Good morning, and welcome to The Children's Place Q3 2023 earnings conference call. On the call today are Jane Elfers, President and Chief Executive Officer, Maegan Markee, Brand President, and Sheamus Toal, Chief Operating Officer and Chief Financial Officer. After the prepared remarks, we will open the call up to your questions. The Children's Place issued its Q3 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.
Thank you, and good morning, everyone. Our Q3 results exceeded our expectations on the top line. The top line beat was driven by another quarter of industry-leading digital performance, fueled by a double-digit increase in e-commerce traffic, with strong back-to-school results in August and the success of our seasonal categories in September and October. And our wholesale channel, led by Amazon, delivered another outstanding quarter. Importantly, our Q3 ending inventories were down 16%, exceeding our expectations. Our bottom-line results were negatively impacted in the Q3 by higher-than-planned distribution costs, driven by a combination of largely unplanned but addressable factors. First, higher fulfillment costs, including the increased utilization of third-party fulfillment services, stemming from shipping significantly more e-commerce units than planned due to higher volumes, coupled with an outsized increase in packages resulting from lower transaction size as our consumer remains under pressure in the current environment.
Second, significantly higher labor costs than planned due to the increased e-commerce demand and a very tight labor market. Third, a delay of certain planned freight and fulfillment savings. Looking ahead, we are planning for these increased distribution costs to continue in the Q4 . Sheamus will cover this in more detail in his prepared remarks. For the Q3 , our e-commerce sales were up low single digits, driven by a double-digit increase in e-commerce traffic. Our e-commerce channel represented an industry-leading 57% of our retail sales in Q3, up from 50% last year and 37% in 2019. Our digital channels are clearly 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 nationwide are expected to surge from 45 million today to over 61 million in 2027, only 4 short years away. The importance of the digitally native Gen Z demographic to our future business cannot be underestimated, and we remain laser-focused on ensuring that digital is at the core of everything we do. While our core customer remains under significant pressure, we are pleased with our ability to drive top line above our expectations throughout the Q3 . Our top-line momentum from Q3 has accelerated into Q4 as our customer is responding to our trend-right assortments and our enhanced marketing tactics. November is off to a strong start, with consolidated retail sales running up low single digits quarter to date versus last year, driven by the continued strength of our digital business.
Our accelerated digital transformation and fleet optimization strategies have positioned us to operate the company with less resources, including less stores, less inventory, less people, and less expense, allowing us to better service our customer online, where she prefers to shop, resulting in what we believe will translate to more consistent and sustainable results over time. Thank you, and now I'll turn it over to Maegan to provide an update on our strong Q3 marketing results.
Thank you, Jane, and good morning, everyone. On our last call, we covered the 4 key pillars of our marketing transformation: our partners, real-time optimized media measurements, marketing spend and contributions, and traditional versus non-traditional marketing. Today, we will focus on how those pillars have supported our Q3 top-line results. Since launching our revamped marketing strategies in the back half of 2022, supported by our best-in-class partners and state-of-the-art marketing tools, we have significantly shifted the way we utilize media. Our strategies are rooted in a customer-centric mindset and filling the purchase funnel, which starts by driving qualified traffic. As Jane mentioned, we experienced a strong double-digit increase in our digital traffic in Q3.
Our positive traffic trends for the quarter are a direct result of knowing how to drive qualified audiences to our family of brands by utilizing our digital marketing channels, deep customer knowledge, and enhanced targeting capabilities. Our ability to scale our digital business by utilizing our digital marketing tactics, tools, and partners, puts us ahead of our competition as we continue to acquire Millennial and Gen Z customers into our family of brands. Now, I'm gonna recap our top-of-tunnel performance. Our brand equity manifested itself in our top-of-funnel brand campaigns in Q3. Q3 contained two very important time periods for both our business and our consumers: back to school and the beginning of the holiday season.
As a leader in the digital space, we know that our core, digitally savvy Millennial customer plans further ahead than our in-store shopper by browsing and purchasing earlier for all of the special emotional events in their children's lives. Combining this behavioral shopper knowledge with our leadership position in back-to-school, holiday dressing, and matching family pajamas, we launched two first-to-market seasonal campaigns with the goal of capturing in-market demand and market share. As a reminder, for back-to-school, we partnered with the global pop superstars, the Jonas Brothers. The Jonas Brothers campaign delivered over 5 billion impressions across our earned and paid media efforts, as well as driving a 40% lift in mobile app downloads and a return on ad spend that is well above the industry benchmarks for top-of-funnel performance.
For holiday, we launched two first-to-market blockbuster brand campaigns, highlighting our expansive, full family holiday assortment for The Children's Place and Gymboree brands, which include a three-part, part trilogy campaign combining music, family, and fashion to engage our core Millennial consumer. This holiday campaign was a first-of-its-kind concept in the children's retail space. Music is synonymous with fashion. So for this year's holiday campaign, we partnered with music icons AJ McLean, Lance Bass, Joey Fatone, Wanya Morris, Snoop Dogg, and of course, the Queen of Christmas herself, Mariah Carey, with a focus on our market-leading position in holiday dressy and PJs. For our Gymboree brand, we continued our long-standing partnership and ambassadorship with Mandy Moore, and further expanded her engagement with the brand by designing a capsule collection with her for the winter season.
Across our holiday campaigns for the Children's Place and Gymboree, we garnered over 12 billion impressions across our earned and paid media efforts. These incredibly disruptive brand campaigns also translated to positive top-line results. For every dollar that we invested, we made over $5 back in top-line revenue. In addition, the growth of our social presence and engagement, driven by our very loyal communities through the start of the holiday season, has been explosive. Since the launch of our holiday campaigns, our brands drove over 395,000 social interactions. Our performance has kept the Children's Place brands in the leadership position on social media, representing close to 50% of total social impressions among our children's apparel retail competitive set. A robust digital acquisition strategy is critical to our success as a digital-first retailer.
Our ongoing brand work, coupled with our fully integrated media strategies, fueled our digital acquisition growth during Q3. Q3 was our fifth consecutive quarter of increased acquisition, with digital acquisition up 3% to last year and up 93% to 2019. Our positive acquisition trend is a direct result of our transformed marketing and media mix strategies that strategically target the total addressable market in order to drive new customer acquisition. With respect to our marketing spend, in 2019, our total marketing spend was less than 2% of revenue versus the industry average for multi-channel brands of 5%-7%. Our marketing spend, as reported, includes not only digital marketing, advertising, celebrity partnerships, and creative for our sites, it also includes the cost associated with our loyalty program, as well as our in-store signage and printed materials.
Our marketing investment in Q3 was in the mid-single-digit range, in line with our specialty peers. We have proven that we have the ability to drive incremental qualified traffic, capitalize on this traffic, and scale our digital penetration, acquire net new audiences while engaging our existing shopper audiences into our family of brands. The progress we've been able to show in the challenging consumer environment gives us confidence in the significant opportunity ahead of us when the macro environment begins to improve. Now, let's move on to our wholesale business. The significant time and resources that we have dedicated toward building our Amazon marketplace since the beginning of the pandemic have resulted in another outstanding quarter... Coming off of our biggest back-to-school season ever on Amazon, we participated in the October Prime Day event, resulting in The Children's Place largest week on Amazon in our history.
The Children's Place matching family Christmas pajamas were highlighted as one of the top three favorite deals in Amazon's Prime Day press release. When we compare our relationship with Amazon today versus pre-pandemic, the progress we have made on both sides has been transformational. We believe that we have significant runway ahead for our continued wholesale growth in the Q4 and beyond. When we look at additional growth drivers in our wholesale channel for 2024, we're focused on the opportunity to scale the Walmart partnership and the international opportunity with Amazon. Thank you, and I will turn it over to Sheamus.
Thank you, Maegan, and good morning, everyone. Net sales for the Q3 decreased $28.9 million, or 5.7%, to $480.2 million, exceeding the high end of our guidance, driven by our strong e-commerce business. These results were in the face of continued macroeconomic challenges, including persistent inflation, a highly promotional retail environment, concerns over the resumption of student loan payments, and other domestic and geopolitical concerns weighing on consumer confidence. Our U.S. net retail sales decreased by $37 million, or 8.9%, to $380.3 million, and our Canadian net retail sales decreased by $10.2 million, or 22.1%, to $35.8 million. Our e-commerce traffic was up double digits for the quarter, while our comparable store traffic was down approximately 7%.
Our comp store traffic versus 2019 continues to be down almost 30%. Our consolidated AUR decreased by approximately 5% for the quarter. We believe, largely due to pressures our consumer is under and the intense promotional environment. Importantly, AURs remain significantly higher than pre-pandemic levels, validating the success of our restructured pricing strategies. Gross profit margin for the third quarter decreased to 33.7% of net sales, as compared to 34.8% of net sales in the prior year. This reflects the largely unplanned but addressable impact of higher distribution and fulfillment expenses stemming from incremental shipping and processing costs, partially offset by the anticipated reductions in cotton and supply chain costs.
The increases in distribution costs were driven by higher e-commerce volumes than anticipated, which resulted in higher compensation expense to fulfill orders as the company incurred significant overtime premiums to process orders, increased wage rates to retain talent, and added incentives to attract new associates. In addition, the company also increased the utilization of third-party fulfillment partners, which operate at higher rates. The company also experienced an outsized increase in the number of packages shipped due to decreases in average order size, given the significant macro pressure our customers continue to face, which resulted in an increase in freight costs and deleveraging of freight expense. Finally, the company experienced a delay of certain planned freight and fulfillment savings as we continued to negotiate the best long-term pricing.
In addition to the distribution costs, the company's gross margin rate was negatively impacted by the growth of our wholesale business, which operates at lower gross margin, but also operates at lower SG&A and is accretive to our operating margin. As a reminder, we record our wholesale revenue on a net basis, recognizing revenue net of commissions, discounts, chargebacks, and cooperative advertising. Adjusted SG&A expense was $102.9 million for the Q3 , as compared to $105.4 million in the comparable period last year. This was the result of reductions in store expenses, home office payroll, incentive compensation, and equity compensation, partially offset by planned investments in marketing, which have been very successful in driving digital traffic and top-line growth.
Our operating income was $45 million for the Q3 , as compared to $57.8 million in the Q3 last year. Adjusted operating income was $47.9 million for the Q3 , as compared to $59.1 million in the comparable period last year. Our interest expense was $7.9 million for the quarter versus adjusted net interest expense of $3.8 million in the prior year's quarter. This increase in interest expense was driven by higher average borrowings and higher average interest rates associated with the revolving credit facility and term loan due to increases in our variable-based rate based upon market increases. The company's provision for taxes reflects a benefit of $1.5 million on a GAAP basis and $0.7 million on an adjusted basis by applying the discrete method.
The company believes that this method more accurately reflects the estimate of interim taxes than the annual effective tax rate method, due to the mix of earnings in different tax jurisdictions and the sensitivity of small changes in ordinary income on the annual effective tax rate. Our adjusted tax rate for the quarter was approximately negative 1.7%, as compared to 20.8% in the prior year. For the Q3 , we reflected net income of $38.5 million, or $3.05 per diluted share, as compared to net income of $42.9 million, or $3.26 per diluted share in the prior year Q3 .
Adjusted net income was $40.6 million, or $3.22 per diluted share, compared to $43.8 million or $3.33 per diluted share in the comparable period last year. As the company continues its transformation from a legacy store operating model to a digital-first model, we recorded one-time charges of $2.9 million, which includes severance, accelerated depreciation, and to a lesser extent, costs associated with the amendment of our credit facility. Moving to our balance sheet. We ended the quarter with cash and short-term investments of $14 million, and with $359 million of borrowings on our 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 the end of fiscal 2023 versus the end of 2022, further positioning us for long-term sustainable growth. Our Q3 ending inventory levels were down 16%, exceeding our expectations, enabling us to end the quarter in a healthy unit and cost position, which is important as we enter the holiday selling period. We expect inventory levels to continue to be down by double-digit percentages versus fiscal 2022 as we end the year. Moving on to cash flow and liquidity. We used $10 million of cash from operations in Q3 versus cash provided of $36 million last year. Capital expenditures in Q3 were approximately $6 million. During the Q3 , we closed 5 locations, ending the quarter with 591 stores.
We now plan to close an additional 64 stores at the end of Q4, bringing our total closures for 2023 to 86 stores. As we come to the end of our decade-long optimization initiative, we plan to enter 2024 with a right-sized fleet of approximately 530 stores. We are pleased to return to profitability in the Q3 and for the back half of the year. So let me take you through some of our outlook. For the Q4 of fiscal year 2023, the company now expects net sales to be in the range of $460 million-$465 million, representing a low single-digit increase as compared to the prior year Q4 . Adjusted operating profit for the Q4 is expected to be approximately 2%-3% of net sales.
Interest expense for the Q4 is expected to be approximately $6.5 million, again, reflecting higher average borrowings and the impact of interest rate increases. Our effective tax rate for the Q4 is expected to be approximately 27%, calculated by applying the discrete method. Adjusted net earnings per diluted share for the Q4 are expected to be in the range of $0.25-$0.45 per share. To provide some color on Q4, we expect Q4 SG&A dollars to be down approximately $18 million-$20 million to the prior year, reflecting the benefit of reduced store expenses, lower home office payroll, and reduced incentive and equity compensation, despite the fact that we're including an additional week of expense due to the 53rd week.
During the Q4 , we expect to expand gross profit margins by approximately 1000 basis points versus the prior year, despite the fact that margins are expected to continue to be negatively impacted by the increased freight and distribution pressures that we experienced in the Q3 , including higher wage rates, increased overtime, increased utilization of third parties, and an increase in packages shipped stemming from higher e-commerce sales and lower transaction size as the consumer remains under pressure. For the full fiscal year 2023, the company now expects net sales to be in the range of $1.605 billion-$1.61 billion.
Adjusted operating profit ranging from 0.6% to 0.8% of net sales, with adjusted net loss per diluted share expected to be in the range of -$0.59 to -$0.39 per share.... These projections include the impact of the 53rd week in 2023, based upon our retail calendar. This week occurs during a low-volume, non-peak clearance period, and as a result, is expected to have a very modest impact on revenues and a negative impact on operating results. We have also significantly reduced our planned capital expenditures for the full year, which are now expected to be in the range of $25 million-$30 million, primarily to support our digital initiatives and enhancements of our fulfillment capabilities. Thank you. And now we'd like to turn the call over for your questions.
At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. As a reminder, to ask a question, please press star one. Our first question will come from Jeff Lick with B. Riley. Please go ahead. Your line is open.
Good morning, guys. Thank you for taking my question, and congrats on the better-than-expected top line. I was wondering if you could kind of help us unpack you know, the increased expenses, you know, just kind of in terms of the $100 million-$125 million. I think really we're at 100 for where cotton is in the you know, incremental expenses that are kind of flowing back in. If you could tell us where we're at there, and then you know, reconcile the increased expense you know, how that's how those two are kind of interrelating, and then just you know what would you see as, hey, this is a permanent change in the business model versus you know, this just caught us flat-footed and we can adjust?
Yeah. Hi, Jeff, it's Sheamus. Thanks for the question. I think, you know, first, I would just start out, you know, in saying that, you know, while we're clearly disappointed with the overall margin rate for the quarter, as you're hinting, there were some clear operational challenges that are addressable for us, but there were also some big wins and bright spots in terms of margin, and you also highlighted one of them, relating to the supply chain costs. But, you know, I think, you know, first and foremost, you know, we were, you know, pretty pleased to maintain very strong merchandise margins, holding our AURs pretty close to our original plan, despite an extremely challenging macro environment.
And then to the first part of your question, that coupled with the planned and anticipated reductions in supply chain costs, cotton costs, as well as you know inbound freight costs, did result in you know very strong merchandise margins for us that were up versus the prior year. To the second part of your question, we did, however, experience some significant pressure on fulfillment and distribution costs, which for us roll into our overall gross margin rate on an external basis. These elevated costs, as Jane you know summarized and I talked about a little bit, were you know really caused by four primary factors that were all magnified based upon the stronger-than-anticipated e-commerce growth during the quarter.
So first, you know, further, you know, putting pressure on the increased volumes was a change in order profile from our customer. Given the challenging macro environment, you know, while we were extremely pleased to see top-line growth at great margins, so we didn't discount stuff to drive that top-line growth, customers did purchase a little bit less on a transaction-by-transaction basis, resulting in an overall increase in shipments and packages, which, when coupled with the higher volume, was certainly far more significant than we had anticipated. That, you know, created some labor challenges for us, in addition to the fact that, you know, we're operating where our DC is in a very competitive labor market, and we were really forced into increasing wages to attract talent, retain talent.
We incurred significant overtime throughout Q3 and are expected to in Q4 to you know process these elevated orders and we've put in incentives to ensure that we retain our talent through holiday. I think as we talked you know earlier we also as a result of that higher volume shifted more orders to our third-party provider which comes at a higher cost but you know we were able to process that volume. And then finally some of the contractual savings that you know we're still working on and believe that we will be able to squeeze out but it's just a longer process than we originally had expected and we're just not willing to you know sign up quickly to get short-term savings.
We're really looking to the future and securing the best long-term pricing. I think when we look at those, like, four reasons that I described, many of them are addressable by us. Certainly, the wage rate increases and the competitive environment that we operate in are probably, you know, the one permanent increase. But I think our challenge and my challenge is, by the time we get to our next peak in back-to-school we come up with a revamped structure in terms of securing talent, shift allocation in our distribution center, so that, you know, a lot of that incentive, a lot of that overtime becomes a temporary thing that's affecting us in the back half of the year.
And then I think, you know, over time, our customer will return to normal historical purchases, as the macro environment improves. So we won't face the same pressures in terms of, you know, order economics and, you know, an outsized increase in orders. And then the contractual savings we still believe in. So I think as we look at the individual pieces, while they're certainly affecting us, in Q3 and will affect us in the short term as we move through peak and holiday, I think they are very addressable for us, and we're going to attack those, and I'm gonna aggressively attack those, as we move into next year and have them solved before our next peak.
Thank you. Our next question comes from Jim Chartier with Monness, Crespi, Hardt. Please go ahead.
Thanks for taking my question. Just wanted to follow up. I mean, is there any way to quantify what the total impact of these, factors are gonna be on the back half of this year, gross profit? And then, you know, what percentage of that do you think is kind of permanent? And then in terms of the timing of fixes, you know, how confident are you that, you know, they'll be in place by kind of the next peak season for back to school?
Yeah, Jim, I'll take that. I think it's probably, you know, easiest to look at it in Q3, you know, what changes in Q4, and then how it continues to evolve as we move on. So I think first in Q3, you know, I think our biggest, you know, impact during the quarter was clearly, you know, the issues that I just described. As I bucket those, I would say that, you know, the change in order economics and the delayed contract savings each were about a third of the impact, you know, give or take, of, you know, what we experienced in terms of margin pressure. The labor and the third-party utilization, I almost combine because they're both increasing our average transactional cost to process an order.
And those two combined, you know, represents about the other third. And they're, they're both pretty equal in terms of, you know, their, their impact. As we move into Q4, some of those, you know, start to reduce in terms of pressure. I think the contractual savings, we will start to see some of that. So, you know, I think we're anticipating some of that pressure to alleviate in Q4. I would say the, the order economics is probably something that we envision in the near term, given the macro environment, you know, being pretty similar in Q4.
And then the wage rates, you know, we've definitely factored that into our guidance and expectations, but, you know, that will start to get alleviated in terms of the incentives and some of those things. As we move beyond Q4, I would think, you know, the vast majority of these, as we get to peak next year in back to school, other than perhaps just the generic wage rate increases that we implemented in the competitive environment that we're operating our DC in. Other than those, I would think that the overtime issues, the higher shift to our third-party provider, the order economics, and the contractual savings will all be solved by the time we get to peak in summer next year.
Thank you. Our next question will come from Jay Sole with UBS. Please go ahead.
Great. Thank you so much. Maybe Sheamus, can you just give us, elaborate a little bit more on free cash flow outlook for the year and sort of debt paydown plans? And you know, there was an 8-K earlier in the quarter where you talked about a covenant issue, like a calculation. Can you just tell us about how that debt covenant calculation is done and where it stands today based on your current guide? Thank you.
Yeah, Jay, I'd be happy to walk you through it. So I think just taking a step back first to the last part of your question. Obviously, earlier this year, in June, we expanded our credit facility. As part of that expansion of the credit facility, there was an entirely new borrowing base calculation that was set up. Our covenants maintained pretty much identical to what they were previously, but there was a new borrowing base calculation that was, you know, changed in that expansion of the credit facility. Unfortunately, as part of that expansion, there were some communication issues between us and our agent, the lead bank, in terms of exactly what that new format should look like and what we, you know, should be putting in, in terms of the information.
There was a totally inadvertent glitch in terms of the information that we put in, which, you know, for a short period of time, caused us to trip a covenant in June for, as I said, a short period of time, but in July, August, September, we were, you know, not in any issue with that covenant. Once it was determined and we identified that, we quickly worked with the banking partners to, you know, one, correct that inadvertent issue, waive any violation that would have created, so to get that totally behind us, and agreed as part of that, to give the bank, obviously, some extra reporting. So, you know, I think that's a non-issue for us and totally behind us at this point.
And it does not change in any way the covenant calculations, going forward. They're exactly the same as they've always been under the deal. I think, you know, in terms of the first part of your question, you know, we continue to march towards the strategy that we laid out earlier this year. We've been extremely successful in reducing inventory. As part of this quarter, we exceeded our inventory reductions plans, given the tight controls that we put on purchases and also the strong top-line growth that exceeded our expectations. We came in with inventory down about 16%, which was stronger than we had guided to.
I think obviously, the expense challenges in terms of distribution and fulfillment did provide some pressure in terms of cash during the quarter, in terms of hitting our targets that we had originally laid out. But as we progress through the back half of the year and Q4, completing Q4, we're continuing to expect significant inventory reductions, ending the year with inventories down double digits versus the prior year. And as part of that, we will see a significant reduction in debt levels from where we are today. So as that inventory declines, we would expect debt levels from where we are today to decline in the neighborhood of $100 million or more.
So you know, it's still, given the results for Q3 and Q4, a little bit lower than we had originally expected, but we continue to march towards our strategy of reducing debt, which we believe positions us better for future success as we move into 2024.
Thank you. Our next question will come from Marni Shapiro with Retail Tracker. Please go ahead.
Hey, guys. I'm curious... By the way, the holiday line looks beautiful. But I'm curious if we could dig in a little bit to her buying patterns and habits right now. It sounds a little bit like she's buying what she really, really wants to have or needs, like uniform or holiday pajamas, but everything else, she's maybe buying 1 item at a time when she needs it. How different is this from behavior you've seen in the past? And I'm curious if her behavior is different in the stores versus online, and if you're seeing any difference between how she's buying on Amazon or your outlets versus your stores. If you could just give us a little color into, you know, how the shopper is behaving with your brand.
Sure. Yeah. She's buying slightly less, as we've covered this morning, with the increase in transactions, but we have an extremely high ADS online, so, you know, we have several units in every order. So that's, you know, it's not a question of her buying 1 unit. I think, to answer your question about what she's buying, we had a really strong back to school, driven by the usual suspects: uniform, denim, backpacks, and those things. But that continued into September and October. September was by far our strongest month. We sold a lot of seasonal categories. We had one of our best outerwear quarters ever, you know, really across the board. There wasn't, you know, one thing that was selling. Obviously, you know, to be able to deliver, you know, positive comps in e-com, we've got to be selling more than, you know, one category.
So it was really broad-based across the board and, you know, clearly driven by, you know, the marketing tactics that Maegan's been able to put in. Clearly driven by, you know, Maegan and her team's ability to figure out how to scale profitable digital traffic and, you know, how to make digital acquisition our number one acquisition channel, which is, you know, very unique in this, obviously, in this environment. So I think when you look into Q4, as we said on the call, you know, we're comping up positive, low single digits quarter to date, driven again by the strength of the e-com business.
So she's really, responding obviously, to the trend-right assortment, but also, you know, again, Maegan and her team's ability to drive strong e-commerce traffic, coupled with the fact that we discussed on several conference calls that we had an opportunity in e-com on the conversion line, based on not owning what we marketed to the depth we had wanted to last year. We really, you know, doubled down on the styles we were marketing this year, and that is, you know, obviously working quarter to date and worked in the Q3 as well. From an Amazon customer profile, like how they buy on Amazon versus TCP, I would say that that would be, you know, less units per transaction, but I'm gonna turn that over to Maegan, who's the expert in that area.
Yeah, certainly from an Amazon perspective, just the makeup of a transaction is very different. She's going there to trial brands. Things are very need-based. She needs it very quickly. So it's a much lower UPT, much lower ADS. That's why we think it's, again, a very complementary partnership for us. When she comes to our website, she's stocking up. Even in a tough environment, we continue to see very strong UPT and ADS, from our, you know, owned and operated website. So certainly, just a very different kind of profile in terms of how she's transacting on those two channels.
Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead. And Dana, your line is live. Please unmute.
... Hi, hi. Can you hear me okay now?
Yes, please go ahead.
Hello? Oh, great.
Yes.
As you think about 2024 having gotten through the volatile 2023, the framework of whether it's margins, whether it's top line, what do you see as the puts and takes? Because obviously, the digital business has very successful growth. How do you think of under the hood on the margin side, what the opportunities can look like? Thank you.
Hi, Dana, it's Sheamus. So, I think great question. I think as we look at it, you know, what's extremely pleasing is to see the success of a lot of the strategic initiatives that we're putting in place in terms of the marketing investments, really driving digital growth in an extremely competitive environment. So a lot of our peers are not seeing the same growth that we are. So I think as we move into 2024, we're excited that, you know, we have the difficult part, which is the top line growth, moving in the right direction. We're excited with the fact that we have inventories well-positioned, and that should enable us to maintain the internal margin and merchandise margin that was strong in Q3.
And, you know, those things which are typically very difficult, especially in a challenging macro environment like we're in today, are things that bode well for us in terms of 2024. I think as we look at, you know, some of the fulfillment challenges and distribution challenges, as I said earlier, we believe that those pressures will reduce. Certainly, in the first half of 2024, of 2023, we had enormous pressures from cotton, increased supply chain costs, which are now gone. And I think, you know, we've seen the reductions that we anticipated in those costs.
We don't have those costs built up in our inventory, so we're moving into the first half of 2024 in a much better position than we started 2023, which, you know, that coupled with the strong top line, the maintaining of our AURs, the strong internal margin, should bode well for a significant improvement in the first half of the year. We haven't gotten into giving, giving specific, guidance, but certainly would expect, dramatic improvement in the first half of the year.
Then, as I said earlier, by the time we get to our next peak, which is back to school, we believe that, you know, we'll have these addressable issues in terms of fulfillment solved, and, you know, should see opportunity in terms of margin, as we move up against those things in Q3 and Q4 of next year. So as I look at, you know, across the quarters of the year, for different reasons, I think we have significant opportunity in each quarter, and it all starts with the success of the strategic initiatives to drive digital and drive top line growth.
And as we said, you know, during the call, we're also gonna benefit from a more stabilized, right-sized fleet for us, of stores, that are better performing, in locations that not only perform well for us, but complement our e-commerce business. So, you know, we still believe in the strategic initiatives, and, you know, I believe that the best days are ahead for us.
Thank you for joining us today. If you have further questions, please call investor relations at 201-558-2400, extension 14500. You may now disconnect your line.