The Children's Place and Gymboree: A tale of two specialty retailers
One invested in inventory technology, assortment and e-commerce. The other went bankrupt. What can the two children's apparel retailers teach retailers?
If you're looking for subtle ways to kick your opponents while they're down — and take their money — consider The Children's Place and Gymboree.
When Gymboree moved to close hundreds of its stores in bankruptcy last year, Children's Place, one of its rivals, didn't just sit around hoping to pick off some of those customers. The retailer developed digital marketing tools specifically for targeting consumers in areas where Gymboree closed stores.
And the tools seemed to be working. By the third quarter last year, CEO Jane Elfers said that 135 Children's Place stores that were located in the same malls where a Gymboree closed continued to "outperformed the fleet" as a whole, according to a Seeking Alpha transcript of the call.
"So we are very hopeful that going forward we will continue to see a nice market share gain from Gymboree as they close stores... and then as they continue to close stores through the fourth quarter," Elfers said. Consider it a nice way of saying: We're winning, suckas.
To watch the performance of Gymboree and Children's Place is to witness two retailers on seemingly opposite trajectories as they fight for customers in what Euromonitor International identifies as a nearly $35 billion children's apparel market. One undertook a massive turnaround to focus its operations and brand, and to prepare for the next era of retail. The other — burdened with debt after a private equity buyout — fell behind in e-commerce, tried to put a foot in every sub-market and was forced into bankruptcy as interest burdens caught up with sagging sales.
(A spokesperson for Children's Place declined to comment on this story. Gymboree spokespeople did not respond to interview requests.)
A 'poster child' of the retail turnaround
Michael Dart, a partner at A.T. Kearney and author of the recent book "Retail's Seismic Shift," describes Children's Place as "a poster child" for retail turnarounds. "It's pretty much an amazing success story."
Jim Cramer called the retailer "one of the great retail stories of the era" on CNBC earlier this year, with the company's stock tripling since its lowest point in 2015, a period when the company's performance slid, prompting an activist to agitate for change and an eventual proxy fight among shareholders
Many analysts and observers put the credit for the turnaround at Children's Place squarely with Elfers, who has been CEO since 2010. "She had clear vision of where she thought she needed to take the business," Dart said. That meant, in part, "systematically upgrading the talent" at the company and aligning that talent with the company's new objectives, he added.
The company's turnaround strategy rests on four "pillars": product, business technology, alternate channels of distribution (including a wholesale business that grew 5% in 2016) and an international business that does well over $200 million in sales. So far, it has paid off. Between 2014 and 2016, the company added more than $20 million in sales and grew its operating income by around 85%, according to the most recent 10-K filing.
The retailer under Elfers also took a hard look at its store footprint, according to Shelley E. Kohan, vice president of retail consulting at RetailNext.
"They're closing like 30 stores a year, which is very prudent."
Shelley E. Kohan
Vice President of Retail Consulting, RetailNext
"They've been looking at stores in a measured and consistent way. They're constantly looking at stores that are not very profitable," Kohan said. "They're closing like 30 stores a year, which is very prudent." (As of October, Children's Place operated 1,027 stores, according to securities filings.)
The retailer is also a savvy operator and has made key investments as Elfers looked to the future of retail. Susan Anderson, analyst and senior vice president with FBR, said in an interview that when Elfers arrived, Children's place was "running spreadsheets" to manage its inventory. "They didn't even know what was at the stores."
Along with upgrading IT systems, and developing tools to determine their inventory needs, the retailer got smarter about inventory. Where merchandise before was "piled high," now it's "lean and clean," Anderson said. "It's night and day at the stores."
Children's Place has also become more precise in its product mix and supply chain. "They do a good job of catering to customers," Anderson said. "They have just enough fashion, just enough basics," with prices below those of Gymboree, she added. Added Kohan, "Children's Place has done a great job with pricing."
Restructuring for e-commerce
Perhaps most critically, Children's Place made investments in e-commerce.
Elfers told CNBC that her company went from 9% e-commerce sales when she started to 23% currently. Anderson thinks the retailer could eventually do around half of its business online. "They have basically structured their business" for the decline and closure of major malls, she said.
During that time Children's Place also built out a mobile commerce infrastructure and has partnered with Amazon to sell products, a program begun in 2014. "What that helped them do is shorten the learning curve… to turn around in a very quick way by partnering with an expert in e-commerce," Kohan said.
And while some retailers have partnered with Amazon only to see the e-tailer move in on their business by launching its own private brands — and gaining a heap of data — neither Kohan nor Anderson thought Amazon was a major threat to Children's Place.
"They're going to learn it anyway," Kohan said of the possibility that Amazon might make its own play in the children's market. In the meantime, Children's Place's other efforts — in mobile and other technology, in assortment, in international sales — "can counteract, quote unquote, Amazon stealing their sales from them," she added.
"Apparel retail is really finicky," Anderson said. "Once Amazon figures out what's trending, it's already too late."
A competitor flounders
Children's Place made all the investments that Gymboree didn't, or couldn't, saddled as it was with nearly $1 billion in debt from a private equity buyout. As Anderson points out, "Anyone with debt hasn't been able to survive."
In many ways, Gymboree's woes last year reflected those of the broader market: declining mall traffic, shifts in consumer spending away toward services and experiences, e-commerce's rapid growth, and growing competition from fast fashion, off-price and everyone else. Retailers who have money to invest can change. The ones that can't have floundered, or gone into Chapter 11.
Founded by Joan Barnes in 1976, the company began as a play and music center for kids. A decade later, it added a line of specialty clothes. By the time Bain Capital bought and took the company private in 2010 for $1.8 billion, Gymboree was rapidly expanding, flush with cash and virtually without debt.
The story has changed drastically since then. The company posted tens of millions of dollars annually. In December of last year, Gymboree reported a net sales decline of 4.6% compared to the prior-year period, a 5% drop in comparable sales and a net loss of $10.9 million. In January 2017, then-CEO Mark Breitbard, who had come from Gap, announced he would step down amid rumors of an impending restructuring. Gymboree brought in Daniel Griesemer as CEO in May.
Barnes, who is now a consultant for Gymboree Play & Music — which the company sold for $127.5 million in early 2016 — told the San Francisco Business Times in May that the company "lost its way when they started to be everything for everybody."
"It spawned an industry, but with it, spawned competitors," she told the Business Times. "Rather than stay true to who we were, we started art classes and sports and went into department stores... Eventually a company can either spin that growth well, or end up diluting the brand."
Part of the problem was that Gymboree's three store banners — Janie and Jack, Crazy 8 and Gymboree — essentially started cannibalizing each other while competitors such as Carters and Children's Place outpaced the company in growth, David Silverman, senior director for retail coverage at Fitch, told Retail Dive in an interview last summer.
Gymboree's clothes have a "Northern European look" to them and typically aim for a slightly younger child than Children's Place, which targets two- to five-year-olds, Anderson said. In her view, the flagship Gymboree brand "is a little stale," priced above Children's Place, and it suffered from Crazy 8's low-prices. (She too, thinks the brands cannibalized one another.)
Gymboree's brand "is a little stale."
Analyst and Senior Vice President, FBR & Co.
As interest obligations became too much for the retailer, and suppliers pressed for tighter financial terms, Gymboree was forced into bankruptcy last June. Fortunately for the retailer, it went into bankruptcy with a plan largely formed and agreed to by its lenders. By October, Gymboree had exited bankruptcy, having closed more than 300, shed $900 million in debt, and had turned ownership over to the company's creditors.
Gymboree did exactly what retailers are supposed to do in Chapter 11. But now it must keep proving its relevance to customers. "They have to really look at assortments and understand who their target audience is," Kohan said. "I find it really interesting they [still] have Janie and Jack, Gymboree and Crazy 8." (There were rumors the company might wind down Crazy 8 in bankruptcy.)
"I feel like they're trying to be everything to all target markets in the children's business. I haven't seen that strategy work well," Kohan said. To do all that, Gymboree would likely need to invest in assortment and technology, she added.
Marshal Cohen, chief industry advisor with the NPD Group, told Retail Dive in an email that Gymboree needs to make some "keen shifts to become more competitive again. They have some work to do to introduce themselves to the new wave of moms…which is a challenge and a blessing."
But Gymboree may yet have work to do. Anderson said her firm's analysis of Google searches shows that Gymboree is still lagging in digital searches, a bad omen for its ability to adapt to online commerce.
A tough sector
Both Gymboree and Children's Place play in a competitive sector, that is quickly digitizing and already had thin margins.
Spending in the space is frequently "need-based" rather than dependent on style, and held hostage by birth rates (which fell annually after the recession and have only recently stabilized) and demographic changes, Anderson said.
Children's Place and Gymboree are hardly the only players in children's apparel. Carter's has more share than either of them, with 16% of the market, while Children's Place and Gymboree each have around 12%, according to IBISWorld. Nearly half the market is up for grabs among other players —and they are big ones.
Walmart, Gap, Kohl's and Target — which refreshed its children's apparel in 2016 with the new Cat and Jack line — all play in the space. And the pie appears to be shrinking as retailers move in. Annual growth in sector sales have fallen 1.3% in the past five years and are expected to fall another 2.1% over the next five, according to IBISWorld. At the same time, the move online will likely tighten margins in the sector, the research firm said.
"Traditional kids' brands are hard pressed for growth," Cohen said. "Stores are creating their own mega brands and stealing share with plans to steal yet more.
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