The Children's Place, ticker symbol PLCE, presenting for the first time at one of our conferences. We are very pleased to have with us this morning John Szczepański, the company's CFO, as well as Jared Schur, the company's Chief Administrative Officer and General Counsel, who will take the first 20 or so minutes to go over the presentation. We'll have about 10 or so minutes for Q&A. For those in the audience who would like to ask a question, please type your question into the Q&A box at the bottom of the Zoom screen, and I'll read the questions out loud. With no further delay, John, the floor is yours.
Great, thank you, Anthony. Thanks for having us today. As Anthony said, I'm John Szczepański, Chief Financial Officer at The Children's Place. We're excited to share the strategies which have been developed by our new leadership team to put the company on a path to long-term sustainable growth. The deck I'll be running through here has also been posted to our corporate web page under the Investor Relations tab. The Children's Place is a pure-play children's specialty retailer with a new focus on an omnichannel experience for our customers and a portfolio of brands with long-term potential. As I mentioned, we have a new management team in place with a new plan, and to support this, we have also announced in our last earnings release the establishment of a transformation program as the foundation.
Our focus will be on operating with discipline, strengthening the balance sheet, and improving the liquidity position of the company to facilitate investment in the brand portfolio. The company's roots date back to 1969 when it began as a toy store that also sold children's clothing and apparel and accessories. In the '80s, the company changed its strategy to focus on purely apparel. In the mid-2010s and teens, we reached almost $2 billion in sales with over 1,000 stores, and in 2019, the company bought the Gymboree brand. We also approached $2 billion in sales in 2021 during peak e-commerce activity in the pandemic. Midway through the pandemic, there was a retrenchment in bricks and mortar retail with store closures having a material impact on sales, brand perception, and customer acquisition. To many former customers, the perception was that The Children's Place had gone out of business.
In early 2024, Mithaq Capital provided significant financial support, acquiring a majority ownership stake in the company. Since this change, we've taken time to form the right leadership team, and we have taken a thoughtful approach to developing a new strategy. We'll continue to move deliberately to revive our brands and regain our status, driving long-term profitable growth. Today, we operate an omnichannel portfolio in 494 stores across eight websites and apps, while selling in 12 countries at 229 points of distribution. Here's more detail about the strategy. We established four key pillars as the basis for the strategic direction of the company in the future.
These pillars are: focus on the customer as our compass, create an emotional connection around our key brands to drive customer engagement, double down on product as the engine for growth to enhance fashion and trend-right collections such as licensed products, and reduce an over-reliance on basics, and finally expand distribution beyond where we play today to meet the customer where they shop while balancing profitability. The foundation of these pillars is our operating model. To support our strategies, creating high-quality goods at value prices while mitigating macroeconomic headwinds and delivering these products with efficiency, leveraging technology. We have also created a transformation office and have recently hired a Chief Transformation Officer to help us drive change and identify new and more productive ways of working through technology enablement.
Our people and our culture will continue to be foundational elements supporting our goals and to drive this company-wide transformation effort with a change mindset. The ultimate goal being to drive growth that outpaces the market, that drives profitability and free cash flow. Over the next few slides, I'll share how The Children's Place and Gymboree are uniquely positioned to capture demand and how we're bringing relevance and excitement back into the portfolio. The first pillar of our strategy is focusing on our customers. We have distinct customer targets for each of our brands. For The Children's Place, our core customers are savvy go-getters. They're driven by value and convenience and aim to make their kids happier. We see an opportunity to acquire new customers, targeting plugged-in parents, as we call them.
These are digitally fluent, time-conscious parents and caregivers who want to shop to feel connected and fun for both them and their kids. For Gymboree, our core customers are what we call memory makers. They're driven by special occasions and milestones, and they want to see their kids specially dressed for these moments. The new customer we'll target is the fashion seeker. The fashion seeker is driven by quality and style that suits the lifestyle the family strives for. Now a bit more about our brands, our second pillar. The Children's Place is repositioned as a destination for style and expression. We're moving far beyond just a basics player. Our vision is clear: a world where kids have the say. That shift gives the brand a more modern and emotionally resonant identity. This direction strengthens brand heat, increases trip frequency, and deepens loyalty, all measurable contributors to lifetime value.
Gymboree serves a complementary role to The Children's Place. It's our premium lifestyle expression with the purpose of sparking the joy of completing the family's look. Our vision is a world where mom is a stylist, not just a shopper. This identity elevates the brand, broadens our household reach, and supports higher margin categories, helping us win in both premium and value spaces without overlap. Our loyalty program is becoming one of our most powerful growth levers. Members already shop twice as often and spend 20% more per trip than non-members. We're redesigning our program with updated tiers, perks, and personalization, focused on expanding enrollment, driving repeat trips, and lifting conversion. Loyalty is not just about discounts. It's about creating a sticky ecosystem where customers feel recognized and rewarded, which drives both top-line growth and margin protection.
At the heart of our turnaround is a sharpened product strategy built around three key elements. Fashion is our focus. We're delivering vibrant, inclusive, and trend-right assortments that foster self-expression and build emotional brand loyalty. What's different now is our ability to tie into cultural relevance, whether it's through licensed partnerships, curated seasonal stories, or tapping into what's resonating in social media. Value is our driver. Multi-packed seasonal must-haves and outfitting options make us the dependable go-to destination. We're offering not just low prices, but a strong price-to-value equation that balances affordability with modern, stylish product. Convenience is our superpower. Parents can outfit head to toe in one trip: apparel, accessories, and shoes. We simplify the mission, making The Children's Place the trusted one-stop outfitting destination. Together, these elements create both emotional loyalty and stronger financial leverage, supporting higher sell-throughs, less markdown dependency, and ultimately margin expansion.
These are the age ranges we cater to across boys and girls, a fit for every child. Our product architecture is intentionally balanced, updating basics so parents can always count on size, fit, and reliability. Trends and collaborations that create cultural currency generate buzz and attract new customers into the brand. Collections and seasonal campaigns that amplify key moments, like back-to-school season and holiday. Here, we're bringing a modern approach to our value proposition, showing families that they don't have to compromise. They can get both affordability and trend-right expressive product. This approach ensures inclusivity and positions us as the easy, relevant outfitting choice across both everyday and special moments. Starting in spring 2025, licensing has become a significant growth engine for us. We're partnering with iconic global names: Sanrio's Hello Kitty, Lionel Messi, Nike brand, Hurley, Converse, and Minecraft to bring fresh, relevant content into our assortment.
These partnerships extend our reach into culturally powerful franchises, attract new households, and bring energy into our stores and digital channels. They complement, not replace, our core product, giving us incremental traffic, stronger basket sizes, and higher margin assortments. The last pillar is our channels of distribution. Our guiding principle is be where our customer is. That means balanced presence across stores, e-commerce, wholesale, licensing, third-party marketplaces, and international partnerships. Stores, e-commerce, and international are established channels today, but we realize the opportunities stores bring, given the reduction in store counts over the past few years. Stores have proven to be an avenue for building brand awareness and customer acquisition while providing tangible experiences with our products. Moving forward, we'll look to distort some of the more underdeveloped channels, leaning into wholesale environments, participating in marketplaces, and further expanding reach and cultural relevance through licensing and collaborations.
Recent openings at Woodbury Common, a shared environment for The Children's Place and Gymboree, and Viewmont Mall, a freestanding Gymboree store, demonstrate our disciplined approach to physical retail, investing selectively where the four-wall returns justify. This diversified channel model strengthens customer acquisition, supports brand visibility, and helps de-risk the business by ensuring multiple points of engagement. To wrap up our pillar strategy, we're building brands that resonate more deeply, product assortments that drive both traffic and margin, and a channel mix that gives us scale while staying disciplined. The impact is showing up in stronger customer engagement and a healthier operating model. Speaking of that, I'd like to provide a little more color on our recent financial results to set a baseline for our long-term aspirations.
The second quarter of fiscal 2025 was the first period where our new product strategies came to life on the floor and on our websites and apps. We reported sales declines of 6.8%, which was improved on a sequential basis from our Q1 sales, which were down 9.6% from last year. Within the quarter, we saw sequential year-over-year improvement in each of the months of that quarter, where May started out at the same trends as Q1. June improved with weather that matched the seasonality of the product that was on the floor. As we disclosed in our last press release, July was the first month in 18 periods where we saw year-over-year sales growth driven by a strong start to our back-to-school season.
While gross profit margin was down 100 basis points, the results were primarily driven by capitalized costs that were released from the balance sheet, partially offset by better product margins and product mix. Operating profit, liquidity, and cash flow were also positive. We continue to focus on profitability, manage our inventory, and overall working capital position. As far as tariffs are concerned, while we're not immune to the headwinds in the macroeconomy, we feel we have the right strategies in place to manage the situation. This slide shows you where we see these offsets in the second half of fiscal 2025 and the first half of fiscal 2026.
Our sourcing teams have been working diligently to find opportunities, leveraging relationships with our vendors, balancing origin mix through a diversified country strategy, working across the product lifecycle to ensure costs are understood from design to production, and incorporating best-in-class practices to optimize the product cost. While our sourcing strategies aren't expected to completely cover these headwinds, we plan to mitigate the balance through the impact of our product strategies and promotional activities with minimal increases to ticket prices so that we can continue to provide the value that we have provided to our customers in the past. As discussed, as part of our long-range plan, we identified areas of opportunity to streamline and optimize our operating model. We evaluated other successful turnarounds for the key elements that made them work and have incorporated them into our thinking.
We have identified three main focus areas where our teams have line of sight to at least $40 million of benefits over the next three years. The first area is organization. Successful turnarounds look to reduce home office expenses. In our release, we announced our goal to get our home office payroll to under an $80 million run rate by fiscal 2026. We will evaluate what we do in-house, leveraging our core competencies and expertise, and determining what can be outsourced versus what should be managed locally. We'll utilize our global office and take advantage of the time difference to increase productivity around the clock. Next is non-merch and third-party spend. We're energizing our non-merch procurement process, evaluating our contracts with third parties and other ancillary spend, and studying the purpose and whether we're getting the value we expect.
If we aren't, we're coming back to the negotiating table to revise these partnerships. We're also instituting RFP processes as contracts expire, creating opportunities for competitive bidding to ensure we're getting the best deals. Finally, as our business has changed over the years, we'll look at how we fulfill demand to ensure we have the right operating model that fits our current size of business. As we optimize our inventory buys and revisit how we display product in stores, we will assess space needs and future build-out costs. These efforts will result in costs of about $5 to $10 million at the start, some of which has already been incurred, but the majority of which will occur in the second half of this year and into the beginning of next year.
Part of the investment will go to keeping current on technology, which is a key element to sustaining successful turnarounds. We feel that by fiscal 2027, we will be at the $40 million run rate. The transformation program is expected to provide a solid foundation for us to execute our strategies to generate free cash flow. These historic snapshots on sales, free cash flow, and their impacts on company valuation and stock price are proof points for us that our path forward is correct and provide a roadmap to guide our financial targets. Additionally, liquidity for any company is critical to enable execution, and free cash flow drives liquidity. We'll be hyper-focused on liquidity and effective working capital management. We talked about how dramatically our store count has changed over the past few years.
We have succeeded in stabilizing the fleet, and we're on track to open new stores in the back half of this year, keeping in mind the opportunity stores bring to brand building and customer awareness. We're also focused on improving our position with landlords by committing to term in the stores that will drive success. We have long-term lease commitments increasing more than three times over the past year. To wrap up, we're entering a new chapter of growth, one defined by stability, profitability, and momentum. Every strategy and opportunity we discussed today is anchored in a clear vision, driving strong free cash flow and liquidity while accelerating top-line growth. With the customer as our North Star, we're building powerful emotional connections to revitalize marketing and iconic brands. Our products are not just offerings; they're the engine for our growth.
Backed by a dynamic and energized leadership team, we're already seeing early signs of success, as demonstrated by the strong performance of our recent back-to-school season. We're moving with speed, agility, and confidence. Our strengthened balance sheet, improved liquidity, and optimized working capital positions us to outperform the market. This is more than just a turnaround. It's a transformation, and we're just getting started. Thank you for your time. Anthony, I think we have time for a few questions.
Absolutely. Thank you very much, John, for the terrific overview of The Children's Place. We do have a lot of questions already in the queue. Let's get started here. John, if you could maybe first tell me more about the management team and what attracted them to The Children's Place.
Thanks, Anthony. I think since Jared's tenure here has been much longer than mine, I think I could turn it over to him to help elaborate there.
Thanks, John. Yeah, in early 2024, as John mentioned, Mithaq Capital provided significant financial support to the company, acquiring the majority ownership stake, you know, essentially on the open market. Mithaq is a thoughtful investor and shareholder with a very deliberate and long-term approach to the business. It's taken time to form the right leadership team to execute on our long-term strategies and work together to develop our go-forward plan. Some of these leaders are brand new to the company, like John, who just joined in March. We did target certain backgrounds in retail specific to each role and the needs of the business that we knew would be coming moving forward. Many of these leaders joined to take on a new challenge, work for a larger organization, or take on more responsibility.
Others are super excited to take part in the transformation effort that we are embarking on to revive our brands. We also have a couple of leaders who are TCP veterans and for various reasons over the course of time left the company and decided to return to new leadership capacities, including our Brand President. We're very excited that we're on the same page. There's one quality that I know that all the leadership has right now, just to work through this transition deliberately with a focus on the long term and to build back our brands better.
Gotcha. OK. Where are we in the turnaround process, and when do you believe you will generate sustainable, positive revenue growth, and what are the main drivers to get to that revenue growth?
Yeah, good question, Anthony. I think I can start, and Jared could chime in. We are still really early in this process, just completing our long-range plan with our leadership team and just identifying the path to our transformation, looking at the organization. As we talked about, we really did study effective turnarounds and found that the main keys to success are a lean home office, which we're striving for. We recently announced in our press release the goal for an $80 million run rate, which is materially improved from $120 million, over $120 million just a few years ago. We're also looking at the transformation to help fuel our goals. One is to shore up our technology stack to support the business, to support our loyalty program that we announced.
More is to come around loyalty, but also to enable us to look at our customer file in more elegant ways, leveraging Salesforce capabilities and others similar to really target our customer in ways based on how they live their lives and how they shop. We talk about our distribution and the channels of distribution that we're focused on. Stores, we understand we've lost our customer file somewhat due to the reduction in our store count. The fact that we've stabilized that network and now are building that back, we feel is a real opportunity, not just for growing the business, but reengaging with the customer as an acquisition and retention tool. As we look at the balance of our transformation strategy, really looking at third-party spend, really looking hard at our contracts. Are we getting the value for those contracts?
On the distribution side, really ensuring that we've got the right network to fulfill demand based on the size of our business. With our contraction in top line over the last few years, we're in a very different place than we were four or five years ago. We've got to ensure a right balance of fulfillment to satisfying demand.
Right. The only thing I would add, Anthony, is a lot of times, investors hear what we're doing with the long-range plan and we're cutting, cutting. This is cutting to reinvest in the business. Mithaq Capital wants us to take all this and sort of reimagine how we think about things, take the money we're saving, and reinvest in the types of technology and where the business is going to be moving going forward. On top of that, whether bad luck before John joined, but I'm one of the people who's been here. We acquired the Gymboree brand, a huge opportunity at one point, nearly $2 billion in sales itself. Then the pandemic happened. The opportunity almost had to launch Gymboree online.
We're now understanding that Gymboree has to be a distinct customer, and we see a huge opportunity to invest in real estate in the Gymboree brand to give it its own identity and try to get back some of that huge opportunity that we know exists for the Gymboree customer as recently as the mid-2010s.
Right. Why is this the time to have net store openings in the midst of a turnaround, and why are you signing longer-term leases as opposed to shorter-term leases, which give you more flexibility?
Yeah, I think as we discussed, we really feel that our stores and our brick-and-mortar presence is a customer acquisition and retention tool. We also feel like we've lost opportunity by engaging in shorter-term leases, and it's resulted in us exiting profitable locations. We're back to repair the relationships with the landlords, show that we're committed to our real estate portfolio, and really stabilize the fleet and grow it. That's really the goal because of that customer acquisition and retention aspect of it and because of the profitability of the stores that we're really focused on.
Right. Returning to your transformation initiative, it sounds like a lot of it is just doing better basic retail blocking and tackling, I would say. You know, correct me if I'm wrong, but I guess the other thing that I wanted to follow up on is, you mentioned, Jared, that you are looking to reinvest back into the business. Kind of thinking about how much will pretty much all of that be reinvested back, or will any of the $40 million savings flow down to the bottom line? How do we think about that?
Yeah, I think we definitely will expect that to fall to the bottom line, but it's going to happen over time, right? We need a little bit of time over the next year, year and a half to really, as we've alluded to, right-size the organization, right-size the distribution, and really get to a firm base. We see, like we said, we see the $40 million really starting to flow through at a full-year run rate by 2027. We certainly don't anticipate spending that $40 million immediately. Where we are today, we can't be more specific than that just because of timing and the early stages of where we are. The intention is obviously to leverage some of that to reinvest back in the business, to grow the business, and obviously to grow the business profitably to double down on that investment.
Thinking about merchandising, how do you address current fashions, including what's on social media? I'm sure you have creative designs that take about a year or so to get those in place. Help us walk through the merchandising decisions and how that flows to your stores.
Yeah, no, that's a great point. We do have longer lead times in our industry in general. We have a very diversified supply base as well. We're not in any one country more than 20% of our manufacturing footprint. That lends itself to a bit more time and a bit more need to have transit time to come into our network. That being said, our teams are really working from the sourcing, product development, and design stages to keep placeholders in our merchandising strategies to enable us to chase into trends. While 95% of our assortment will be in that really planful lane, we are setting up capability to have more read and react into the mix. It's our sourcing teams who have come in and really worked with our partners to enable that.
Gotcha. OK.
Anthony, I'll also add, you know, John mentioned earlier, you know, bringing on a Chief Transformation Officer really focusing on technology. While we'll always have some longer lead times in our industry, it's just the nature of the business. I do think leveraging technology, everything that's out there that can help us sort of reduce times will help us in that regard as we move forward.
Gotcha. We're almost out of time. I'll try to squeeze one quick one here. Maybe if you could just talk a little bit about the competition in this space and the biggest threat to your market share.
I'm going to not talk about our competition because we're not here to talk about them. We're here to talk about us. I think, Anthony, it's a very competitive landscape. We realize that we've given up market share over the years. Some of it is external. Some of it was internal reasons. For all the reasons that we just talked about, I think we've got a good plan to take back market share and grow the business back again.
OK. This sounds like a great plan. Unfortunately, we didn't get to all the questions that we had in the queue. Certainly, if anybody has any follow-up questions, please forward that to us here at Sadotti or to The Children's Place directly. With that, we'll have to wrap it up here. Thanks again for sharing The Children's Place story. Sounds like a lot of good things happening there in terms of the transformation initiative and turnaround. Good luck to you guys, and have a productive day at the conference.
Thank you, Anthony. Appreciate it.
All right, thanks. Thank you.
Bye.
Bye-bye. Bye.