Ladies and gentlemen, thank you for standing by and welcome to The Children’s Place First Quarter 2020 Earnings Conference Call. This call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Anthony Attardo, Director of Investor Relations to begin.

Good morning and welcome to The Children’s Place conference call. On the call today are Jane Elfers, President and Chief Executive Officer; and Mike Scarpa, Chief Operating Officer and Chief Financial Officer. The Children’s Place issued a press release earlier this morning and copies of the release and presentation materials for today’s call have been posted on the Investor Relations section of the company’s website. After the speakers’ remarks, there will be a question-and-answer session. 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 the company’s SEC filings, including the Risk Factors section in 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 to your questions. We ask that each of you limit yourself to one question so that everyone will have an opportunity. And with that, I would like to turn the call over to Jane Elfers.

Thank you, Anthony and good morning everyone. I would like to start out by thanking the thousands of our associates who have done a remarkable job these past few months under very difficult circumstances. They have demonstrated the resilience of this organization by keeping our business running at a high level and providing millions of growing kids across the country with the clothes they need. I want to say a special thank you to our frontline distribution center and store associates who have been the heroes of our company throughout this crisis, working hard every day to ensure that our facilities continue to operate safely and effectively and that families all over North America continue to receive the essential clothes they need for their growing children. Moving on to current business, we are not providing guidance, but we want to bring you up to date on current business. As demand for our essential children’s clothing continues to surge, our omni-channel advantages are clear. Quarter-to-date, our consolidated sales are running a positive low-double digits with online demand up 300%, while approximately 95% of our stores remain closed. We have brought back 88% of our furloughed store associates with the remaining furloughed store associates expected to return by July 1 when we are planning to have the majority of our stores open. Moving on to our strategic initiatives. Although we are facing a period of uncertainty regarding the future impact of the COVID-19 pandemic, the Children’s Place is moving swiftly and decisively to proactively address these challenges. How we emerge from this crisis depends on the actions we take now. In order to position the company for continued success, we are balancing near-term priorities necessary to preserve our financial flexibility, including working to protect our employees and customers, flexing our supply chain…

Thank you, Jane and good morning everyone. I will start by reviewing our Q1 results, including an update on our balance sheet, cash flow and liquidity. I will then provide an update on our progress with several strategic actions, including steps taken to help reduce operating costs and capital spend and the significant acceleration of store closures, which collectively are anticipated to enhance our longer term profitability outlook, while helping to preserve our financial flexibility. Starting with our Q1 results, in the first quarter, we generated an adjusted EPS loss of $1.96. Net sales were $255 million versus last year’s $412 million. Our total sales decreased 38.1% as a result of temporary store closures due to the COVID-19 pandemic. For the first 5 weeks of the first quarter, comp sales increased in the low single digits, before the store closures on March 18 weighed on sales in March and April. E-commerce sales increased 12.2% to approximately 53% of total net sales, as online sales accelerated following the March 18 store closures. Adjusted gross margin decreased 990 basis points from 36.7% to 26.8%. While merchandise margins were in line with our expectations prior to the store closures, for the quarter, they were down approximately 430 basis points with 70% of the decline driven by a higher e-commerce penetration, primarily related to the store closures. The remainder of the gross margin decrease was a result of higher fulfillment costs, along with the de-leverage of fixed expenses resulting from the decline in sales as a result of store closures. Adjusted gross margin excluded approximately $88 million of charges, primarily in three items, which the company believes are not reflective of the performance of its core business, primarily related to the following: one, in line with prudent accounting practice, we recorded an inventory provision…

Thank you [Operator Instructions] Our first question comes from the line of Adrienne Yih of Barclays.

Good morning, everybody.

Hi.

Good morning.

Hi, great. Glad everybody is doing well. So Jane, thanks for all the color, very helpful. My last comment was, 2021, much-much smaller store base. If we think about the business, say, 3 years from now or even 5 years, a little bit of a longer term, what does the kind of e-commerce-to-store footprint look like? Does it really matter, because you’re becoming so omni, and can you give us a quick update on the Gymboree launch and how that’s faring? Thank you very much.

Sure. As far as Gymboree, we are really pleased with how Gymboree launched. We had a really great customer response out of the box and from what she was telling us on our social media channels, we really hit the nail on the head as far as the product aesthetic. Unfortunately, as we have discussed before, we launched with predominantly Easter products during the crisis, so we only had about four weeks before the lockdown began, but we continue to be very pleased with the summer lines that we have launched over the past couple of months, and the customer feedback remains very positive on the groups that we have launched. They have the same call-outs that they had from the beginning. They are asking us to produce more boy products. They are asking us for more underwear, and specifically they want pajamas. JIMMY’Z [ph] was a big category for Gymboree in the heyday. And all of those three categories are in the works for fall, and so we will see more of that throughout the back half of the year. And as we did for TCP products, we went into the back half and right-sized the year – back year’s supply with projected demand and made some outsized inventory reductions in the categories that we think will probably pose some of the biggest issues, like the dressy categories. We are being conservative for the back half of the year, but overall extraordinarily pleased, really kudos to our design team. They really did a phenomenal job, really hitting like I said, the nail on the head. And then as far as 3 or 5 years out, it’s hard to tell, but I would tell you that if someone had told me that I was going to have all my stores closed and I would be double-digit comping consolidated, I’m not sure even though I am a pretty big advocate of our digital future, I don’t even know if I would have believed that. So I think, through this crisis, we have really seen what we can do. Digitally, I think we are obviously strongly on offense. Now, we have a need-based product. We have a recession-proof product. We have our digital investments that have set us up, to have the kind of success we are having right now, and it really allows us to move aggressively to right size our store portfolio. So, we are looking at, as Mike said, 625 approximately stores in the next – in 20 months to have that, and then we will take it from there. I certainly think stores will be an important part of our business going forward, as I think an omni-channel model is important and we have seen that. But we are certainly – as I said, taking an aggressive stand to pair our store base now, now that we can see, that we can continue to grow revenue even with our stores closed.

Your next question comes from the line of Tiffany Kanaga of Deutsche Bank.

Hi. Thanks for taking our questions. The quarter-to-date consolidated sales trends were helpful. Would you talk specifically to how your reopened stores have performed, if you can give a comp or some incremental color for just that group, even though I know it’s a small cohort? And would you break down how much Gymboree is contributing to the digital growth, and what the core Children’s Place online growth looks like?

Sure. As we said, we have 61 stores open and they are doing 97% of last year’s productivity – 97% of last year’s sales, so we are very pleased with that. As far as Gymboree, we are not breaking it out, but it’s a much-much smaller piece of the business digitally.

Your next question comes – I am sorry.

Just to add some color to that also in terms of the stores that are open. We are seeing conversion of high-single digits. We are seeing UPTs up high-single digits. We are actually seeing AUR up low-single digits. So, all very positive information as we reopen our stores.

Your next question comes from the line of Jim Chartier of Monness, Crespi Hardt.

Good morning. Thanks for taking my question. Just was wondering if you could – it was a little bit of color on what the profitability of your business is going to look like in 2Q? Are there higher fulfillment costs and other costs, more and more channels that are going to weigh on margins in the second quarter despite the double digit comps? And then, could you just talk about the profitability of e-commerce in a more normal environment versus store fleet, and the stores that you are planning to close? Thanks.

Jim, this is – even though we are not providing guidance due to all the uncertainty, I can provide some color, comments regarding Q2 margins versus what we are seeing from consensus and facts at perspective. We think that the margins may be a little optimistic that we are seeing, given our projected penetration of e-commerce in the quarter. Remember that Jane pointed out, that our stores will not be completely open until 1st of July, so heavy e-commerce penetration. We are also seeing some inefficiencies and fulfillment costs associated with the large number of ship-from-store orders that we are fulfilling. And also, we are running into some inefficiencies in our DC and in [indiscernible], due to the social distancing and safety protocols that we put in place. So, those two things weigh on margins, and then as Jane indicated, with the promotional environment, the second quarter also weighs on margins. We think that Q1 is – would be the most difficult quarter from a margin perspective, but we do expect sequential improvement as the year goes on.

Your next question comes from the line of Dana Telsey of Telsey Advisory Group.

Good morning, everyone, and hope everyone is safe and healthy. As you think of the bucket of SG&A, how much of the reductions are permanent reductions? How much comes back? And then as you think about planning for the third and the fourth quarter in ordering, inventories for holiday season and even late back to school, how is it different going forward, and what do you see there and just lastly how is outlets in Canada? Thank you.

So from an SG&A perspective, we were down roughly $39 million in the quarter, with more than half of it coming out of our store base, associated with the furloughs that we took in terms of our store associates and our field management. We would expect that we are going to continue to see SG&A under last year’s levels. We have taken a look at our corporate staff, and made appropriate adjustments, and obviously as we continue to close 200 doors this year, obviously expense will come out of the organization, both from a store payroll perspective, occupancy perspective, and potentially just a corporate structure.

And then, as far as Canada, we are seeing triple digit e-commerce growth in Canada as well, from an outlet point of view of the stores we have opened. Now remember it’s a small group, we are double-digit comping in outlet, so that has been very strong. And then I think your last question was around inventory in the back half of the year. We are approaching it very conservatively. We obviously were not able to impact our spring and summer receipts, but we were able to impact our back half receipts. So we are being very conservative. We have to see what is happening with school openings. Many districts haven’t announced yet, so we have our eye on that. We have our eye on when the tax-free events are going to be, a lot of that is unannounced as well. And so that’s very important 2 things for us in Q3, the back-to-school business and tax free. And then when you get into Q4, we are anticipating that there could be significant pressure with respect to social distancing traffic in the stores. We have no idea what a Black Friday might look like for some of those big Saturday weekends in December. So we have approached it very conservatively, particularly from the stores point of view, and then obviously to talk about it, could there be a second spike.

Your next question comes from the line of Paul Lejuez of Citi.

Hey, thanks guys. It seems like you have a lower percentage of your stores opened than many other retailers out there. Was curious as to why, if that has something to do with the centers that you are located in, not reopening, and maybe just talk about, how many stores could you have reopened but didn’t? And what percent of stores are you fulfilling out of? And then just second, as e-comm plays a bigger role and you have fewer stores now after the store closings, from which to fulfill orders, are you thinking about adding additional DC capacity? Thanks.

Sure. Well over 85% of our stores are helping to fulfill. So that is the answer there. As far as the answer of why the stores are not open, we were planning on opening a significant number of stores last week, but with the unrest of the past 10 days, we decided that we would wait until next week. So we are going to be opening on Tuesday, which is 6/16. We are going to be opening around 350 stores. So a huge number of stores. We will open another amount on 6/23, which is the following Tuesday, and then we’re – our plan is really to have every one of our stores opened by July 1. Now we can’t promise that, because we have a heavy concentration in New Jersey and New York, and there was a lot of moving parts with New Jersey and New York. So significant number of stores still haven’t given the exact date in New Jersey and New York, but they are all leaning toward the end of June. So that’s why we are using July 1st. So we should have most of them open by July 1. And then as far as helping to fulfill, we were pretty – obviously we have the stores really pitching in now to help with the social distancing going on in the DC. But we had always planned to have radio kick in, in a big way for back-to-school. That’s what we had planned for the past year, since last year’s back to school. And so they will be set up, as we get into mid-July, when the peak of back-to-school normally happens, they will be set up from mid July on to take over a big share of the burden from the stores. So we are feeling good about that. We are on track with that and we should be fine there.

Your next question comes from the line of Susan Anderson of B. Riley FBR.

Hi, good morning. Thanks for taking my question. Nice to see the robust online growth. So we are looking out to next year, and kind of curious after you close the 200 stores this year, how are you thinking about the P&L? E-comm is usually lower gross margin, but higher EBIT now without the rent on those stores, should we expect this to be significantly helpful to EBIT from ‘19 levels? And then also, would you expect more efficient fulfillment costs going into next year? And then finally, those 200 stores were they profitable and I guess will they reopen at all this year and then shut down after they reopen – clear the products? Thanks.

Look, it’s incumbent on us to drive our P&L through a couple of different factors. Obviously, we are thrilled with the level of business we are currently doing online, considering that 95% of the stores are closed, and we are seeing digital demand up 300%, fantastic. Open stores, obviously running at 97% of last years. Productivity is also a very positive thing. The flexibility that we have built into our into our fleet, given the fact that we can get down to 625 store base over the next two years, is also a powerful weapon for us. And then as Jane mentioned in her prepared remarks, the conversion of store-only shoppers that we are seeing at four times the rate of last year, is huge for us. So now it’s incumbent upon the management team to drive the appropriate rent deals in the remaining stores that are open, drive the appropriate corporate structure, and also ensure the fulfillment capacity to support this digital first organization. We believe that all of the above is an opportunity for profit improvement over time.

Your next question comes from the line of David Buckley of Bank of America.

Good morning. Thanks for taking my question. So just following up on that last question, the 200 store closing this year, will the majority of these stores not reopen in the second quarter, or will they be post holiday closing weighted? And then just what percentage of you – sorry Mike, I will let you answer on it.

We expect that by the end of the second quarter, we will be probably in the 100 store range of closures. So half of them will take place in the ensuing month and a half. We expect that a good portion of them will open and liquidate and then will close, depending on the inventories that are left in the store if there are ship-from-store activities. You had another question?

Yes. Thank you. That’s helpful. And then just what percentage of e-comm orders are now being filled from stores and can you just talk about the economics of shipping from store versus fulfilling e-comm orders from your DC?

Sure. We would say probably about 55% is being filled right now from our ship from store capabilities, as Jane mentioned by adding ship from store, with more than double our overall capacity. And as I mentioned our capacity in both our DC and in radio is somewhat limited, based on some of the safety protocols that we put into place. When we look at ship from store economics, obviously, they don’t have the equipment that our distribution centers have. So from a labor productivity they are probably a 40% productivity level of our DCs, and then obviously our order size has increased nicely in these last couple of months, and we are seeing our UPT is actually up over 20%. So what we are incurring is, splits associated with that, which drives freight costs up, probably in the 40% to 60% range compared to when we’d normally ship complete orders through. So not the most economical situation for us, but we are thrilled we have the ability to expose store inventory, ship from store and meet moms’ needs and reduce our overall inventory burden, as we move into back-to-school.

We have time for one more question. Your final question comes from the line of Marni Shapiro of The Retail Tracker.

Hey guys. Great job getting through this crazy period. So can you just talk about a couple of things? As you open the new stores, your stores are typically a pretty tight fit. How are you thinking about either adjusting it, so there’s a little bit more space, so people can more comfortably be away from each other, and what would that look like going forward? And then online and in stores, but even online, you’ve done a nice job of expanding your footwear business, and it feels like that could be a bigger opportunity now to go forward online especially. So could you just talk a little bit about how that business was, during the last couple of months, and if you still see that as a good opportunity?

Yes, I mean I think footwear, though it has been an important business for us and as we saw in Q1, we certainly had some pressure on the dressier category, just like we did with the dressy apparel. But in Q2 so far, we have seen very strong demand for casual for sandal, sneakers, flip flops, those types, slides, those types of things. So we are excited about footwear going forward and we are going to continue to fund that business. From a collateral point of view, you can go on our website and look under our COVID update. We have done a lot of work on our stores. We have signs up. We have social distancing. We have sneeze guards at the register. We have sanitizing products, pretty much around the gamut on making sure that when we open those stores, we are setup as safely as we possibly can, for our customer. Certainly, we will have to meet our flow, traffic flow if that is necessary, into the store to make sure that we do adhere to the social distancing guidelines. But I think the stores are very prepared and set up and – for the stores that are open, they are doing a great job.

Thank you for joining us today. If you have further questions, please call Investor Relations at 201-453-6693.