Children's Place (PLCE) Prelim. Q4 Results Miss Consensus

The Children’s Place, Inc. (Nasdaq: PLCE), the largest pure-play children’s specialty apparel retailer in North America, today announced preliminary unaudited results for the fourth quarter of 2022.

Jane Elfers, President and Chief Executive Officer, said “We now expect to report a net loss in the range of ($52) million to ($57) million for the fourth quarter. This net loss was primarily due to a deterioration in gross margin for reasons not expected when we provided prior guidance, particularly a macro-economic environment in the fourth quarter that proved to be far more challenging for our core customers than we originally anticipated. As a result of this challenging environment and significantly higher input costs, including decade-high cotton costs and other supply chain costs, the Company made several forward-looking strategic decisions regarding the level and composition of its inventory, which negatively impacted short-term margins but significantly reduced higher cost, end-of-season merchandise, putting us in a much healthier inventory position as we enter 2023.”

Ms. Elfers continued, “Our 2022 operating results were negatively impacted by approximately $125 million versus 2021 due to three input costs: first, an approximate $65 million incremental impact to our 2022 operating results due to the spike in cotton prices, our largest product input cost; second, an approximate $30 million incremental impact to our 2022 operating results due to having to utilize airfreight amidst the worldwide supply chain delays caused by the COVID-19 pandemic; and third, an approximate $30 million incremental impact to our 2022 operating results from the spike in container costs, also due to the COVID-19 pandemic. As we enter 2023, cotton prices are down approximately 40% from their 2022 highs and are expected to continue to decline in 2023, container costs are now approaching pre-pandemic rates, and we have effectively eliminated the use of air freight in 2023 as the worldwide supply chain moves back in line with historical norms. While we still need to work through inventory in the front half of 2023 that has these higher input costs embedded in it, beginning in the back half of 2023, the combined impact of these three input cost reductions is expected to result in an annualized benefit to our operating results of more than $100 million.”

Ms. Elfers concluded, “The significant reduction of input costs and the strong focus on expense and inventory management led by our new CFO, Sheamus Toal, position us well to deliver for investors in 2023. Combined with our industry-leading digital penetration as a result of our successful digital transformation that began several years ago and was completed during the pandemic, our strong stable of brands, the success of our fleet optimization strategy and our rapidly growing Amazon business, we expect to return to double digit operating margins for the back half of 2023 and beyond.”

Fourth Quarter 2022 Preliminary Unaudited Results While the results are still preliminary and subject to the Company’s detailed year end closing process and its independent audit, the Company now expects to report the following results for the fourth quarter of 2022:

• Net sales are expected to be approximately $454 million to $456 million, versus the Company’s prior guidance of $460 million at the low end, and down approximately $52 million to $54 million, or down approximately 10.2% to 10.6%, versus last year.
• Operating loss for the quarter is expected to be in the range of (14.2%) to (15.6%) of net sales and adjusted operating loss is expected to be (13.4%) to (14.8%) after excluding approximately $3.6 million of adjustments, primarily related to store level asset impairments and fleet optimization costs to close certain retail locations, versus the previous guidance of adjusted operating income in the range of 2.5% to 3.3% of net sales.
• Loss per share for the fourth quarter of 2022 is expected to be in the range of ($4.24) to ($4.63) and adjusted loss per share is expected to be in the range of ($4.02) to ($4.41) after excluding approximately $3.6 million of adjustments, as compared to the Company’s previous guidance of adjusted earnings per diluted share of $0.50 to $0.75.
• Fourth quarter inventory is now expected to be up 5.5% to 6.5% versus last year, compared to a year-over-year increase of 24% ending the third quarter of 2022. Carryover inventory levels are expected to be significantly lower than we originally projected.

(Consensus sees Q4 EPS of $0.55 on revenue of $467.8 million)

The Company stated that factors leading to a significant net loss in the fourth quarter included:

• Macro-Economic Environment - The macro-economic environment in the fourth quarter proved to be far more challenging for our core customers than originally expected, resulting in lower sales than projected and the need for increased promotions as the Company worked to drive sales and reduce seasonal inventory levels.
• Inventory Optimization - In early December, in light of the challenging macro-economic environment, the Company made several forward-looking strategic decisions regarding the level and composition of its inventory, which negatively impacted short-term margins but reduced higher cost, end of season merchandise, putting us in a much healthier inventory position as we enter 2023. These strategic actions included the acceleration of inventory turns that enabled the Company to liquidate units with higher built-in input and other supply chain costs. In addition, other decisions were made as the quarter progressed and at quarter-end that contributed to gross margin deterioration, including the write down of non-go-forward inventory and a sizable charitable donation of inventory to our philanthropic partners at Delivering Good.
• Transactional and Support Costs – The Company incurred higher levels of fulfillment expenses due to unplanned increases in both units shipped and split shipments, which resulted in deleveraging of fulfillment and shipping expenses. The Company also experienced an increase in selling, general and administrative expenses in an effort to drive sales and due to inflationary pressures, which hindered the ability to reduce expenses as much as originally planned.

Certain of the Company’s preliminary unaudited results are reported in this press release on an adjusted, non-GAAP basis. Adjusted earnings (loss) per diluted share and adjusted operating income (loss) are non-GAAP measures, and are not intended to replace GAAP financial information, and may be different from non-GAAP measures reported by other companies. The Company believes the income and expense items excluded as non-GAAP adjustments are not reflective of the performance of its core business, and that providing this supplemental disclosure to investors will facilitate comparisons of the past and present performance of its core business.

The Company plans to provide further commentary on the fourth quarter and full year 2022 and the Company’s outlook for 2023 in March as part of its earnings release and conference call.

This press release does not contain all the necessary information for an understanding of the Company’s results of operations for the fourth quarter of 2022 or the full year 2022. As the Company completes its quarter-end and fiscal year-end financial close processes and finalizes its financial statements for the fourth quarter and full year 2022 including completing the analysis and assessment of the Company’s year-end tax provision, it is possible that the Company may identify items that require it to make adjustments to the preliminary unaudited financial information set forth above, and those adjustments could be material. The Company undertakes no obligation to, and does not intend to, update financial information prior to the release of final fourth quarter and full year 2022 financial information currently scheduled for March.

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