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 1st 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. This call is being recorded.
Executive Officer, if you object to our recording of this call, please disconnect at this time. All participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. After the speakers' remarks, we will take questions as time allows. Officer. Before we begin, I would like to remind participants that any forward looking statements made today are subject to the Safe Harbor statement Officer 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 of Form 10 ks for its most recent fiscal year.
These forward looking statements involve risks and uncertainties Executive Officer, which could cause actual results to differ materially. The company undertakes no obligation to publicly release any revisions to these forward looking statements Executive Officer, to reflect events or circumstances after the date hereof. After the prepared remarks, we will open the call up for your questions. Executive Officer. It is now my pleasure to turn the floor over to Jane Elfers.
Officer. Thank you, and good morning, everyone. Following the March 11 presidential address, Executive Officer, which confirmed immediate stimulus payments, announced an accelerated vaccination timeline and promised the Executive Officer. We delivered outstanding first quarter results with gross margin, operating margin and EPS all at record levels. Our Q1 'twenty one net sales of $435,000,000 exceeded our Q1 'nineteen net sales Executive Officer of $412,000,000 despite having 261 or 27 percent fewer stores Executive Officer, Q1 2019 and historically low demand for Easter dress up product and a 15% reduction in mall operating hours Executive Officer, 2019.
All key metrics across both our digital and stores channels exceeded expectations. Executive Officer. Our exceptional sales growth was driven by several factors, including double digit increases in AUR Executive Vice President and Chief Executive Officer, 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, Executive Officer, our ability to retain new digital customers we acquired during the pandemic and a significant reactivation of store customers Executive Officer, that we had temporarily lost due to the government mandated closure of all of our stores. Executive Officer. Our record Q1 2021 gross margin was driven by significantly higher merchandise margins Executive Officer, in both our digital and stores channels, significant occupancy savings from favorable lease negotiations Executive Officer, and fewer stores as compared to Q1 2020 and meaningful e commerce fulfillment optimization.
Executive Officer. Focusing on digital. Consolidated digital sales increased 37% in Q1 versus 2020, Executive Officer, representing 42% of total sales. Digital sales increased 35% in the U. S.
Executive Officer and 82% in Canada, driven by a double digit increase in traffic, partly as a result of our ability to retain new customers Officer. Our digital business has always been our highest operating margin contributor due to its high UPT, Executive Officer, and with the pandemic driven acceleration Executive Officer, to a steady state annual digital revenue of approximately 50%, we are now gaining additional leverage on fixed overhead costs Executive Officer and driving higher digital operating margin. In addition, we continue to plan for reductions Executive Officer and our per order e commerce fulfillment costs in 2021 due to a number of packaging and network optimization efforts, Executive Vice President and Chief Executive Officer, combined with the ability of our 3rd party fulfillment partner to service higher levels of demand in 2021, Executive Officer, which should virtually eliminate the amount of supplemental ship from store required. Executive Officer. With respect to our stores, it's important to note that our Q1 2021 store net Executive Sales of $231,000,000 represent 85% of our Q1 2019 store net sales Executive Officer, despite having 261 or 27 percent fewer stores in Q1 'twenty one versus Q1 'nineteen.
U. S. Store sales exceeded expectations, driven by strong product acceptance, Executive Officer, double digit AUR increases and higher ADS. Similar to what we saw in Q4, Executive Officer, our outsized store performance Executive Officer, 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 Executive Officer and reduced promotions.
Importantly, we were also pleased to see existing customers return to our stores Executive Officer, in significant numbers from the limited shopping options available to them last spring Executive Officer, due to the government mandated closure of the vast majority of brick and mortar retailers. Executive. Canada store sales were down 43%, with traffic down 69% due to the continued impact Executive Officer of Government Mandated COVID-nineteen temporary closures impacting approximately 50% Executive Officer of our Canadian fleet during the quarter. With respect to our fleet optimization initiative, Executive Officer. We closed 25 stores during Q1 and we plan to close 98 more stores in full year 2021, Executive Officer, bringing our total 2 year store closures to our previously announced target of 300 stores.
Executive Officer, Rebound until at least the end of this decade. As I am sure you all saw earlier this month, the 2020 birth rate data was released Executive Officer. And as we anticipated, births for 2020 were down dramatically to the lowest level since 1979 at just Executive Officer, the data also reveals an 8% decline in births in the month of December, Executive Officer, the biggest drop for the month of December since 1964. Those December babies were conceived
Executive Officer, before the pandemic started to
accelerate and experts predict that birth rates will fall even further in 2021. Executive Officer. It's important to note that less than 5% of our revenue comes from newborn age 0 to 2.
Executive Officer. So we have
multiple opportunities and ample time to offset these sustained birth rate drops. Executive Officer. As we indicated on our Q4 call, we recognized a long time ago that U. S. Birth rates were not going to be a tailwind.
Executive Officer. Our purchase of Gymboree Executive Officer, gives us a sizable market share opportunity in our underpenetrated toddler space that more than makes up for the anticipated sales drop Officer, the Chief Executive Officer, the Chief Executive Officer, the Chief Executive Officer, the Chief Executive
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Executive Officer, the Chief Executive Officer, the Chief Executive Officer, the Chief Executive Officer, Executive Officer. We believed correctly that the big kids space was overcrowded with too many retailers vying for a declining sales base Executive Officer, without a positive catalyst with respect to birth rates. The big kids' competitive playing field Executive Officer, has narrowed significantly in the last few years, which aligns with our well documented strategy of trading short term margin pain Executive Officer for long term margin gain. It's important to note that among the kids retailers who declared bankruptcy Executive Officer and Liquidated 1000 of stores in the last few years. Justice and Crazy 8 did not carry any newborn Exact 0 to 2 product and Gymboree was almost completely out of their unprofitable newborn business at the time of their second bankruptcy.
Executive Officer. My point is none of the large children's retailers had newborn market share to seed Executive Officer, because their mall based businesses like ours were targeted to the 4 year old and up age range, making TCP Executive Officer, our Chief Executive Officer, our
Chief Executive Officer, our Chief Executive Officer, our Chief
Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Officer, to the return to 100 percent in person learning. As you may know, July is our biggest month in Q2. Executive Officer, and within July, the majority of sales are concentrated into the last 2 weeks of the month with the start of back to school shopping. Executive Officer. We believe that if the vast majority of elementary schools return to 100% in person learning this fall, Executive Vice President and Chief Executive Officer.
In addition, we believe the expanded Executive Officer, Child Tax Credit Benefits, outlined in the American Rescue Plan, which include a monthly payment to approximately Executive. 39,000,000 families covering 88% of all the children in the United States Executive Officer, should provide an additional tailwind for our business just in time for our key back to school selling season. Executive Officer. These payments are scheduled to begin on July 15 and provide for monthly checks Executive Officer of $300 for each child under age 6 $2.50 for each child between 6 17 years old. Executive Officer.
Looking ahead, Q4 also presents an opportunity for TCP to regain our historical leadership position in the dress up Executive Officer, assuming the vaccine rollout is successful and social distancing mandates continue to be removed Executive Officer, leading up to the holidays. We leveraged a very difficult period in 2020 Executive Officer, to accelerate our strategic transformation, and we believe we are now well positioned to deliver accelerated operating margin expansion Executive Officer, in 2021 and beyond. The acceleration of our digital business, our highest operating margin channel Executive Officer, made possible by our pre pandemic digital transformation investments, combined with the significant sales transfer rate Executive Officer. We are achieving from our strategic decision to close 300 or a third of our stores in less than 20 months Executive Officer, is resulting in an industry leading approximately 50% steady state annual digital penetration. Our long standing fleet optimization strategy enables us to close the 300 stores Executive Officer, without financial penalty and reset our occupancy costs.
These occupancy cost reductions should continue to be a Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
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Officer, our Executive Officer in 2020 to our digital first strategy, we have gained efficiencies and removed significant expense from our P and L. Executive Officer. These efficiencies will continue to benefit us in 2021 and beyond. We anticipate further operational Officer, we are pleased to report that we are making progress on our operations Executive Officer, are further removed and we are able to return to normal operations in both our stores and distribution centers. Executive Officer.
We continue to navigate the extraordinary complexity of the pandemic, while remaining firmly on offense. Executive Officer. Our long standing strategic plan has served us well. We are a stronger company today than we were prior to the pandemic, Executive Officer, and we look forward to continuing to deliver accelerated operating margin expansion for our shareholders in 2021 and beyond. Executive Officer.
Now, I'll turn it over to Rob.
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 Q1, We delivered a record adjusted EPS of $3.25 Net sales increased by 180,000,000 Executive Officer, or 71% to $435,000,000 versus last year's $255,000,000 Our U. S. Net sales increased Executive Officer, our President and Chief Executive Officer, our President and Chief Executive Officer, our President and Chief Executive Officer, our President and Chief Executive Officer,
our Executive Officer,
while our Canadian net sales increased by $13,000,000 or 76 percent to $30,000,000 versus last year's $17,000,000 Comparable retail sales were a positive 83% versus Q1 2020. As an additional point of reference, Comparable retail sales were positive 21.5% versus Q1 2019. Executive Officer. Our net sales were positively impacted by several factors during the quarter. First, the significant majority of our U.
S. Stores were open Executive Officer for the entire quarter this year versus the temporary closures we experienced for approximately 50% of the quarter last year Executive Officer, as a result of mandated government shutdowns. 2nd, strong customer response to our casual product assortment. Executive Officer and 3rd, the unprecedented level of stimulus payments resulting from the government pandemic relief legislation announced in mid March. Executive Officer.
These factors along with favorable weather and an easing of COVID related restrictions resulted in consolidated net sale increases Executive Officer, in both March April of over 100% versus the prior year. These positive factors Executive Officer, our Q1 net sales were negatively impacted by Executive Officer, the impact of our 199 permanent store closures in the past 12 months inclusive of Executive Officer, the 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 Executive Officer and the impact of an approximately 15% reduction in mall operating hours as mandated by our mall landlords. Executive gross margin. Adjusted gross margin increased 2,571 basis Executive Officer, our Chief Executive Officer, our Chief Executive Officer,
our Chief Executive Officer, our Chief Executive Officer, our Chief Executive
Officer, our Chief Executive Officer, Executive Officer. One, the leverage of fixed expenses resulting from the increase in net sales as a result of anniversarying Executive Officer, the temporary closure of our entire fleet in Q1 2020. 2, significantly higher merchandise margins in both our digital and stores channel, Executive Officer, resulting from a double digit AUR increase due to strong customer product acceptance leading to higher price realization and reduced promotions. And 3, a reduction of $21,000,000 in occupancy expenses during the quarter due to rent abatements of $8,000,000 Executive Officer, 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 Officer, higher inbound freight transportation costs driven by ocean carrier equipment shortages and higher container rates. Adjusted SG and A. Adjusted SG and A was approximately $104,000,000 versus $92,000,000 last year and leveraged 12.31 basis Executive Officer, the 1231 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. Executive Operating Income.
Adjusted operating income for the quarter increased 136,000,000 Executive Officer, to $71,000,000 or 16.2 percent of sales, a record result versus an adjusted operating loss of $65,000,000 last Officer and leveraged 4,168 basis points. Interest expense. Our interest expense for the quarter was $4,000,000 versus $2,000,000 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%, Executive Officer, 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 $65,000,000 We ended the quarter with $197,000,000 Officer outstanding on our revolving credit facility. During the quarter, we extended our existing accordion feature of $35,000,000 Executive Officer for 1 year, maintaining $360,000,000 of total availability under our revolving credit facility. Executive Officer.
We ended the quarter with total inventory up 24% versus last year. It is important to note Executive Officer, our Q1 2020 inventory included a provision of approximately $63,000,000 last year. If you remove the impact of the inventory provision, our inventory increased 5% versus last year. Executive Officer. The entirety of this increase in inventory versus last year continues to be comprised of the back to school basics Executive Officer, we have been carrying since last June.
Our seasonal carryover inventories are down approximately 49%. Executive Officer. Moving on to cash flow and liquidity. We used approximately $17,000,000 in cash from operations in Q1 Executive Officer. Due to the repayment of certain suspended 2020 rents, net of abatements, as well as other planned 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 Executive Officer, as the result of the seasonality of our business. We remain confident that between our cash on hand, Executive Officer, Cash from operations and credit facility. We have the necessary liquidity to support our operations. Capital expenditures in Q1 were approximately $7,000,000 Now I'll provide an update on our store activity in the quarter, Executive Officer, along with planned actions we are taking to continue to accelerate our fleet optimization initiative. During the first Executive Officer.
We completed the balance of lease agreements on our 2020 occupancy negotiations with our key go forward landlords. Executive Officer. We recognized the rent abatement of $8,000,000 in Q1, bringing the total abatements on the account of 20.20 to $21,000,000 to date. Executive Officer. We expect to recognize the remaining portion of our 2020 abatements in Q2, which will be meaningfully lower than Q1.
Executive Officer. We also realized significant occupancy savings from favorable lease negotiations on our go forward store portfolio Executive Officer and from the 199 store closures in the past 12 months, inclusive of the 25 stores we permanently closed in the quarter. Executive Officer. We ended the quarter with 7 24 stores and total square footage of 3,400,000, Executive Officer, a decrease of 20% compared to Q1 last year. We are planning to close an additional 98 stores by the end of fiscal 2021, Executive Officer, which will bring our total store closures to our previously announced target of 300 stores.
Executive Officer. 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, Executive Officer. 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 Executive Officer, as we leveraged 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. Executive Officer. Lastly, we are planning for lower sales in our Canadian stores business.
Given the ongoing government mandated lockdowns Executive Officer, that have 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. Executive Officer. We expect that gross margin, Q2 gross margin will moderate from Q1 levels as a result of several factors, Executive Officer, including the deleverage of our fixed expenses on the lower net sales, the larger Q1 abatement and the higher inbound transportation costs due to continued supply and Chief. SG and A is planned to be in the range of $110,000,000 which is higher than Q1 Executive Officer, 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 Executive Officer and higher than Q2 last year due to the anniversarying of the COVID-nineteen closures as well as higher incentive compensation accruals. Executive Officer.
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. Executive Officer. 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 fiscal 2022. We anticipate digital sales will represent approximately 50% of total sales, which puts our steady state Executive Officer, our annual digital revenue penetration significantly ahead of our competition, supported by our digital investments, Executive Officer, strong transfer rate and fleet optimization initiatives.
We anticipate increased costs for inbound freight
Executive Officer, will continue to impact our business.
Raw material input costs are also rising. We have been able to successfully mitigate these Executive Officer, 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, Executive Officer. 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, Executive Officer, net of abatements, as well as other planned changes in working capital.
As a reminder, Executive Officer. We are planning to receive a tax refund in the range of $40,000,000 as part of the benefits provided under the CARES Act. Executive Officer. I've mentioned on our prior calls that our term loan provides us with the opportunity to use a significant portion of this refund
Executive Officer, to pay down the term loan without penalty.
We are planning for capital expenditures in the range of $50,000,000 for the year Executive Chairman, with the large majority allocated to digital and supply chain fulfillment initiatives. Lastly, Executive Officer, based on our current liquidity position and assuming a normalized back to school selling season, we plan to Executive Officer, we'll resume our capital return program in the Q3 of 2021. As a reminder, we currently have $91,000,000 remaining of our 2
Executive Officer. Executive
Officer.
Executive Officer. Our first question comes from the line of Dana Telsey of Telsey Advisory Group.
Executive Officer.
Good morning, everyone, and congratulations on the very nice progress. Thanks, Jane. And all the investments you've made in the year coming to fruition now in these results. The benefit that you saw from Stimulus and now frankly we have the upcoming child tax Executives 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?
Executive Officer. How are you thinking about it in terms
of the ability to generate full price sell through and digital?
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 It will 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 Executive, fleet optimization, SG and A, the digital penetration now at a steady state 50% annual, Executive Officer. 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, we've got all states Accept 9 right now reporting that they're going back to 100% learning. So barring any reversal or recurrence of Executive Officer, COVID or another setback. Clearly, those child tax credit benefits starting in July and going through December Executive Officer. 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. Executive and back to school with kids not being in school for the last 2 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 and a lot of people are having trouble getting their inventory in, but our back to school inventory is in place.
Executive Officer. It really sets up quite nicely for an exciting back to school. So I think that's how I'd answer that question. Thanks.
Executive Officer. Our next question comes from the line of Jim Chartier of Simmons, Crespi, Hardt and Company.
Executive Officer.
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 continue beyond this year?
And then as you think about Executive Officer, the structural changes that you've made, the lower distribution costs, lower occupancy costs, improved SG and A cost structure. It seems like your Historical operating margin of 7% or 8%, could be too conservative. Could you just talk about where that margin should be longer term? Thanks.
Executive Officer. Yes. Thanks, Jim. I'm going to start off on the occupancy one and then I'll turn it over to Rob to talk about operating margin. Executive Officer.
With respect to occupancy, I think it's really important for everyone to understand what actually transpired in 2020
Executive Officer. 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, I made 2 important decisions. First, I made the decision to Executive Officer. Fully support the digital pivot by dramatically accelerating our store closure program, which well documented targeted 300 permanent store closures in 20 months. Executive Vice President and Chief Executive Officer.
And second and as importantly, if not more importantly, I
made the decision to leverage all the previous good work that had been done on flexible lease term Executive Officer, to reset the occupancy cost structure for the company. So Rob and I partnered on this, I guess, Rob, starting in Q2 of last Executive Officer and the 2 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 Executive Officer, 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 of 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. Executive Officer. And we anticipate that this occupancy work is going to be a significant contributor to our plan for accelerated operating margin expansion and Executive Officer. Well worth the time and effort the 2 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 Executive Officer.
With that, I'll turn it over
to Rob.
Jim, from an operating margin perspective, it's a little bit of a long winded answer because I have Executive Officer, I believe it was 8.5 and 9.6 at that time. And we saw that our transformation strategy was really starting Executive Officer, to gain hold and lock in. At that time, we made the decision to accelerate $50,000,000 of investments to further accelerate our digital penetration of And clearly with the pandemic and what happened last year and leveraging some of those abilities in terms and the things that we did to move the needle overnight to a steady state of 50% digital penetration annually. That was the right call. Also the other piece that we have to call out is from in 2018 2019, we made the very visible Executive Officer.
With the shrinking market in terms of less births and a smaller kids Executive Officer. Clearly, that was the right decision as well as it has positioned us to come out
of this
pandemic to gain that fragmented market share. So now with the accelerating 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 SG and 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.
Executive Officer.
Our next question comes from the line of Jay Sole of UBS.
Great. Thanks so much for taking my question. So I want to follow-up 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's a bigger e commix, Which is a better margin business. You've got lower rent in the remaining stores business. There's less competition, which is allowing you to raise AUR versus that time and there's 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 Same as it was in the past. And maybe if you could just first clarify that? And then the second thing is Gymboree. Can you just give us an idea on where the launch stands right now? Like what impact you think it can have on sales and back to Executive.
And just where the give us an update on Gymboree that would be helpful. Thank you.
Sure. Thanks, Jay. As far as Gymboree is concerned, we've talked about it a lot. Executive Officer. We launched into a pandemic.
That business is highly dependent on events and holidays and occasions. Clearly, Easter was not Executive Officer. Q1 was not good for Gymboree from an Easter perspective. We feel very strongly in Gymboree. We feel very good about the customer Executive Officer.
We've spoken about it being north of $140,000,000 opportunity. We feel we have not We've changed our mind on that. We feel that it is north of $140,000,000 opportunity, the same as we expect for TCP with return to school and the return to occasions and the relaxing and social distancing. We expect Gymboree to have a strong back half and we're 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?
In terms of operating margin, we haven't given guidance, right? So, I'm not going to give actual numbers Executive Officer, my comments really are to clarify that we've made the structural changes, and Executive Officer. 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've reset our SG and 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 Lewis of Citi.
Hi, this is Kelly on for Paul. Thanks for taking your question. Just on the Question on the gross margin. Was there any benefit from any one time inventory reserves in 1Q 2021? Executive Officer.
How do we think about the merchandise margin going forward? And then just second question as it relates to gross margin is, 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 Executive. Thinking about that going forward. And then just lastly, just on SG and A, should we be using that 2Q Executive Officer, guidance is sort of a proxy for SG and A for the remainder of this year as in it being down kind of 5% versus 2019 Executive 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 $8,000,000 which contributed roughly 200 basis points We expect obviously a slightly less meaningful abatement in Q2, But the rest of it is merchandise margin net of delivery expenses for e comm, etcetera. The next piece to your question Executive to SG and A, SG and A, we had a SG and A of roughly $104,000,000 We expect that to rise slightly to $110,000,000 for the Q2. We haven't provided longer term guidance in that at this point, but We expect that's 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 Executive Officer, to reopen completely and to be able to incur those store expenses.
And then the last piece to your question, I think I missed a piece in between. On occupancy expenses, occupancy expenses were and Chief Executive Officer, we're $21,000,000 lower in the quarter than last year, dollars 8,000,000 of that was the one time abatement. The remaining $13,000,000 represents the impact of the Executive Officer, our favorable lease negotiations. When you think about that relative to 2019, inclusive of the store closures since that time, Occupancy expenses were roughly $25,000,000 lower.
Our next Officer, comes from the line of Susan Anderson of B. Riley.
Hi, good morning. Nice job on the quarter. Jane, I was wondering maybe if you could talk about the dressy product over Easter. Did you see the consumer returning at all to that type of product? Executive Officer.
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 Executive Officer, 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?
Thanks, Susan. With respect to Easter Executive Officer, Dress Up, it was at a historical low in Q1. Things like dresses, ties, hats, tights, Executive Officer. Those types of products, very, very low demand. We had bought it down, and thank goodness we did because it was very difficult.
Of 2019. And within that product, you saw some of the elements that we also do double duty with on Easter. So you We saw things like polos and woven bottoms in boys pick up, but they were for back to school versus for dressy. So I think that bodes Well, for back to school and what we're anticipating in Q3. And then as far as inventory levels, we've pretty we've talked about them Since last back to school, our carryover inventory, as Rob mentioned, is down almost 50% and we are still carrying a nice amount Executive Officer, we anticipate that as we get towards the end of Q3, you'll see our inventories normalize with a normalized back Executive
Officer. Ladies and gentlemen, we have time for one more question. Our final question comes from
Okay. Well, thank you, everyone. Hello? Marni, you're there. Hi.
I'm here.
Executive Officer.
Yes, that's weird. I can hear you guys. Maybe the connection was bad. So I said congrats, amazing quarter and welcome back.
Executive Officer.
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 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 Executive Officer, will you increase costs just to increase marketing in the back half?
Executive Officer. Yes. I think as far as back to school product is concerned, the Uniform product isn't pack and held. It's on the floor and it's on the site. Executive Officer.
And so it's available for mom whenever she needs it, based on how schools were rolling with hybrid and remote learning models. So we've had Executive Officer, available to sell for the customer. Alongside of that, we've had a shoe assortment and a backpack assortment, which has Also fared well in Q1 versus Q1 2019. When you think about the product that's on the water and that's coming for back to school, it's more Executive Officer and from a delivery point of view, we're on track with that. The supply chain disruption is like a 2 to 4 week disruption that we're seeing on the summer product,
Executive Officer. For back to
school so far, we're looking good. Another element, big element of back to school is our graphic tea program, which is also on 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. Executive Officer. So we anticipate being able to really go after particularly on the digital side of the business as we're now close to a 50% digital business.
We'll continue to support those acquisition retention and reactivation strategies throughout the back to school period.
Executive Officer, and thank you for joining us today. Executive Officer, if you have further questions, please call Investor Relations at 201-558-2400 Extension 14,500. You may now disconnect your lines and have a wonderful day.