Children's Place Inc (PLCE) 2002 Q1 法說會逐字稿

Please stand by. The conference is about to begin. Please stand by.

Welcome to the Children's Place first- quarter earnings conference call. During the conference call, participants will be in a listen-only mode. Afterwards, you will be able to participate in a question-and-answer session. If you have a question, just register for a question. This is being recorded for May 16th, 2002. I will now turn the program over to management.

Thank you for joining us. We are here to discuss the first quarter results reporting this morning. If you haven't received these, call (212) 558-2409. The call will begin with formal remarks. A question-and-answer period will follow. The operator will instruct you on the procedure at that time. I will remind you that during the course of this conference call, it may contain forward-looking statements. These statements are based upon the company's current expectations and are subject to various risks and assertions that are contemplated in the forward-looking statements including, in particular, the risk and uncertainties described in the securities and exchange commission documents. The actual resulting events may differ. You are cautioned not to place undue reliance on forward-looking statements. We take no obligation for these forward- looking statements after the date hereof or for unanticipated events. The inclusion of any statement in this call does not reflect our opinions of (inaudible) events or material statements. Joining us on this morning's call are Ezra Dabah, chairman and chief executive officer; Seth Udasin, chief financial officer; and Mario Ciampi, senior vice president store development and logistics. I would like to turn the call over to Ezra Dabah. You may begin.

Thank you. Good morning everyone. I am pleased to welcome all of you who have joined us for the first quarter conference call. I will begin by reviewing the highlights of the Children's Place results for the quarter. Seth will discuss the financial performance in more detail. Mario will update the store growth and Seth will provide the outlook for the remainder of 2002 fiscal year. As always, we will be happy to answer any question at the end of our presentation I am pleased to announce the Children's Place has posted record sales and earnings for the first quarter of 2002 despite the difficult environment. The highlights: Record net sales of $173 million and 8 percent increase over sales of $160.5 million last year. Gross margin of 45.7 percent for the first quarter representing a 320 basis point increase over the prior year period. Net income in the first quarter, increased by 19 percent to $15.2 million, from $12.8 million in the year-ago period. Diluted earnings per share increased by 17 percent to a record of 56 cents. This earnings growth was achieved despite an 11 percent comparable store shelf decline for the quarter. Our growth strategy is ahead of schedule with 34 new stores opening the first quarter out of 130 stores planned for the year. As previously announced, we ended 2001 with low inventory levels; that remained low during this year's first quarter. We believe that our overall performance could have been stronger during the quarter if our inventory ownership had been at higher levels. In response, we have increased the inventory levels beginning in June and appropriately positioned the inventory for the balance of 2002. We also believe that we have skewed our merchandise mix too heavily towards fashion. As a result we are strengthening our bread-and-butter basics business. And beginning in the second half of this year, basics will comprise at least one-third of the total unit inventory. We look forward to the further improvement on the merchandising side of our business. A new addition is Amy Hauk, who is vice- president of merchandising. She joined us from Gap/Old Navy where she held several senior positions. Over the last three quarters, we have achieved strong bottom line growth by focusing on the growth margin expansion. Beginning in the back-to-school season, our pricing strategy will be more competitive. We expect more customer acceptance of our brand. As announced earlier this month, we have completed the acquisition of 23 stores in the Canadian market to establish a strong position across the northern border. This acquisition gives the Children's Place the foundation to expand up to 125 stores in the Canadian market with our fashionable brand of high- quality, value-priced merchandise. It's important to note that all of our store expansion plans will continue to be funded through our strong cash flow. Separately, we filed a statement with the SEC with a reported offering of 2 million shares of common stock held by Saunders Karp and Magrew (phonetic) who made their original investment in the company in 1996. The company will not receive proceeds from the sales of these shares. I would like to pass the microphone over to the chief financial officer, Seth Udasin, who will be discussing this in more detail.

Thank you. We achieved record first quarter sales in the 13-week period ending May 4th, 2002. During the quarter we opened 34 new stores and remodeled one. As of May 4th, we operated 554 stores in 47 states. There was an average of 4300 square feet per store. Sales for the quarter increased 8 percent to $173 million dollars. The first quarter decrease was primarily comprised of a 13 percent decline in the overall number of transactions partially offset by the transaction size going down. Gross profit increased 345 basis points. This increase was primarily the result of higher mark-ups. Mark-ups during the quarter were higher than last year primarily because of lower merchandise cost. The higher occupancy cost is as a result of a negative comp performance and the increase in the number of new stores not yet producing regular store revenues. 110 basis points up to 26.8 percent. This increase was due to negative comp store sales and expenses for new stores not yet producing regular store revenues. Payroll and marketing were offset by lower pre-opening expenses. Depreciation and amortization increased 110 basis points as a result of the comp store sales and increased depreciation relating to new store openings not yet producing average store revenues. Operating income as an approximate percent of store sales increased from 13.1 percent in a year ago. We're proud of this given the current environment other than net income went to $15.2 million up from last year's 12.8. This resulted in a 7 percent increase in earnings per share to 56 cents this year versus 48 cents last year The balance sheet, as you see in the press release, we are in a strong cash position at the end of quarter. Our cash increased 42 million dollars to over 66 million dollars at quarter end. We have no borrowings or long-term debt. Inventory is up 3 percent over last year on an 8 percent sales increase. Inventory per store is down 19 percent and inventory per square foot is down 21 percent. These lower levels are attributed to conservative sales planning and tight inventory management. We may have been a little too conservative. We believe this will improve in the second quarter and we will be well-positioned for the all-important back-to-school season. I would like to turn the call over the to Mario Ciampi.

Thank you. During the first quarter we opened 34 new stores and completed the Woodbury Commons outlet store. We operated 554 stores in 47 states. These stores are producing annual sales $1.1 million for the first quarter. We are on target to open 130 new stores this year, including approximately 30 in Canada, remodel 6 stores, and convert 7 stores to the combo format. We will end the year with 634 stores. Comps received best performance in the New York metro area and southwest regions. Strip centers outperformed the balance. To capitalize, on this, 50 percent of our stores will be in non-mall environments and 10 percent in the New York metro region. They are performing better than the balance of the chain. As we stated in the past, 30 percent of this year's new stores will be located in California and Texas feeding on current favorable demographics. The previously announced 23-store acquisition in Canada closed on May 1 to make them Children's Place stores. We have made logistical and operations (inaudible) in timely manner. All are scheduled to open during the very beginning of the third quarter. We will add five to seven stores by the holiday season. This will give us Montreal and Toronto, the two biggest markets in the country. We believe we can operate 125 stores in Canada. To support our Canadian expansion, we are taking possession of a distribution center, which will be operational during the second quarter. Leading our efforts in Canada, we have added Lesya McQueen, vice-president of Canadian operations. The vast majority of positions have been filled, and training begins this month. We are well-positioned to open, operate these stores, and get a significant market share. Lastly, during the quarter, we continued to build the infrastructure. Significant portions of the new financial system and merchandise planning and operations are operational. We are able to purchase in dollars and units. In the second half we will use Arthur's inventory and allocation system. I would now like to turn the call back to Ezra Dabah.

Thanks Mario. I would like to reiterate we are pleased with the accomplishments during this quarter as the increase has been 17 percent. We look forward to capitalizing on all the highlights in this call, including the inventory increase, basic merchandise and the new pricing strategy. During our current business conditions, we are reducing the sales projection for the full year; however, giving our anticipated improvement in gross margin and effectively using our operating expenses, earnings per share growth will be 25 percent growth. Seth will now provide you with more detail on the financial outlook.

Thanks, Ezra. Here are the general expectations for the second quarter fiscal year 2002. This is the first time we've given guidance for the second quarter. We expect to open 35 new stores in the U.S. during the second quarter. Due to our comparable store sales trends, comps for the second quarter are projected to be in the negative, mid- single digit range. We believe sales for the second quarter of 2002 will increase 15 percent over last year. We expect our gross profit margin to decrease 250 basis points, over last year's second quarter as a result of our negative comp sales, more competitive pricing strategy, and the high number of fashion merchandise in our inventory. We are focusing on decreasing expenses, and we expect these to decrease 50 basis points. As a result of the comp sales and new store openings, we expect the depreciation expense to decrease 100 basis points. Based on these expectations we now believe second quarter will have a loss of 25 cents versus last year's of 15 cents. For the full year, as we mentioned previously, we plan to open 130 stores. 100 in the United States and 30 in Canada. We believe these new stores should have analyzed sales of $1.1 million each. Given our comparable sales store trends, we contemplate a negative increase of approximately 15 percent over 2001. We expect to see improvement in SGA expenses offset by higher depreciation expenses. This should result in our operating margin increasing to 12.5 percent of sales in 2002. Based on this, we believe 2002 earnings per share should increase 25 percent. Included in these numbers is the start of our Canadian operation, which we believe will be dilutive up to 5 cents a share. That concludes our earnings guidance. We would be happy to answer any questions you may have. Thanks, Ezra. Here are the general expectations for the second quarter fiscal year 2002. This is the first time we've given guidance for the second quarter. We expect to open 35 new stores in the U.S. during the second quarter. Due to our comparable store sales trends, comps for the second quarter are projected to be in the negative, mid- single digit range. We believe sales for the second quarter of 2002 will increase 15 percent over last year. We expect our gross profit margin to decrease 250 basis points, over last year's second quarter as a result of our negative comp sales, more competitive pricing strategy, and the high number of fashion merchandise in our inventory. We are focusing on decreasing expenses, and we expect these to decrease 50 basis points. As a result of the comp sales and new store openings, we expect the depreciation expense to decrease 100 basis points. Based on these expectations we now believe second quarter will have a loss of 25 cents versus last year's of 15 cents. For the full year, as we mentioned previously, we plan to open 130 stores. 100 in the United States and 30 in Canada. We believe these new stores should have analyzed sales of $1.1 million each. Given our comparable sales store trends, we contemplate a negative increase of approximately 15 percent over 2001. We expect to see improvement in SGA expenses offset by higher depreciation expenses. This should result in our operating margin increasing to 12.5 percent of sales in 2002. Based on this, we believe 2002 earnings per share should increase 25 percent. Included in these numbers is the start of our Canadian operation, which we believe will be dilutive up to 5 cents a share. That concludes our earnings guidance. We would be happy to answer any questions you may have.

Thanks, Ezra. Here are the general expectations for the second quarter fiscal year 2002. This is the first time we've given guidance for the second quarter. We expect to open 35 new stores in the U.S. during the second quarter. Due to our comparable store sales trends, comps for the second quarter are projected to be in the negative, mid- single digit range. We believe sales for the second quarter of 2002 will increase 15 percent over last year. We expect our gross profit margin to decrease 250 basis points, over last year's second quarter as a result of our negative comp sales, more competitive pricing strategy, and the high number of fashion merchandise in our inventory. We are focusing on decreasing expenses, and we expect these to decrease 50 basis points. As a result of the comp sales and new store openings, we expect the depreciation expense to decrease 100 basis points. Based on these expectations we now believe second quarter will have a loss of 25 cents versus last year's of 15 cents. For the full year, as we mentioned previously, we plan to open 130 stores. 100 in the United States and 30 in Canada. We believe these new stores should have analyzed sales of $1.1 million each. Given our comparable sales store trends, we contemplate a negative increase of approximately 15 percent over 2001. We expect to see improvement in SGA expenses offset by higher depreciation expenses. This should result in our operating margin increasing to 12.5 percent of sales in 2002. Based on this, we believe 2002 earnings per share should increase 25 percent. Included in these numbers is the start of our Canadian operation, which we believe will be dilutive up to 5 cents a share. That concludes our earnings guidance. We would be happy to answer any questions you may have. At this time, register for a question by touching the one on your touch-tone phone. To withdraw the question, press the pound sign. Again, you can register by pressing one on the touch-tone phone. We have Margaret Whitefield with Brean Murray Research.

Good morning. Would you comment further as to what basics represent currently, and what if any exposure you are expecting for fashion mark-downs in the current period. And elaborate on the impact of the pricing strategy you're reviewing for fall and what kind of decrease we can expect and what kind of impact this may have on the gross margins. Thanks.

Margaret, we took basics down way too much in the spring season and as we stand, about 10 percent of our inventory is basics today. That's again, 20 percent of our inventory last year being basics. And strategically, the beginning of the year, we were looking to, um, for less promotions on one end as well as, um, you know, being in a fashion cycle, um, we are - we basically swung the pendulum way too far towards fashion. So to some extent we will have to flush out some of that during the second quarter. In other words to our price decreases beginning with the back-to-school season, we look forward to being more competitive, but we would rather not specifically share details about what that might be.

Okay. But I take it they are offsetting gross margin issues?

That's correct

Okay. Thank you.

Thank you.

The next question is from Mark Freedman, Merrill Lynch.

Thank you. Good morning. Good job in a tough environment. Could you talk a little more about the traffic trends versus - the street stores versus the mall stores. And I have a follow-up question.

I'm sure, like a lot of other retailers, we track the mall traffic, and it's publicly available information. Generally we see mall traffic down between 5 and 10 percent for us. And, um, it's sort of consistent with, you know, our transaction decrease. We see more traffic in the non- mall environments; our best performing stores were strip centers, and street stores. So we did see lower transaction decreases in those units.

Okay. Great. And, Ezra, could you talk a little bit - you guys are always being creative with promotions. Um, where do you stand as far as, um, you know, some of the most recent ones. You changed a little bit; you added some more, too.

Second questi Is there anything that stood out in the first quarter and what we should expect going forward?

Mark, yeah, we have seen the promotion lose some luster more so even this first quarter, but as we began, the first ones did very well, the second did okay, and this past quarter, the promotions did not do as well as we expected and were quite below previous - previous levels. So, the market - you know, the customer still continues to react, though, to that short-time promotions, and we do see a substantial increase in our unit sales, so we are looking forward to continue promoting; maybe not to the extent as we had previously; especially in view of the fact that we are looking to more competitive pricing strategies.

Would it be fair to say you've reacted to some of the lost luster in promotions by being more competitive in the price point in the beginning, and you think that's the more appropriate way to run the business in the long term?

The main reaction in being more competitive is the loss of transactions.

Great. Thanks, guys.

Thank you.

We will take the next question from Marcia Aaron with Pacific Growth Equities.

Good morning. Can you talk about how your strategy will differ on the price reductions? I know you tried it a few years ago. I know it didn't have the pop you anticipated, and maybe can you touch on what you're seeing competitively in terms of both product - but also, um, what you're seeing on the pricing side from the competition?

Right. Um, as we were looking at, um, at our past, where - when we dropped our prices, we found that - our average dollar sale basically decreased by the same percentage of our price decrease. And in view of that, we felt we would be better off coming up because we weren't getting the so-called bang for the buck from the customer. We didn't realize that the transactions on the other hand, were coming down. So we're basically, you know, to some extent - made an error, you could say, by not realizing the transactions coming down at the same time. So going forward, we - again, we look to be more competitive on price. And when we were more competitive on price, we saw the transaction count come way up. So we may incur some average transaction, um, deflation. We look forward to see the transactions coming up substantially. Um, more so to all the levels as you have recalled, we used to - a transaction constantly went up and up. In regards to the competition, to some extent we have seen them come down in price, too, so , um, to a great extent we look forward to be more competitive to them.

And, I'm curious as to why you think the transactions will be going up because last time they didn't -

Last time the transactions were flat and the average dollar sales went down. And now we have raised our prices and the transactions have come down.

Okay.

We believe they will go back up.

Faster than the average transaction goes down?

Yes.

Have you tested this, or is this your experience?

It's our experience.

And it's what we stood for. It's going back to our roots to some extent. We used to stand for better pricing than we do today.

Yep. And can you talk about how your, um - you know, what you've seen. I know you tried different things on the marketing front. For lack of a better, you know, term, you've had a catalog out there, an image piece. How has that worked for you?

Preliminary results have shown that to work pretty well.

Are there plans to continue that in the second half?

Yes, there are, but - we look forward to, um - you know, to advertise at the same time that price point to a greater extent that we have in these past catalogs.

Finally, can you address the Long Beach situation? When will you have your back-to- school product on shore and any contingencies - plans in case there's a slowdown through that port?

We're well aware of it, and have what we think are sufficient contingency plans. Some of our product comes in, in June before the strike occurs.

Ninety percent will be in before the end of June.

And we have reserved air freight for the possible strike to, um, fly some goods in if necessary.

Great. Thank you and good luck.

The next question is Richard Balm (phonetic), CIBC World Markets.

I have two questio One with regard to your - talking about bringing your pricing down to be more competitive.

Right.

Can you be more specific who you're being more competitive against and what you saw they were doing in the first quarter that caused you to change your pricing strategy going forward?

It's not as much as what our competitors were doing, as much as we felt, you know, that a strong message has always be Great value, great prices. And to some extent, we have strayed from that over the past couple of years. And we look forward to go back to, um, the years when the customer flipped a ticket that says, wow, great price on every item. So not just on the basics, but also on the fashions. And you know our costs, as you know, have come down substantially over the past couple of years and continue to come down. So to some extent we look forward to, um, giving, um, the consumer some of that to enjoy some of the reduction in product cost as we have enjoyed plus some.

Let me follow-up on that, Ezra. How - - versus a year ago on light product, how far up had the prices drifted on a percentage, and was it equal across boys and girls in all age groups or was it more out of line in one or more of those?

It drifted up approximately 10 percent.

Are you going to try to get back the 10 percent or do 10 percent and more?

Let's say to start with, around that number.

I've got a second question. Ezra, you're - you're taking down the second quarter pretty significantly from where the street was or from where we were. And yet you're keeping the full year the same at plus 25 percent. I did a quick back-of-the- envelope calculation, and it looks like the second half, instead of being up 17 percent, it needs to be up twice that, up about 30 to 35 percent. Um, where do you think you're going to get - you know, what line items are you going to get this from? Almost like a doubling in terms of percentage increase; about 25 cents you have to make up in the second half. And why do you think you will be able to get it wherever you think you can get it?

Okay. Richard, this is Seth Udasin. And as I mentioned we have not given out guidance for second, third or fourth quarter previously. Um, so people on their own had come up with their quarterly expectations. What we see happening in the, um, back half of the year is, um, an improvement in sales, a continued improvement in our gross profit margin line. We, um, will have - believe that our SG and A expenses will be leveraged in the third and fourth quarter, and the only item not is the depreciation expense is set. And they're not high enough to leverage that item. The back half of the year is in the 30 percent range over last year.

Okay. Thank you.

Thank you.

We will take the next question from Roxanne Myer with CIBC World Markets. Go ahead.

It's Dorothy Lakner at CIBC World Markets. I wanted to go back to the - going back to basics, what you're doing, and just help me understand, as you go back to more basics - which I would think have lower gross margins than the fashion part of the business does -um, is it the fact that you're just getting better cost that's going to allow your gross margin to go up as you take basics back to a bigger part of the mix?

Dorothy, our experience that basics and fashion yield , um, very similar gross margins at the end. While we start, um, somewhat lower in our initial mark-up on basics, we experience, um, less mark-downs in that category, so they end up with the same gross margins, basics and fashions; that's experience over many years.

Okay. And on inventories, where do you expect them to end up at the end of the second quarter? And can you talk about the second half as well, where you want to take them?

Yes, on a per-store basis, um, you know, we're beginning the quarter approximately 19 percent down. I would think that, um, at the end of the second quarter, we would be somewhere between , um, flat to down 10 percent. I think we probably, you know, want slightly down, to stay a little bit conservative versus last year. And I think in the second half of the year, um, we would probably continue to be in that range, um, flat to slightly down.

Great. Thank you.

Thank you.

We will take the next question from John Zolidis with Buckingham Research. Go ahead, please.

Good morning. Quick question. Can you speculate a little bit why the street and strip malls are doing better? Is that due to the more competitive situation in those channels? And why the New York metro and southwest areas seem to be better? And the question Is there anything we can do with the chain as a whole to bring up the rest of the stores to the levels we're seeing in those two areas? Thanks.

Yes, it is pure speculation.

I personally think that mall traffic is down to a greater extent than, you know, strip center traffic, which is more destinational type traffic in strip centers, you know, urban downtown. They seem to be more value-oriented than the mall, and I think in tougher economic times, they're more resilient against offsets in traffic. The reason why we've always performed at a higher level in the New York metro area is because, it's our home market. We understand it like the back of our hand. We have a great team in place. It's a fashionable market, and we cater to the fashion community. So I think that would continue to be strong. The southwest, since we've opened, we have seen pretty good results. The demographics are great; there are a lot of children down there and a fashionable market. We think with the change toward a higher mix of basics, we think that will play more favorable to the balance of country, as well.

Okay. And have you seen any , um, trends that correlate with , um, weather across the country so far in the spring?

Absolutely. I think where we've, um - you know, we feel we've gotten hurt in the northeast and midwest during a very cold spring.

And have stores in warmer regions comp'd positively?

They've comp'd better. I think the southwest is an example of that.

Okay. Thank you.

Thank you.

We will take the next question from Kindra Devaney, Fulcrum Partners.

Thank you. First of all I wonder if you can talk in more detail about the unit inventory. I'm getting the idea that sourcing costs could be down as much as 15 or 20 percent. Why? And your IMU (audio interference) -

I'll take the gross margin question fir A couple of things are happening, you know, we think to bring the gross margin down in the second quarter. Um, certainly, you know, going to this new, more competitive pricing strategy will put pressure on our IMU, occupancy costs. The fashion to basics ratio is such, and for us to work to correct it is going to mean getting out of the fashion goods to re- balance. So by the second half of the year we have one-third of our merchandise as basics.

You're planning that by the start of back to school?

Yes.

You're getting aggressive in your mark-downs? Q-2?

Right.

I'm wondering, the sourcing costs are down 10 to 20 percent. So are your units up to last year?

No. The units are down to last year _ are down to last year, and that's because our average unit price is higher than last year.

Okay. Even with the improvement in the sourcing costs?

Our units are down.

Your IMU is going to be lower in the second half.

Lower than last year? Pretty close to last - close - it's going to vary by quarter, but close to slightly down.

Okay. And then why is it that we're going to see leverage on expenses?

Well, we're - we focus on expenses always, and we've been looking at opportunities and, um, we are putting in place, um, systems. You know, we talked about the systems we've put in place, and we're going to get leverage off of those systems. We're being very prudent as always to reduce the expenses, and we've gone through and updated things which we do on a regular basis. And, um, based on our projections now, the leveraging of expenses for the remainder of the year -

Most importantly, we've taken the sales down. We're taking a harder look and are tightening the belt in relation to expenses. We have enjoyed compound annual growth rates of 35 percent over the last 5 years, and our expenses have gone - you know, similar rates. Now that the sales are coming down, we are making sure that the expenses don't go above ourselves - our expectations.

Okay. You think the expense leveraging can continue into the second half?

Yes, absolutely.

Okay. Thanks very much.

Thank you.

Wells Fargo, Paula Kalandiak.

Good morning. Last year during the second quarter conference call you said you were taking fashion from the 55 to 65 percent, to 70 to 75 percent. And now you're saying it's 90 percent of the mix. And I'm wondering how it got to that if your target was 70 to 75 percent?

The target was 70 to 75 percent, and that was for the full year, so we normally have a greater percentage of basics during the fall seasons than we do in the spring season. And , um, Paula, we have swung the pendulum too far in the spring season. It should have been in the low 20s and it's down to 10. So we were enjoying fashion sales greater in the beginning of the year, and we have taken that too far on one end. And on the other, we are seeing a more basic cycle coming through right this minute.

Okay. Thank you.

We will take the next question from Jonathan Atganan (phonetic).

I was curious to figure out as to what sorts of fashion items were not working in the spring season. Was it the boys' items or typically was it women's or large girls' items that weren't working? And what were those items?

Yeah. We've had a more difficult time in our boys area, more so in the big boys. We have always, you know, thought we had opportunity there, but we haven't maximized that yet. This particular quarter, we have seen the baby boy business somewhat, um, worse than it has been before. Actually our girls business continues to do quite well. It was mostly in the boys business and the accessory business that we lost sales.

And you think switching to basics will somehow fix some of this?

That's right.

David Berman, Berman Capital.

Hi, guys. I have a few questions, three questions. The first is about the balance sheet. And I was wondering if you could comment about pre-paid expenses, which went up $4 million. Should I tell you the other two questions now?

Sure. Other current assets, up about $3.8 million. A couple of big items included in this is the pre-paid real estate expenses, and with 100 more stores, there's a lot more there. Deferred taxes roll into this line, and also insurance costs are up significantly. We have more prepaid insurance. Those are the major three items that have attributed to this increase of $4 million.

The second question is - I recorded the beginning of the question - the beginning of the call, and I believe you said the numbers would be 25 cents for the second quarter?

Right.

And I think the street is lower than that. So are you pushing - I mean, are you moving sort of - because I think you're keeping the year's numbers the same, correct?

We have never given guidance for the second, third or fourth quarter. The street did come up with a loss of, um, I believe it was 9 cents for the second quarter. We, um, lost 15 cents last year, and , um, have a loss projected now of 25 cents for the second quarter of this year. We do believe, based on these initiatives and continued gross margin improvement, some SG and A leveraging we will have earnings increases in the neighborhood of 30 percent, and we believe that that should give us -

So that number of 210 - I'm looking at Marcia's report - 210, is that the number you endorse?

We believe approximately 25 percent over last year, um, that that's - you know, in that ballpark. We also, um - you know, Mario spoke about our Canadian expansion, and there are additional expenses in the second quarter that relate to Canada. You know, so that's a further reason -

Okay. So you're trying to shift - and the third question You guys have a very good turn. And I'm really impressed with your inventory control, but I'm trying to understand how your process works in terms of knowing the right balance. Your inventories are down a lot, 19 percent per store or something like that. And your comps are down 11 so, you know, one could argue that your comps are down because you don't have inventory; or you could argue the opposite. So every day you have to wrestle with what the balance should be. You mentioned you're going to have more inventory. How do you wrestle with that balance and what do you - what - how do you do that?

It's a tough one to wrestle with, um, certainly. Um, you know, we feel that we did not have adequate inventory during the first quarter. And size as of today, we're less than ideal. There are a lot of things as mentioned that we need to fine tune. We have to get the fashion-to-basics ratio right, get the pricing right. There are a lot of assumptions, and we think we've fine tuned that and are on the right track.

You're going to increase inventory and hopefully the sales will follow. One of many initiatives.

One of many.

Have you noticed a change in the environment at all? Did you compare that to the environment in your area? In the last 6 months, business seems to be having a hard time getting up and, you know Gymboree has done a good job. They're smaller. Have they affected you at all? Anything competitors have done?

We've competed against Gymboree for a long time, but we haven't - we've been very strong. We don't think that's affected us.

Anything else you could point to, perhaps?

I think we still believe the environment is tough out there. It's, um, always competitive, and it's over the last, say, two years, it's gotten more competitive in the children's arena, but there's - you certainly - um, we're a major player and plan on staying as one.

Congratulations on the great inventory control. It's phenomenal.

The next question is from Michael Freedman, Sawgrass (phonetic) Capital.

I have two questions. I noticed that you guys seem to be moving into a couple of Lechters locations in Bridge (inaudible) and Jackson Height, Queens. I wondered if you assumed a bunch of Lechters' leases, and if that skews your store types or areas?

We purchased 7 stores from the Lechters bankruptcy. All but two of them are open now, and they are included in the 130 stores.

And secondly, um, you're - um, you know, if you do kind of a two-year normalization of your comps - the first quarter was, I guess, minus 11, and minus 2 gets you to minus 13. Given your guidance for mid-single-digit decreases in the second quarter on top of a 16 percent comp decline last year, the two-year comp goes from minus 13 to minus 21 in the second quarter, despite your merchandising and pricing initiatives. And I was wondering if you could give us additional color on, you know, why things are so gloomy.

Well, I - you know, we're looking at current trends today, and to - um, to get to the ideal situation that Ezra spoke about will take time. Um, the basic fashion ratio, needs to be adjusted over time. Um, the inventory levels, you know, need to be adjusted. The pricing strategy needs to be communicated to the customers, so we are looking at a trend in April and I believe we are not going to turn to a positive , um, in the second quarter. Our business, the comps are erratic. And people like to do the two-year comparison, but it doesn't always hold up.

Thank you. Good luck.

We will take a follow-up question from Margaret. Go ahead.

Yeah, back to the second quarter and the loss projectio I'm wondering what kind of a dilution number you have plugged in from Q-2 in Canada. Could this be more than you were looking at for the first year?

A few pennies, but not as much as a nickel.

Do you plan on comps in Q-3 or Q-4? I take it you have a negative comp plan for the year overall?

We believe the back half of the year would be flat.

Okay. And any - any updates on the combo stores, if they're outperforming your regular stores?

They continue to perform better than the chain average, and as we said before, we'll, um, convert another 7 this year and be up to 35 for the year. So we're still bullish on the format.

Ezra mentioned you had significant cost decreases, and were experiencing more. Could you quantify that on the merchandise side?

Um -

That's something we don't quantify.

Okay.

We have seen over the last three quarters, our gross margin has come up substantially. A good portion had to do with the decrease in cost of goods. We were de-leveraged by the costs.

Thank you.

We will take the next question.

Quick question for you. Would the pre-position back to a more value posture and away from fashion - what are the thoughts on advertising spent to do that? And where you talked about being able to leverage SGA in the back half, what are the thoughts of the advertising compared to year-over- year?

Advertising increases year-over-year is projected to be in line with store growth. And, um, we, um, look forward to get the message out, um, by the use of our direct mail marketing and our point of sale material. Um, but at this moment, we have no , um, other external plans, especially in view of the fact that we are tightening expenses so.

Traditional methods and rediscovery of the positioning when people get in the stores?

That works very, very fast. Word of mouth has gotten us to this. And that works wonders.

Okay. Thanks, guys.

Follow-up question from Roxanne Myer CIBC World Markets. Go ahead, please.

Dorothy Lakner, again. Can you give us the breakdown of boys versus girls, the percentage of the sales mix?

Well, bo Boys - big boys and little boys, combined for the first quarter - let me look this up a second, Dorothy. It was about - between 25 and 30 percent of the business.

Okay. And was that similar to last year?

That was down from last year.

Okay. And girls?

Girls, um, big and little combined was between - I'm sorry; let me just get these numbers - was, um, almost 55 percent, and that was up versus last year.

Okay. Thanks.

We would like to turn the call back over to management for concluding comments.

Thanks everyone, and thanks for joining us on today's call. We look forward to, um, delivering a great year together. Thank you!