our focus on continuing to improve our e-commerce fulfillment.

Got it. If I can ask one more Jane just, because you mentioned the importance of continuing to focus on Amazon and the other strategic initiatives. It sounds like that Amazon business continues to evolve and improve. Can you just give us maybe dive in a little bit more and elaborate on, what you saw in Amazon in the quarter? And what's giving you confidence about that business as you move into the back half of the year and next year?

Yeah. I mean we had pretty significant increases in Amazon in 2021, and we came into 2022 with a very aggressive plan, and we're beating it every quarter. So we've increased again, our plan in Amazon in the back half. We have really made a lot of strides with them as far as the partnership is concerned. And they are working very closely together with us to try to sell a lot of the white space voids they have on their site. They really have a very fragmented big kids business. And I think they clearly now see the opportunity now that they're in a much different inventory position than they've been in, that Children's Place is a key partner in order to help them fill that white space. And so, we had a great -- like I said we had an outstanding Prime Day. We're up about 300% versus last year. But I think more importantly our business has continued to build every week since. So we just keep doing more, and more, and more sales with them and beating our projections for them and beating their own internal projections. So we worked really hard in the second quarter. We had to overspend but we worked hard to mitigate some of the supply chain issues we saw in our East Coast ports to be able to get them the inventory to fill them back into Prime Day, and also to be able to do the significant business we see in basics for August and September. But going forward, they continue to get into new categories all the time. We've really started out with the basics business. We've now gotten into a fashion business. They had a really strong business last year in holiday sleepwear in the Christmas and Halloween sleep. They have much, much stronger positions in that this year. They never had outerwear before. They have that coming in this year. Footwear is another thing that we're just scratching the surface with them on but what they've been able to have. And it's really basically in uniform has been very, very successful. So we keep strategically adding fashion categories, on top of the big base of the basics business we have. So that's -- we anticipate that will continue to build and grow as we get into 2023 and beyond. So really exciting partnership and then, as we talked about we launched on Gymboree just very recently and excited to be partners exclusively with them as well.

We'll take our next question from Dana Telsey of Telsey Advisory Group. Your line is open.

Good morning everyone. Jane, as you think about back-to-school -- as you think about back-to-school to holiday anything -- any learnings from the macro pressures on the consumer from back-to-school of how you're preparing for holiday, whether it's timing, whether it's promotions any of it? And then just, on the store front versus online, what did you see as you went through the quarter in terms of traffic? Did it change at all versus online? And when you talk about other initiatives, how is Sugar & Jade progressing relative to your plan? Thank you.

Sure. Well, Sugar & Jade is small. And so the plan is very, very, very small. As we have said, we are testing through the four quarters of the year to see what they want. And so we learned what they wanted in holiday and we then did our holiday 2023 buy based on that. We learned a lot in spring and summer about the commodities that they want. It's not really about outfitting with Sugar & Jade. It's really about the commodity categories and saw some significant learnings from spring and summer that we're able to go back into for next spring and summer. And now, for back-to-school, we're kind of seeing the same thing, strengthen backpacks, strengthen fashion denim and a continued strengthen like lounge/sleepwear for them. So we're happy with what we're learning. But like, as I said, it was a very small plan to start with. So we feel good about how we planned it and what's happening with it. As far as traffic, store traffic was a little bit better than it has been in second quarter when you compare it to 2021. It was down like 4%. But when you compare it to 2019 in pre-pandemic levels, it's still down in the mid-30s. So that's -- as far as we're concerned that's not great. And so we'll continue to watch that. We are very pleased in a very tough quarter. We are very disappointed with our results in Q2, but we were pleased with where e-com traffic held up at up 7%. And so we thought that that was pretty good, particularly with the amount of e-comm penetration in those last two weeks of July. And as we mentioned on the call e-com traffic in Q3 is up 5%, which surprises me quite frankly,…

Thank you.

Thank you.

[Operator Instructions] We'll go next to Susan Anderson of B. Riley.

Hi. Good morning. I want to maybe follow up just on the promotions. It sounds like, you feel really good about the basics and its being -- it's pretty rational out there. You feel like you don't feel there is a need to promote. I guess, what's the risk there if your competitors you get promotional on basic product during back-to-school. Would you have to, I guess, follow suit? And then, also I'm curious, it sounds like you feel like kid’s inventory at those competitors is still pretty good, it's other categories that may be driving the traffic to the store and purchasing there. So I guess, I'm curious how you feel about just the competitor inventory and if that's a risk to having to promote more in the quarter. And then lastly, just on supply chain. It sounds like, the issues -- what's the risk of that coming back in the third quarter? And then if you could talk about freight and shipping costs in third quarter year-over-year expectations. Thanks.

Sure. As far as the basics and the competitors, I think, when you look at us versus our two main competitors, I think, we're well in line on our basics. It's clearly a strength of ours, has been for years. And when you look at where we're priced versus them, we're very much in the pocket of being competitive and in some cases, we're lower than them. So, I feel confident that we're going to continue to be okay in the basics AUR as we kind of have been all year. And if we could stay okay in what was a very irrational environment in Q2 and we've seen what we've been through almost three weeks in August, which is really where the bulk of our back-to-school business happens from 715 to 815, I think we'll continue to be able to keep that AUR where we need it. If you look at Q3, we originally had our AUR planned up about 9%. Basics continues to be low-teens and fashion was mid-singles. We've kept the Q3 AUR plan in basics in the low teens and we've taken the fashion AUR down to -- from up mid-singles to down mid-singles for a total AUR plan of 2. And so, we think that we have appropriately derisked the fashion from the over promotions of the competitors. Yes, as I said that, I don't think that the kids inventory and our competitors is in a state where it needs to be promoted. I think that just from what we see and obviously we don't have complete visibility into our competitive inventories. But from what we see in stores and what we see online that doesn't seem to be where their issues are stemming from. And certainly, when you listen to them, speak about the…

Our next question is from Kelly Crago of Citi. Your line is open.

Hi. Thanks. This is Kelly on for Paul. Just curious if we could circle back on the composition of your inventory. I think you said spring/summer units are down 45% versus last year. Does that mean, you do not have much carryover excess spring/summer inventory to get through at this point? In other words, you're sort of – you entered the back-to-school season pretty clean from an inventory perspective. And sorry, if I missed this how much are your total units up year-over-year?

Yes. That's exactly what it means Kelly. Our spring/summer is down 45%. The predominant driver in our inventory increases are increased AUCs and higher costs. That accounted for nearly just over 60% of the increase. From a unit inventory perspective, we have a small amount of – tiny amount of growth and that's really relative to our strategic growth initiatives Amazon Gymboree and Sugar & Jade.

And we'll take a question from Marni Shapiro of Retail Tracker. Your line is open.

Hey, guys.

Good morning.

Good morning. I just wanted to clarify, Jane you've talked a lot about sort of the basics business versus the fashion business versus the dressy, three different things in your store. But it sounds like your customer is responding to those either need pockets, so back-to-school uniforms or emotional pockets so holidays or family event. Can you just talk about her resistance or penchant to come in or be online and buy those items versus the other? And I guess, what falls in that other pocket because you then clarify the difference between wovens and knits. So it doesn't sound like it's across the board on the fashion. It sounds like she is being very specific and mindful in what she's shopping for if I could put it that way?

Yes. Marni 100% agreed that she has been very specific and mindful from a basic point of view a 100% agreement, she's still stocking up on those. She needs them for back-to-school. They've been a very strong part of our business from July 15 onward. They always are a much bigger part of our business this time of year. And we're very happy with what we've seen. We mentioned the AUR. We feel very good about, where we're planned, where we're actually coming in and the AUR associated with that. When you go uniform obviously would be included in that uniform denim backpacks those types of things. When you look at the emotional product, and you go online and you see things like apple picking and harvest and the plats that we bring in and the family looks, and all those things. She is clearly responding to those as well, which is why I think that the fashion AUR is holding up a lot better in Q3 than it did in Q2. And then you get to the resistance categories. And so what I would call the resistance categories and this has been year-to-date. We'll have to see what happens in the back half would be the knit categories. And so the T-shirts, the mix and match, those types of things, sleepwear have all been subpar performers in the first half of the year, because when you saw how they outperformed in 2021, I think that, there would naturally be a pullback. And so you think about as you move into Q3 and Q4 for us what are those categories and the things that come to mind right away for me is the long sleeve knits and active bottoms which are two big, big categories for us in Q3 and Q4. And so those are the types of things that we have to watch carefully and we have to watch to make sure that we're not overpromising ourselves on AUR, because those are categories that we have to wait and see, if mom is going to start to buy those again, or if she's going to still think that she's got enough knits to last her and she's going to continue to go for woven tops and into woven bottoms. I think the other thing that is going to have to happen, before those specific net categories that, I'm talking about get back on track again is definitely a weather change. I do not anticipate the mom is going to start stocking up on any type of knit category, until she needs to. And so I think when we see the weather change, which we'll hopefully see in mid-September – mid to late September, we'll really have a much better idea of how knits in general as a category is going to perform through Q4 in the back half of the year.

Thank you for joining us today. If you have further questions, please call Investor Relations at area code 201-558-2400 extension 14500. You may now disconnect your lines and have a wonderful day.