Good morning, and welcome to the Children's Place Fourth Quarter and Fiscal Full Year 2022 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 fourth quarter and full-year fiscal 2022 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.

Jane Elfers - President and Chief Executive Officer

Thank you and good morning, everyone. After my opening remarks, I'll turn it over to Maegan, who leads our marketing and Amazon teams to review our significant progress in 2022 and highlight our 2023 plans for these two key growth areas. Maegan will turn it over to Sheamus to review our Q4 and full-year 2022 results and provide our Q1 and full-year 2023 outlook. Sheamus will turn it back to me for closing comments.

As we announced in early February, our 2022 operating results were negatively impacted by unprecedented input costs - the spike in cotton prices, air freight and container costs. While we are working through higher cost inventory in the front-half of 2023, input cost reductions, our focus on expense and inventory management and our strategic growth initiatives, our plan to drive double-digit operating margins in the back-half of 2023. Over the last several years, we have successfully executed a strategic transformation of The Children's Place focused on four key pillars - Superior product, digital transformation, wholesale and international expansion and fleet optimization.

When we embarked upon this initiative, we analyzed the highly competitive environment, rapidly changing consumer shopping trends and birth rates which as of 2017, had been falling for a decade. We determined that in order to successfully compete, we needed to capture market-share, while positioning ourselves to meet the needs of our increasingly digitally savvy core millennial customer along every step of her purchase journey. We made several key strategic decisions during the course of our transformation, some of which led to short-term volatility in our results, but all of which have positioned the company for sustained long-term growth on both the top and bottom-line.

With our multiyear transformation now complete, we are focused on our next phase - top and bottom-line growth. Our growth will be underpinned by the same four strategic pillars - Superior Product, Digital Dominance. Wholesale and International Expansion, and an Optimized Fleet. Today, we thought it would be helpful to review how our strategic initiatives have positioned us for long-term growth with our digitally savvy core millennial customers and the Gen Z customers right behind them. So, let's start with our successful digital transformation.

Prior to the onset of the pandemic, we accelerated our digital transformation with a $50 million investment to upgrade our platform systems and omnichannel capabilities. This was a necessary and timely initiative that enabled us to keep pace with our core millennial customer - a younger consumer who is rapidly evolving into a digital-first consumer. We know our customer well and we recognized long before the pandemic that our millennial mom shift to digital was happening, and now as we are about to enter our fourth year since the pandemic hit, our preference for online shopping has only continued to increase.

Without that investment, we would not have been able to service our customers when all of our stores were shut-down for several months at the start of the pandemic, and we would not have the significant competitive advantage of our industry-leading digital penetration that we have today.

Importantly, in order to take full advantage of our customer's strong preference for online shopping, we focused on rapidly shifting our primary acquisition channel from digital to digital from stores, and we have achieved our desired results in a remarkably short period of time with Digital Now, our primary acquisition channel. We then made the strategic decision to aggressively promote our products in order to capture market share, and then overstored kids retail space. One year later, we saw the benefits from this strategy as we captured pricing power for our core TCP brand when they were approximately 2,000 fewer mall base kids stores.

Concurrently, our design team began rejuvenating the iconic Gymboree brand, an acquisition that has strategically positioned us to be a more powerful competitor, and what has been for us an under-penetrated toddler demographic. And during the pandemic, we recognize the opportunity to further accelerate our transformation. We launched three new brands, each one targeting an untapped or under-developed market share opportunity and a higher income demographic than our core TCP customer.

Our brand expansion strategy is a key element of our market-share growth strategy, as these new brands gives us the opportunity to significantly expand our customers' lifetime value. Maegan will cover this in more detail in her prepared remarks.

Looking ahead to what we believed was going to be a significantly larger and higher-margin digital business post pandemic, we further invested in our industry-leading digital channel with a focus on expanding our digital fulfillment capabilities. We partnered more closely with Amazon, and we invested in the Amazon business and achieved significant growth with this important wholesale partner, and are now positioned for sustained growth with Amazon in 2023 and beyond.

Based on our millennial customers' rapidly evolving preferences for shopping online, we accelerated our fleet optimization initiatives by closing almost one-third of our stores within 20 months without additional cost to us given the lease flexibility we had built into our model.

Our store closing initiatives enabled the structural change to our digital-first business model and significantly lowered occupancy expense on our remaining fleet. By the end of 2023, our fleet optimization strategy will be substantially complete, positioning us in the optimum brick-and-mortar locations to service our millennial and Gen Z consumers' omnichannel shopping preferences.

And lastly, to support our strategic reset, we invested in and transformed our marketing function, positioning us to optimize every touch point along our younger, digitally savvy core customers' purchase journey. Our data-driven marketing strategy is designed to support top-line growth by increasing new customer acquisition, increasing customer retention and loyalty, and importantly, significantly increasing customer lifetime value by supporting a synergistic shopping experience across our expanded family of brands.

We made strategic investments across every area of the marketing organization. Our teams both internal and external are reset research and processes and new state-of-the art marketing tools and systems. As we have discussed several times, we have historically underfunded marketing. Our marketing strategies produced strong returns in the back-half of 2022, particularly in the areas of brand awareness and acquisition. Now that we've seen strong returns from our marketing transformation, we believe we can unlock significant topline growth opportunity through increased marketing investments in 2023 and beyond, more closely aligning our marketing spend with industry norms.

Despite major challenges for our team, our business and our customers, our work during the pandemic accelerated our digital transformation by approximately five years, allowing us to successfully complete our multiyear strategic reset at the end of 2022.

As we move into our next phase, sustained growth, or strategic pillars remain consistent. So, let's take this opportunity to review the current status of each of them. Starting with our first strategic pillar - Product. Our core TCP brand continues to strongly resonate with our customers in 2022. The strength of our core TCP product is due in large part to our long-tenured, best-in class design team's deep understanding of our customers' wants and needs. The consistent strength of our core TCP product gave us the confidence to explore new brand opportunities. To that end, we launched three new brands; Gymboree, Sugar and Jade and PJ place.

With respect to market share, birth rates peaked in 2007 and have not returned to those levels in the 15 years since, and future projections do not have birth rates approaching 2007 levels. Counting on an uptick in birth rates to solve for declining sector market share is not a winning strategy. Each of our new brands is strategically positioned to target an underdeveloped or untapped market share opportunity. It is rooted in our core competencies and targets a higher income demographic than our core TCP brand.

With the addition of these three brands, we can realize a significantly higher customer lifetime value than would be possible with just a single brand, making this complimentary multi-brand approach an important part of our future growth strategy. In addition to expanding our market-share and increasing customer LTV, our family of brands provides us with additional opportunities to partner with our wholesale and international franchisees to further grow brand awareness, market share and increase our top and bottom-line.

Starting with Gymboree, the Gymboree customer is a higher income customer and is less price-sensitive than our core TCP customer. Gymboree targets the key toddler demographic ages two to six, which is an underpenetrated demographic for TCP. With the Gymboree brand, we are acquiring customers whose children are very young, and as the child grows, we introduce those customers to our wider stable of brands. For example, a Gymboree toddler girl can grow up wearing the iconic Gymboree bow-to-toe look and then move on to TCP big girl product, and then onto our Sugar and Jade Tween line and eventually into our Gen Z PJ Place offerings, before she eventually starts a family of her own and the whole cycle repeats.

Our launch of Gymboree on Amazon last fall was a very important step in Gymboree's growth trajectory, as it provided us with significant acquisition vehicle from a higher income consumer. Looking ahead to 2023 and beyond, we are planning to increase Gymboree's marketing investments to further drive brand awareness and acquisition. We now anticipate that the Gymboree brand will reach our initial revenue goal of $140 million in sales in full year 2025.

Moving on to Sugar and Jade. The Tween market is a fragmented market that is estimated at approximately $8 billion. Our largest TCP business is our big girl division, and due to our leadership position in big girl apparel and accessories, Sugar and Jade is a natural extension of that core competency. The strategy behind Sugar and Jade keeps our highest spending customer, our Big Girl customer and our brands longer and further expands their lifetime value.

We are entering our second year with Sugar and Jade and from a product point of view, we have a clear understanding of what categories resonate with the Tween customer. With our refined product strategy, our next step in Sugar and Jade's evolution is to build brand awareness to reach a wider audience. This increased marketing investment is planned to begin for holiday 2023.

And lastly, PJ Place. PJ Place as a one-stop shop for all of our sleepwear and loungewear. We have a leadership position in kids sleepwear and matching adult sleepwear. In fact, within our sleepwear business, adult is our fastest-growing category. This new sleep and lounge product also gives us an opportunity to be relevant to an older Gen Z customer and younger millennials, before they start families of their own. PJ Place houses all of our sleep and loungewear products and brands, TCP, Gymboree, Sugar and Jade and our new PJ Place sleep and lounge product in one easy to shop tab on our website.

Looking ahead to 2023 and beyond, we are focused on continuing to expand our total sleep and loungewear market share across all of our brands and partners in this fast-growing category.

Moving on to our second pillar - digital transformation. For full-year 2022, digital represented 48% of our retail sales versus 33% in 2019. We continue to deliver industry-leading digital penetration and our highest operating margin channel in 2022, supported by marketing initiatives focused on optimizing our channel results. Approximately 60% of our acquisitions came through our digital channel in Q4. Our millennial mom's clear preference for the ease and convenience of shopping for her kids online is here to stay, and we believe our rapid and successful shift to digital as our primary acquisition channel gives us an important competitive advantage as we work to acquire and retain millennial moms and begin to market to the oldest of the Gen Z cohorts, who are now starting to become our next-generation of customers.

We are excited about our digital growth opportunities and our highest operating margin channel, and based on the success of our digital transformation, the strength of our digital business and our increased investments in this channel. Digital is projected to represent over $1 billion in sales by full-year 2025, or over 60% of our total retail sales versus 33% of our retail sales in 2019, doubling our digital penetration in six years and further cementing our successful transition to a digital-first retailer. As a point of reference, our $1 billion digital revenue forecast does not include digital revenue from our wholesale or international businesses.

Moving on to our third strategic pillar - Alternate Channels of Distribution. Our Amazon business continued to outperform our projections in 2022. Amazon is a key growth focus in our wholesale distribution strategy, and in 2022, we strengthened our Amazon partnership. Amazon is our second-highest operating margin channel, a significant contributor to our top and bottom-lines, and a very important consumer acquisition vehicle with many of these customers having higher income levels.

Amazon represents a major growth opportunity in 2023 and beyond, and Maegan will further discuss Amazon in her remarks.

And with respect to our fourth and final pillar - Fleet Optimization. We have made outstanding progress on our fleet optimization initiative over the last few years. We have closed 315 stores since 2019, representing 34% of our fleet. If we had stayed locked into our overstored model with onerous fixed costs and multiyear double-digit traffic declines even before the pandemic, I believe we would have followed the path of dozens of other retailers who permanently closed their doors before and during the pandemic. Instead, we have transformed into a dynamic variable based transactional cost structure with our industry-leading digital business, thereby, reducing risk and paving the path towards sustained top and bottom-line growth.

Looking ahead, we are now anticipating that we will close approximately 100 more stores, with the bulk of those store closures occurring in 2023. This will leave us with an optimized fleet of approximately 500 stores as we enter 2024. Our fleet optimization strategy has been a critical part of our company's structural reset, and aligns with our current and future customers' digital shopping preferences.

The data is clear. Millennials have a strong preference for online shopping, and this is only projected to continue to increase with Gen Z parents. I think it's important to note that we have a very small newborn and baby business, so our customers are overwhelmingly younger self purchasers versus other retailers, we still have a much larger share of older customers including grandparents and gifters, many of whom, for example, still prefer an in-store experience as they drive to the store to pick up the perfect baby gift. We are confident that our projected fleet size of approximately 500 stores allows us to maximize our omnichannel capabilities and grow our industry-leading digital penetration and service young digitally savvy customers through our highest operating margin channel.

Thank you, and now I will turn it over to Maegan to discuss our marketing transformation and our Amazon channel.

Maegan Markee - Senior Vice President, Marketing

Thank you, Jane, and good morning, everyone. As Jane mentioned, our marketing transformation over the past few years enables us to capitalize on maximizing our interactions with our younger, digitally savvy, millennial and Gen Z customers, and to support the growth of a significantly larger and stronger digital business coming out of the pandemic.

Starting in the back-half of 2022, we felt confident in our ability to concept, build, deploy and optimize fully-integrated, creative marketing strategies, paired with a robust media mix aimed to reach, inspire and convert our shoppers at every stage of their purchase journey with the Children's Place family of brands. Our data-driven marketing transformation was designed to support the significant future top-line opportunity we've been discussing for several quarters, by increasing new customer acquisition, customer retention and loyalty. And importantly, significantly increasing customer lifetime value through our marketing efforts and our new brand launches.

As Jane discussed earlier, the recent launch of our Gymboree, Sugar and Jade and PJ Place brands have not only aided in our success in driving overall brand awareness, and our ability to seize untapped market-share opportunities, but has also lifted customer lifetime value.

Through our family of brands, we've been able to provide market differentiation through our unique and trend-right product assortments, and provide value defined beyond just price that is delivered through quality, fit, versatility and durability, solidifying the Children's Place leadership position in the children's apparel industry.

In the short time since launching these brands, we've seen strong results as it relates to customer lifetime value, spend and frequency. To date, our analysis shows that on average our multi-brand shoppers - customers who shop at Children's Place and one or more other of our brands spend two and half times more than single-brand shoppers. These multi-brand shoppers have a frequency of more than two times a single-brand shopper, and have a higher spend per purchase of 15% more than a single-brand shopper. Said in another way, customers that shop two or more of our family of brands are far more valuable than our single-brand shoppers.

Now let's move to recap our very encouraging, full funnel strategy results from the back-half of 2022, starting with top of funnel. With top of funnel brand awareness being a key area of focus for us in Q3 and Q4, the Children's Place, Gymboree, Sugar and Jade and our new brand launch, PJ Place cut through the noise experienced by other retailers during this timeframe. It was a curtains up moment for our brands and we are incredibly proud of the results.

We partnered with some of the largest celebrity names in mainstream media, Including Kevin Hart, Kris Jenner, Khloe Kardashian, Mandy Moore and Tyler Cameron. Across our back-to-school and holiday campaigns for the Children's Place, Gymboree and PJ Place, we garnered over 143 billion impressions across our earned and paid media efforts. To put this in perspective, our 2021 back-half campaigns represented just 0.6% of the reach that we achieved in the back-half of 2022.

These incredibly disruptive brand campaigns also translated to positive topline results. For every dollar we invested, we made close to seven times back in top-line revenue, and our blended return on ad spend of $6.75 is well above the industry benchmark for top of funnel performance.

Moving onto our social dominance. While our followers continue to steadily increase, the true measure of success across social media is the quality of our followers and the level of engagement. Our Q3 and Q4 brand campaigns have proven that the Children's Place brands continue to hold the number-one position on social media, driving industry-leading results, representing 70% of total social impressions and representing 59% of total social interactions amongst our children's apparel retailers competitive set.

The Children's Place family of brands dominated social media to take the number-one rank across impressions and interactions for Q3 and Q4 of 2022. All of these successful top of funnel brand activations fueled our growth and acquisition. In fact, U.S. acquisition during the fourth quarter of 2022 was up 3% versus last year, despite being up against a record setting Q4 in 2021. Even more impressive when compared to Q4 of 2019, acquisition is up 11%, despite having significantly less stores, which further validates our successful digital acquisition strategy.

When looking at full-year 2022, acquisition was up 3% versus 2021, a banner year for the industry, and up 7% versus 2019, despite having 34% less stores. Looking ahead to 2023, and based on the successes of our recent strategies, we are planning for growth in our customer file driven by digital acquisition.

Now, let's move further down the funnel and discuss retention and loyalty. Consolidated U.S. retention was up 4% in Q4 of 2022 versus Q4 of 2021. As a customer-centric organization, we think Mobile First. Our millennial and Gen Z shoppers are connected to their mobile devices, and mobile is the cornerstone of our digital strategy. In Q4, 77% of our U.S. 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 Q4, our mobile app accounted for 18% of our U.S. digital transactions versus 14% in Q4 of 2021, fueled by an impressive 15% increase in mobile app customers versus last year. Our mobile app customers spend and shop two times more than our non-app customers.

Our loyalty and private-label credit programs also continued to be strong retention vehicles for our brand. Our consolidated loyalty penetration was 78% of U.S. sales in Q4 of 2022 versus 74% in 2021, showing meaningful growth across our largest customer base, and our private-label credit penetration was 22% of U.S. sales in Q4 of 2022.

While we saw strong acquisition and retention results in 2022, we also experienced challenges with respect to customer spend due to the unprecedented inflationary environment which disproportionately impacted our core customer. While we were able to maintain our customer frequency in the U.S. versus 2021, we had a decrease in customer spend of 7% versus 2021.

Now let's move on to our historical marketing investments, our future investment plans and their respective returns. As we've discussed before, The Children's Place has historically been underfunded with respect to marketing versus our specialty peers. Our marketing spend measured by our ad spend to sales ratio was less than 2% in 2022, well below the industry benchmark of over 3%.

Despite our relative underfunding in 2022, we delivered a blended return on ad spend of $10.52 which is significantly above the industry benchmark of $6 to $7. This clearly signals opportunity to further drive incremental sales through increased marketing investment, while still delivering a healthy return.

Now let's move on to Amazon. Along with our decision to accelerate our digital transformation, our store closure plans and our marketing transformation, we also accelerated our Amazon initiatives. The significant time and resources including inventory and marketing investments that we have dedicated towards building our Amazon marketplace over the past two years has resulted in significant growth, with Amazon delivering another strong performance in Q4.

As we shared on our last call, we achieved record-high Amazon sales during the prime day period in Q2. And sales continued to build throughout the back half of the year. We participated in the Turkey Five Thanksgiving promotion in Q4, which resulted in the largest day of Amazon sales in our history, exceeding our Q2 prime day record. Our Q4 Amazon site sales were up 120% versus Q4 of 2021, fueled by a 200% increase in traffic year-over-year. Our Q4 performance capped a strong end to the year with site sales up 118% in full year 2022 versus full-year 2021, fueled by a 197% increase in traffic, serving as a strong indicator of the potential we have with this partner in 2023 and beyond.

Marketing is a key component to driving the Amazon business, and our successful marketing strategies are driving the significant year-over-year increases in traffic. Ad attributed sales with Amazon were 49% of total Amazon channel sales for 2022, up 308% versus 2021 with a strong double-digit return on ad spend.

Last fall, we launched our iconic Gymboree brand on Amazon, and the Amazon Gymboree business has consistently built since our launch and exceeded our expectations for 2022. This momentum was partially fueled by an enhanced advertising strategy built around maximizing the brand visibility in high-impact placements. Our Gymboree ad performance has been recognized by Amazon as a case study for successful cold start brands, based on the strong performance with over 50% of total Amazon channel sales coming through ad attributed sales in 2022 at a very healthy return on ad spend, which signals the significant opportunity ahead to drive incremental sales-through increased marketing investments.

We anticipate that our partnership with Amazon will continue to strengthen. We'll talk more about the future opportunities as the year progresses, but we see opportunity to pursue both expanding our family of brands through the Amazon channel as well as international growth opportunities.

Looking ahead to 2023 and beyond, we have significant growth potential from our marketing transformation, our realigned marketing spend and our strong Amazon partnership. I am proud to be leading these important initiatives.

Now, I will turn it over to Sheamus.

Sheamus Toal - Senior Vice President, Chief Financial Officer

Thank you. Megan, and good morning, everyone. I would like to begin by providing some context to the full-year 2022, and more specifics on our fourth quarter results. I will then provide some remarks with respect to our outlook for 2023 and our strategic vision for the future.

First, as a relatively newcomer to the company, I was able to analyze the results of our comprehensive multiyear transformation with fresh eyes, and I am confident that our strategic reset to a digital-first company provides a strong foundation for consistent and profitable growth in the future, which will drive shareholder value creation.

Let me say a little bit more about the remarkable transition the company has made to a digital-first retailer with a productive optimized store base. Make no mistake about it, this was a change which are younger millennial customer required us to make. I know from my past experience that the journey from a company with over 1,100 stores and a single-digit e-commerce penetration to one having approximately 600 stores and 50% of its revenues online is not easy, but The Children's Place did it. Ignore for a moment the impact of the macro issues, which we and all retailers faced in the last 12 months, including the unprecedented cost of cotton, shipping containers and air-freight, as well as the impact of record inflationary pressures which our customers confronted.

To successfully transform, we needed to practically reinvent the company, and that transition did not come without some ups and downs, both operationally and financially. But it is my belief that the past volatility in our performance is now largely mitigated as we now have the key building blocks of our strategy in place, as Jane described.

We will now begin to fine-tune and capitalize on our new model, and I am highly confident that beginning in the back-half of 2023, our results will prove that our transformation strategy was the right one.

In terms of a brief overview of our Q4, as we previously disclosed our fourth quarter results came in significantly below our original expectations, but were slightly better than our revised guidance in early February. We reported adjusted loss per share of $3.87 per share for Q4. This loss was primarily due to the combination of high product input costs, most notably, cotton and freight and the effects of the macroeconomic environment that proved to be far more challenging for our core customers than we originally expected. In the face of these unforeseen challenges, the company made several strategic decisions with respect to the level and composition of inventory and expenses, which resulted in additional operating margin pressure as we disclosed in our February 6 press release.

In terms of the detailed results, net sales for the fourth quarter decreased $52 million or 10% to $456 million, primarily driven by the macroeconomic challenges. Our U.S. net sales decreased by $72 million or 16% to $372 million, and our Canadian net sales decreased by $4 million or 9% to $43 million. Comparable store sales decreased 12.8% for the quarter. This result was negatively impacted by the challenging macro-environment, resulting in the continued slowdown in consumer demand due to unprecedented levels of inflation and the absence of government stimulus.

Our comparable-store traffic was up approximately 2% and our e-commerce traffic was down approximately 3%, driven by lapping the COVID surge last year, which significantly decreased store traffic and increased e-commerce traffic last year in December and January.

Our overall average dollar sale declined by approximately 10%, driven by a mid-single-digit decline in both AUR and UPT. Importantly AURs remained significantly higher than pre-pandemic levels, validating the success of our updated pricing strategies, which we believe will pay significant dividends as input and transactional costs come down as we move into the back-half of 2023.

Adjusted gross profit margin for the quarter decreased to 17.5% of net sales as compared to 38.2% of net sales in the prior year, driven by the combination of an unprecedented increase in input costs, including cotton and supply-chain costs, the impact of a highly promotional retail environment, temporarily elevated transaction costs due to an increase in the number of packages shipped combined with various strategic initiatives that the company took to reduce inventory and ensure that we entered the spring season with clean, fresh inventories.

Adjusted SG&A was $129 million for the fourth quarter, as compared to a $119 million last year. This increase was primarily a result of the investment in marketing initiatives, as Maegan described, an increase in various sales tax reserves and inflationary pressures on various general and administrative expenses.

Our net interest expense was $5 million for the quarter versus adjusted net interest of $2 million in the prior year's fourth quarter. The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the revolving credit facility and term-loan.

For the fourth quarter, we reflected an adjusted net loss of $48 million or $3.87 per share as compared to an adjusted net profit of $44 million or $3.02 per diluted share in the comparable period last year.

Moving to our balance sheet, we ended the year with cash and short-term investments of $17 million, $287 million of outstanding borrowings on our revolving credit facility and a modest amount of long-term debt, which remains unchanged at $50 million.

During the quarter, we made significant progress in our inventory reduction efforts. As we previously discussed, our inventory still includes certain higher average unit cost inventory that was purchased in 2022 when input costs were at their peak. Nonetheless, we are pleased that we were able to liquidate a significant portion of this inventory in Q4, and importantly, ended the year with lower inventory levels of seasonal fall and holiday inventory.

Inventory levels which had been up 24% as we entered the quarter were only up approximately 4% as we ended the quarter, enabling us to end in a healthy unit position despite the higher carrying costs. As previously disclosed, the increase in inventory as of year-end is entirely due to higher input costs, including cotton and supply-chain costs, as unit inventories are down double-digits versus the prior year.

Our basic inventory which includes several key high-volume categories with limited to no markdown risk accounted for approximately 50% of our on-hand inventory at the end of Q4. This is a larger portion of inventory dedicated to basics than in past years, which helps mitigate inventory risk in a low AURs category.

Moving on to cash-flow and liquidity. We generated $9 million of cash from operations in Q4 versus $66 million last year. As we will discuss in our outlook, our digital-first model positions us well to generate free-cash flow which will ramp up in the second half of the year.

Capital expenditures in Q4 were $14 million. During the fourth quarter, we repurchased 372,000 shares for $14 million, leaving $164 million outstanding on our current authorization. Year-to-date, we have purchased 2 million shares.

During the fourth quarter, we closed 45 locations, and for the full-year 2022 closed 59 locations, ending the year with 613 stores. We continue to carefully evaluate our store fleet and close low-volume unprofitable stores. With over 75% of our fleet coming up for lease action in the next 24 months, we are maintaining meaningful financial flexibility in our lease portfolio.

In a moment, I will provide further commentary about our real-estate rationalization program as part of my discussion of our future outlook. Before I get into our specific guidance, let me provide you with my thoughts on how we are approaching 2023 and beyond. With the support of Jane and the Board, I am making some necessary changes to instill more financial and operating discipline to improve our results, provide more consistent and more profitable growth and drive shareholder returns.

Let's start with our approach to inventory. Fiscal 2022 was clearly a challenging period for the company and the entire retail sector, due to the impacts of record-high inflation and also from an inventory management perspective. These challenges included the impact of decade high cotton prices, record-high container costs and unprecedented reliance on air freight due to supply-chain delays, cost challenges that unlike most other retailers, the company was able to largely avoid in 2021, but they did impact us in 2022.

As we previously disclosed, our 2022 operating results were negatively impacted by approximately $125 million versus 2021 due to three input costs. First, a $65 million impact due to the spike in cotton prices, our largest product input cost. Second, approximately $30 million of air-freight amidst the worldwide supply-chain delays caused by the COVID-19 pandemic. And third, approximately a $30 million increase in container costs also due to the COVID-19 pandemic.

While these costs certainly impacted 2022, it will be a different story in 2023. As we enter 2023, cotton prices are down approximately 40% from the 2022 highs, and are expected to continue to decline in 2023. Container costs are now approaching pre-pandemic levels. And we've 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 reduction in these costs is expected to result in an annualized benefit of more than $100 million. While the effects of these high input costs have impacted all cotton based apparel retailers, the timing or quarterly periods impacted maybe different from company to company, due to the length of each company's production cycle and their use of pack and hold from previous seasons. For us, given our supply-chain process, these higher costs significantly impacted the latter part of 2022 and will continue through the first-half of 2023, but we clearly see the light at the end of the tunnel as these costs have subsided. We fully expect that these headwinds will turn to tailwinds in the second half of 2023 and will position us on a path of consistent sustainable, profitable growth.

As we moved into 2023, we remain cautious with our inventory investments as we believe the challenging environment will persist and our customers will continue to face pressures due to high inflation and lower disposable income. This started with ensuring that we ended 2022 with lower levels of holiday fashion and non-go-forward inventory, which we accomplished in Q4. We also took a cautious view of spring and summer inventory and reduced unit inventory purchase for the first half of 2023, given the high input costs.

Finally, we ensured that we appropriately invested in inventory in the back-half of 2023 to maximize the margin opportunity that we see as average unit cost decline, and we successfully hold the average unit price increases that we realized over the past two years.

We believe these actions together will enable us to deliver consistent margin performance and sustainable improvement in profitability as we move into the back-half of 2023 and beyond as we further enhance our already strong digital presence.

Now, let's shift to the digital transformation we've undergone. As Jane described several years ago, the company developed a strategic plan to transform from a traditional brick-and-mortar business with a website into a dynamic, multi-branded, omnichannel business with an industry-leading digital penetration. This strategic decision not only saved the company during the pandemic, but I firmly believe that had the company not put this plan in place when it did, and had the team not remained laser-focused on achieving it despite the short-term volatility that may have caused, we would not be here today talking about how well positioned we now are for long-term sustainable growth on the top and bottom-lines.

The main goal of this strategy was to increase shareholder value by shifting away from deteriorating mall-based retail locations with multiyear declining traffic trends and high fixed-cost structures to a multi-brand digital experience that increases the lifetime value of our core [Technical Issues] Millennial customers by extending the life of the relationship with them, despite the negative demographic trends of 15 years of declining birth since their peak in 2007. This transformation also required a major shift in our DC strategy and capabilities as we had to rapidly transition from our then existing predominantly store-based distribution center operations to a digital-first fulfillment model.

While this transformation strategy required significant investments and created short-term volatility, it has clearly positioned us for long-term success. Without these investments, we would not have been able to optimize our relationship with our core millennial customer who clearly prefers a digital-first experience. The benefits of this transformation are clear, as we have not only doubled our e-commerce business, which now represents approximately 50% of our revenue, but we've done this during a time period when we've closed approximately half of our retail locations. This digital transformation has enabled us to show dramatic growth in this important component of our business, which has our highest operating margins with room for additional margin expansion and drives the best return on investment for our shareholders.

First, in terms of brick-and-mortar, we previously had more than 1,100 retail stores with very high fixed operating costs due to minimum guaranteed occupancy deals, high support costs, an increasing payroll expenses due to rising minimum wage rates, which have led to a more than 30% increase in our store-level wage rates over the past five years. Importantly, our transformation has allowed us to migrate customers away from underperforming, low-volume stores to a higher operating margin digital channel, which is not burdened with high fixed-cost and consistent negative traffic trends like mall-based retail locations. These real-estate rationalization efforts have led to us ending 2022 with 613 stores with an industry-leading 50% digital penetration.

In terms of our future store footprint, we have spent a considerable amount of time analyzing our portfolio, and depending upon the outcome of various landlord negotiations, we expect to optimize our fleet with approximately 500 retail stores in the best trade areas to service our core customers' omnichannel needs.

On the digital side, as Maegan described, we continued to invest in marketing as this channel represents approximately 60% of our new customer acquisition as our millennial customer clearly prefers to shop online. Positioning us in very short order to have $1 billion digital business. In order to support this consistent and profitable growth, we continue to invest in our distribution capabilities to further improve margins and increase profitability. We are expanding our Alabama distribution center to add further e-commerce fulfillment capabilities with a planned capital investment of up to $40 million over the next 18 months.

This owned DC already operates at significantly lower cost than our third-party fulfillment centers, and once our expansion is complete, we will move more of our fulfillment from third parties to our lower-cost own DC, which is expected to further expand margins.

In summary, our successful digital transit transformation has enabled us to profitably shift away from underperforming stores with high fixed-cost to our variable based digital model where every transaction is accretive to earnings. We believe we will see the benefits of the success reflected in our financial results in the second half of 2023. We believe this strategy has successfully positioned us ahead of our peers for long-term sustainable growth and topline and expansion of bottom-line profitability, driving incremental shareholder value.

Moving to capital allocation, this is a topic on which we regularly discuss with our Board, and I have extensive experience. We have completed our operating plans for 2023, and we will maintain a strong focus on inventory management, reducing the level of inventory investment throughout the year. As we progress through the year and particularly in the back-half of the year when free-cash flow is expected to significantly expand due to our planned double-digit operating margins, we expect to reduce leverage and decrease borrowings by more than $100 million by the end of the year, further positioning us for long-term sustainable growth.

Now, let me take you through our outlook for Q1 and fiscal year 2023. As the company has previously indicated and has been widely reported across the retail apparel sector, the first six months of 2023 are expected to be impacted by several temporary macro headwinds, primarily resulting from higher input costs, most notably cotton. These high input costs which are embedded in inventory that will be liquidated in the first half of 2023 will negatively impact margin rates during the first six months of 2023. However, importantly these input costs have already decreased, and goods purchased for the back-half of 2023 are at much more favorable costs which is planned to result in more consistent and profitable growth through significant margin expansion, resulting in double-digit operating margins in the back-half of 2023.

Our first-quarter guidance also reflects a cautious consumer outlook with significant headwinds, including the macroenvironment, the continuation of record inflation, unfavorable weather trends across the country in March, and lower tax refunds. These are significant factors affecting our lower-income customer.

In light of these pressures, for Q1, the company expects the following: Net sales are expected to be in the range of $335 million to $345 million, representing a decrease in the mid-single-digit percentage range as compared to the prior year first quarter. Adjusted operating loss is expected to be in the range of 6.5% to 8% of net sales. Adjusted net loss per share is expected to be in the range of $1.60 per share to $1.90 per share.

We anticipate that the first-quarter gross margin rate will decline approximately a 1,000 basis-points, reflecting the impact of higher input costs on goods expected to be sold in the first-half of 2023, as well as anticipated higher shrink costs given the current retail environment.

Selling, general and administrative expenses are expected to be up slightly reflecting inflationary pressures and planned increases in marketing, partially offset by reductions in-store payroll due to lower store count and our expense rationalization initiatives. However, on a rate basis, these expenses are expected to deleverage due to the impact of lower revenue. At the end of the first quarter, inventory is expected to be down in the high-single digit percentage range versus the prior year first-quarter, and unit inventories are expected to be down double-digits versus the prior year.

We are planning for capital expenditures of approximately $5 million for the quarter. The large majority being allocated to support digital initiatives and the expansion of our fulfillment capabilities.

Moving on to Q2 and the full-year outlook. As we move into the second quarter, we are expecting gross margin pressures to begin to subside. And while we're still expecting an operating loss for the quarter, this loss is expected to moderate versus our Q1 results. The cost headwind that is expected in the front half of 2023 are anticipated to turn to tailwinds in the back half of the year, largely due to inventory purchased for our critically important back-to-school and holiday seasons being at much lower input costs. This will enable us to significantly improve margins in the back-half of the year as we plan to return to double-digit operating margins for the six-month period, and will drive significant free cash flow.

For the full-year, the company expects the following: Net sales are expected to be in the range of $1.62 billion to $1.66 billion, representing a decrease in the low-to mid-single-digit percentage range as compared to the prior fiscal year. Adjusted operating profit is expected to be in the range of 3.5% to 4.0% of net sales. Adjusted net earnings per diluted share is expected to be in the range of $2.50 to $3 per share. These results include the impact of the 53rd week in 2023, based upon our retail calendar. This week occurs during a low-volume non-peak clearance period, and as a result is expected to have a very modest impact on revenue and an insignificant impact on operating results.

We are planning capital expenditures for the full year to be in the range of $40 million to $50 million, primarily to support our DC expansion, digital initiatives and the enhancements of our fulfillment capabilities. We anticipate closing 100 stores as part of our ongoing fleet optimization initiative with the bulk of the closures happening in 2023, leaving us with an optimized fleet of approximately 500 stores. We are planning for full year tax rate of approximately 25%.

Thank you, and I will now turn it back over to Jane.

Jane Elfers - President and Chief Executive Officer

Thank you, Sheamus. I want to thank Sheamus for his strong partnership and the significant contributions he has made since he joined our team in November. He has made a very positive impact in a short-time, and on behalf of the SLT we are thankful for his experience and his contributions as we partner with him to drive shareholder value in 2023 and beyond.

In closing, we are a very different company today than we were in 2019. We have architected and executed a sweeping structural reset of our company in the midst of one of the most turbulent times in retail history. I am so proud of our team for accomplishing this task. And I believe, a large part of the reason we were able to deliver these accomplishments successfully and with conviction is our unique profile. We are a women led company. Our senior team is over 50% women, and approximately 90% of our associates and our customers are women. And further, the majority of our associates are from the millennial and Gen Z generation. We are our customer. We learn from each other every day and we push each other to stay relevant through our laser-focus on our digital-first model and our accelerated store optimization plan.

We have product that resonates with our digitally savvy millennial mom. Marketing that converts, and we now have an infrastructure that is optimized for the way they shop today and will shop tomorrow. I am grateful to lead such a dynamic team, and I want to thank all of them for their hard work along this exciting journey.

With our successful multi-year strategic transformation now complete, we are focused on our next phase top and bottom-line growth. Our growth will be underpinned by our four strategic pillars - superior product, digital dominance, wholesale and international expansion and an optimized fleet.

Top-line growth will be fueled by our strong stable of brands, a business model focused on digital, our highest operating margin, and most important channel for our young, digitally savvy, core millennial customer and the Gen Z customer right behind her, our strong wholesale business and our successful marketing and branding efforts.

Bottom-line growth will be fueled by the return of normalized supply-chain in cotton costs, the benefits of our significant AURs increases since the start of the pandemic and the tailwinds from the strong financial and operational discipline initiatives that Sheamus is leading.

Our team is resolutely focused on execution, and we believe we are on-track to return to double-digit operating margins in the back-half of 2023, and are well positioned to deliver long-term, consistent growth for our shareholders.

Thank you, and now we'll open the call to your questions.

Question & Answers

Questions and Answers:

[

Operator

[Operator Instructions] We'll take our first question from Jay Sole of UBS. Your line is open.

Jay Sole - UBS - Analyst

Great, thank you so much. Jane, can you just talk a little bit about how you see the sales growth trend playing out for the year? You talked about Q1, but can you give us a sense of how you see it playing after the year and what the key drivers will be? Thank you.

Sheamus Toal - Senior Vice President, Chief Financial Officer

Hi Jay, this is Sheamus, I'll take that. Obviously, as we guided in our commentary and in ROVs, where looking forward to a full year and the back-half of the year where we are going to drive double-digit operating margins. As we said in the commentary, we've taken a conservative view to the year, particularly the first-half of the year. I think we've been cautious in terms of what we see in the macroenvironment. Some of the headwinds that we see in terms of still record-high inflation, unfavorable weather trends as well as lower tax refunds, and the impact that that has had on our customer. We also, as I've described in our commentary, have invested in a little bit lower unit inventories given the high input costs in the first half of the year. So, while we've guided to the fact that inventory is lower on a unit basis, we still do have that higher-cost inventory to work through, and that plays through in our expectations in terms of guidance for our topline.

I think as we've talked in our release and a specific guidance that we gave, we're expecting mid-single-digit decreases in the first part of the year and the first quarter of the year, and that will improve as we go beyond. Q1. We are still being conservative in terms of and cautious in our outlook for the back-half of the year, but we do see some opportunity in the back-half of the year which gave us the ability to guide to still lower levels of sales, but modestly improved versus Q1. So, we do see improvement as we are progressing through the year.

Jay Sole - UBS - Analyst

Got it, thank you so much.

Operator

We'll take our next question from Jim Chartier of Monness, Crespi and Hardt.

Jim Chartier - Monness, Crespi, Hardt and Company - Analyst

Good morning, thanks for taking my questions. First, I was wondering if you could talk about the AUR performance between fashion and basics. And then how are you planning inventory between fashion and basics, and then have promotional levels for you returned to normal post the holiday season, now that you have worked through some of the excess inventory. Thanks.

Jane Elfers - President and Chief Executive Officer

Yeah, on the AUR, Jim, it was pretty much the same decrease that we saw in Q4 mid-singles on both of them, basics and fashion. As we move ahead, we are a little bit cautious on the fashion side based on the consumer. So, we've claimed at a little bit lower as we - a little bit lower than basics as we head into 2023, and then from a competitive view right now, as you probably know many, if not most of our competitors, specifically called out soft kids and baby business in Q4. So, we certainly weren't alone there, and I think, largely due to the inflationary pressures that are on the consumer right now, and I think all of us see the consumer shopping a little bit less frequently lately. Everyone seems to be focused on inventory reductions, we've pretty much heard that from every one as well, but we believe that due to the continued macro pressures, particularly in the front-half of the year, that it will remain a competitive pricing environment.

Operator

[Operator Instructions] We'll go next to Dana Telsey of Telsey Group.

Dana Telsey - Telsey Advisory Group - Analyst

Good morning, everyone, and thank you very much for all the detail on the business strategy go-forward. When Maegan spoke about Amazon and the penetration the success that you're having - that you're having there, how do you think of the penetration of digital moving forward? Does it get beyond the 50% that you mentioned, with the store closures that you have that increased marketing spend, how is it divided - how do you see it divided, whether it's different channels that you're seeing, become more activated as you're spending the dollars on the marketing? What do you see is what that balance will be? Would that percentage of sales going to marketing?

And then just lastly, Jane, as you think about the different brands, is there any that you are seeing that could be outsized as we move forward or the different puts and takes as you think of that customer base. Thank you.

Jane Elfers - President and Chief Executive Officer

Sure, I think from a digital penetration, we've talked extensively about us being approximately 50% right now, which was our original goal when we set-out our strategic transformation, and we're able to accelerate it by approximately five years through the pandemic. So that's why we talk about having achieved that original goal by the end of '22. I think we've also talked pretty extensively about reaching a 60% digital penetration by the end of full year '24, and today when we talked about, we introduced a little bit of forward-looking 2025, we think that will be over 60% digital penetration. So, we continue to see digital as the cornerstone of our strategy, its certainly is where our millennial customer wants to be, and where the Gen Z consumer behind her is so. That will continue to be our focus. We talked about an optimized fleet, we talked about closing 100 more stores, we feel that will be substantially the end of our fleet optimization strategy for now. We feel that, that'll be the right stores in the right trade areas that over index in omnichannel capabilities, and certainly are the ones that service the omnichannel needs of our millennial and Gen Z customers. So, we feel-good about hitting that 500 number, approximately 500 number, by the end of 2023. From a marketing spend point-of-view, we've been pretty upfront and transparent about us being significantly underfunded in marketing in the past. I think with all the work that Maegan and her team has done on transforming our marketing area and the extraordinarily strong results we saw in the back-half of '22 when she started to activate it, on brand acquisition, awareness, social media dominance, she was pretty lengthy and her commentary on describing how strong we feel about it. We will be making investments, increased investments in 2023 and beyond in marketing, and I will turn it over to Maegan just to talk about it a little bit by brand. We certainly have learned a ton from Amazon, as we do a pretty large marketing spend with that channel, and then I think, going forward, to answer your question about the brands and the penetration, Gymboree is on a great trajectory. We introduced today that we think by end of full year '25 that will be at $140 million, which was our initial projection. We're all pretty aware of the fact that we've launched Gymboree into a pandemic and kind of lost two years there, as it's a very-high occasioned brand, and you need occasions and you need families to get together to make that brand work around the key holidays. We're happy what we saw in the back-half of '22 when people were able to start to gather and get-together again. And so, we feel that '23 and beyond is really the time to put the marketing money behind Gymboree in a big way.

And then we also spoke about Sugar and Jade, which is the smallest of the brands, and certainly we've perfected the product, we believe, with our best-in class design team, and now what Sugar and Jade needs is brand awareness and marketing spend behind it.

So, let me turn it over to Maegan to add what she would like to, to that.

Maegan Markee - Senior Vice President, Marketing

Yeah, I think from a spend balance perspective, going back to your question, just around closing the stores and then our marketing investment, as we optimize the fleet and close the stores, we worked very closely with the real-estate team here to make sure that we are balancing our marketing investment to really kind of hone in on those key areas that we're closing stores. So, we're making sure that our spend is balanced in those DMAs, those regions, so that we are really growing brand awareness without having to utilize a brick-and-mortar store front. The tactics are obviously primarily digital in nature, and that's where we're pushing the customer. As we close the store, we push her to e-com business, and again we really focus our investment in those key areas where we're walking away from stores. From a tactic perspective, we're utilizing things like paid search, paid social and Amazon, where she is going for brand discovery. So we have a pretty robust strategy around how we work in partnership as we kind of optimize our fleet and make sure our marketing investment is in the right places.

Operator

And we'll take our next question from Marni Shapiro of Retail Tracker. Your line is open.

Marni Shapiro - The Retail Tracker - Analyst

Hey guys, thanks for taking the call. Maegan, the marketing over holidays was truly outstanding. Actually, Sheamus, I just wanted to touch back on a couple of things you said. I think you said something about inventory, you were liquidating inventory in the first half, as in liquidating or just selling it and moving through it. I just want to clarify that point because liquidating felt like a strong word there.

Sheamus Toal - Senior Vice President, Chief Financial Officer

Yes, hi Marni, thanks for the question. Yes, just to clarify that. What I meant by that comment was, we're selling it through in our normal process. So, it's not like liquidation sale. But as we sell through that higher unit cost inventory, we are going to absorb that higher-cost inventory and our cost of sales. So, I was just trying to reference that that will flow-through as part of our normal process. It is not something out of the ordinary where we would be running liquidation events or anything like that.

Marni Shapiro - The Retail Tracker - Analyst

Okay, great. And then could you just also remind us, I think it was last - it was back-to-school '22, where you had - were selling through pack and hold from '21, went-back-to-school wasn't really happening, and those units were purchased at lower cotton costs. So, as we come into the back-to-school period, which for you guys is August and into September, depending on the region, will you be selling through some lower-cost AUC, plus the new lower cost - some higher-cost AUC and some lower-cost AUC, or you won't have quite the same compare on the product because of the pack and hold, meaning like the lift on the AUC improvement won't be as big in the fourth quarter.

Jane Elfers - President and Chief Executive Officer

Let me try to untangle that. In 2021, was where we were selling the goods that we didn't sell in 2020 because of the pandemic. So, we sold them in 2021, which were lower-cost AUC goods that were bought prior to the cotton spike. The basics that we own now are basics that have the higher cotton in them. So as Sheamus outlined, we will still have some of those basics throughout all of 2023, but they will also, we will also be getting in new basics in 2023 prior to back-to-school that have the lower cotton. So it will be, to your point, a combination of both in the basics category.

Operator

Thank you, and this does conclude our conference for today. Thank you for joining us. If you have further questions, please call Investor Relations at area code 201-558-2400, extension 14500.

AI Assistant

CHILDRENS PLACE INC

Q4 2022

Earnings Transcript

Find Answers

Ask about any part of the document to get insights, explanations, or key details.