Empty Classrooms Spell Trouble For Largest Children’s Clothing Retail Chain

Kids’ clothing retailer The Children’s Place was hit hard when the Covid-19 pandemic began closing U.S. malls in March.

Now, as the pandemic is keeping most U.S. schools closed, or preventing them for re-opening in a traditional manner, The Children’s Place is about to get hit even harder.

In reporting its second quarter results today, The Children’s Place painted a grim picture for the rest of the year and said it doesn’t expect back-to-school shopping patterns to return to normal before next spring, at the earliest.

President and CEO Jane Elfers told analysts and investors that she and the company’s executive team, starting about six weeks ago, have been closely monitoring school reopening plans in all of the states where it has stores.

As of this week, Elfers said, in 47% of the markets with Children’s Place stores, the schools will be doing virtual learning this fall. Another 35% are using a hybrid model, with some virtual learning and some in-person, and 11% are allowing parents to choose either virtual or hybrid. Only 4% of the school will have traditional in-person instruction, and 3% have not yet announced their decision.

“We don’t anticipate that there will be a catalyst to drive any back-to-school meaningful business until Spring ’21 at earliest,” Elfers said. “We’re not looking for anything to happen in the later half of the year or in the fourth quarter to drive back to school sales,” she said.

And that’s bad news for a retail chain where back-to-school season rivals holiday time as a main sales driver of the year.

The hit from closed classrooms, along with mall stores that remain closed in some states, as well as reduced operating hours at the open malls, means The Children’s Place is expecting total net sales will drop by 25% to 30% during the current third quarter.

In contrast, in Canada, where close to 90% of schools are returning to full-time, in-person learning, sales are down only by single digits, to date, in the third quarter, the company said.

Approximately 70% of its third quarter sales are generated in August and September, “with the majority of those sales coming from back-to-school apparel and accessories,” Michael Scarpa, Chief Operating Officer and Chief Financial Officer, said on today’s conference call.

During the second quarter, which ended August 1, net sales fell 12.3% to $368.9 million, with a net loss of $46.6 million and adjusted loss of $21.7 million, the company reported today.

Wall Street reacted to the bad news about back-to-school with a sharp decline in the stock. Children’s Place shares closed down 18.85% for the day, at $18.92

The Children’s Place is in the midst of reinventing itself from a primarily mall-based, brick-and-mortar behemoth to a more nimble, digital-first operation. It deserves high marks for some of the digital wins it has accomplished since the pandemic began, both in the first and second quarter.

During the second quarter, digital sales rose 118% and the base of digital customers increased 175%. Downloads of its app were up 115%.

Pre-pandemic, the company had invested $50 million into improving its digital capabilities. That helped it turn many of its closed stores into fulfillment centers during the peak period of mall closings, with employees filling online orders from stores, allowing the company sell merchandise that otherwise would have been trapped in closed stores.

The Children’s Place in 2013 announced long-term plans to “right-size” and shrink its store count, and the pandemic will speed up that game plan.

It has 824 stores currently and it expects to shrink to approximately 625 stores by the end of fiscal 2021, and to have only 25% of its total revenue coming from mall based stores by that time. It closed 102 stores during the first half of this year.

That right-sizing of its store footprint will leave The Children’s Place with about half the number of stores it had at its peak, and 42% fewer stores than just five years ago.

But as The Children’s Place has embarked on its digital transformation, it has also learned some of the hard lessons of the tough new math of e-commerce. Gross margin dropped because of higher costs involved in fulfilling and shipping online orders from stores.

During the second quarter, the company did roughly 55% of its e-comm shipping from stores – “obviously a very unproductive way to move that inventory,” Scarpa said. He expects there will be less ship-from-store this quarter, which will help margins, but also higher shipping fees from UPS and the postal service, which will hurt them.

Along with the bad news, there are good reasons to root for The Children’s Place to ultimately pass the pandemic test. Tween mall competitor Justice recently liquidated 710 of its 828 stores. Of the liquidated stores, 388 were in malls or centers that also had a Children’s Place store, meaning one less competitor in the older girls space for Place.

Elfers also noted that through June, according to research firm The NPD Group, The Children’s Place is the only “pure-play children’s retailer” (meaning not a general merchandiser like Walmart or Target) to gain market share year-to-date.

If it can weather what will be a tough fall and winter, 2020 and Spring 2021, it could find itself in very good shape for back-to-school season 2021, whatever that will look like.