With e-commerce up 300% quarter to date while about 95% of stores were still closed due to the pandemic, the Children's Place said it will abandon many of its mall locations for good. Overall, e-commerce in the first quarter rose 12.2% to about 53% of net sales. At the start of 2022, the retailer's mall-based portfolio will represent less than 25% of its total revenue, CEO Jane Elfers said.
Executives said 300 stores will permanently close in the next 20 months: about 100 by the end of the second quarter for a total of 200 closures this year, and another 100 set to close in 2021. About half of the first set of closures will take place in the next month and a half, with most of them expected to open briefly for liquidation sales, CFO/COO Mike Scarpa told analysts, according to a conference call transcript from Motley Fool.
The dramatic pivot came as the company reported that first-quarter net sales fell 38.1% to $255.2 million. The retailer swung to a $114.8 million loss from $4.5 million in net income a year ago, with a gross loss of $19.7 million from gross profit of $152 million last year. That was a 990-basis point downswing to 26.8% of net sales, primarily due to the higher costs of e-commerce fulfillment, along with the fixed expenses of closed stores, according to a company press release.
These new plans from the Children's Place, made possible, executives said, by flexible leases that will allow them to act quickly, further darkens the future for U.S. malls.
About 70% of the company's fleet has "a lease event by year-end fiscal 2021, which arms us with a meaningful flexibility to further optimize our store fleet," Scarpa said.
Plans to shrink its base aren't new, but have been drastically expanded. Since its fleet optimization initiative was announced in 2013, the Children's Place has closed 275 stores. The company closed four stores permanently in the first quarter, ending with 920 and square footage of 4.3 million, a decrease of 5.1% compared to the same period last year.
While executives expressed confidence in their new digital-first strategy, they also acknowledged ongoing uncertainty from the pandemic. The back-to-school season, extremely important in kids' apparel, is already complicated by the fact that many school districts haven't announced fall plans, Elfers said. And as the holidays approach, social distancing could still be a factor for stores, she warned.
"We have no idea what a Black Friday might look like for some of those big Saturday weekends in December," she said.
The pivot also carries higher costs, among other complications of selling apparel online.
"We continue to think of margin risk as to the most significant issue as the company aims for higher digital penetration and a much smaller mall footprint, coupled with a tight liquidity position, should the negative cash flow continue through the year," Wedbush analysts led by Jen Redding said in emailed comments.
The retailer is reopening about 350 stores on June 16 and more the following week, with plans to have all reopened by July 1, Elfers said.
The Children's Place is among the few apparel retailers without plans to pack and hold some inventory to the next season. The retailer ended the quarter with inventory down about 1.5%, including $63 million of inventory reserve related to the pandemic, according to Scarpa.