Good morning, and welcome to The Children's Place Second Quarter 2023 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; Maegan Markee, Brand President; Sheamus Toal, Chief Operating Officer and Chief Financial Officer; and Josh Truppo, Vice President, Financial Planning and Analysis. [Operator Instructions] The Children's Place issued its second 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. Before we get started, I want to congratulate Meagan and Sheamus on their recent promotions, and welcome Mary Beth Sheridan to our team. I'm looking forward to partnering with them as we continue to advance the company's digital-first strategy. Our Q2 results exceeded our guidance on both the top and bottom line. The top line beat was the result of our strong digital performance, fueled by a strong start to back-to-school, driven by our successful first-to-market, back-to-school digital marketing strategies and our on-trend product assortments. In addition, Amazon delivered another outstanding quarter. The bottom line beat was the result of our continued focus on expense management. With respect to monthly sales cadence, May was our weakest month, June improved significantly with the kickoff of our back-to-school campaign and July was our strongest month of the quarter. Our e-commerce sales were up low single-digits for both the month of June and the month of July, driven by a low double-digit increase in e-commerce traffic for the quarter. Our e-commerce channel represented an industry-leading 51% of our retail sales in Q2, up from 47% last year and 30% in 2019. We haven't touched on birth rates for a while, so I wanted to take a moment to update you on how we think about birth rates within the context of our digital-first strategy. As we've said for the past decade, we do not anticipate birth rate increases when we plan our business, and it's a good thing we don't. Just to refresh everyone, here are some facts on birth rates, pre versus post pandemic. Birth rates hit their peak at 4.3 million in 2008 and have never recovered since. In 2019, prepandemic, births were 3.75 million. In 2020, they dipped to 3.6 million, a 40-year record…

Thank you, Jane, and good morning, everyone. I will focus my remarks today on the 4 key initiatives that have propelled our marketing transformation and the impact the transformation has had on our results pre versus post pandemic. It's clear from our conversations that a lot of you are not familiar with, and would like to learn more about the award-winning partners we work with, the state-of-the-art proprietary marketing tools that we leverage every day to measure and maximize our results, the effectiveness of our marketing spend and the results of our significant shift to nontraditional media since the start of the pandemic. The 4 key initiatives that I'll cover today that underpin our successful marketing transformation are: our partners, real-time optimized media measurement, marketing spend and traditional versus nontraditional marketing. First, our best-in-class partners who support us behind the scenes. Prior to the pandemic, the marketing organization was siloed. This siloed approach did not allow us to effectively and efficiently plan, execute, optimize and ultimately measure the effectiveness of our investments. Since then, we've centralized our partners, teams and budgets and onboarded data and measurement solutions that allow us in real time to strategically drive our business KPIs. Our partners. Ipsos MMA supports us across multi-touch attribution, marketing mix modeling and incrementality measurement. Ipsos MMA has been evaluated and scored as a leader by Forrester for its unified customer attribution approach and activate marketing, planning and optimization platform. We leverage the ACTIVATE platform daily within our organization. From a media perspective, we partner with an industry-leading digital media and measurement firm that helps clients drive and deliver measurable marketing performance. This team of experts specializes across all digital marketing mediums and partners with our in-house team on a daily basis. Our 2 industry-leading partners are critical to the second…

Thank you, Meagan, and good morning, everyone. We were pleased that despite the continued macroeconomic pressures, the second quarter exceeded our guidance from both a top and bottom line perspective. We continue to make significant progress on our inventory levels during the quarter. We liquidated more of our spring and summer product during the second quarter than we originally planned to ensure that we started the back half in an even a cleaner inventory position. Due to our efforts, our high AUC spring/summer inventory is down 27% versus last year, and our total Q2 ending inventory is down 13% year-over-year, significantly better than our guidance of down high single-digits. Importantly, we believe that inventory strategies that we have in place going forward will result in continued improvement in our inventory position versus last year throughout the back half of 2023 and beyond. Net sales for the second quarter decreased $35 million or 9% to $346 million, which exceeded our guidance. This better-than-expected result was primarily driven by our strong e-commerce performance and a strong start to back-to-school. These favorable results were in the face of continued macroeconomic challenges, including persistent inflation, a highly promotional retail environment and concerns over the resumption of student loan payments. Our U.S. net sales decreased by $41 million or 13% to $275 million, and our Canadian net sales decreased by $6 million or 18% to $29 million. Comparable store sales decreased 9% for the quarter. Our comparable store traffic was down approximately 4%, while our e-commerce traffic was up low double digits. Our comp store traffic decline was driven by pressure in the month of May with an improvement as we entered the key back-to-school selling period. However, our comp store traffic versus 2019 continues to be down more than 30%. While our consolidated AUR…

[Operator Instructions] Our first question comes from Jim Chartier with Monness, Crespi and Hardt.

I just want to talk about the guidance for a second. So it looks like, by my math, that at the midpoint, your operating income guidance is actually up a little bit from before. So can you just talk about what changed in terms of your outlook for interest expense or the tax rate?

Yes. Jim, I think you're generally correct. I think in terms of our operating profit guidance, we do feel strongly about, obviously, the 10% operating margin that we continue to believe that we'll be able to achieve in the back half of the year, driven by our margin expectations on a gross margin level, which, as we talked in my prepared comments, we did experience some pull forward of some clearance merchandise into July, which will benefit us versus our expectations in the back half of the year. And then obviously, our cost controls and initiatives that we continue to accelerate are helping us from an SG&A perspective, which are all helping us to improve operating profits slightly versus our previous guidance. We did experience an increase in interest rate and interest costs associated with borrowings. So that partially offset some of those increases. So that's what you're seeing in terms of the bottom line result. I think tax rate is generally where we would have expected. But essentially, you're seeing some of the operating profit improvements that we've been able to project slightly offset by increased interest rate due to higher borrowings and higher market-based rates.

Great. And then if I could ask a follow-up. Just -- you've moved up the marketing campaign by a month for back-to-school. Others have kind of talked about the back-to-school extending into September, late this year. How are you thinking about the back-to-school season? Are you continuing to invest in marketing in August and September at the same rate as last year? And then just overall, are you pleased with kind of back-to-school in August to date?

Yes. Jim, it's Jane. I think clearly, based on our prepared remarks, we're very excited about back-to-school. We launched early. We were first-to-market, and I think that you can tell through our results, particularly digital, that, that was a successful strategy. Just to refresh everyone, the lion's share of the back-to-school business happens between [$7.15] and [$8.15]. So 60% of our back-to-school business is between that time period. And I'm sure it's similar for others. I'm always a little surprised when people talk about extending back-to-school to September. We don't have a back-to-college business. But considering all the kids are pretty much already back on campus, I would assume that business is heavily front-loaded as it is for us. And when you think about our business at TCP, by 8/28, which is 1.5 weeks from now, 80% of our kids in our markets are back in school. So like I said, August is really where this happens for us. And August, as you all know who follow us, is an outsized month and represents usually historically about 40% of the quarter. And so what's happening now is really the big businesses in uniform, denim, graphics, that's what's really driving the sales in that 07/15 to 09/01 time period, if you will. Fashion business has been very strong for us in stores as well as on our digital channels. So we're happy to see that. And also Halloween has been -- we always launched that around 07/01, but that has been particularly strong for us. And I think as Meagan mentioned in her prepared remarks, our digital shopper shops earlier than our store shopper. And so we're seeing really positive response to that. And we'll continue to spend on marketing, as we discussed in our prepared remarks through the balance of the season. But I just want to make it clear that, as we leave August behind, we quickly move into selling seasonal products in the start of holiday and really leave back-to-school behind.

We'll take our next question from Jeff Lick with B. Riley Financial.

Congrats on a great quarter. By my math here, if I use Sheamus' data with U.S. and Canada, it appears your digital business was down mid-single digits. Obviously, you said it was up for June, July, which implies a pretty significant acceleration. I'm just wondering, I'm assuming your guidance implies digital will be up for the year -- or for -- up for the second half. And I'm just kind of wondering, do you -- are there things with regards to the marketing and that you're seeing that kind of give you even more confidence in that guidance, the digital guidance?

Yes. Jeff, it's Sheamus. I think, first, from a trend perspective, I think generally in the ballpark, our digital business was -- in Q2 was in the low-single-digit percentage range. And as you said, and as we talked about in our prepared remarks, that was an improving trend throughout the quarter where we saw that flip to positive in the last 2 months of the quarter. I think as we look at our guidance and our expectations for the back half of the year, I think we have some different perspective by channel, and it's probably best to understand it by looking at the different channels. I think, first, as we look at the wholesale business, as we've discussed and commented on a number of occasions, we expect the wholesale business to be up significantly in the back half of the year, contributing to positive results on the top line and helping us, obviously, from a comp perspective. Secondarily, from a brick-and-mortar standpoint, given the macro pressures, coupled with continued expectations on our part for declines in mall traffic, we do expect the brick-and-mortar business to continue to be challenged during the back half of the year. And I'm really not anticipating any improvement in that trend at all. And then finally, in the back half of the year, to the point of your question, with respect to e-commerce, we are expecting a slight improvement in trend due to a combination of factors. Obviously, we've experienced positive traffic trends based upon the success of our marketing strategies. We're not anticipating that those trends will dramatically improve from where we are now, but they are positive. So we're still anticipating the success of those marketing investments as we move into the back half of the year. And then I think we see some opportunity for increased or improved conversion as we move into the back half of the year as we're better positioned in certain key items for the holiday season. And those key items importantly are further supported by some of our marketing initiatives. So I think that gives us an opportunity in the back half of the year relative to last year to see an even more improved trend in the e-commerce business versus what we saw in Q2. I think from an AUR perspective, we're anticipating still a challenging environment and not really anticipating an improvement in the trend in terms of AUR. But overall, our digital business is expected to improve slightly based upon that improvement in conversion and that continued success of the marketing investment in terms of driving traffic.

Our next question comes from Dana Telsey with Telsey Group.

Nice to see the progress. As you think about the business model shifting to digital and then certainly, every indication as it becomes a more efficient business model, how do you think of the expense structure going forward? And does it get leaner than what it is given, obviously, the balancing act of marketing investment driving customer growth and transaction, but also the expense structure internally? And then, Jane, you just announced the hiring of Mary Beth on the Chief Merchant side. What do you see that opportunity in enhancing the merchandise assortment, whether through The Children's Place brand or the other brands?

Sure. Mary Beth is a very seasoned merchant and has worked in a lot of different channels in a lot of different businesses. And so she's only been here a couple of weeks, but she has immediately hit the ground running, which is not surprising, as I had mentioned in the press release. I've worked with Mary Beth in the past so I think she's going to bring a level of discipline and a level of urgency around the opportunities in the brands, and to your point, not just TCP, but how do we continue to get the momentum going in Gymboree, how do we break through on Sugar & Jade and really make that business more important as we look to 2024 and beyond. And like I said, she's worked on a lot of different businesses. So I think that she can look across the brands and think about incrementality. I think what it also does is it really frees Meagan up to really focus her energies on marketing and on our wholesale business directly mostly from Amazon. So having Meagan be able to spend a lot more focused time on growing the Amazon business and the potential offshoots of that Amazon business, be it international or what have you, and then also to see what Meagan and her team have been able to do on the marketing front, it's just absolutely incredible when you think about where we were prepandemic and where we are now. And you look at just things like our digital business comping positive in June and July and double-digit traffic increases. We haven't heard a lot of reports so far, but from the ones we have, we are certainly a significant outlier in how strong our digital results are. And obviously, that's where our eggs are in the basket and continue to move on that. So I think that, that will really free Meagan up for that as well. And the rest of it, I'll turn it over to Sheamus.

Yes. So in terms of the first part of your question, as far as our digital acceleration, we do see the opportunity to have a permanent reduction in our expense structure. As I commented and Jane commented in our prepared remarks, in terms of operating efficiencies, we believe that the digital acceleration will enable us to obviously, as we commented, have less stores, less inventory, less people, less expense, less debt, less interest as a result of that debt. So there's a whole host of efficiencies. On the expense side, we've obviously executed a number of initiatives this year, which are reducing expenses. We've commented in our guidance in terms of expectations for expense reductions relative to last year. And those are not a onetime thing that are temporary benefits. We believe that's a resetting of the expense structure as we shift to a more digital business, as we layer in more wholesale, which, as I commented earlier, comes with less SG&A expense. And I think it's also important to note, within that SG&A expense, as we've talked on numerous occasions, we're also investing in marketing. So we're able to achieve SG&A expense reductions despite the fact that we're making investments in marketing to drive our digital business, which are extremely important to our growth initiatives, but we're, in essence, able to self-fund those marketing investments with the restructuring of our business and the expense reductions that we see across the business. And some of that hits in SG&A expense. Some of it is also coming through occupancy cost reductions, as Meagan talked about in her comments, where we're shifting from billboards or nameplates on brick-and-mortar locations to more digital marketing initiatives. That digital marketing ends up in SG&A expense, where some of that occupancy cost was actually in our margin structure. So I think we're certainly getting more efficient, more effective with our expense structure, and that's not a temporary benefit. That's an ongoing benefit that will cascade into 2024 and beyond, enabling us to have more sustainable growth and more sustainable increases in terms of operating profits.

We will take our next question from Jay Sole with UBS.

Great. Jane, I want to ask just about third quarter versus fourth quarter and just how the business has evolved because the guidance for third quarter sales looks like it's implying sales for third quarter to be a lot bigger than they will be for fourth quarter. Although if you go pre-pandemic in the past, fourth quarter was always bigger than third quarter given it's holiday. Is the change just around the wholesale business and its growth? Or is there something else going on that would really make structurally third quarter bigger now? And then if you kind of maybe just talk about Gymboree, and as that business grows, how that should impact fourth quarter, that would be super helpful.

Yes. I'll turn it over to Sheamus for the first part, and then I'll take it back for Gymboree.

Yes. I think as Jane said earlier, in terms of the importance of back-to-school, it is a critically important time period for us where we do see a significant amount of revenue uptick in Q3. So that has definitely driven more revenue and a disproportionate amount of revenue into Q3. So it's a critically important quarter for us because of that. I think that, that's what you're seeing in our expectations in terms of the performance split between the quarter.

And then from a Gymboree perspective, I can take that part of the question. Gymboree, we're planning when we think about Q3 into Q4, Gymboree, we've talked about before, is a very holiday-centric business. So we're going to continue to see really exciting growth from the Gymboree brand as we head into Q4. And a lot of that is going to be surrounded by an incredible marketing campaign. We had announced Mandy Moore. We've continued to see really positive success with her throughout the year. And really where it kicks into gear as the tail end of Q3 heading into Q4 as we bring in our expanded holiday assortment. This is where we had a lot of opportunity last year where we saw very early selling. We oversold our inventory so when we head into December, we have a lot of opportunity in the November, December time period. So we're very optimistic about the continued growth of Gymboree, especially as we kick into the key holiday selling time period.

I think the last thing I would just add to the first part of that, as stores have become less penetration for us, I think that in earlier years, when stores were a higher penetration, I think they do have a slightly better performance relative between Q3 and Q4 because of some of the events and a longer, a longer time period. But as we've shifted to more digital, we do see a little bit more volume in Q3 versus Q4.

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.