Earnings Transcript for PLCE - Q2 Fiscal Year 2023

Operator: Good morning, and welcome to The Children's Place Second Quarter 2023 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; Maegan Markee, Brand President; Sheamus Toal, Chief Operating Officer and Chief Financial Officer; and Josh Truppo, Vice President, Financial Planning and Analysis. [Operator Instructions] The Children's Place issued its second quarter 2023 earnings press release earlier this morning, and a copy of the release and presentation materials have been posted to the Investor Relations section of the company's website. Before we begin, let me remind you that statements made on this conference call and in the company's earnings release and presentation materials about the company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company's website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. It is now my pleasure to turn the call over to Jane Elfers.

Jane Elfers: Thank you, and good morning, everyone. Before we get started, I want to congratulate Meagan and Sheamus on their recent promotions, and welcome Mary Beth Sheridan to our team. I'm looking forward to partnering with them as we continue to advance the company's digital-first strategy. Our Q2 results exceeded our guidance on both the top and bottom line. The top line beat was the result of our strong digital performance, fueled by a strong start to back-to-school, driven by our successful first-to-market, back-to-school digital marketing strategies and our on-trend product assortments. In addition, Amazon delivered another outstanding quarter. The bottom line beat was the result of our continued focus on expense management. With respect to monthly sales cadence, May was our weakest month, June improved significantly with the kickoff of our back-to-school campaign and July was our strongest month of the quarter. Our e-commerce sales were up low single-digits for both the month of June and the month of July, driven by a low double-digit increase in e-commerce traffic for the quarter. Our e-commerce channel represented an industry-leading 51% of our retail sales in Q2, up from 47% last year and 30% in 2019. We haven't touched on birth rates for a while, so I wanted to take a moment to update you on how we think about birth rates within the context of our digital-first strategy. As we've said for the past decade, we do not anticipate birth rate increases when we plan our business, and it's a good thing we don't. Just to refresh everyone, here are some facts on birth rates, pre versus post pandemic. Birth rates hit their peak at 4.3 million in 2008 and have never recovered since. In 2019, prepandemic, births were 3.75 million. In 2020, they dipped to 3.6 million, a 40-year record low, and stayed at those approximate levels for 2021 and 2022. And for 2023, birth rates are projected to remain flat to 2022. We believe that market share gains, not hoping for a baby boom, is what will move the needle for our business. And we believe that in order to gain share in the future, digital needs to be our top priority. The digital channels are where our current core millennial customer prefers to shop for her kids. And based on the data, digital is where our future Gen Z moms will overwhelmingly prefer to transact. Almost all new digital buyers will come from Gen Z. Gen Z digital buyers will surge from 45 million today to over 61 million in 2027, only 4 short years away. Mobile or m-commerce is where Gen Z overwhelmingly prefers to do their digital shopping. So as Gen Z becomes our next generation of core customers, it is critical that we make sure we are ready for them. The importance of the digitally native Gen Z demographic to our future business cannot be underestimated, and that is why we prioritized mobile-first as the cornerstone of our digital transformation several years ago. Maegan will provide more detail on our progress in this area in her prepared remarks. Moving on. We have previously shared our expectation that once we were past the pandemic and the historic supply chain upheaval and unprecedented cost, we would be in a better position to assess our accelerated strategic transformation from a legacy store operating model to a digital-first model, and to capitalize on the efficiencies of the new model. We've learned a lot since 2019, and it's clear to us that because we accelerated our digital transformation and our fleet optimization strategies, we are more efficient and streamlined and can now operate the company more effectively with less resources, less stores, less inventory, less people and less expense, resulting in what we believe will translate to more consistent and sustainable results and more operating profit. In his prepared remarks, Sheamus will cover the following topics and how they are planned to positively impact our financial performance in the short term and beyond. Less stores. Our accelerated store closure strategy and its critically important impact on our future performance as we trade off low-quality store sales for higher-margin e-commerce and wholesale revenue. Less inventory. As we move beyond 2023 and the high costs embedded in our inventory, we have the ability to operate the company at lower inventory levels versus prepandemic as a direct result of our transformation from a legacy store operating model to a digital-first model. Less people. The ability to operate the company with a lower corporate head count versus pre-pandemic as a direct result of our transformation from a legacy store operating model to a digital-first model. And less expense, our ability to operate the company with a lower, permanent fixed expense structure as a direct result of our transformation from a legacy store operating model to a digital-first model, with significantly expanded digital and wholesale businesses, all leading to more consistent and sustainable results and the opportunity for expanded operating margin versus prepandemic levels. But before we get to Sheamus, I will turn it over to Meagan to discuss the significant progress we have made pre versus post pandemic with respect to our marketing transformation and marketing's impact on our business. pre and post pandemic. Meagan?

Maegan Markee: Thank you, Jane, and good morning, everyone. I will focus my remarks today on the 4 key initiatives that have propelled our marketing transformation and the impact the transformation has had on our results pre versus post pandemic. It's clear from our conversations that a lot of you are not familiar with, and would like to learn more about the award-winning partners we work with, the state-of-the-art proprietary marketing tools that we leverage every day to measure and maximize our results, the effectiveness of our marketing spend and the results of our significant shift to nontraditional media since the start of the pandemic. The 4 key initiatives that I'll cover today that underpin our successful marketing transformation are

Sheamus Toal : Thank you, Meagan, and good morning, everyone. We were pleased that despite the continued macroeconomic pressures, the second quarter exceeded our guidance from both a top and bottom line perspective. We continue to make significant progress on our inventory levels during the quarter. We liquidated more of our spring and summer product during the second quarter than we originally planned to ensure that we started the back half in an even a cleaner inventory position. Due to our efforts, our high AUC spring/summer inventory is down 27% versus last year, and our total Q2 ending inventory is down 13% year-over-year, significantly better than our guidance of down high single-digits. Importantly, we believe that inventory strategies that we have in place going forward will result in continued improvement in our inventory position versus last year throughout the back half of 2023 and beyond. Net sales for the second quarter decreased $35 million or 9% to $346 million, which exceeded our guidance. This better-than-expected result was primarily driven by our strong e-commerce performance and a strong start to back-to-school. These favorable results were in the face of continued macroeconomic challenges, including persistent inflation, a highly promotional retail environment and concerns over the resumption of student loan payments. Our U.S. net sales decreased by $41 million or 13% to $275 million, and our Canadian net sales decreased by $6 million or 18% to $29 million. Comparable store sales decreased 9% for the quarter. Our comparable store traffic was down approximately 4%, while our e-commerce traffic was up low double digits. Our comp store traffic decline was driven by pressure in the month of May with an improvement as we entered the key back-to-school selling period. However, our comp store traffic versus 2019 continues to be down more than 30%. While our consolidated AUR declined approximately 5% for the quarter, driven by the liquidation of spring and summer season merchandise, our AUR and go-forward basics and back-to-school product was up year-over-year. Importantly, AURs remain significantly higher than prepandemic levels, validating the success of our restructured pricing strategies, which we believe will pay significant dividends as input and transactional costs continue to come down in the back half of 2023. Gross profit margin for the second quarter decreased to 25.4% of net sales as compared to 30.2% of net sales in the prior year. This reflects the combination of an unprecedented increasing input costs, including cotton and supply chain costs, the impact of accelerating our spring/summer liquidation starting in early June in order to enter Q3 in a stronger inventory position and the significant growth of our wholesale business, which operates at lower gross margins, but also operates at lower SG&A expenses and is accretive to our operating margin. Adjusted SG&A was $102 million for the second quarter as compared to $114 million in the comparable period last year. This decrease was primarily a result of reductions in store expenses, home office payroll and equity compensation. As you heard from Meagan, marketing is a critical part of our digital transformation strategy, and we are pleased to be able to self-fund our incremental marketing needs for the balance of the year through efficiencies from our transformation to a digital-first operating model. Our net interest expense was $7.6 million for the quarter versus adjusted net interest expense of $2.6 million in the prior year's quarter. The increase in interest expense was driven by higher borrowings and higher average interest rates associated with the revolving credit facility and term loan due to increases in our variable rate based upon market rate increases. Our adjusted tax rate for the quarter was approximately 19% as compared to 19% in the prior year. For the second quarter, we reflected adjusted net loss of $26.5 million or $2.12 per share as compared to an adjusted net loss of $11.7 million or $0.89 per share in the comparable period last year. As the business has transformed from a legacy store operating model to a digital-first model, as previously announced, we implemented several planned actions, which resulted in nonoperating charges totaling approximately $12 million, consisting of approximately $6 million of employee severance, benefit costs, and professional fees associated with the workforce reduction, and approximately $5 million consisting of a lease termination payment, accelerated depreciation and other costs associated with the early termination of our corporate headquarter lease. Moving to the balance sheet. We ended the quarter with cash and short-term investments of $19 million, and with $348 million of borrowings on our recently expanded revolving credit facility and a modest amount of long-term debt, which remains unchanged at $50 million. We continue to expect to decrease borrowings by more than $100 million by the end of 2023 versus the end of 2022, further positioning us for long-term sustainable growth. As I previously noted, during the quarter, we continued to make progress in our inventory reduction efforts. Q2 ending inventory levels were down approximately 13%, ahead of our expectations, enabling us to end in a healthier unit and cost position as we enter the important back-to-school selling period. We expect inventory levels to continue to be down versus last year throughout the balance of 2023, providing a significant opportunity to expand free cash flow. Moving on to cash flow and liquidity. We used $38 million of cash from operations in Q2 versus a use of $34 million last year. As we will discuss in our outlook, our digital-first model better positions us to generate free cash flow, which we expect will be considerable in the second half of the year. Capital expenditures in Q2 were $7 million. During the second quarter, we closed 3 locations, ending the quarter with 596 stores. We continue to carefully evaluate our store fleet and close lower-volume, underperforming stores. With over 75% of our fleet coming up for lease action in the next 24 months, we maintain meaningful financial flexibility in our lease portfolio. As we look to the future, we remain confident that based upon our accelerated transformation to a digital-first retailer, we can operate the company with significantly less than we were able to do prior to the pandemic, less stores, less inventory, less people and less expense, resulting in more consistent and sustainable results and more operating margin. Let me cover these topics in greater detail. I will reference 2019 where appropriate, as 2019 represents the most recent prepandemic year, and for The Children's Place specifically, 2019 represents the best comparison pre our accelerated digital transformation. First, less stores. While we've talked at length about our real estate portfolio and our accelerated store closing strategy, I wanted to provide some hard facts that illustrate the significant financial benefits of our store closure strategy. Since 2016, we have closed 495 stores. And since 2019, we've closed 392 stores. With the expected 80 to 100 store closures this year, we will have closed almost 600 stores since 2016. We estimate that traffic to these stores that we have closed since 2019 would have been down over 30% versus 2019, resulting in significantly lower store productivity, which, when combined with higher occupancy costs, higher wage rates, significantly higher shrink and retail theft and the inflationary pressures on corporate overhead, would have resulted in these stores losing tens of millions of dollars on an annualized basis. We have historically transferred more than 30% of the revenue from closed stores to adjacent locations and to our digital channel, which clearly helps mitigate the loss of revenue and provide a vehicle to retain customers. Additionally, the closed stores were significantly less effective in liquidating inventory, creating margin pressure as compared to our digital channel. We estimate that had these stores remained open, they would have required in excess of $50 million of working capital to fund a full inventory assortment, creating a significant strain on our working capital availability. Importantly, while the store rationalization program has resulted in the closure of underperforming stores that no longer strategically aligned with our core customer, our fleet optimization strategy has enabled us to establish a new go-forward target base of approximately 500 stores ending for the full year 2023. The composition of our new 500 store base is much more heavily weighted towards outlets versus prepandemic. Outlets are our most productive and profitable store type. And entering 2024, we expect that outlets will represent approximately 22% of our stores versus 14% in 2019, and approximately 30% of our store sales versus 20% of sales in 2019. Throughout our decade-long fleet optimization initiative, the company has been laser-focused on the significant shifts taking place with respect to demographics. Birth rates have been on a decline for 15 years. And over the last decade, population shifts out of the Northeast and Midwest and into the markets in the Southeast and Southwest have been significant. It is important that our brick-and-mortar stores are positioned in markets with a population to support our product. Prepandemic, 60% of our U.S. stores were in the Northeast, Midwest and West. And entering 2024, that number will be in the low 50% range. Additionally, since the pandemic, many of our core millennial customers have taken advantage of work remote capabilities and migrated south and west for a better quality of life. The data is very clear. Had we not closed them, these underperforming stores would have been an untenable burden on the company. And because we closed them, we are significantly better positioned going forward from a top and bottom line perspective. For the past decade, we have been focused on transforming to a digital-first, digital-dominant retailer because unlike many other omnichannel retailers, digital is our most profitable channel, and our customer clearly prefers shopping for her kids online. Looking at other omnichannel retailers across our peer group, the average digital penetration is approximately 30%. We have an industry-leading digital penetration in excess of 50% and growing in our most profitable channel, which we believe is a significant competitive advantage that now allows us to be more flexible and more profitable versus prepandemic as the millennial and Gen Z moms continue their historic migration to the mass and online channels. Next, less inventory. Following the pandemic, we experienced a significant spike in input costs, including cotton and supply chain costs. As we have discussed at length, these factors, combined with the challenging external environment, resulted in inflated inventory levels throughout fiscal 2022 and into the first half of 2023. And in response, we have taken several strategic steps with respect to inventory management. We liquidated seasonal inventory in Q4 of 2022 to reduce risk and enter 2023 in a stronger inventory position. During the first 6 months of 2023, we have continued our focus on liquidating our high AUC inventory. And because of those efforts, we are entering the important back half of the year in a much cleaner inventory position, with carryover seasonal inventory down 26% versus last year. In light of the reductions of input costs, combined with the current macro environment, and in support of our transition from a legacy store model into a digital-first model, we have significantly pulled back on our inventory investments for the balance of 2023 and into 2024. Finally, based upon the impressive results we have seen in the back half of 2022 with respect to our celebrity and influencer marketing campaigns, we have increased the inventory investments devoted to these campaigns. Next, less people. As part of our structural transformation from a legacy store operating model to a digital-first retailer, we recently implemented a planned workforce reduction. This initiative resulted in a 17% reduction of our salaried workforce, representing 181 positions, the substantial majority of which were located at our corporate office. While our prior and current guidance reflect the financial benefit of this reduction, this was an important step that we were able to take as a direct result of our transformation, enabling us to operate our company with less headcount versus prepandemic. Now let's discuss less expense. We believe the permanent structural efficiencies we have gained by moving away from our legacy store operating model, combined with our strong focus on expense optimization, will enable us to continue to operate in a significantly more effective and efficient manner. A recent example of this is the announcement of our corporate office lease termination. After rightsizing our head count, we can now operate with significantly less space, and we were not willing to accept the above-market rent escalations that were built into our previously -- previous lease. And we are now in the process of determining alternative solutions before the expiration of our reduced lease term, which expires in May of 2024. Our expense reduction initiatives will be further bolstered by our ongoing and rapid expansion of our second most profitable business, wholesale, driven by Amazon, which operates at a lower gross margin rate than our retail business, but at a significantly lower SG&A rate than our retail business and is accretive to our operating margins. We anticipate that the 300-plus percent increase in our wholesale business since 2019 will have an approximate 250-basis-point negative impact on our gross margin rates in 2023 versus 2019. However, the minimal fixed costs associated to run that business more than offsets the gross margin loss and is accretive to our operating margins. Looking ahead to 2024, our wholesale growth is expected to outpace our retail growth. So the dynamic between gross margin and SG&A will continue to positively impact our operating margins. Going forward, we believe the combined effects of these initiatives will enable us to operate the business with a significantly lower permanent fixed expense structure than we were able to do prepandemic, and will provide us with the opportunity to deliver improved profitability with more consistent and sustainable operating margins. Finally, less debt and more operating margin. While we recently announced the expansion of our revolving credit facility, which strengthens our financial position, supports our seasonal working capital needs and reduces downside risk, the combination of our reduced store fleet, decreased inventory investments, cost savings initiatives and the expected return to profitability significantly provides us the opportunity to generate meaningful free cash flow in the back half of 2023. We expect to utilize this free cash flow to pay down debt in the back half, and we continue to plan to have lower debt levels by over $100 million at the end of 2023 versus 2022. As we enter 2024, we believe the improved balance sheet positioning will help us produce more sustainable operating margins and more consistent free cash flow throughout 2024 and beyond. As the company has previously indicated, the first 6 months of 2023 were negatively impacted by several temporary headwinds, most notably cotton. These high input costs embedded in our spring and summer fashion inventory in the first half of 2023 have now largely been liquidated. And as we have previously indicated, we expect significant gross margin and operating margin expansion in the back half of 2023. Now let me take you through our outlook. The company is providing guidance for the back half of 2023 and for the third quarter of 2023, and is narrowing its previously provided guidance for the full year. For the back half of 2023, the company continues to expect to deliver double-digit operating margins, driven by strong product offerings, decreased input costs embedded in inventory, the benefit of reduced inventory levels and strong expense discipline. Net sales for the combined third and fourth quarters are expected to be in the range of $910 million to $920 million, representing a decrease in the mid-single-digit percentage range as compared to the prior fiscal year. Adjusted operating income for the 6-month period is expected to be approximately 10% of net sales. Interest for the combined 6-month period is expected to be approximately $13 million, reflecting higher average borrowings than the prior year and the impact of increased rates due to the increase in interest rates over the past year. Our effective tax rate is expected to be approximately 20% to 21%. Adjusted net earnings per diluted share are expected to be in the range of $5 to $5.25. For the third quarter of fiscal 2023, the company expects the following

Operator: [Operator Instructions] Our first question comes from Jim Chartier with Monness, Crespi and Hardt.

James Chartier: I just want to talk about the guidance for a second. So it looks like, by my math, that at the midpoint, your operating income guidance is actually up a little bit from before. So can you just talk about what changed in terms of your outlook for interest expense or the tax rate?

Sheamus Toal: Yes. Jim, I think you're generally correct. I think in terms of our operating profit guidance, we do feel strongly about, obviously, the 10% operating margin that we continue to believe that we'll be able to achieve in the back half of the year, driven by our margin expectations on a gross margin level, which, as we talked in my prepared comments, we did experience some pull forward of some clearance merchandise into July, which will benefit us versus our expectations in the back half of the year. And then obviously, our cost controls and initiatives that we continue to accelerate are helping us from an SG&A perspective, which are all helping us to improve operating profits slightly versus our previous guidance. We did experience an increase in interest rate and interest costs associated with borrowings. So that partially offset some of those increases. So that's what you're seeing in terms of the bottom line result. I think tax rate is generally where we would have expected. But essentially, you're seeing some of the operating profit improvements that we've been able to project slightly offset by increased interest rate due to higher borrowings and higher market-based rates.

James Chartier: Great. And then if I could ask a follow-up. Just -- you've moved up the marketing campaign by a month for back-to-school. Others have kind of talked about the back-to-school extending into September, late this year. How are you thinking about the back-to-school season? Are you continuing to invest in marketing in August and September at the same rate as last year? And then just overall, are you pleased with kind of back-to-school in August to date?

Jane Elfers: Yes. Jim, it's Jane. I think clearly, based on our prepared remarks, we're very excited about back-to-school. We launched early. We were first-to-market, and I think that you can tell through our results, particularly digital, that, that was a successful strategy. Just to refresh everyone, the lion's share of the back-to-school business happens between [$7.15] and [$8.15]. So 60% of our back-to-school business is between that time period. And I'm sure it's similar for others. I'm always a little surprised when people talk about extending back-to-school to September. We don't have a back-to-college business. But considering all the kids are pretty much already back on campus, I would assume that business is heavily front-loaded as it is for us. And when you think about our business at TCP, by 8/28, which is 1.5 weeks from now, 80% of our kids in our markets are back in school. So like I said, August is really where this happens for us. And August, as you all know who follow us, is an outsized month and represents usually historically about 40% of the quarter. And so what's happening now is really the big businesses in uniform, denim, graphics, that's what's really driving the sales in that 07/15 to 09/01 time period, if you will. Fashion business has been very strong for us in stores as well as on our digital channels. So we're happy to see that. And also Halloween has been -- we always launched that around 07/01, but that has been particularly strong for us. And I think as Meagan mentioned in her prepared remarks, our digital shopper shops earlier than our store shopper. And so we're seeing really positive response to that. And we'll continue to spend on marketing, as we discussed in our prepared remarks through the balance of the season. But I just want to make it clear that, as we leave August behind, we quickly move into selling seasonal products in the start of holiday and really leave back-to-school behind.

Operator: We'll take our next question from Jeff Lick with B. Riley Financial.

Jeff Lick: Congrats on a great quarter. By my math here, if I use Sheamus' data with U.S. and Canada, it appears your digital business was down mid-single digits. Obviously, you said it was up for June, July, which implies a pretty significant acceleration. I'm just wondering, I'm assuming your guidance implies digital will be up for the year -- or for -- up for the second half. And I'm just kind of wondering, do you -- are there things with regards to the marketing and that you're seeing that kind of give you even more confidence in that guidance, the digital guidance?

Sheamus Toal: Yes. Jeff, it's Sheamus. I think, first, from a trend perspective, I think generally in the ballpark, our digital business was -- in Q2 was in the low-single-digit percentage range. And as you said, and as we talked about in our prepared remarks, that was an improving trend throughout the quarter where we saw that flip to positive in the last 2 months of the quarter. I think as we look at our guidance and our expectations for the back half of the year, I think we have some different perspective by channel, and it's probably best to understand it by looking at the different channels. I think, first, as we look at the wholesale business, as we've discussed and commented on a number of occasions, we expect the wholesale business to be up significantly in the back half of the year, contributing to positive results on the top line and helping us, obviously, from a comp perspective. Secondarily, from a brick-and-mortar standpoint, given the macro pressures, coupled with continued expectations on our part for declines in mall traffic, we do expect the brick-and-mortar business to continue to be challenged during the back half of the year. And I'm really not anticipating any improvement in that trend at all. And then finally, in the back half of the year, to the point of your question, with respect to e-commerce, we are expecting a slight improvement in trend due to a combination of factors. Obviously, we've experienced positive traffic trends based upon the success of our marketing strategies. We're not anticipating that those trends will dramatically improve from where we are now, but they are positive. So we're still anticipating the success of those marketing investments as we move into the back half of the year. And then I think we see some opportunity for increased or improved conversion as we move into the back half of the year as we're better positioned in certain key items for the holiday season. And those key items importantly are further supported by some of our marketing initiatives. So I think that gives us an opportunity in the back half of the year relative to last year to see an even more improved trend in the e-commerce business versus what we saw in Q2. I think from an AUR perspective, we're anticipating still a challenging environment and not really anticipating an improvement in the trend in terms of AUR. But overall, our digital business is expected to improve slightly based upon that improvement in conversion and that continued success of the marketing investment in terms of driving traffic.

Operator: Our next question comes from Dana Telsey with Telsey Group.

Dana Telsey: Nice to see the progress. As you think about the business model shifting to digital and then certainly, every indication as it becomes a more efficient business model, how do you think of the expense structure going forward? And does it get leaner than what it is given, obviously, the balancing act of marketing investment driving customer growth and transaction, but also the expense structure internally? And then, Jane, you just announced the hiring of Mary Beth on the Chief Merchant side. What do you see that opportunity in enhancing the merchandise assortment, whether through The Children's Place brand or the other brands?

Jane Elfers: Sure. Mary Beth is a very seasoned merchant and has worked in a lot of different channels in a lot of different businesses. And so she's only been here a couple of weeks, but she has immediately hit the ground running, which is not surprising, as I had mentioned in the press release. I've worked with Mary Beth in the past so I think she's going to bring a level of discipline and a level of urgency around the opportunities in the brands, and to your point, not just TCP, but how do we continue to get the momentum going in Gymboree, how do we break through on Sugar & Jade and really make that business more important as we look to 2024 and beyond. And like I said, she's worked on a lot of different businesses. So I think that she can look across the brands and think about incrementality. I think what it also does is it really frees Meagan up to really focus her energies on marketing and on our wholesale business directly mostly from Amazon. So having Meagan be able to spend a lot more focused time on growing the Amazon business and the potential offshoots of that Amazon business, be it international or what have you, and then also to see what Meagan and her team have been able to do on the marketing front, it's just absolutely incredible when you think about where we were prepandemic and where we are now. And you look at just things like our digital business comping positive in June and July and double-digit traffic increases. We haven't heard a lot of reports so far, but from the ones we have, we are certainly a significant outlier in how strong our digital results are. And obviously, that's where our eggs are in the basket and continue to move on that. So I think that, that will really free Meagan up for that as well. And the rest of it, I'll turn it over to Sheamus.

Sheamus Toal: Yes. So in terms of the first part of your question, as far as our digital acceleration, we do see the opportunity to have a permanent reduction in our expense structure. As I commented and Jane commented in our prepared remarks, in terms of operating efficiencies, we believe that the digital acceleration will enable us to obviously, as we commented, have less stores, less inventory, less people, less expense, less debt, less interest as a result of that debt. So there's a whole host of efficiencies. On the expense side, we've obviously executed a number of initiatives this year, which are reducing expenses. We've commented in our guidance in terms of expectations for expense reductions relative to last year. And those are not a onetime thing that are temporary benefits. We believe that's a resetting of the expense structure as we shift to a more digital business, as we layer in more wholesale, which, as I commented earlier, comes with less SG&A expense. And I think it's also important to note, within that SG&A expense, as we've talked on numerous occasions, we're also investing in marketing. So we're able to achieve SG&A expense reductions despite the fact that we're making investments in marketing to drive our digital business, which are extremely important to our growth initiatives, but we're, in essence, able to self-fund those marketing investments with the restructuring of our business and the expense reductions that we see across the business. And some of that hits in SG&A expense. Some of it is also coming through occupancy cost reductions, as Meagan talked about in her comments, where we're shifting from billboards or nameplates on brick-and-mortar locations to more digital marketing initiatives. That digital marketing ends up in SG&A expense, where some of that occupancy cost was actually in our margin structure. So I think we're certainly getting more efficient, more effective with our expense structure, and that's not a temporary benefit. That's an ongoing benefit that will cascade into 2024 and beyond, enabling us to have more sustainable growth and more sustainable increases in terms of operating profits.

Operator: We will take our next question from Jay Sole with UBS.

Jay Sole : Great. Jane, I want to ask just about third quarter versus fourth quarter and just how the business has evolved because the guidance for third quarter sales looks like it's implying sales for third quarter to be a lot bigger than they will be for fourth quarter. Although if you go pre-pandemic in the past, fourth quarter was always bigger than third quarter given it's holiday. Is the change just around the wholesale business and its growth? Or is there something else going on that would really make structurally third quarter bigger now? And then if you kind of maybe just talk about Gymboree, and as that business grows, how that should impact fourth quarter, that would be super helpful.

Jane Elfers: Yes. I'll turn it over to Sheamus for the first part, and then I'll take it back for Gymboree.

Sheamus Toal: Yes. I think as Jane said earlier, in terms of the importance of back-to-school, it is a critically important time period for us where we do see a significant amount of revenue uptick in Q3. So that has definitely driven more revenue and a disproportionate amount of revenue into Q3. So it's a critically important quarter for us because of that. I think that, that's what you're seeing in our expectations in terms of the performance split between the quarter.

Jane Elfers: And then from a Gymboree perspective, I can take that part of the question. Gymboree, we're planning when we think about Q3 into Q4, Gymboree, we've talked about before, is a very holiday-centric business. So we're going to continue to see really exciting growth from the Gymboree brand as we head into Q4. And a lot of that is going to be surrounded by an incredible marketing campaign. We had announced Mandy Moore. We've continued to see really positive success with her throughout the year. And really where it kicks into gear as the tail end of Q3 heading into Q4 as we bring in our expanded holiday assortment. This is where we had a lot of opportunity last year where we saw very early selling. We oversold our inventory so when we head into December, we have a lot of opportunity in the November, December time period. So we're very optimistic about the continued growth of Gymboree, especially as we kick into the key holiday selling time period.

Sheamus Toal: I think the last thing I would just add to the first part of that, as stores have become less penetration for us, I think that in earlier years, when stores were a higher penetration, I think they do have a slightly better performance relative between Q3 and Q4 because of some of the events and a longer, a longer time period. But as we've shifted to more digital, we do see a little bit more volume in Q3 versus Q4.

Operator: Thank you for joining us today. If you have further questions, please contact investor relations at (201) 558-2400, extension 14500. You may now disconnect your lines.