Dive Brief:

• The Children’s Place changed its fourth-quarter guidance Monday. In unaudited results, the kids' apparel retailer said it now expects net sales of $454 million to $456 million, versus prior guidance of $460 million in net sales. That’s down $52 to $54 million, or as much as 10.6% versus last year. 
• The company’s Q4 operating loss is expected to range from 14.2% to 15.6% of net sales, and its adjusted operating loss is expected to range from 13.4% to 14.8% after excluding $3.6 million of adjustments.
• The Children’s Place cited macroeconomic factors that “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.”

Dive Insight:

President and CEO Jane Elfers said three specific higher-than-expected input costs totaling about $125 million are contributing factors to the worse-than-expected financial performance for the fourth quarter.

First, Elfers said, the company experienced a $65 million incremental impact to 2022’s operating results due to a spike in cotton prices. Cotton, Elfres said, is the company’s largest product input cost. Second, The Children’s Place used air freight due to worldwide supply chain delays caused by the pandemic. The company took another hit due to a pandemic-related increase in container costs. The air freight and container-related costs totaled $60 million.

The Q4 loss per share is now expected to range from $4.24 to $4.63. Adjusted loss per share is now projected to range from $4.02 to $4.41 after excluding about $3.6 million of adjustments. The company’s previous guidance projected adjusted earnings per diluted share of $0.50 to $0.75.

While Children’s Place’s Q4 outlook is now worse than expected, Elfers said the financial outlook is likely to improve as the year continues. 

“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,” Elfers said in a statement. 

“While we still need to work through inventory in the front half of 2023 that has these higher input costs embedded in it,” Elfers said, “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.”

Elfers also said she expects the company “to return to double-digit operating margins for the back half of 2023 and beyond,” and credited CFO Sheamus Toal for reducing input costs and focusing on expense and inventory management.

At the end of last month, Children’s Place had 613 stores in the U.S., Puerto Rico and Canada. Based in Secaucus, New Jersey, just across the river from New York City, The Children’s Place also has five international franchise partners and 220 points of distribution in 15 countries. The company also operates stores under the Place, Baby Place, Sugar & Jade, Gymboree and PJ Place banners.

“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,” Elfers said. 

Private equity firm Bain Capital bought then-rival Gymboree for $1.8 billion in 2010.

Gymboree struggled as sales lagged and competition increased — the company needed debt relief and working capital."

As a result, debt forced Gymboree into Chapter 11 twice. Gymboree first filed for bankruptcy in 2017, then again in 2019. The Children’s Place bought former rival Gymboree out of bankruptcy in 2019.

In January 2022, The Children’s Place employed about 11,900 employees, according to its 2021 10-K filing. About 2,000 of those workers were based at corporate offices and distribution centers. Approximately 1,500 workers were full-time store employees and 8,400 were part-time or seasonal store employees. 

In that same report, the company said it accelerated its planned store closures due to the pandemic, shuttering 256 stores over the past two fiscal years. “These closures have resulted in improved profitability and operating margin accretion due to sales transfer to surrounding stores and/or e-commerce, low cost of exit, and the elimination of underperforming locations,” the company said.

The Children’s Place also said its Q4 inventory is now expected to increase 5.5% to 6.5% versus last year, compared to a year-over-year increase of 24% at the end of 2022’s third quarter. The company also said carryover inventory levels are expected to be significantly lower than previously projected. 

The company plans to announce its final Q4 and 2022 annual earnings in March.