Good morning and welcome to The Children's Place First Quarter 2023 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; Sheamus Toal, Chief Financial Officer; Maegan Markee, Senior Vice President, Digital Marketing; and Josh Truppo, Vice President, Financial Planning and Analysis. After the prepared remarks, we will open the call up to your questions. The Children's Place issued its first quarter 2023 earnings press release earlier this morning, and a copy of the release and presentation materials have been posted to the Investor Relations section of the company's website. Before we begin, let me remind you that statements made on this conference call and in the company's earnings release and presentation materials about the company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company's website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. It is now my pleasure to turn the call over to Jane Elfers.

Thank you, and good morning, everyone. Our Q1 results were negatively impacted by the ongoing macro-tension, which resulted in outsized pressure on our core consumer by limiting their purchasing power. With respect to monthly cadence, February was the strongest month. March was below expectations and April further decelerated post Easter. For Q1, our e-commerce top line trend was significantly better than our stores trend. Quarter-to-date, top line retail trends have decelerated from April with continuing inflationary pressure on our lower income consumer. Based on what we believe will continue to be a difficult macro environment, we have tempered both our top and bottom line expectations for the balance of the year. I'll provide more detail on how we're thinking about the back half of the year after I provide a brief update on our strategic pillars. Starting with our first strategic pillar product. Our Easter dress-up product across both TCP and Gymboree were the highlights of the quarter. Starting with TCP, no one in the kids space compares to our assortment of family matching dress-up product for the holidays and Easter was no exception. With respect to Gymboree, customer demand for our Easter dress-up product was outstanding, resulting in sell outs of many of the styles from our Mandy Moore Easter collection, which provided us with some excellent learnings for next year. Not only with respect to depth of ownership, but also with respect to the top line power of our spot-on celebrity partnerships. Moving on to our second pillar, Digital Transformation. Digital represented 46% of our retail sales in Q1 versus 45% last year. After accounting for the artificially inflated February store sales and traffic compare due to the Omicron surge from last year, Digital represented 49% of retail sales in March and April. We continue to deliver industry…

Thank you, Jane, and good morning, everyone. Since the start of our marketing transformation, we've been focused on three key strategies. First, the accelerated growth of our e-commerce footprint. Second, our fully integrated marketing and media mix with an emphasis on top of funnel brand awareness. And third, new customer acquisition via our compelling and differentiated family of brands. Let's recap our encouraging results across these key strategies, beginning with accelerated e-commerce growth. Consolidated e-commerce traffic in Q1 was up low double-digits versus Q1 of 2022, fueled by our increased media spend and top of funnel brand campaigns. Consolidated e-comm traffic across our family of brands represented 77% of our total traffic, up from 74% in 2022 and 60% in 2019, making digital our largest traffic channel. Digital represented 46% of our retail sales in Q1, up from 45% in 2022 and 33% in 2019. Mobile continues to be the cornerstone of our digital strategy. In Q1, 76% of our US digital transactions occurred on a mobile device. Our targeted mobile app strategies have driven a significant increase in mobile app transactions and mobile app users. In Q1, our mobile app accounted for 19% of our US digital transactions versus 15% in Q1 of 2022 and 7% in Q1 of 2019 fueled by an impressive 32% increase in mobile app customers versus last year. Our mobile app customers spend 75% more than non-app users and shop 61% more than non-app users. Our mobile app continues to drive strong customer engagement, especially amongst our loyalty members who represent over 97% of our mobile app transactions. We're very proud of our industry leading digital penetration and we're planning for continued growth in this channel throughout the balance of 2023 fueled by our increased media spend and top of funnel brand campaigns in…

Thank you, Maegan, and good morning, everyone. As Jane discussed, the first quarter proved to be a difficult period from a top line perspective due to a challenging macro environment which continued to impact demand from our core customer. While sales were negatively impacted, we continued to make significant progress on our inventory levels, with Q1 ending inventory down 8% year-over-year. We took advantage of the cooler weather to liquidate more of our fall winter inventory than originally planned, enabling us to work through some additional higher AUC goods. Net sales for the first quarter decreased $40.8 million or 11.2% to $321.6 million, primarily driven by the continued macro-economic challenges, including inflation, lack of government stimulus and a decrease in tax refunds. Our US net sales decreased by $39.5 million, or 13% to $268.2 million and our Canadian net sales decreased by $6 million or 20% to $24.5 million. Comparable store sales decreased 8.2% for the quarter. Our comparable store traffic was up approximately 3%, while our e-commerce traffic was up low double-digits. Our comp store traffic was driven by a double-digit increase in February in which we lapped the COVID surge from last year. While our consolidated AUR declined by approximately 2%, driven by the liquidation of prior season merchandise. Our AUR on go forward spring and summer product was flat. Importantly, AURs remained significantly higher than pre-pandemic levels, validating the success of our restructured pricing strategies, which we believe will continue to pay significant dividends as input and transactional costs come down as we move into the back half of 2023 and our AUC decline as we continue to liquidate goods purchased after the surge in supply chain costs in 2022. Gross profit margin for the first quarter decreased to 30% of net sales as compared to 39.2%…

Thank you. [Operator Instructions] We'll go first to Jim Chartier with Monness, Crespi, Hardt.

Hi. Good morning. Sheamus, I was wondering if you could first kind of talk about the gross margin in first quarter. What were the biggest drivers of the decline, if you can quantify the impact of the freight and cotton costs there, how the inventory, how you're going to manage promotional activity in the second quarter given the sales shortfall? And then if you could provide an update on kind of the cost structure and any additional cost savings that you've seen with a little bit more time with the company? Thank you.

Yeah, absolutely. Thanks, Jim, I appreciate the question. First, in terms of Q1, as we discussed in our prepared remarks, Q1's gross margin rate came in slightly better than we had expected. I think our original guidance was to be down approximately 1000 basis points when we came in a little bit better than that, as we talked, when we gave the original guidance and in various discussions previously, that impact in terms of gross margin was largely driven by the higher input costs, in terms of the higher AUCs that had built up in our inventories, given the supply chain pressures and cotton pressures that we experienced last year in our purchasing activity. As we look at kind of bifurcating the most significant pieces of that. In Q1, it was clearly a combination of both cotton as well as high supply chain costs that were embedded in inventory that was receded towards the end of 2022. With cotton probably being a higher penetration of that deterioration. The anticipated margin impact was not as a result of incremental promotional activities or liquidation of inventory. It was almost exclusively those higher input costs. As we move into Q2, as we guided, we're still anticipating some level of pressure on margins as compared to last year, certainly much less than we experienced in Q1, but nonetheless, we are anticipating about a 200 basis point decline in margin in Q2. That decrease in margin is primarily the result of again, higher input costs, but in this case almost exclusively cotton, because the higher freight costs have dissipated and the inventory associated with those higher freight costs has also largely been liquidated. So the impact in Q2 is more so related to cotton. It's still a little bit of higher freight cost and then…

And Jim, I think from the promotional question you asked, we placed we had mentioned before that we placed summer fashion receipts down significantly versus last year due to the pressure we had on AUC. So as Sheamus says, we plan to end the quarter down with inventory down high singles and we anticipate that the fashion element of the high AUC spring and summer goods will be completely behind us. And then we'll end with a healthy position in basics, which sets us up for back-to-school.

Thank you. Our next question comes from Jeff Lick with B. Riley Financial.

Hi, guys. Thanks for taking the question. Jane, I was wondering if you maybe could elaborate a little typically in this quarter's call when you have a weak weather period, the May deterioration that you talked about, generally, you show some signs of picking up, that didn't happen this year. So I was wondering if you could elaborate a little on that and then just juxtapose that against all the good things you kind of have going on with the digital traffic up, getting into the back half, also Amazon. I'm just wondering there seems like there'll be this kind of aha moment where those the good factors kind of overwhelm the bad factors. I'm just kind of curious how you're thinking about that?

Yeah, I think we had. Thank you. I think we had mentioned in our last call that we really wanted to see a weather break because we didn't get a weather break the whole quarter during first quarter. And so that would allow us to see how much of what was happening in Q1 was weather versus how much was the consumer. So to your point, we did get a break in the weather in early May and we did not see that change our trajectory. As we mentioned on the call, we've decelerated in May versus where we were in April. So we believe that it's really solidly on the back of the consumer right now and clearly she's under pressure. We don't see that changing in the near term. As Maegan pointed out, she's spending less when she visits. And inflation is in everything she buys. You've heard it all. Savings are down. Credit card debt is up. And so she's being very, very cautious with her budget. From a marketing perspective, remember that Q2 is our usually our least profitable quarter. We don't have a marketing campaign per se in Q2 until we get the very end of July where we start up our back-to-school in mid-July. So when you think about what marketing is doing for us currently, it's not doing what it did for us in Q1, which Maegan outlined, and it's certainly not doing for us what we anticipated to do in Q3 and Q4 and what we saw from last year. So we anticipate May is going to continue to be tough. The store business is going to continue to be tough. June is going to be a continuation of that. And then when we get to July, remember that we have a bit of a different cadence than others. 40% of our quarter is comes from the month of July and about 60% of that comes from the last two weeks. So that is a very important period for us. And like I said we'll be ramping up marketing. From an Amazon point of view, I'm going to turn it over to Maegan to talk about it. I think she can provide some more detail on as we shift into back-to-school in mid-July on both the marketing front and the Amazon front to kind of round out your question about how we see the low right now and then how we see that improvement in the back half.

Yeah. So certainly from an Amazon perspective, despite the slowdown that we're seeing in consumer demand caused by inflation, it's really not impacting that business. Our results and the investment that we've made in marketing obviously resulted in a very strong quarter. And when we think about the back half of the year, there's a lot that we're planning for from an Amazon perspective in terms of significant growth. And it's really based on the current trends that we've been seeing quarter-over-quarter consistently for the past year. Our increased marketing investment, we're continuing to scale that as we head into Q3 and Q4, it will be very meaningful over last year, on the Amazon side. We're also seeing significant outsized fashion growth. So as I had mentioned, our fashion penetration was up a 1000 basis points in Q1, which really lends itself to the opportunity that we see as we head into Q4 specifically with holiday. So there's a lot of kind of really good happening there in terms of what we feel like we're going to see for the balance of the year. Along with what we're already seeing in book sales as we head into one of our biggest time periods as we head into back-to-school with Amazon. So there's a lot of momentum that's planned for the significant growth we're seeing in the back half of the business in the back half of the year for that business. And then from a marketing perspective, as Jane had mentioned, we really start to ramp up significantly in the July time period as we head into back-to-school with our back-to-school brand campaign and then the same into holiday. There's a lot when we think about kind of what's fueling that digital growth. And as we had mentioned in some…

Our next question comes from Jay Sole with UBS.

Great. Thank you so much. Jane, we just talked a lot about Amazon there. But if you can just maybe talk a little bit about you know I know you said you'd give some more numbers kind of maybe later in the year, but just big picture over the last 90 days, like what gives you confidence that the Amazon business continues to develop? And if you can give us an idea of like how big this business can be over time and how profitable it can be, that would be helpful. Thank you.

Yeah, I think as far as and I'll take this question just as far as again where we're really seeing the growth and why we feel confident in the back half of the year, from an Amazon perspective, we're looking at as we head into the back-to-school time period, what we already have in terms of book sales. We're also looking at, again, a scaled marketing investment. The trends, we're continuing to see the trend coming off of Q1. And then again, when we just look at those past 90 days, we have not seen the slowdown in that business. We've continued to build coming out of the Q1 time period and feel like we're in a significantly better position from both an inventory and an investment perspective for the Q3 and Q4 time period of this year than we've ever been historically with the Amazon business specifically. So I think that's really what those kind of levers are what really make us feel confident in the continued growth.

I think the other thing I would add to that is, you know, for us the Amazon business is certainly a big and important business and we anticipate that not only are we going to expect growth in the back half of the year, but we're really expecting that business to grow significantly as we move into '24 and '25. We believe we have, you know, opportunities within that business, both in the TCP brand as well as our recent launch of Gymboree on Amazon. So we believe that there's tremendous growth opportunity. I think it's important to put it in perspective as well. While the first half of the year was certainly a difficult time period for us or anticipated to be a difficult time period for us due to macro pressures and high input costs as we move into the back half of the year and into 2024, we really believe that we're establishing a new base for growth, go forward growth and part of that new base is that Amazon business that Maegan described and we're expecting an acceleration of that business as we move into the back half of the year. And in Q4, we're also going to benefit, as part of that new base from a stabilization in terms of cost. So the input costs are dissipating as we've talked. We're going to benefit from clean inventories. We're going to benefit from reduced expense structure that we're diverting into marketing and then also a stabilized store base as we're nearing the end of our store closure, initiatives that we believe we're going to settle in at around 500 stores. All of this adds up to really establishing a new base for the company in terms of growth for the future that will enable us to not only grow top line, but expand margins and generate significant free cash flow. So we think it's you know Amazon is certainly an important part of that go forward strategy.

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