Q&A with Jane Elfers, CEO of The Children’s Place

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\"RRWe had the opportunity to talk with Jane Elfers, CEO of The Children’s Place, the number one pure-play children’s specialty apparel retailer. Here’s what she had to say about her first year at the company, the differences between the specialty and department store businesses, and the challenges of selling to some of the most value-conscious customers on the planet: parents of small children.

Q. Jane, you’ve been at the helm of Children’s Place for a year which has been a transitional one for the economy. Can you give us some idea of how the company has been doing through all of this? Do you think the recession is over, and if so, what will the recovery be like? What do you think about 2011 and beyond?

A. The Children’s Place made significant progress in 2010. We grew top-line sales, and expanded market share through the opening of 67 new stores, primarily in value centers. We strengthened the management team and made great progress on our five key growth initiatives; improving the merchandise, accelerating new store growth, optimizing inventory management, sharpening the marketing message, and driving e-commerce growth. As we approach 2011, we know that our customers have been affected by the difficult economy and we anticipate they will continue to be cautious in their spending. However, we believe we are well positioned to continue to grow market share.

Q. Children’s Place, with almost 1000 stores, is the largest children’s apparel specialty retailer, so you’ve no doubt been a barometer of sorts. How has the overall children’s apparel market fared relative to other apparel categories in the recession? Has the competitive environment changed? How big a role has being a value retailer played?

A. Although children’s apparel has underperformed the adult apparel market over the past two years because of declining prices, unit growth has held up for a couple of reasons. First, there was an increase in the US birth rate in the early to mid 2000s, so the population has increased. Second, children’s apparel is a less discretionary purchase than adult apparel. Children outgrow last year’s clothes so parents need to replace most of their children’s clothing each season. However, consumers are trading down to value retailers and buying more merchandise on sale. As I said earlier, we have expanded our market share due to our value positioning. However, the increased promotional activity has resulted in a decline in our gross margin over the last couple of years. A number of the initiatives we have underway are focused on expanding gross margin going forward.

Q. Do you see increasing raw material and other costs impacting your retail pricing going forward?

A. This is the biggest issue in the industry right now. When we purchased our spring and summer lines, prices were above last year due to higher cotton, labor and shipping prices. We made the decision to take some modest price increases on select items in our spring/summer lines to partially offset the higher cost of goods. In addition, we value engineered our product and altered the mix to help mitigate the increased costs. Approximately 40% of our product is made in China, and we have been moving some of that to countries with lower labor rates. Cotton prices have continued to escalate substantially so we will also see price increases on the back-to-school and holiday 2011 lines. Fortunately, we are priced 30% below most mall-based children’s apparel retailers so even with these planned price increases, our merchandise still represents a tremendous value to our moms.

Q. Also, if Children’s Place as a value retailer is one of your success factors, what are some of the other drivers? How important is fashion, and would “fast fashion” be an advantage in the category?

A. Our customer is looking for great fashion and color. Children’s fashion tends to lag the teen and adult market so we have a little more time to monitor and pick up
on the successful trends in the teen market and translate them for our children’s line. We have modernized the merchandise starting with the spring 2011 line. We are providing greater differentiation between big and little kids, and we are introducing more fashionable basics. Our cycle from design to in-store is over six months.
Going forward, we are looking to decrease the lead time for some categories, such as denim and graphic tees. We are also implementing localization strategies, so that stores receive product that is most appropriate to their region, from both a demographic and seasonality standpoint, when they need it.

Q. What does the Children’s Place brand represent to consumers? Who is your target customer?

A. The Children’s Place is known for head-to-toe outfitting, great value and an easy-to-shop environment. Our stores have a very “boutique” atmosphere, which customers have responded very well to. The customer can find coordinating tops, bottoms, socks, shoes, and accessories all in one place. Our typical customer has two children and an annual household income of around $70,000. We have broad appeal among Caucasians, Latinos and African Americans. We naturally have a young customer – and our young moms are heavy users of e-commerce and social media – so most of our marketing and promotional programs are internet-based now. Continuous improvement of the customer experience is a key initiative for us.

Q. And, who do you view as your major competitors? How do you differentiate?

A. Our customers shop at a lot of children’s apparel stores, including Old Navy and Target, whose price points are very similar to ours, as well as JCPenney and Kohl’s. There is less cross-shopping between our customer and those of Gap, Gymboree and department stores because their prices are so much higher.

Q. There’s been some talk about Children’s Place being a good merger candidate with Carter’s and/or Gymboree. In fact, Goldman Sachs estimated such a move could increase the value of the company up to 50%. And Galt Investment Partners felt there was great cost reduction synergies (up to $50 million), through such a combination. Is this something you would consider?

A. Our management team and board remain focused on improving the performance of the business and maximizing long-term shareholder value. We believe our current strategic initiatives will drive increased sales and profitability for The Children’s Place in 2011 and beyond. We are very well positioned to grow market share given our strong brand and value proposition. After my first year at the helm of The Children’s Place, I am even more optimistic than I was when I started.

Q. What have been some of the major differencesfor you coming from the department store business model, where you were President and CEO of Lord & Taylor for 9 years, to running a branded specialty chain? What has been more challenging and what has been easier?

A. This has been a very interesting transition for me, going from leading a broad-based department store to the narrower focus of a branded specialty chain. We have more control over our destiny at The Children’s Place; we control the process from design to point of sale. On the other hand, the biggest challenge so far has been to get the right people, processes and systems in place to fully maximize the business. That was my first priority and we have made tremendous progress over the past year in strengthening our team, our processes and our systems. There is greater volatility in the children’s apparel business than in broader based department and specialty retailers. Customers are increasingly buying children’s apparel closer to need, so changes in weather and holiday timing can dramatically alter results.

Q. As someone who “grew up” in the retail business, (with your father working for
a big retailer,) what are your thoughts on the evolution of the industry? What are the biggest changes you’ve noticed?

A. Since prices are the same now as when I started twenty five years ago, I would have to say that technology is the biggest differentiator. Real time information at point of sale, planning and allocation systems, e-commerce, m-commerce (mobile commerce) and social media have all changed the pace at which we operate and the decisions we are able to make.

Q. The retail industry is still in a very transformational phase, with the technological changes you just mentioned, as well as cost pressures, oversaturation, etc., changing the game for everyone. What do you see as some of the biggest challenges facing the industry in the next several years?

A. At this point in time, I believe the state of the economic recovery and rising costs are the biggest challenges facing retail. US consumers are unlikely to have higher disposable incomes in 2011, yet they will face rising food, energy and apparel prices. This may negatively impact unit apparel purchases for awhile.

Q. This is really an opinion question, but maybe one that you don’t mind answering: many child development experts are saying that because of the unchecked access to media, TV, Internet, etc., kids are growing up too fast, taking on pressures at a young age, not really being allowed to “be a kid.” Do you agree? If so, how have marketing and merchandise trends adapted to this new reality?

A. I do agree that kids are growing up faster. We see girls as young as 6 and 7 wanting to dress like their teenage sisters, rather than their younger sisters. That is why we are providing more differentiation between big and little merchandise in our stores. Moms want to shop at The Children’s Place as long as possible because we offer age appropriate styling and great values. Upgrading our offerings for big girls and boys is aimed at keeping these children wearing PLACE clothes longer, which we know parents will appreciate.

Q. With such an over-stored, over-stuffed and now, over-web-sited marketplace, with every price being challenged downward, (or lose the sale), how does one ever raise prices? And, if not, does this not lower all ships, potentially forcing cuts in quality, fashion and innovation? What are your thoughts on that rather philosophical question?

A. Retail apparel has been in a deflationary environment for over twenty years. That is going to change. We don’t believe the answer is to put less into the quality of the product. We will continue to offer high quality, fashionable merchandise at a great value, albeit a slightly higher price than in the past. We’ll see how the customer responds but we have an advantage because we are going in 30% below most other mall-based children’s retailers.

Q. Another big picture question: Could you ever see a scenario in which a department store invites you to lease space in their children’s apparel area in which you would essentially create and actually operate a Children’s Place shop, such as JC Penney is doing with Sephora and Mango, or Macy’s does with Sunglass Hut and others? And, would you do that?

A. We think the biggest opportunity for The Children’s Place is to expand into value centers in smaller markets that don’t have a big mall nearby. These value centers are frequently strip malls serving populations of 100-250 thousand, sometimes less. Stores close by may be Target or Kohl’s or Walmart, and there are frequently several other value retailers in the mall. These are destination shopping centers so conversion is higher than in regional malls. Lease and build-out costs are lower so our year-one return on investment is significantly higher. We have more than 90 of these value center stores now and are very pleased with the results we are seeing. We plan to open another 85 stores in 2011, and half of these new stores will be in value centers.

Q. Any globalization plans for The Children’s Place?

A. There is a lot of demand for The Children’s Place in other markets. We get calls every day asking to open stores in Latin America, Europe and the Middle East. At this point, we have stores only in the US and Canada, but our e-commerce site began international shipping in November 2010. We have had preliminary discussions with some potential partners about opening stores internationally, and we just hired a Senior VP of International Business Development who will develop for us a roadmap for international expansion. We expect that will be a big piece of our longer-term growth strategy.



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