Good morning, and welcome to The Children's Place Second Quarter 2023 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; Maegan Markee, Brand President; Sheamus Toal, Chief Operating Officer and Chief Financial Officer; and Josh Truppo, Vice President, Financial Planning and Analysis.

[Operator Instructions] The Children's Place issued its second quarter 2023 earnings press release earlier this morning, and a copy of the release and presentation materials have been posted to the Investor Relations section of the company's website.

Before we begin, let me remind you that statements made on this conference call and in the company's earnings release and presentation materials about the company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected.

For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company's website.

On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. It is now my pleasure to turn the call over to Jane Elfers..

Thank you, and good morning, everyone. Before we get started, I want to congratulate Meagan and Sheamus on their recent promotions, and welcome Mary Beth Sheridan to our team. I'm looking forward to partnering with them as we continue to advance the company's digital-first strategy. Our Q2 results exceeded our guidance on both the top and bottom line.

The top line beat was the result of our strong digital performance, fueled by a strong start to back-to-school, driven by our successful first-to-market, back-to-school digital marketing strategies and our on-trend product assortments. In addition, Amazon delivered another outstanding quarter.

The bottom line beat was the result of our continued focus on expense management. With respect to monthly sales cadence, May was our weakest month, June improved significantly with the kickoff of our back-to-school campaign and July was our strongest month of the quarter.

Our e-commerce sales were up low single-digits for both the month of June and the month of July, driven by a low double-digit increase in e-commerce traffic for the quarter. Our e-commerce channel represented an industry-leading 51% of our retail sales in Q2, up from 47% last year and 30% in 2019.

We haven't touched on birth rates for a while, so I wanted to take a moment to update you on how we think about birth rates within the context of our digital-first strategy. As we've said for the past decade, we do not anticipate birth rate increases when we plan our business, and it's a good thing we don't.

Just to refresh everyone, here are some facts on birth rates, pre versus post pandemic. Birth rates hit their peak at 4.3 million in 2008 and have never recovered since. In 2019, prepandemic, births were 3.75 million. In 2020, they dipped to 3.6 million, a 40-year record low, and stayed at those approximate levels for 2021 and 2022.

And for 2023, birth rates are projected to remain flat to 2022. We believe that market share gains, not hoping for a baby boom, is what will move the needle for our business. And we believe that in order to gain share in the future, digital needs to be our top priority.

The digital channels are where our current core millennial customer prefers to shop for her kids. And based on the data, digital is where our future Gen Z moms will overwhelmingly prefer to transact. Almost all new digital buyers will come from Gen Z.

Gen Z digital buyers will surge from 45 million today to over 61 million in 2027, only 4 short years away. Mobile or m-commerce is where Gen Z overwhelmingly prefers to do their digital shopping. So as Gen Z becomes our next generation of core customers, it is critical that we make sure we are ready for them.

The importance of the digitally native Gen Z demographic to our future business cannot be underestimated, and that is why we prioritized mobile-first as the cornerstone of our digital transformation several years ago. Maegan will provide more detail on our progress in this area in her prepared remarks. Moving on.

We have previously shared our expectation that once we were past the pandemic and the historic supply chain upheaval and unprecedented cost, we would be in a better position to assess our accelerated strategic transformation from a legacy store operating model to a digital-first model, and to capitalize on the efficiencies of the new model.

We've learned a lot since 2019, and it's clear to us that because we accelerated our digital transformation and our fleet optimization strategies, we are more efficient and streamlined and can now operate the company more effectively with less resources, less stores, less inventory, less people and less expense, resulting in what we believe will translate to more consistent and sustainable results and more operating profit.

In his prepared remarks, Sheamus will cover the following topics and how they are planned to positively impact our financial performance in the short term and beyond. Less stores.

Our accelerated store closure strategy and its critically important impact on our future performance as we trade off low-quality store sales for higher-margin e-commerce and wholesale revenue. Less inventory.

As we move beyond 2023 and the high costs embedded in our inventory, we have the ability to operate the company at lower inventory levels versus prepandemic as a direct result of our transformation from a legacy store operating model to a digital-first model. Less people.

The ability to operate the company with a lower corporate head count versus pre-pandemic as a direct result of our transformation from a legacy store operating model to a digital-first model.

And less expense, our ability to operate the company with a lower, permanent fixed expense structure as a direct result of our transformation from a legacy store operating model to a digital-first model, with significantly expanded digital and wholesale businesses, all leading to more consistent and sustainable results and the opportunity for expanded operating margin versus prepandemic levels.

But before we get to Sheamus, I will turn it over to Meagan to discuss the significant progress we have made pre versus post pandemic with respect to our marketing transformation and marketing's impact on our business. pre and post pandemic.

Meagan?.

our partners, real-time optimized media measurement, marketing spend and traditional versus nontraditional marketing. First, our best-in-class partners who support us behind the scenes. Prior to the pandemic, the marketing organization was siloed.

This siloed approach did not allow us to effectively and efficiently plan, execute, optimize and ultimately measure the effectiveness of our investments. Since then, we've centralized our partners, teams and budgets and onboarded data and measurement solutions that allow us in real time to strategically drive our business KPIs. Our partners.

Ipsos MMA supports us across multi-touch attribution, marketing mix modeling and incrementality measurement. Ipsos MMA has been evaluated and scored as a leader by Forrester for its unified customer attribution approach and activate marketing, planning and optimization platform. We leverage the ACTIVATE platform daily within our organization.

From a media perspective, we partner with an industry-leading digital media and measurement firm that helps clients drive and deliver measurable marketing performance. This team of experts specializes across all digital marketing mediums and partners with our in-house team on a daily basis.

Our 2 industry-leading partners are critical to the second initiative, optimized media measurement. The degree of effectiveness of any marketing strategy is heavily reliant on accurate measurement. Prior to the pandemic, we did not have the forward forecasting tools or visibility, which hindered our ability to optimize our marketing investments.

With the adoption of our customer-centric marketing strategy came the need for a unified measurement approach across all of our touch points.

Ipsos MMA has successfully solutioned 1 of the biggest marketing measurement challenges in the industry with the launch of its unified marketing planning platform, a marketing attribution, optimization and simulation solution that captures a holistic range of omnichannel business drivers.

This platform delivers real-time optimization across all marketing touch points, providing us with accurate results and validated sales predictions, enabling us to generate measurable incremental sales and profit to help us to more strategically deploy every marketing dollar and to measure, in real time, the effectiveness of those dollars.

Both our measurement and media partners support our in-house team on marketing strategy and media execution on a daily basis, which leads to our third initiative, marketing spend. In 2019, our total marketing spend was less than 2% of revenue versus the industry average for multichannel brands of 5% to 7%.

Our marketing spend, as reported, includes not only digital marketing, advertising, celebrity partnerships and creative for our site, it also includes the costs associated with our loyalty program as well as our store signage and print materials.

As we complete our fleet optimization initiative at the end of this year, our ability to expose customers to our brand has shifted from high-cost traditional brick-and-mortar billboards, which were effectively part of rent expense, to digital-first acquisition strategy.

Our incremental marketing investment in 2023 and beyond, which we have self-funded through efficiencies in our digital-first operating model, are anticipated to be in the mid-single-digit range, in line with our specialty peers.

Our working media investment is now focused on full funnel marketing, which is made up of top of funnel, mid-funnel and lower funnel tactics. Unlike lower funnel tactics, which are aimed at speaking to shoppers who have already expressed purchase intent, top of funnel marketing serves to spread awareness, educate prospects and cultivate brand buzz.

Lastly, our fourth initiative, traditional versus nontraditional marketing. In 2019, our budget was almost solely focused on traditional marketing investments of e-mail and retail signage.

Shortly after the onset of the pandemic, when our core millennial customers' behavior rapidly shifted to mass and online consumption, we made the strategic decision to significantly accelerate our store closures.

These accelerated shifts in consumer behavior and company strategy demanded an accelerated marketing transformation with significantly different marketing investments.

It was critical that our marketing strategy and investment shifts were rooted in accurate customer data, which led us to commission a deep enterprise customer segmentation analysis at the start of the pandemic as the first important step to inform our digital marketing transformation strategy.

As the result of our segmentation work, we are now focused on investing in nontraditional marketing, which simply put is any strategic marketing activity or tactic that uses innovative methods to reach a target audience.

We're laser-focused on meeting and serving our millennial mom wherever, whenever and however she wants to interact with our brands, whether that's on social media, in her Gmail through celebrity and influencer she's inspired by or streaming a video on Hulu or YouTube. We need to be everywhere that she is.

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, and we've seen great success in our results. Now let's review some of those results starting with acquisitions.

As we've discussed on several occasions, a robust digital acquisition strategy is critical to our success as a digital-first retailer. We're pleased to share that during an incredibly challenging retail environment, Q2 was our fourth consecutive quarter of increased acquisition, with U.S. acquisition up 8% to last year.

Even more impressive when you consider that our Q2 acquisition was approximately flat to 2019 with more than 350 or approximately 40% less stores. Our positive acquisition trend is the direct result of our transformed marketing and media mix strategies that strategically target the total addressable market in order to drive new customer acquisition.

Those new strategies, combined with our broader digital first strategy, have resulted in 57% of our acquisition coming through our digital channels versus 37% prepandemic. This is a significant shift and one that we believe puts us substantially ahead of our competition as we work to acquire millennial and Gen Z customers into our family of brands.

Next, brand buzz, which is an incredibly exciting and important initiative for us as we transform to a digital-first operating model. Our brand work specifically has been transformative pre versus post pandemic. Prepandemic top-of-funnel brand awareness from both an earned and paid perspective was not a focus.

We relied on our legacy store operating model to generate brand awareness and new customer acquisition. With our core millennial customers' significant migration to mass and online channels since the start of the pandemic, we could no longer rely on the store channel to generate the majority of our brand awareness and customer acquisition.

We needed to apply a customer-centric lens to every customer touch point, and that starts with an engaging and noise-cutting content strategy that serve to mom via digital media mediums we know that she consumes. Since launching our branding initiatives in the back half of 2022, we've garnered over 159 billion earned and paid media impressions.

Our business relied on our store presence to drive brand awareness and engagement prepandemic. So all of these brand activations are net new and have transformed our brand awareness. In tandem, driven by our incredibly loyal communities during the same time period, the growth of our social media presence and our social engagement has been explosive.

Since the back half of 2022, our brands drove over 3.4 million social interactions, which represents a 3,000% increase over prepandemic levels.

Our social strategy has bolted The Children's Place brands into the leadership position across social media impressions, with our brand representing 62% of total impressions and 60% of social interactions across our children's competitive set, making The Children's Place the dominant player on social media for 2022 and for 2023 year-to-date.

Lastly, marketing contribution pre and post pandemic. Marketing contribution is the percentage of total revenue directly attributed to marketing efforts. In 2019, marketing contributed approximately 13% of digital sales. In Q2 of 2023, marketing contribution has grown to over 20% of digital sales.

During this time period, promotions and promotional activity experienced a 300-basis-point decrease in contribution to digital sales.

Our growth in digital marketing contribution has allowed us to reduce our reliability on promotional activity to drive digital sales as compared to prepandemic, further validating the sustainability of our structural pricing reset.

Even in 1 of the most challenging retail environments we have ever experienced, the success of our post-pandemic marketing transformation is clear. Our marketing transformation has been a critically important element to our overall transformation from a legacy store operating model to a digital-first retailer.

We now have the right partners, the right tools and the right team to drive meaningful reach, to drive qualified traffic, to scale our digital penetration and to acquire net new audiences into our family of brands through a full-funnel marketing strategy.

And the most exciting part is that we're just getting started, and we have significant opportunity ahead of us to continue to leverage our partners and our learnings. Now let's briefly review our Q2 marketing results.

As a leader in the digital space, we know that our core, digitally savvy millennial customer browses and purchases for all of the special and emotional events in their children's lives earlier than our in-store shopper does.

Combining this behavioral shopper knowledge with our leadership position in back-to-school, we launched a first-to-market back-to-school brand campaign approximately 1 month earlier than our historical launch date with the goal of capturing in-market demand and market share.

Our intentional pull-up strategy was our curtains up moment across every aspect of our business, and supported by our strong product launches, our multipronged full-funnel media strategies are buzzworthy creative and are strategic targeting. Importantly, we saw a positive inflection in our business immediately following the launch.

Our first-to-market back-to-school campaign launch included headliners and global pop superstars, the Jonas Brothers, and was strategically timed to coincide with the band's comeback reunion and highly anticipated debut of their newest album. Typically, brand campaigns of this sort have long-tail impact.

However, as expected, our first-to-market back-to-school campaign impacted our business day 1.

We delivered positive single-digit e-commerce comps for both the month of June and the month of July, fueled by low double-digit e-commerce traffic increases for the quarter, which we believe puts us significantly ahead of our competition with respect to our digital results.

Since the launch of our first-to-market back-to-school campaign, we have delivered over 15 billion impressions across our earned and paid media efforts, and further supported by our continued dominance on social media with The Children's Place taking the #1 rank amongst our children's competitive set.

We have shared with you many times that mobile is the cornerstone of our digital-first strategy due to how important mobile is to the core millennial customer. And as Jane covered in her prepared remarks, mobile is exponentially more important to our emerging Gen Z customers. So it's critical that we stay ahead of this important cohort. 80% of our U.S.

digital transactions occurred on a mobile device during the second quarter, a new quarterly record for us. Now let's move on to mobile app. The mobile app is a very important part of our overall mobile strategy since our mobile app customers spend approximately 100% more than non-app users and shop approximately 80% more than non-app users.

Since kicking off our back-to-school launch with our mobile app tie-in, we've experienced a 48% lift in mobile app downloads. Our targeted mobile app strategies have driven a significant increase in mobile app transactions and mobile app users. In Q2, our mobile app accounted for 20% of our U.S.

digital transactions versus 16% in Q2 of 2022 and 7% in Q2 of 2019, fueled by an impressive 21% increase in mobile app customers versus last year. I'll finish with an update on our growing Amazon business.

The significant time and resources that we have dedicated towards building our Amazon marketplace since the beginning of the pandemic have resulted in another outstanding quarter. Amazon site sales and traffic were both up triple digits in Q2 versus Q2 of 2022.

We participated in July Prime Day events, resulting in TCP's largest week on Amazon in our history. It's really incredible when we compare our relationship with Amazon today versus prepandemic. The progress that we have made on both sides has been transformational.

And again, the exciting part is that we believe we have significant opportunity for continued wholesale growth in the back half of this year and beyond with this important partner. Thank you. And now I will turn it over to Sheamus..

Net sales are expected to be in the range of $470 million to $475 million, representing an approximate 7% decrease as compared to the prior year third quarter. Adjusted operating profit for the third quarter is expected to be approximately 13.5% of net sales.

Interest expense for the third quarter is expected to be approximately $7 million to $7.5 million, again reflecting higher average borrowings and the impact of increased rates due to the increase in interest rates over the past year. Our effective tax rate for the third quarter is expected to be approximately 20% to 21%.

Adjusted net earnings per diluted share for the third quarter are expected to be in the range of $3.55 to $3.65.

We anticipate that Q3 2023 gross margin rate will increase by approximately 200 to 300 basis points versus last year, reflecting the anticipated decrease in input costs on goods expected to be sold during the quarter, partially offset by a decrease of approximately 100 basis points due to the significant growth of our wholesale business, which operates at lower gross margins.

SG&A expenses are expected to be down slightly versus last year, reflecting reductions in store payroll due to lower store count, reduced home office payroll and other expense rationalization initiatives, partially offset by planned increases in marketing expense and an increase in incentive compensation.

At the end of the third quarter, inventory is expected to be down in the low-double-digit percentage range versus the prior year third quarter.

To provide some color on the fourth quarter, we expect the fourth quarter SG&A dollars to be down significantly versus last year and will be down versus Q3, which reflects the impact of our expense reduction initiatives. We expect our fourth quarter gross profit margin will expand by 1,300 to 1,400 basis points compared to last year.

Our gross margin projections take into account the significant expansion of our wholesale business, which we estimate will negatively impact our Q4 gross margin rate by more than 100 basis points versus last year's fourth quarter. But as we previously discussed, this business operates at lower SG&A and is accretive to our operating margin.

In addition, we expect our margins will also be negatively impacted by the continuation of the challenging macroeconomic environment as our core customers are expected to continue to feel the impact of inflation for the remainder of the year.

The company is narrowing its previously provided guidance for the full year 2023, and now expects net sales to be in the range of $1.575 billion to $1.585 billion, adjusted operating profit ranging from 2.7% to 3% of net sales, and net earnings per diluted share expected to be in the range of $1 to $1.25 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, nonpeak clearance period, and as a result, is expected to have a very modest impact on revenues and an insignificant 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 $20 million to $25 million, primarily to support our digital initiatives and the enhancement of our fulfillment capabilities.

We anticipate closing 80 to 100 stores as part of our ongoing fleet optimization initiative, with the bulk of the closures happening at the end of 2023, leaving us with approximately 500 stores. Thank you, and we will now open the call to your questions..

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

I just want to talk about the guidance for a second. So it looks like, by my math, that at the midpoint, your operating income guidance is actually up a little bit from before.

So can you just talk about what changed in terms of your outlook for interest expense or the tax rate?.

Yes. Jim, I think you're generally correct.

I think in terms of our operating profit guidance, we do feel strongly about, obviously, the 10% operating margin that we continue to believe that we'll be able to achieve in the back half of the year, driven by our margin expectations on a gross margin level, which, as we talked in my prepared comments, we did experience some pull forward of some clearance merchandise into July, which will benefit us versus our expectations in the back half of the year.

And then obviously, our cost controls and initiatives that we continue to accelerate are helping us from an SG&A perspective, which are all helping us to improve operating profits slightly versus our previous guidance. We did experience an increase in interest rate and interest costs associated with borrowings.

So that partially offset some of those increases. So that's what you're seeing in terms of the bottom line result. I think tax rate is generally where we would have expected.

But essentially, you're seeing some of the operating profit improvements that we've been able to project slightly offset by increased interest rate due to higher borrowings and higher market-based rates..

Great. And then if I could ask a follow-up. Just -- you've moved up the marketing campaign by a month for back-to-school. Others have kind of talked about the back-to-school extending into September, late this year.

How are you thinking about the back-to-school season? Are you continuing to invest in marketing in August and September at the same rate as last year? And then just overall, are you pleased with kind of back-to-school in August to date?.

Yes. Jim, it's Jane. I think clearly, based on our prepared remarks, we're very excited about back-to-school. We launched early. We were first-to-market, and I think that you can tell through our results, particularly digital, that, that was a successful strategy.

Just to refresh everyone, the lion's share of the back-to-school business happens between [$7.15] and [$8.15]. So 60% of our back-to-school business is between that time period. And I'm sure it's similar for others. I'm always a little surprised when people talk about extending back-to-school to September. We don't have a back-to-college business.

But considering all the kids are pretty much already back on campus, I would assume that business is heavily front-loaded as it is for us. And when you think about our business at TCP, by 8/28, which is 1.5 weeks from now, 80% of our kids in our markets are back in school. So like I said, August is really where this happens for us.

And August, as you all know who follow us, is an outsized month and represents usually historically about 40% of the quarter. And so what's happening now is really the big businesses in uniform, denim, graphics, that's what's really driving the sales in that 07/15 to 09/01 time period, if you will.

Fashion business has been very strong for us in stores as well as on our digital channels. So we're happy to see that. And also Halloween has been -- we always launched that around 07/01, but that has been particularly strong for us. And I think as Meagan mentioned in her prepared remarks, our digital shopper shops earlier than our store shopper.

And so we're seeing really positive response to that. And we'll continue to spend on marketing, as we discussed in our prepared remarks through the balance of the season. But I just want to make it clear that, as we leave August behind, we quickly move into selling seasonal products in the start of holiday and really leave back-to-school behind..

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

Congrats on a great quarter. By my math here, if I use Sheamus' data with U.S. and Canada, it appears your digital business was down mid-single digits. Obviously, you said it was up for June, July, which implies a pretty significant acceleration.

I'm just wondering, I'm assuming your guidance implies digital will be up for the year -- or for -- up for the second half.

And I'm just kind of wondering, do you -- are there things with regards to the marketing and that you're seeing that kind of give you even more confidence in that guidance, the digital guidance?.

Yes. Jeff, it's Sheamus. I think, first, from a trend perspective, I think generally in the ballpark, our digital business was -- in Q2 was in the low-single-digit percentage range.

And as you said, and as we talked about in our prepared remarks, that was an improving trend throughout the quarter where we saw that flip to positive in the last 2 months of the quarter.

I think as we look at our guidance and our expectations for the back half of the year, I think we have some different perspective by channel, and it's probably best to understand it by looking at the different channels.

I think, first, as we look at the wholesale business, as we've discussed and commented on a number of occasions, we expect the wholesale business to be up significantly in the back half of the year, contributing to positive results on the top line and helping us, obviously, from a comp perspective.

Secondarily, from a brick-and-mortar standpoint, given the macro pressures, coupled with continued expectations on our part for declines in mall traffic, we do expect the brick-and-mortar business to continue to be challenged during the back half of the year. And I'm really not anticipating any improvement in that trend at all.

And then finally, in the back half of the year, to the point of your question, with respect to e-commerce, we are expecting a slight improvement in trend due to a combination of factors. Obviously, we've experienced positive traffic trends based upon the success of our marketing strategies.

We're not anticipating that those trends will dramatically improve from where we are now, but they are positive. So we're still anticipating the success of those marketing investments as we move into the back half of the year.

And then I think we see some opportunity for increased or improved conversion as we move into the back half of the year as we're better positioned in certain key items for the holiday season. And those key items importantly are further supported by some of our marketing initiatives.

So I think that gives us an opportunity in the back half of the year relative to last year to see an even more improved trend in the e-commerce business versus what we saw in Q2. I think from an AUR perspective, we're anticipating still a challenging environment and not really anticipating an improvement in the trend in terms of AUR.

But overall, our digital business is expected to improve slightly based upon that improvement in conversion and that continued success of the marketing investment in terms of driving traffic..

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

Nice to see the progress.

As you think about the business model shifting to digital and then certainly, every indication as it becomes a more efficient business model, how do you think of the expense structure going forward? And does it get leaner than what it is given, obviously, the balancing act of marketing investment driving customer growth and transaction, but also the expense structure internally? And then, Jane, you just announced the hiring of Mary Beth on the Chief Merchant side.

What do you see that opportunity in enhancing the merchandise assortment, whether through The Children's Place brand or the other brands?.

Sure. Mary Beth is a very seasoned merchant and has worked in a lot of different channels in a lot of different businesses. And so she's only been here a couple of weeks, but she has immediately hit the ground running, which is not surprising, as I had mentioned in the press release.

I've worked with Mary Beth in the past so I think she's going to bring a level of discipline and a level of urgency around the opportunities in the brands, and to your point, not just TCP, but how do we continue to get the momentum going in Gymboree, how do we break through on Sugar & Jade and really make that business more important as we look to 2024 and beyond.

And like I said, she's worked on a lot of different businesses. So I think that she can look across the brands and think about incrementality. I think what it also does is it really frees Meagan up to really focus her energies on marketing and on our wholesale business directly mostly from Amazon.

So having Meagan be able to spend a lot more focused time on growing the Amazon business and the potential offshoots of that Amazon business, be it international or what have you, and then also to see what Meagan and her team have been able to do on the marketing front, it's just absolutely incredible when you think about where we were prepandemic and where we are now.

And you look at just things like our digital business comping positive in June and July and double-digit traffic increases. We haven't heard a lot of reports so far, but from the ones we have, we are certainly a significant outlier in how strong our digital results are.

And obviously, that's where our eggs are in the basket and continue to move on that. So I think that, that will really free Meagan up for that as well. And the rest of it, I'll turn it over to Sheamus..

Yes. So in terms of the first part of your question, as far as our digital acceleration, we do see the opportunity to have a permanent reduction in our expense structure.

As I commented and Jane commented in our prepared remarks, in terms of operating efficiencies, we believe that the digital acceleration will enable us to obviously, as we commented, have less stores, less inventory, less people, less expense, less debt, less interest as a result of that debt. So there's a whole host of efficiencies.

On the expense side, we've obviously executed a number of initiatives this year, which are reducing expenses. We've commented in our guidance in terms of expectations for expense reductions relative to last year. And those are not a onetime thing that are temporary benefits.

We believe that's a resetting of the expense structure as we shift to a more digital business, as we layer in more wholesale, which, as I commented earlier, comes with less SG&A expense. And I think it's also important to note, within that SG&A expense, as we've talked on numerous occasions, we're also investing in marketing.

So we're able to achieve SG&A expense reductions despite the fact that we're making investments in marketing to drive our digital business, which are extremely important to our growth initiatives, but we're, in essence, able to self-fund those marketing investments with the restructuring of our business and the expense reductions that we see across the business.

And some of that hits in SG&A expense. Some of it is also coming through occupancy cost reductions, as Meagan talked about in her comments, where we're shifting from billboards or nameplates on brick-and-mortar locations to more digital marketing initiatives.

That digital marketing ends up in SG&A expense, where some of that occupancy cost was actually in our margin structure. So I think we're certainly getting more efficient, more effective with our expense structure, and that's not a temporary benefit.

That's an ongoing benefit that will cascade into 2024 and beyond, enabling us to have more sustainable growth and more sustainable increases in terms of operating profits..

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

Great. Jane, I want to ask just about third quarter versus fourth quarter and just how the business has evolved because the guidance for third quarter sales looks like it's implying sales for third quarter to be a lot bigger than they will be for fourth quarter.

Although if you go pre-pandemic in the past, fourth quarter was always bigger than third quarter given it's holiday.

Is the change just around the wholesale business and its growth? Or is there something else going on that would really make structurally third quarter bigger now? And then if you kind of maybe just talk about Gymboree, and as that business grows, how that should impact fourth quarter, that would be super helpful..

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

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

I think that, that's what you're seeing in our expectations in terms of the performance split between the quarter..

And then from a Gymboree perspective, I can take that part of the question. Gymboree, we're planning when we think about Q3 into Q4, Gymboree, we've talked about before, is a very holiday-centric business. So we're going to continue to see really exciting growth from the Gymboree brand as we head into Q4.

And a lot of that is going to be surrounded by an incredible marketing campaign. We had announced Mandy Moore. We've continued to see really positive success with her throughout the year. And really where it kicks into gear as the tail end of Q3 heading into Q4 as we bring in our expanded holiday assortment.

This is where we had a lot of opportunity last year where we saw very early selling. We oversold our inventory so when we head into December, we have a lot of opportunity in the November, December time period. So we're very optimistic about the continued growth of Gymboree, especially as we kick into the key holiday selling time period..

I think the last thing I would just add to the first part of that, as stores have become less penetration for us, I think that in earlier years, when stores were a higher penetration, I think they do have a slightly better performance relative between Q3 and Q4 because of some of the events and a longer, a longer time period.

But as we've shifted to more digital, we do see a little bit more volume in Q3 versus Q4..

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