Children's Place Inc (PLCE) 2015 Q1 法說會逐字稿

Welcome to the Children's Place third-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 statement 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 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. Good morning, everyone. Our very strong first-quarter results reflect the significant progress we are making across our multiple strategic growth initiatives. Some highlights for the quarter include: top sales increased 0.7%, our fourth consecutive quarter of positive comps; US comp sales increased 0.5% in the quarter; Canada comp sales were up 2.3%; adjusted gross 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 FY15 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 12 earnings call, we discussed that 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 our comp trend improve from the negative mid single-digits 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. 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 through the repurchase of approximately 648,000 shares and dividend payments. 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 have returned over $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 systems 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, upgrades to our e-commerce website and mobile site permit advanced functionality and capabilities on our US and Canadian websites. Enhancements to our CRM capabilities allow us to focus on customer segmentation to increase acquisition, retention and engagement.

Moving on, I want 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 200 stores through 2017. In the first quarter, we opened 2 stores and closed 7, for the full year, we plan to open 5 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. We expect this will start to positively impact sales in Q4 of 2015.

Three, further SG&A leverage. We've made great strides in reducing SG&A in the last two years. We are committed to further leverage SG&A in 2015 despite making investments throughout the year to support our systems transformation initiatives. In 2013, we reduced SG&A expense by $25 million and 60 basis points year-over-year. 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 company-wide transformation speaks to the strength and focus of our entire management team.

Four, inventory management and receipt discipline. Our new assortment planning tool continues to indicate further inventory reductions. 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 metrics, 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.

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 face 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, systems, process, and talent. I want to thank the team for their persistent and tenacity. 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 unlock 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. 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 a sales transfer rate in excess of 20% to nearby stores or to e-commerce as a result of these store closures. In those markets where we have closed stores, we are seeing the neighboring stores along with e-comm become more productive from both a comp sales and profitability perspective. These results further our commitment to executing this optimization program, while dramatically slowing down new store openings.

Channel expansion. We are confident about the long-term growth potential associated with our expansion into alternative channels of distribution. We are further developing our relationships with our international and wholesale partners. At the same time, we're making the necessary investments in technology to enable us to accelerate our channel expansion, grow 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 store and SKU to optimize our overall buys and better match breadth of assortments with depth of inventory. We piloted this tool with our summer 2015 [buy in] outlet, where we saw a double-digit reduction in our unit buy. We realized some of that benefit in Q1 as our gross margin in outlet was significantly higher compared to last year driven in part by our success with this tool. We followed this by rolling this tool out to the back-to-school and fall 2015 buys for all channels, where we saw a high single-digit reduction in units. Early indications on our holiday 2015 buys are pointing to a mid single-digit reduction in overall unit receipts.

Moving on to our new allocation and replenishment tool. This module drives 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 is 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 e-receipt capabilities for the second half of the year and the improvements to our search engine optimization, which are already in progress. Two, customer retention. Our recently completed work on 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 use of online account creation and access to point and rewards. We now have enhanced lifecycle marketing capabilities enabling us to target those customers best suited to be loyalty members. 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 of the United States, while enhancing vendor management. In the first quarter, we began making vendor payments deploying our cash in Asia, improving US 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 the low single-digits decrease. Carryover inventory was down 14% versus last year. We are very pleased with these results. 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 above the high end of our guidance range on a positive sales comp of 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 increased in AUR and 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 a slight increase in AUC 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 spent 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 through 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 that 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 to 70 basis points compared to last year.

Now on to full-year 2015 guidance. We project FY15 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 that 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 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 to 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 FY15. 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 previous guidance of $75 million to $80 million. This reflect our ongoing efforts to drive efficiencies in spend as well as savings associated with building internal difficulties 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.

(Operator Instructions)

Dorothy Lakner, Topeka Capital Markets.

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.

I Just wondered if you could speak a little bit more to the opportunity there as you move forward? Particularly as you continue to implement the new systems?

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 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 Place stores and outlet.

Betty Chen, Mizuho Securities.

I'd like to add my congratulations as well, very nice quarter. Jane or Mike, can you talk a little bit about some of the new tools? We've noticed definitely more personalization in term of the messaging, that seems to be much more actionable. Can you speak a little bit more to that? Whether, while early in the process, you've had any sort of leads or learnings?

Then my second question was regarding the upcoming markdown optimization tool. In the past, retailers have spoken quite favorably of the margin opportunities from such capabilities, is it possible for you to maybe quantify what that benefit may be? The timing of that? Thanks.

Sure. Thanks, Betty. As far as the personalization is concerned, we spent last year working with our outside partners on segmentation. We've segmented our customer file. We finished that work at the end of last year.

We've also now retained a new email service provider, who has the capabilities to take that segmentation analysis and focus it, as you mentioned, into much more personalization. So we have 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 email 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 buy -- just as an example, do you have boys? Do you have girls? How old are they? Do you have infants?

So we can tailor the message and the product offerings. Then also most importantly, we can tailor the promotional offers as well as we further understand which customers response to promotions, which customers respond to regular price and so on and so forth. So it's been very eye-opening and very enlightening. We're 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, work will be initiated in the third quarter of this year on a company-wide markdown optimization tool. This will complete the three major pillars of our inventory management efforts.

We piloted some analytics around pricing optimization in our outlet business and saw 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.

Susan Anderson, FBR Capital Markets.

Congrats also on a very good quarter. I was wondering, could you just dig in a little bit deeper on AUR? Because the performance was really good. Did you guys see anything else driving that? Such as like pricing? Or just a better promotional environment?

Well, 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. Then when you look at what that did to drive the merch margins and then the gross margins, I think that's really where it's at also as far as inventory. As we said, we came into the quarter with inventories down 8%. That certainly helped us having a clean inventory position.

Anna Andreeva, Oppenheimer

Congratulations on a great results. 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? How are things trending so far in May?

Then I guess to Mike, now that you are seeing a top line upside with margin upside like this -- it's been a while since Children's Place experienced this. Maybe talk about some of the bridge to get to double-digit margin goal over time?

Sure. As we said on the call, we were down mid single-digits on March 12, at the time of our call. We had an outstanding March period after that with the response to the product, as we said.

Then in April, we certainly saw the lull 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. We don't give monthly guidance, obviously, but I would tell you that we're off to a very nice start.

Sure. From a long-term operating margin perspective, we've 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; two is optimizing our store, real estate portfolio, fleet optimization; three is really the expansion of the alternative channels of distribution. So we're well along the way in our systems transformation; SAP foundation implemented in 2014, we've added our assortment planning tool.

We'll go live with our allocation and replenishment tool for back-to-school. We'll begin pricing in the third quarter -- begin work on a pricing tool in the third quarter. Obviously, the digital work with -- we've completed so far with customer segmentation. It's 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.

Then obviously with the alternative channels of distribution, we are pleased with the results of wholesale and international. Obviously, we're making the investments we need from a technology perspective to help really grow significantly in those channels.

Of course, SG&A is also a component. Obviously, product is number one here. We've been able to maintain our market share over the past five years. So, even without the systems, we've done a great job on product. We're quite optimistic going forward.

John Morris, BMO Capital Markets.

Congratulations everybody on a great quarter; great start to the year. Jane, probably a question for you. As you look ahead to the back half in terms of the product and the merchandising especially since you've been so much more actively involved, tell us a little bit about the opportunities 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 had taken over direct response -- reporting responsibility for design. 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 in -- really in the August -- July/August time period. She was able to affect some of the back-to-school product. Then fully affect the line from September forward. She has a very, very strong kids' design background, understands the customer inside and out and also understands moms very well.

So I think that you guys will be extremely pleased to see her products come on. There's not a major departure from what we're doing. She understands the DNA of the Children's 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 years. So even without systems, our product has been our strength and really has resonated with mom.

I think when you think of some of the opportunities in the back half of the year, I think that there is opportunity certainly around owning the classifications better as we continue to learn every single year. We continue to fine-tune that.

I think that there's opportunity to cut CCs back. There's opportunities with our new tools to get much more focused on inventory and understanding by item what is going to produce and what CCs that we can cut out of the mix in order to improve profitability.

So I think the combination of that product that Jennifer brings, plus the systems and our ability to continue to flow newness 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 are going to bode well for the second half of the year.

Janet Kloppenberg, JJK Research.

Congratulations on a good quarter. Jane, I was wondering if you could talk a little bit about the categories of strength you witnessed in the first quarter? If there's any categories 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? Just lastly, is the depreciation step-up associated with the IT investment? Or some e-commerce systems investments? I like to better understand that. Thank you.

Sure. Thanks, Janet. I would tell you that the performance in the quarter was very, very consistent. There's really not a lot of ups and downs to report. The only thing that I would add to that is around the Easter time period, as we had said, the response to the fashion product was outstanding. We 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.

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.

We're seeing our assortment planning tool indicating declines in unit purchases in the high single-digit range for back-to-school in fall. Holidays is looking for a decline in the mid single-digit range. So inventories seems to be in good shape.

We go live with our allocation replenishment tool for back-to-school. We are starting to see some cotton price benefit with apparel AUCs down slightly in the back half of the year. So all of that gives us the confidence to guide to an increased in the 80 to 100 basis point range.

Marni Shapiro, The Retail Tracker.

Congratulations, the stores look fantastic. Could you talk a little bit about -- we hear a lot about the girls business and Easter dresses and the fashion. Just a little update on the boys business? If it trended as well -- as strongly? An update on the license business? You had some nice launches in support or especially on the boys side in super heroes. If you could just talk a little bit about that?

Sure. Thanks, Marni. 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 brought into the boys business early in the quarter in Easter. Things that I would highlight would be, the skinny chinos -- the colored skinny chinos were outstanding for us. Then a lot of our short programs, we upgraded with ship leads in design and patterns versus maybe the more simple basic shorts that we had last year. Those were excellent.

So, I think the fashion pieces that mom is responding to on the boy side is exciting. With Jen, as I said, coming onboard, 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. That was really exciting.

Brian, who runs merchandise for us is very strong in the license and in the license market and is spending a lot of his time making sure that we're on top of future events that are coming up, movies, et cetera. So, you're going to continue see more of that from us.

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