Categories Consumer, Earnings Call Transcripts, Retail

The Children’s Place, Inc. (PLCE) Q1 2021 Earnings Call Transcript

PLCE Earnings Call - Final Transcript

The Children’s Place, Inc. (NASDAQ: PLCE) Q1 2021 earnings call dated May. 20, 2021

Corporate Participants:

Jane Elfers — President and Chief Executive Officer

Robert Helm — Chief Financial Officer


Dana Telsey — Telsey Advisory Group — Analyst

Jim Chartier — Monness, Crespi, Hardt & Company — Analyst

Jay Sole — UBS — Analyst

Kelly — Citi — Analyst

Susan Anderson — B. Riley FBR — Analyst

Marni Shapiro — Retail Tracker — Analyst



Good morning and welcome to The Children’s Place First Quarter 2021 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; and Rob Helm, Chief Financial Officer.

The Children’s Place issued its first quarter 2021 earnings press release earlier this morning. A copy of the release and presentation materials for today’s call have been posted to the Investor Relations section of the company’s website. [Operator Instructions] After the speakers’ remarks, we will take questions as time allows.

Before we begin, I would like to remind participants that any forward-looking statements made today are subject to the Safe Harbor statements found in this morning’s press release, as well as in the company’s SEC filings, including the Risk Factors section of the company’s Annual Report on Form 10-K for its most recent fiscal year. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. The company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof. After their prepared remarks we will open the call up for your questions. [Operator Instructions]

It is now my pleasure to turn the floor over to Jane Elfers.

Jane Elfers — President and Chief Executive Officer

Thank you and good morning everyone. Following the March 11th presidential address, which confirmed immediate stimulus payments announced an accelerated vaccination timeline and promise the country and earlier than anticipated return to normal. We experienced a significant and sustained sales lift. We delivered outstanding first quarter results with gross margin, operating margin and EPS all at record levels.

Our Q1 ’21 net sales of $435 million exceeded our Q1 ’19 net sales of $412 million, despite having 261 or 27% fewer stores versus Q1 ’19 and historically low demand for Easter dress-up product and a 15% reductions in mall operating hours versus 2019. All key metrics across both our digital and stores channels exceeded expectations.

Our exceptional sales growth was driven by several factors, including double-digit increases in AUR versus Q1 2020, resulting from strong product acceptance, higher price realization, reduced promotional activity and unprecedented stimulus, as well as an acceleration in back-to-school sales, our ability to retain new digital customers we acquired during the pandemic, and a significant reactivation of store customers that we had temporarily lost due to the government-mandated closure of all of our stores.

Our record Q1 2021 gross margin was driven by significantly higher merchandise margins in both our digital and stores channels, significant occupancy savings from favorable lease negotiations and fewer stores, as compared to Q1 2020 and meaningful e-commerce fulfillment optimization.

Focusing on digital, consolidated digital sales increased 37% in Q1 versus 2020, representing 42% of total sales. Digital sales increased 35% in the US and 82% in Canada, driven by a double-digit increase in traffic, partly as a result of our ability to retain new customers acquired during the pandemic. Our digital business has always been our highest operating margin contributor, due to it’s high UPT, low return rates and lower overhead costs versus our stores channel. And with the pandemic driven acceleration to a steady-state annual digital revenue of approximately 50%, we are now gaining additional leverage on fixed overhead costs and driving higher digital operating margins.

In addition, we continue to plan for reductions in our per order e-commerce fulfillment costs in 2021, due to a number of packaging and network optimization efforts, combined with the ability of our third-party fulfillment partner to service higher levels of demand in 2021, which should virtually eliminate the amount of supplemental ship from store required.

With respect to our stores, it’s important to note that our Q1 ’21 store net sales of $231 million, represent 85% of our Q1 ’19 store net sales, despite having 261 or 27% fewer stores in Q1 ’21 versus Q1 ’19. US store sales exceeded expectation, driven by strong product acceptance, double-digit AUR increases and higher ADS. Similar to what we saw in Q4, traffic levels remained under pressure down 36% versus 2019 level. Our outsized store performance bolstered by our strong transfer rate, further reinforces our strategic fleet optimization strategy.

Merchandise margins were up significantly in our stores channel, driven by higher AURs, due to strong product acceptance and reduced promotions. Importantly, we were also pleased to see existing customers return to our stores in significant numbers from the limited shopping options available to them last spring, due to the government-mandated closure of the vast majority of brick-and-mortar retailers. Canada store sales were down 43% with traffic down 69%, due to the continued impact of government-mandated COVID-19 temporary closures, impacting approximately 50% of our Canadian fleet during the quarter.

With respect to our fleet optimization initiative, we closed 25 stores during Q1, and we plan to close 98 more stores in full-year ’21, bringing our total two year store closures to our previously announced target of 300 stores. As we covered extensively in our Q4 remarks, birth rates have been downtrending for years and are not expected to rebound until at least the end of this decade.

As I’m sure, you all saw earlier this month, the 2020 birth rate data was released and as we anticipated birth for 2020 were down dramatically to the lowest level since 1979 at just 3.61 million births. The data also revealed an 8% decline in birth in the month of December, the biggest drop for the month of December since 1964. Those December babies were conceived before the pandemic started to accelerate and experts predict that birth rates will fall even further in 2021. It’s important to note that less than 5% of our revenue comes from newborn age 0 to 2. So we have multiple opportunities and ample time to offset these sustained birth rate drop. As we indicated on our Q4 call, we recognize the long time ago, that US birth rates were not going to be a tailwind. So our strategic focus has been on taking market share for the better part of the last decade.

Our purchase of Gymboree gives us a sizable market share opportunity in our underpenetrated toddler space that more than makes up for the anticipated sales drop from sustained birth rate declines over the next decade. The big kid destination strategy that we put in place almost a decade ago, continues to secure a leadership position in the big kids space. We believed correctly that the big kids space was overcrowded with too many retailers vying for a declining sales base without a positive catalysts with respect to birth rates. The big kids competitive playing field has narrowed significantly in the last few years, which aligns with our well documented strategy of trading short-term margin pain for long-term margin gain.

It’s important to note, that among the kids retailers, who declared bankruptcy and liquidated 1,000 of stores in the last few years. Justice and Crazy 8 did not carry any newborn size 0 to 2 product. And Gymboree was almost completely out of their unprofitable newborn business at the time of their second bankruptcy. My point is none of the large children’s retailers had newborn market share to seed, because their mall-based businesses like ours were targeted to the four year-old and up age range making TCP, a natural market share beneficiary of these large liquidations.

With respect to current business, Q2 is off to a strong start. We are not providing EPS guidance, due to the uncertainty and volatility surrounding the pandemic, particularly as it pertains to the return to 100% in-person learning. As you may know, July is our biggest month in Q2 and within July the majority of sales are concentrated into the last two weeks of the month with the start of back-to-school shopping. We believe that if the vast majority of elementary schools return to 100% in-person learning this fall, we will be an outsized beneficiary.

In addition, we believe the expanded Child Tax Credit benefits, outlined in the American rescue plan, which include a monthly payment to approximately 39 million families covering 88% of all the children in the United States should provide an additional tailwind for our business, just in time for our key back-to-school selling season. These payments are scheduled to begin on July 15th and provide for monthly checks of $300 for each child under age six and $250 for each child between six and 17 years old.

Looking ahead, Q4 also presents an opportunity for TCP to regain our historical leadership position in the dress-up category. Assuming the vaccine rollout is successful and social distancing mandates continue to be removed leading up to the holidays. We leveraged a very difficult period in 2020 to accelerate our strategic transformation. And we believe we are now well positioned to deliver accelerated operating margin expansion in 2021 and beyond.

The acceleration of our digital business, our highest operating margin channel made possible by our pre-pandemic digital transformation investments combined with the significant sales transfer rate we’re achieving from our strategic decision to close 300 or a one-third of our stores in less than 20 months is resulting in an industry-leading approximately 50% steady state annual digital penetration.

Our long-standing fleet optimization strategy enable us to close to 300 stores without financial penalty and reset our occupancy costs. These occupancy cost reductions should continue to be a significant operating margin tailwind throughout 2021 and beyond. In addition, by aligning our overhead cost structure in 2020 to our digital first strategy, we have gained efficiencies and remove significant expense from our P&L. These efficiencies will continued to benefit us in 2021 and beyond.

We anticipate further operational efficiencies and sales opportunities when social distancing and other restrictions such as limits on hours of operation are further removed. And we are able to return to normal operations in both our stores and distribution centers. We continued to navigate the extraordinary complexity of the pandemic, while remaining firmly on offense. Our long-standing strategic plan has served us well. We are a stronger company today than we were prior to the pandemic and we look forward to continuing to deliver accelerated operating margin expansion for our shareholders in 2021 and beyond.

Now I will turn it over to Rob.

Robert Helm — Chief Financial Officer

Thank you, Jane, and good morning everyone. I will review the Q1 results and then I will provide some thoughts on Q2 and the balance of 2021.

In the fiscal first quarter, we delivered a record adjusted EPS of $3.25. Net sales increased by $180 million or 71% to $435 million versus last year’s $255 million. Our US net sales increased by $160 million or 71% to $384 million versus last year’s $224 million, while our Canadian net sales increased by $13 million or 76% to $30 million versus last year’s $17 million.

Comparable retail sales were a positive 83% versus Q1 2020, as an additional point of reference, comparable retail sales were a positive 21.5% versus Q1 2019. Our net sales were positively impacted by several factors during the quarter: first, the significant majority of our US stores were open for the entire quarter of this year versus the temporary closures we experienced for approximately 50% of the quarter last year as a result of mandated-government shutdowns.

Second strong customer response to our casual product assortment. And third, the unprecedented level of stimulus payments resulting from the government pandemic relief legislation announced in mid-March. These factors, along with favorable weather and an easing of COVID-related restrictions resulted in consolidated net sales increases in both March and April of over 100% versus the prior year. These positive factors resulted in better-than-expected performance across all of our key retail metrics.

Our Q1 net sales were negatively impacted by the impact of our 199 permanent store closures in the past 12 months, inclusive of 25 stores we closed during this quarter and the 178 stores we closed during fiscal 2020. The impact of the government-mandated temporary closures in Canada, with approximately 50% of our fleet closed for more than half of the quarter and the impact of an approximately 15% reduction in mall operating hours as mandated by our mall landlords.

Adjusted gross margin. Adjusted gross margin increased 2,571 basis points to 43.4% of net sales, a record Q1 gross margin. The gross margin increase was the result of: one, the leverage of fixed expenses resulting from the increase in net sales as a result of anniversering the temporary closure of our entire fleet in Q1 2020. Two, significantly higher merchandise margins in both our digital and stores channel, resulting from a double-digit AUR increase, due to strong customer product acceptance leading to higher price realization and reduce promotions.

And three, a reduction of $21 million in occupancy expense during the quarter, due to rent abatements of $8 million with the balance of the decrease coming from favorable lease negotiations and reductions in occupancy expenses for stores closed in the past 12 months. We anticipate occupancy savings for the balance of the year. These gross margin benefits were partially offset by higher inbound freight transportation costs, driven by ocean carrier equipment shortages and higher container rates.

Adjusted SG&A. Adjusted SG&A was approximately $104 million versus $92 million last year and leveraged 1,231 basis points to 23.9% of net sales. The 1,231 basis point leverage was a result of the leverage on the higher net sales and cost savings resulting from the significant store closures in Canada for the majority of the quarter, partially offset by higher incentive compensation accruals.

Adjusted operating income. Adjusted operating income for the quarter increased to $136 million to $71 million or 16.2% of sales, a record result versus an adjusted operating loss of $65 million last year and leveraged 4,168 basis points.

Interest expense. Our interest expense for the quarter was $4 million versus $2 million last year. The increase in interest expense reflects the higher debt balance and the higher interest rate associated with our term loan.

Tax rate. Our adjusted tax rate was 27% in part due to the anticipated higher incentive compensation accruals in the current year.

Moving on to the balance sheet. Our cash and short-term investments ended the quarter at $65 million. We ended the quarter with $197 million outstanding on our revolving credit facility. During the quarter, we extended our existing accordion feature of $35 million for one year maintaining $360 million of total availability under our revolving credit facility. We ended the quarter with total inventory up 24% versus last year.

It is important to note that our Q1 2020 inventory included a provision of approximately $63 million last year. If you remove the impact of the inventory provision, our inventory increased 5% versus last year. The entirety of this increase in inventory versus last year continues to be comprised of the back-to-school basics, we have been carrying since last June. Our seasonal carryover inventories are down approximately 49%.

Moving on to cash flow and liquidity. We used approximately $17 million in cash from operations in Q1, due to the repayment of certain suspended 2020 rents, net of abatements, as well as other plan changes in working capital, which brought our vendor payables back in line with historical levels.

It is also important to note that we historically experienced negative cash flows in the first half of the year, as the result of the seasonality of our business. We remain confident that between our cash on hand, cash from operations and credit facility, we have the necessary liquidity to support our operations. Capital expenditures in Q1 were approximately $7 million.

Now, I’ll provide an update on our store activity in the quarter along with planned actions, we are taking to continued to accelerate our fleet optimization initiative. During the first quarter, we completed the balance of these agreements on our 2020 occupancy negotiations with our key go-forward landlords. We recognize the rent abatement of $8 million in Q1, bringing the total abatements on the account of 2020 to $21 million to-date. We expect to recognize the remaining portion of our 2020 abatements in Q2, which will be meaningfully lower than Q1.

We also realized significant occupancy savings from favorable lease negotiations on our go-forward store portfolio. And from the 199 store closures in the past 12 months. Inclusive of the 25 stores, we permanently [Phonetic] closed in the quarter. We ended the quarter with 724 stores and total square footage of 3.4 million, a decrease of 20%, compared to Q1 last year. We are planning to close an additional 98 stores by the end of fiscal 2021, which will bring our total store closures to our previously announced target of 300 stores.

While we are not providing EPS guidance, due to the continued uncertainty and volatility caused by the pandemic, we wanted to provide you with some thoughts regarding Q2 and full-year 2021. Starting with Q2 net sales, as Jane mentioned, we are off to a strong start for the quarter. With respect to the channel level sales, we would like to remind you that we experienced unprecedented levels of e-commerce demand last year. As we leverage our omni-channel capabilities to fulfill orders from our temporarily closed stores.

E-commerce represented over 70% of our sales in Q2 last year, but approximately half of those sales were filled from stores inventory. We anticipate that our e-commerce sales will be lower in Q2 this year versus Q2 last year. We also anticipate store sales will be significantly higher in Q2, as we anniversary the shutdown of our entire store fleet for approximately 50% of the quarter last year.

Lastly, we are planning for lower sales in our Canadian stores business. Given the ongoing government-mandated lockdowns that had been in place since the beginning of March and are scheduled to be in place until sometime in June, impacting approximately half of our Canadian fleet.

We expect that gross margin — Q2 gross margin will moderate from Q1 levels as a result of several factors, including the deleverage of our fixed expenses on the lower net sales, the larger Q1 abatement and the higher inbound transportation cost, due to continued supply chain disruption.

SG&A is planned to be in the range of $110 million, which is higher than Q1, due to the anticipated reopening of the temporarily closed stores in Canada, as well as the expected easing of the landlord reductions in store operating hours. And higher than Q2 last year, due to the anniversarying of the COVID-19 closures, as well as higher incentive compensation accruals.

Moving on to the balance of 2021. For the second half of the year, we expect store sales to be flat to 2020 levels, as increased store productivity should offset the impact of our permanent store closures over the previous 12 months. We are planning to close an additional 98 stores during fiscal 2021 to achieve our accelerated store closure target of 300 stores and expect approximately 75% of our total revenues to be generated outside of traditional malls in the fiscal 2022.

We anticipate digital sales will represent approximately 50% of total sales, which puts our steady state, annual digital revenue penetration, significantly ahead of our competition supported by our digital investments, strong transfer rate and fleet optimization initiatives. We anticipate increased cost for inbound freight will continue to impact our business.

Raw material input costs are also rising, we have been able to successfully mitigate these increased costs to-date with our 2021 AUC projected to be down low single-digits through our holiday placements. We are planning to return to positive operating cash flows for fiscal year 2021. However, we expect operating cash flow generation to be slightly lower than historical levels for the first half of the year, due to the repayment of the suspended 2020 rents, net of abatements, as well as other plan changes in working capital.

As a reminder, we are planning to receive a tax refund in the range of $40 million, as part of the benefits provided under the CARES Act. I’ve mentioned on our prior calls, that our term loan provides us with the opportunity to use a significant portion of this refund to pay down the term loan without penalty. We are planning for capital expenditures in the range of $50 million for the year 2021 with the large majority allocated to digital and supply chain fulfillment initiatives.

Lastly based on our current liquidity position and assuming a normalized back-to-school selling season. We plan to resume our capital return program in the third quarter of 2021. As a reminder, we currently have $91 million remaining of our $250 million authorization.

At this point, we will open the call to your questions.

Questions and Answers:


Thank you. The floor is now opened for questions. [Operator Instructions] Our first question comes from the line of Dana Telsey of Telsey Advisory Group.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning everyone and congratulations on the very nice progress.

Jane Elfers — President and Chief Executive Officer

Thanks, Dana.

Dana Telsey — Telsey Advisory Group — Analyst

Jane the — all the investments you’ve made in the year coming to professional in these results.

Jane Elfers — President and Chief Executive Officer

Thank you.

Dana Telsey — Telsey Advisory Group — Analyst

The benefit that you saw from stimulus and now frankly, we have the upcoming Child Tax Credits that are going to — should be a benefit through the rest of the year also. How are you looking at that? Whether it’s in product? How are you thinking about it in terms of the ability to generate full price sell-through and digital?

Jane Elfers — President and Chief Executive Officer

Well, I think from a stimulus point of view, obviously stimulus benefited everyone in the quarter. I think, as we mentioned both Rob and I, May is off to a very strong start. Stimulus over time will obviously be temporary, I think fundamentals are what is lasting and we’ve been working at this for a long time. I think when you look at the results we had in Q1 and where we see the balance of the year, I think that comes from the hard strategic work and the structural work. We’ve done with respect to occupancy, fleet optimization, SG&A, the digital penetration now at a steady-state 50% annual. All the work we’ve done in the last year on fulfillment costs, the competitive landscape is completely different now than it was a few years ago. What we’ve done on supply chain and then, of course, consistent product offering. We have fundamentally transformed the company and really, as I said in my prepared remarks leverage 2020, a really difficult period to really set ourselves up for expanded operating margin.

I think when you look at what we talked about with back-to-school, you know, we’ve got all states except nine right now reporting that they’re going back to 100% learning. So barring any reversal or recurrence of COVID or another setback, clearly those Child Tax Credit benefits starting in July and going through December at a minimum. I know they’re talking about extending them, but right now, July to December. Clearly that will be a very large tailwind for us.

And back-to-school with kids not being in school for the last two years, since they’ve been in school, and you add in the Child Tax Credit and you add in the fact that we’ve got our inventory. I know a lot of people are having trouble getting their inventory in, but our back-to-school inventory is in place, it really sets up quite nicely for an exciting back-to-school. So I think that’s how I’d answer that question. Thanks.


Our next question comes from the line of Jim Chartier of Monness, Crespi, Hardt & Company.

Jim Chartier — Monness, Crespi, Hardt & Company — Analyst

Hi, good morning. Thanks for taking my question. Just want to talk about the margin opportunity going forward. One, you talked about occupancy savings this year, do those continued beyond this year? And then, as you think about the structural changes that you’ve made the lower distribution costs, lower occupancy costs, improve SG&A cost structure. It seems like your historical operating margin of 7% or 8% could be too conserve, could you just talk about where that margin should be longer term? Thanks.

Jane Elfers — President and Chief Executive Officer

Yes. Thanks, Jim. I’m going to start off on the occupancy one and then I’ll turn it over to Rob talk about operating margin. With respect to occupancy, I think it’s really important for everyone to understand what actually transpired in 2020, that was different than in previous years. So I would say in April of 2020, when I saw what was possible with respect to the power of our digital business and how much revenue we were generating with all of our stores closed and made two important decisions.

First, I made the decision to fully support the digital pivot by dramatically accelerating our store closure program, which well documented targeted 300 permanent store closures in 20 months. And second, and as importantly, if not more importantly, I made the decision to leverage all the previous good work that have been done on flexible lease term to reset the occupancy cost structure for the company.

So Rob and I partnered on this, I guess, Rob and starting in Q2 of last year and the two of us have spent an enormous amount of time strategizing and negotiating. We have over 200 landlords as we’ve mentioned before. And the amount of time we’ve spent with them on the significant number of lease actions that were available to us. Rob mentioned in his prepared remarks, that we’re still finalizing the last of our 2020 lease negotiations through Q2 of this year, with the abatements he spoke about.

So Rob and I accomplished what we set out to do, which was to target, plan and execute 300 permanent store closures. And really leverage the flexibility of our lease term to reset our occupancy cost structure going forward for 2021 and beyond. And that really was as a result of partnering and making the decision to move forward collaboratively with the right landlords and part ways with the rest. And we anticipate that this occupancy work is going to be a significant contributor to our plan for accelerated operating margin expansion. And well worth the time and effort, the two of us have put into it over the last year, recognizing at the same time, we were navigating and leading the company through a pandemic.

So with that, I’ll turn it over to Rob.

Robert Helm — Chief Financial Officer

Jim, from an operating margin perspective, it’s a little bit of a long-winded answer, because I have to go back a few years, just to give a little more detail on the trajectory of this business. But back in 2016 and ’17, we had operating margins in the range, I believe with these 596 at that time and we saw that our transformation strategy was really starting to gain hold and lock in. At that time we made the decision to accelerate $50 million of investments to accelerate — further accelerate our digital penetration of our business and our digital business overall. And clearly with the pandemic what happened last year, leveraging some of those abilities in terms of ship from store and the things that we did to move the needle overnight to steady-state of 50% digital penetration annually, that was the right call.

Also the other piece, that we have the call out is from — in 2018, 2019 we made the very visible decision to go after market share and take short-term margin pain for a long-term margin gain, which negatively impacted both our gross margin line and our operating margin line. With the shrinking market in terms of less births and a smaller kids market overall, clearly that was the right decision, as well as and has positioned us to come out of this pandemic to had — to gain that fragmented market share.

So now with the accelerated investment behind us and less competition and considerably less cleared out competitive landscape, we’ve seized the opportunity to shift to digital to a steady-state 50%. And with our work that we’ve done in the last year that Jane mentioned in terms of resetting our cost structure in terms of being digital first from an SG&A footprint with less store expenses and less upper field and overhead and resetting our occupancy expenses. We’re now set for a resumption of that upward trajectory that we saw prior to 2018 in terms of operating margin.


Our next question comes from the line of Jay Sole of UBS.

Jay Sole — UBS — Analyst

Great, thanks so much for taking my question. So I want to follow-up on what you just said. You’re basically saying that if you look at the 8.5% and 9.5% margins that you did a couple of years ago. The differences today are: one, there is a bigger e-com mix, which is a better margin business. You’ve got lower rent in the remaining stores business, there is less competition, which is allowing you to raise AUR versus that time and there is lower overhead within the cost structure?

And so, but I wasn’t sure I understood the conclusion, which is that you think the margins — the EBIT margins can be better than it was in the past? Or you say it’s going to be at the same as it was in the past? And may be if you give us — first clarify that?

And then the second thing is Gymboree, could you give us an idea on where the launch stands right now like what impact you think it can have on sales and back-to-school and just where the — give us an update on Gymboree, that will be helpful? Thank you.

Jane Elfers — President and Chief Executive Officer

Sure. Thanks, Jay. As far as Gymboree is concerned, we’ve talked about it a lot. We launched into a pandemic that business is highly dependent on events and holidays and occasions. Clearly Easter was not a good — Q1 was not good for Gymboree from an Easter perspective. We feel very strongly in Gymboree. We feel very good about the customer response we’ve got and we’ve spoken about it being north of $140 million opportunity. We feel we have not changed our mind on that. We feel that it is north of $140 million opportunity, the same as we expect for TCP with the return-to-school and the return-to-occasions and the relaxing social distancing. We expect Gymboree to have a strong back half and we’re planning it that way, particularly as you get into the holiday period.

I’ll turn it over to Rob for operating margin, I’m not sure he’s going to bite on that one. But, Rob?

Robert Helm — Chief Financial Officer

In terms of operating margins, we haven’t given more guidance, right? So I’m not going to give actual numbers relative to operating margin. My comments really are to clarify that we’ve made the structural changes and we’re past our investments and have a considerably cleared out competitive landscape. The operating margin is obviously contingent on sales levels returning, supply chain disruption and cost inflation, all those other factors that are macro factors that impact us in this environment. But we — the bottom line conclusion is we’ve made changes to reset our occupancy structure. We reset our SG&A structure to be digital first and we’ve set ourselves with e-commerce packaging and network optimization, where we should be able to drive operating margin expansion again in the future.


Our next question comes from the line of Paul Lejuez of Citi.

Kelly — Citi — Analyst

Hi, this is Kelly on for Paul, thanks for taking our question. Just on the question on the gross margin, we there any benefit from any one-time inventory reserves in 1Q ’21? And how do we think about the merchandise margin going forward?

And then just second question, as it relates to gross margin, thanks for the color on the occupancy line. But any chance you could provide — any color on how much occupancy is down relative to 2019? And just how we should be thinking about that going forward. And then just lastly, just on SG&A, should we be using that 2Q guidance is sort of a proxy for SG&A for the remainder of this year, as [Indecipherable] being down kind of 5% versus 2019 levels? Thank you.

Robert Helm — Chief Financial Officer

Thanks, Kelly. And I’ll unpack each of those one at a time. From a gross margin perspective there were no one-time items within gross margin, no inventory reserve releases, just the one-time abatement of $8 million, which contributed roughly 200 basis points of additional gross margin. We expect obviously a slightly less meaningful abatement in Q2. But the rest of it is merchandise margin net of delivery expenses for e-com etc.

The next piece of your question relative to SG&A. SG&A, we had a SG&A of a roughly $104 million. We expect that’s a rise slightly to $110 million for the second quarter. We haven’t provided longer-term guidance in that at this point. But we expect that’s a probably a pretty fair base to consider going forward. Considering the fact that we expect store hours to resume for our major mall landlords and eventually Canada to reopen completely and to be able to incur those store expenses.

And then the last piece to your question, I think, I missed the piece in between. On occupancy expenses, occupancy expenses were $21 million lower in the quarter than last year $8 million of that was the one-time abatement, the remaining $13 million represents the impact of the permanent closures and our favorable lease negotiations. When you think about that relative to 2019 inclusive of the store closures since that time, occupancy expenses were roughly $25 million lower.


Our next question comes from the line of Susan Anderson of B. Riley.

Susan Anderson — B. Riley FBR — Analyst

Hi, good morning, nice job in the quarter. Jane, I was wondering maybe if you could talk about the dressy product over Easter. Did you see that — the consumer returning at all to have that type of product. I think you have less in store though. And then just in terms of the boost that you mentioned as schools, kind of, reopen this spring in first quarter. I guess, was that a significant benefit? And were you able to sell down some of that uniform inventory and for back-to-school this year, are you planning inventories up?

Jane Elfers — President and Chief Executive Officer

Thanks, Susan. With respect to Easter dress up, it was at a historical low in Q1 things like dresses, ties, hats, tights, those types of products, very, very low demand. We had bought it down and [Indecipherable] as we did, because it was very difficult. What we did see in Q1 was a pretty significant boost in bac-to-school product, as compared to Q1 2019. And within that product you saw some of the elements that we also do double duty with on Easter, so you saw things like Polos and Woven bottoms in boys pickup that they were for back-to-school versus for dressy. So I think that bodes well for back-t-school and what we are anticipating in Q3.

And then as far as inventory levels, we pretty — we talked them extensively since last back-to-school or carry over inventory as Rob mentioned is down almost 50%. And we are still carrying, you know, nice amount of the same basics we’ve had since last year. We anticipate that as we get towards the end of Q3, you will see our inventories normalize with a normalize back-to-school.


Ladies and gentlemen, we have time for one more question. Our final question comes from the line of Marni Shapiro of Retail Tracker.

Jane Elfers — President and Chief Executive Officer

Marni? Okay, no Marni. Well, thank you everyone.

Marni Shapiro — Retail Tracker — Analyst


Jane Elfers — President and Chief Executive Officer

Hi, Marni, are you there?

Marni Shapiro — Retail Tracker — Analyst

Hi, I’m here. Yes, that’s clear, I can hear you guys maybe the connection was bad. So I said congrats amazing quarter and welcome back.

Jane Elfers — President and Chief Executive Officer

Thank you.

Marni Shapiro — Retail Tracker — Analyst

I just want to dovetail on the back-to-school, I know you have all the uniform basics packed and held, so to speak. But what about the ancillary products you do a nice back-to-school, backpack business and even shoes. I know you always have a good shoe business there. And if you can talk a little bit about your marketing efforts and plans for marketing in the back half, and will you increase the costs to — to increased marketing in the back half?

Jane Elfers — President and Chief Executive Officer

Yes, I think as far as back-to-school products concerned that the uniform product is impact and how that’s on the floor and then some on the site and so it’s available for mom, whenever she needs it based on how schools were rolling with hybrid and remote learning models that we’ve had that available to sell for the customer, alongside of that we’ve had a shoe assortment and a backpack assortment, which is also fared well in Q1 versus Q1 2019. When do you think about the product that’s on the water and that’s coming for back-to-school, it’s more fashion and from a delivery point of view, we’re on track with that. The supply chain disruption is like a two to four week disruption that we’re seeing on the summer product, but for back-to-school, so far we’re looking good.

Another element — big element of back-to-school is our graphic T key program, which is also one-time. So, all signs point to us being in a really good place with inventory for back-to-school. From a marketing point of view, certainly we’ll be spending more money on marketing, than we did last year, because there wasn’t a back-to-school and marketing was pulled way back. So we anticipate being able to really go after, particularly on the digital side of the business as we are now close to 50% digital business will continued to support those acquisition, retention and reactivation strategies throughout the back-to-school period.


And thank you for joining us today. If you have further questions, please call Investor Relations at (201) 558-2400, extension 14500. You may now disconnect your lines and have a wonderful day.


This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

These fast-food stocks can strengthen your portfolio this year. Here’s why

For American restaurant chains, the early months of the pandemic were a challenging period. But soon things changed for the better as people started ordering their favorite food items online

What to expect when McCormick & Company (MKC) reports Q1 results next week

Shares of McCormick & Company, Incorporated (NYSE: MKC) were up over 2% on Friday. The stock has dropped 12% year-to-date. The condiments manufacturer is scheduled to report its first quarter 2023

KB Home (KBH) Earnings: 1Q23 Key Numbers

KB Home (NYSE: KBH) reported total revenues of $1.38 billion for the first quarter of 2023 which was relatively flat compared to the same period last year. Net income of

Add Comment
Viewing Highlight