Children's Place Inc (PLCE) 2002 Q3 法說會逐字稿

Welcome to the Children's Place third quarter conference call. Today's conference will be recorded on November 14, 2002. If you would like to ask a question at any time during the conference, just press the one on your touch-tone telephone to register your line for a question. At this time I would like to turn the meeting over to Heather Anthony, Director of Investor Relations. Please go ahead.

Heather Anthony, Director of Investor Relations, Children's Place: Thank you, operator, and good morning, everyone. Thanks for joining us today for our third quarter conference call. Management will begin with some prepared remarks followed by question and answer session. The operator will instruct you on the procedure at that time. Before we begin, I would also like to remind participants that remarks made by management today may contain certain forward-looking statements. These statements are based upon the company's current expectations and assumptions and are subject to various risks and uncertainties that may cause actual results to differ materially from those contemplated in such forward-looking statements. Including in particular, the risks and uncertainties described in the company's filings with the Securities and Exchange Commission. With that out of the way, I'll turn the call over to Mr. Ezra Dabah, chairman and Chief Executive Officer. Ezra, you may begin.

Ezra Dabah, Chairman and CEO, Children's Place: Thank you, Heather. Good morning, everyone, and welcome to our third quarter conference call. As usual, I'll begin by reviewing our results for the quarter and our strategies for the future. Amy Hauk, our VP of merchandising, will then provide an update on our merchandise initiatives followed by Mario, who will update you on our operations. Seth will then discuss our third quarter financial performance in more detail and provide guidance for the remainder of fiscal 2002. As always, we will be happy to take your questions at the end of our presentation.

Today we reported third quarter results as follows: Net sales of $173.4 million, a 4 percent decrease compared to net sales of 181.4 million last year. Net income of 1.6 million compared to net income of 18.7 million in the same period last year. An earnings per share of six cents versus 70 cents per share in the last year third quarter. Our final results likely exceeded our most recent guidance due to better-than-expected sales at our new stores in the month of October. As anticipated, our last conference call, third quarter results primarily reflect merchandising issues as well as the general confidence level of the economy.

We have learned from our recent experiences and are promptly addressing every challenge. We have seen our plans and initiatives coming together to return our business to the path of profitable growth. With a clearly defined game plan, we are now intensely focused on implementation. We are rectifying our weak points while maximizing our strengths. Our brand identity, unique styling and fashion offering remains consistent. We are focusing on balance as a key to our merchandising strategy, the quality of our product is being enhanced, and our new pricing strategy will bring to our customers even greater values every day. We've made progress in all of these initiatives over the past several months. Maximizing gross profit margin while giving great values to our customers has always been our number one priority. With our lower prices, we believe that we can still deliver an impressive gross margin because we have great strength in our sourcing and buying capabilities.

What adds to our comfort in the strategy is a successful performance of our Canadian stores, where our new colorful and efficient store product (ph) type in addition to our everyday value approach, has resulted in significantly less markdowns. Briefly touching on our store extension plans for fiscal 2003, our plans have been adjusted so that the necessary strategy is being implemented result in a sustainable turn in the business. We are slowing our store growth and look to return to our high sales productivity in our existing stores. This concludes my opening remarks. Thanks for your attention. At this time I would now like to turn the call over to Amy, who will provide more details on our merchandising initiatives and I'll return at the end with some closing comments. Amy?

Amy Hauk, Vice President Merchandising, Children's Place: Thank you, Ezra. This morning I wanted to touch on high level Q 3 results and holiday product. I also wanted to reiterate the strategic options that we have taken to address products beginning with spring 2003 and the new merchandising time line that put into place starting with next summer's line. For Q 3 we saw our strongest performance in newborn and baby areas. We also saw strong in basics in two fours as well as bottoms in all businesses. Challenging categories of business included outer wear and fall sweaters. As stated previously, the earliest success in some was diluted throughout the season because they outperformed our expectations and could not maintain traction due to insufficient quantities.

Turning to holiday, our newborn and baby divisions have seen the best results, along with our basics in two fours which is a continuation of the trend we saw in fall. The dressy portion of our holiday collection is performing well with its focus on more traditional dressing, a well balanced color palette and easy outfitting. We look for good performance based on early reads to come from bottoms and all of our two four items going into the rest of the holiday season along with our upcoming ice chasers promotion.

I'm now going to switch gears and talk about the future merchandising strategy of the Children's Place. As I have stated before, our mission is to create a focused assortment which is balanced with the right mix of basics, fashion and lifestyle merchandise, appealing to abroad customer base with a commitment to quality and everyday value. Starting with spring2003, the merchandising team has reduced the number of styles by30 percent over the previous year. The reduction in style count will allow us to present greater clarity to our customer and service them by being in stock. We have also increased our two fourand basic investment to approximately 50 percent of our planned receipts. We believe that this will further enhance the value propositions with our customer. We reduced the amount of merchandise lines and new product flow to stores and increased the life span of key product categories. This will help support a consistent seasonal product message and reduce the presence of markdowns in our stores.

At the same time that we are implementing these new merchandise strategies, it is important to note that we are returning to the unique, colorful coordinated look that the Children's Place is known for. The fashion element of our business will continue to be a significant part of our merchandising strategy. It is what has and will continue to help differentiate us from the competition. In conjunction with the changes we have made starting in spring of 2003, the merchandising, design, production, marketing and planning teams have put into place a merchandising time line, which launched with the summer of 2003 line. The merchandising time line incorporates critical dates, key deliverables and meeting formats that culminate with presentation weeks. A week during which we work in our mock stores with samples to merchandise, review store sets and nail down key marketing ideas for the season. This cycle repeats four times annually.

This new structure provides the frame that acts as a catalyst for increased collaboration, consistency and discipline across the different functions. The new merchandising strategy and time line in conjunction with a recommitment to quality and value will help us to deliver on time a cohesive well focused line with the correctness to position business for long term growth and profitability. I'll now hand it over to Mario.

Mario Ciampi, Senior Vice President, Children's Place: Thanks, Amy. During the third quarter we opened 30 stores, including 13 in Canada. We remodeled two, one of which was also an expansion and closed one. New stores in the U.S. are producing sales on an annualized basis slightly above $1 million. Although this number is below our plan, these stores are profitable, have a positive impact on our cash flow, and produce good R (ph) lines (ph). For fiscal2002 we will have opened 126 stores, closed 3, and now - and will operate 643 stores including 28 in Canada. Results for the quarter were soft in all geographies with the best results coming from west and Southwest regions where comps (ph) were in the negative high single digits. Given the current business trends we have reduced the number of planned store openings for 2003 and now plan to open approximately 50 stores, 10 to 15 of which will be in Canada. Although our new stores remain profitable. We have chosen a more conservative growth plan while our new strategic initiatives take hold. The vast majority of our stores are cash flow positive, and we do not anticipate a meaningful increase to our store closing rate. Importantly, we will be able to fund our expansion without having to take on any debt.

Turning to our new store prototype, we now have four U.S. stores in this format, in addition to all of our Canadian stores. Domestically we will have opened three more stores in this format this year. And as we continue to closely monitor their results, customer response has been positive. Importantly, capital costs for these three stores were reduced by approximately 20 percent through value engineering, and we anticipate further reductions for next year's group of stores. Our business in Canada continues to be very strong, and our acceptance by the Canadian customers has been extremely positive. Sales for the quarter exceeded planned in our first quarter of operation. The average store in Canada has sold approximately 30 percent more units than an average U.S. store. And going forward we have identified additional merchandise opportunities that will further strengthen our Canadian business.

Additional openings next year will add to our critical mass creating better operating efficiencies. This coupled with the potential elimination of duty and quota, on purchases from several countries, will help grow merchandise margins and will leverage our expense structure. Given the success we are experiencing, we are dedicated 20 to 30 percent of next year's store openings to take advantage of the . opportunities we see in the Canadian marketplace.

Turning to E-commerce, we continue to see positive trends in this business, as sales for the quarter grew by approximately 30 percent over last year. On the logistics front we remain proactive regarding the West Coast ports labor dispute. Over the last -- past couple of months, we have used both air freight and all water east coast routes as alternatives and monitor the situation. As we mentioned on last week's sales call, late receipts of our holiday one line were partially due to the dispute, and we currently anticipate that our holiday two line will be delayed by approximately one week although still in stores prior to Thanksgiving. We are beginning -- we are being proactive to ensure that our spring merchandise line is in place prior to the end of the cooling-off period.

Lastly, I would like to briefly touch on our Arthur (ph) planning and allocation system that we have been integrating for the past year. Both major faces of our new merchandising system are now in place, and are being used by all of our planners and allocators. We are beginning to see important advantages and look forward to further leverage from this new system. A few advantages include being able to plan in both dollars and units, significant efficiencies in performing one ail indication for all three of our D.C.s (ph) and improvements in store modeling. We believe that these new advanced planning improvement will increase unit inventory levels. Finally, as we look to the future, we are encouraged that our SG&A expenses per store are at their lowest levels since1998 as we begin to see a positive turn in sales, our models should show increased leverage. I will now turn the call over to Seth Udasin, our CFO.

Seth Udasin, CFO, Children's Place: Thank you, Mario. During the third quarter we opened 30 new stores and closed one. As of November 2, 2002, we operated 629 stores in approximately2.million square feet, or an average of 44 hundred square feet per store. In the quarter, net sales decreased 4 percent to $173.4million from $181.4 million last year. Comparable store sales for the third quarter decreased 21 percent versus a 9 percent decrease in the prior year. The third quarter's comparable store sales decrease was primarily result of a 15 percent decrease in the average transaction size coupled with an8 percent decrease in the number of transactions. While we sold three percent more units per transaction this quarter than last year, they were at a lower average retail price due to aggressive markdowns on our fall and older season merchandise and our strategic decision to lower prices. Gross profit in the quarter decreased to 35.6 percent this year from 46.3 percent last year. This decrease was primarily the result of higher markdowns and costs partially offset by higher markup.

Markdowns during the quarter were substantially higher than last year as a result of the need to clear out fall and older season merchandise. The higher occupancy cost is the result of the negative comp store sales performance, along with the increase in the number of new stores not yet producing average store revenues. Markup during the quarter was higher than last year, primarily as the result of lower merchandise costs. In addition, we estimate that we incurred increments of freight costs of approximately $1million due to the West Coast ports labor dispute. SG&A expense as percent to sales increased 360 basis points to28.8 percent. This increase was primarily due to the following: One, negative comp store sales have primarily impacted store payroll, two, new stores that are not yet producing average store revenues, and three, increased insurance and marketing expenses. It is important to note that submit (ph) and A expenses per store is down 10 percent compared to last year as we ton to focus on tight expense controls.

Depreciation and amortization increased 130 basis points versus last year as the result of the decline in comp store sales and increased depreciation related to new store openings not yet producing average store revenues. This resulted in net income for the quarter of $1.6million versus net income of$18.7 million last year. On a per share basis, we are earned six cents versus 70 cents last year. Moving on to our balance sheet, we ended the quarter with $14.4 million in cash versus $8.7 million last year. The end of the quarter we had no borrowings on a revolving credit facility versus approximately $7.4 million last year. In addition, we have no long-term debt. Total inventory cost approximately was up six percent last year on a four percent sales decrease while inventory per square foot is down 15 percent. Currently our fall and older season merchandise represents13 percent of total inventory.

Looking to the fourth quarter, we expect to open 14 new stores and close two. As Mario mentioned at the end of the fiscal year, we will have 643 stores in operation, including 28 in Canada. Given our recent results, difficult December comparisons and continued external challenges, our outlook remains cautious. Assuming third quarter comparable store sales trends continue, we would expect total sales to decrease moderately compared to last year. As a result, fourth quarter earnings would show a slight improvement compared to the 6 cents earned in the third quarter this year. Turning to our year-end balance sheet, we expect to end fiscal 2002 with cash in excess of $25million and no debt. That concludes my remarks. I'll now turn the call back over to Ezra.

Thank you, Seth. In closing, I would like to emphasize again our strength, look at the unique product and style and flair, values are great. Our social capabilities are unbeatable, and we will continue to build on those strengths to re-establish our advantage. While appointed with our results, we are confident that we are taking the right steps to achieve long-term success. While the initiatives are being implemented, our expenses are tightly managed and controlled, and our balance sheet remains healthy with no debt and positive free cash flow for the balance of the year. Thank you for your attention, and we will now take your questions. Operator?

Thank you. If you have any questions, you may press the one on your touch-tone phone. Press the pound key to withdraw your question. Once again, if you would like to ask a question, please press the one on your touch-tone phone at this time. We will take our first question from Marcia Aaron with Pacific Growth Equities. Please go ahead.

Marcia Aaron, Pacific Growth Equities: Yes, sir, good morning.

Good morning Marcia.

Could you talk a little bit about the sourcing gains? I know as you look forward, you're trying to improve the quality of the product. What's the outlook for the IMU as you try to balance the two, the quality with price?

Yeah, going forward, our first priority, as we buy our product, is to basically do our very best to further enhance quality. And we're doing that by beefing up fabrics, make them somewhat heavier. We're doing that by washing most of our items. In the past we didn't wash our knits, going forward, most of our knits are washed. So they will look more comfortable and more beefy and more loafy (ph). And even though -- and the other thing we are focusing on is to make sure that the product comes in timely. While in the past we may have taken some more risks going forward, we look forward to mitigate the risks by dealing with factories that have performed to us -- for us in a better way in the past. Even though we're still finding that our price -- that we're being able to leverage the now bigger quantity that Amy and the team are buying by reducing our styles, we are buying substantially more quantity. And that has enabled us to even further reduce the prices from last year, year over year spring-summer.

Are you changing countries as well, or is it still the same basic countries?

Same basic countries. We are much more heavier in Vietnam these days since they opened up and got the favorable status. And we are also more into AGOA countries, and joined enjoying duty free savings than before. So those are the exceptions, we're basically in the same countries. A little more in China, of course, now that 239 quarter has been eliminated, and that's that 0 to 24 months newborn range. We could not bring in for that quarter. So our business in China has increased as well, and that's a very, very good -- very stable and very fast market.

We'll take our next question from Dorothy Lakner with CIBC. Please go ahead.

Dorothy Lakner, CIBC World Markets: Yes. Thanks. Good morning, everyone.

Morning.

Could you talk a little bit about the marketing spend in the third quarter versus a year ago and then what your plans are for the fourth quarter as well?

Yeah. In the third quarter it was a little bit higher than last year's third quarter, you know, a couple hundred thousand dollars, probably, in terms of dollars. Some of it was unique is in that it included billboards in Canada. We moved our print media from, I think, November last year into October. And we did more with our e-mail programs. So there was a slight shift between quarters. And I don't know for the fourth quarter plans maybe Ezra wants to address, or Amy.

: Basically Dorothy, in line with last year.

So in addition to the ice chasers, which is coming up, are there any other events we shouldlook for in the fourth quarter?

Well, we -- you know, we have plans to be as promotional as necessary during the quarter as we see fit. We look forward to the ice chaser promotion which we basically do every year. This year it's somewhat bigger, and the value is substantially better. And we'll see how the quarter progresses. But we do intend to look and stay promotional as needed, he is specially in view of the competition.

Great. Thank you.

We'll take our next question from Kimberly Greenberger with Lehman Brothers. Please go ahead.

Kimberly Greenberger, Lehman Brothers: Great. Thank you. Good morning.

Good morning, Kimberly.

Seth, a question for you on fourth quarter sales. Can you comment on how you see the calendar shift in things with Thanksgiving impacting the November and December comp? And then on the inventory side of things, did I hear correctly inventory per square foot down about 15 percent at the end of the quarter? How much of that declined is due to a decrease in the cost per unit because of all the sourcing benefits that you've been seeing, and how much is due to a decline in then umber of units, if you can comment on that, that would be great.

Okay. Kimberly, first in terms of the fourth quarter sales, is certainly -- we have six less shopping days between Thanksgiving and Christmas. We are, though, looking at what happened with us last year. We had a negative, I believe 16 percent comp in November and a positive two in December. I think November's going to be, you know very -- even though it's easy comparison, it's going to be a tough comparison because of the six less shopping days in the month. December has a tougher comparison, but, you know, my belief is that more sales are going to be concentrated in that time period now, and I think when we look at the two months combined, they're probably, you know, we're not going to see a major impact with the six less hopping days.

I'm sorry, go ahead.

Yes. The second question was about the inventory per square foot is down 15 percent at the end of Q3, and is it units or dollars was your question? The units versus last year were pretty flat at this time, so it was really the dollars that were down at both retail end cost.

Okay. So you're seeing --it's really a function of the savings that you're getting and the lower cost structure from your sourcing operations that's causing the decline in inventory not because the units aren't here?

Right.

That's correct, Kimberly. But just to let you know that, you know, we were short in units throughout the third quarter, and we just caught up at the end of the third quarter.

Okay. Great. So you feel like you're in the right position here coming into the holiday season?

Going into the fourth, yes, with the exception of the couple of first weeks in November just because we are delaying the holiday too.. With that exception our unit inventory throughout the fourth quarter is projected to be somewhat higher than last year.

Okay. Great. And then Ezra, you indicated that you would like, you know, sort of ago-forward pricing strategy for Children's Place would be sort of more compelling every day low prices, not to purchasing from Wal-Mart. But -- and you indicated that that would cause your first half of '03 pricing to be down in the range of 20 percent. And with that strategy, you would probably have the opportunity to eliminate some of the price promotion that you had done. Any thoughts on the trends and family promotion and/or other promotions that you might be -- have the opportunity to eliminate? And is it your is your strategy still for the down 20 percent on the pricing for next year?

Down 20, we're still playing with -- we're still testing a couple of things as we speak, and it may be a little bit lower than that. And, of course, we are looking to eliminate some of the many promotions that we have done in the past. And the customers will clearly, basically, get the units at a promotional price, but every day. And I think that will be still very -- still very recognized for the consumer. So we look forward to much more higher sales due at regular price than we have seen before. And for the customers, it will be so much easier for them to gravitate towards buying our products immediately without having to wait for a sale because the price is going to be so advantageous.

We'll take our next question from Paula Kalandiak with Wells Fargo Security. Please go ahead.

Paula Kalandiak, Wells Fargo Security: Good morning.

Good morning.

I have a question for Seth. I believe on the September conference call you stated that by the end of FY '02 you expected approximately only 5 percent of the store base not to be cash flow positive. Is that still correct?

Yeah. I think that's still a pretty good approximation. We have looked at results through third quarter, and our projections for the fourth, and that would probably be accurate. It's probably, you know, a lot of those stores are going to be borderline and there's only probably a handful that are, you know, seriously cash flown egative.

Okay. And then also I just wanted to clarify when you were talking about the gross margin, you said that the pressure from higher markdowns and occupancy was partially offset by higher markup. I wanted to clarify that in spite of your value pricing strategy, your markup was still high enough that it was able to offset?

That's correct.

Okay. That's it. Thank you.

Okay.Operator: We'll take our next question from David Berman (ph) with Berman capital.

Hi, this is actually Kristina Henry with Berman capital. Hi. Two questions for you. Following on, I know Kimberly had asked about inventory. I have aquestion related to that. In this quarter your sales were down four percent, and your inventories were up six percent. So you know, say a minus 10 point differential. In your second quarter, your sales were up 10 percent and your inventory was down nine percent. So a 19 percent differential in the other direction. I was wondering if you could embellish on that. In other words, on this trend, in other words is this a change in philosophy or complicated by late deliveries and so on?

I don't think it's really a change in strategy. You know, certainly we have bought, and our plans have been for better comps than we've been achieving recently. So we certainly are buying and receiving more merchandise than, you know, the sales are indicating. And unfortunately, you know, we've had to either, the markdowns, reduce that inventory amount. Some of it's just the timing of how receipts come in. There's a tremendous amount of holiday merchandise, you know, coming in right now, and, you know, building up for the big peak period leading into Christmas. So some of it's more of a seasonal nature.

Okay. Actually, my second question is somewhat of a follow-up to that with respect to the merchandise that's arriving right now, the holiday merchandise. What is your sense of -- are you getting the complete -- the complete outfits? Do you feel like are you receiving that? I know that it's difficult with the late deliveries and so on. How is the composition of this inventory that's arriving right now?

I think the composition is actually a lot stronger than it has been in the past of what we saw in the fall season. So we obviously have postponed our holiday to set up for one week, and we feel like we're going to be much more lifting the curtain on the collection and feel that we will have a stronger presence in impactive (ph) outfitting.

Got it. Great. Well, thank you very much.

Thank you.

We'll take our next question from Richard Baum with Credit Suisse First Boston. Please go ahead.

Richard Baum, Credit Suisse First Boston: Good morning, everybody.

Morning.

Just a few follow-ups here. One is, this is maybe for Amy and Mario. But, you know, you've indicated that you're going to rationalize the SKU mix. You're going to eliminate -- you've eliminated 30 percent for the spring season. What are the implications for your store size? I know you've been building a lot of these combo stores. It seems like with the elimination of SKUs, you're not going to need the horizontal space that you would. You know, are the stores too big now? Are you lowering your prototype? Reducing it? And if not, why not?

Well, you know the famous retail saying, stock em high, watch them fly. We actually have spent a lot of time merchandising the new assortment (ph) mix into the stores, and we actually feel like we have done rather a disservice in the past in showing our merchandise and really directing the customer on what the right things are to buy. So we actually feel like with this elimination of styles, that our message is going to be clear and it will be easier for our associates to service the customer.

And with the lower prices, that will afford us to have more units in the stores. So there really are no plans to reduce the size of the store. We think it's appropriate for the strategy going forward. And as to the combo stores, we have roughly 40 of them. So you know, they remit (ph) a small portion of the chain. And, you know, we are looking at that as sort of ago-forward concept, the stores are performing well, but we're sort of trying to rationalize the size of those going forward. And then mostly in very high profile, high volume situations where we would need the extra square footage any way.

With the SKU count down 30 percent or whatever what are the expectations about how many units -- will it be made up of (ph)units in the store?

: I think it's critical to note the differences. The SKU count is not down to the degree that the style count is down. So it's down in the teens in the SKU count, from a SKU count perspective. I was referencing style count in the future.

Down in the teens?

Yes.

Do you expect to offset that with units, let's say, up in the teens?

Absolutely. Absolutely. Depth per SKU is up dramatically.

That's a main issue in the third quarter was the fact of the over-assortedness (ph), you know, and it was very difficult for the customer to understand what it is we are showing because the merchandise (inaudible) is nice and it's got style was just one on top of the other and very crowded. So the size of the store is kind of perfect, we look forward to the merchandise to have more breathing room next year.

Okay. I understand. Secondly, with the reduction in the number of stores that you're openingnext year, Seth, can you provide us with a preliminary indication of what cap ex is expected to be?

Sure, Richard. As we have said first, this year, you know, we've been talking about capex being between 50 and $60 million. I would say at this point it's probably going to be closer to that $50 million number. Next year the store count would be about 40 percent of this year's store openings. So it's probably going to be in the $25 million range.

Okay. It will be nice for the cash flow, won't it?

Yes.

And let's see. Third, on your carryover of inventory, you mentioned on the call 13 percent fall carryover. How does that compare this year versus last year? And how does it compare historically, and how do you -- you know, are you on the method that you've already taken those markdowns in the third quarter or is that a fourth quarter markdown liability?

It's 13 percent today, we generally try to have old season inventory between 10 and 15 percent. Last year at the end of the third quarter, old season was 14 percent. And we generally are in that range, as I said, between 10 and 15 percent. We take the vast majority of the markdowns are taken -- have been taken in the third quarter. We take both hard markdowns and POS. And we also, for those that we have not taken, we do provide a markdown provision on our balance sheet.

So it shouldn't be significantly -- I mean, it's kind of -- it sounds apples to apples.

Correct.

And frankly, the 13 percent is very much in control.

And most of it's sitting in the outlets.

Right.

Okay. When you say that in control, it reminds me of Alexander Hague.

Just lastly, a couple of comments that I just wanted to follow up on. One is you talked about the nice reception in Canada to the new store prototype. And secondly, that your earnings were above plan due primarily to the fact that the new stores were more productive or performed better in October than you had expected. I think the question really goes to this new store prototype. Can you be specific about to the extent that you've done research or exit interviews about what it is about the prototype that customers --that's allowing -- or that's causing customers to buy more?

Well, you know, most of our experience with the new prototype has been in Canada, like we said. We only have four of the open operating in the U.S. And, you know, it's very different, as you've seen. It's much more fun and lively. It allows for, we think, a much better display of product in the store visually. Customers like the -- you know, like the circulation. They like, you know the things that we have in there for children to, you know, to play with, and, you know, some of the other amen its of the store. You know, in general, in the U.S., based on current business, it's been difficult sort of to gauge, you know, inaccurate an accurate depiction of the results.

We'll take our next question from Marnie Shapiro with Merrill Lynch. Please go ahead.

Marnie Shapiro, Merrill Lynch: Hey, guys.

Morning.

I have a couple of questions. And most of it's product-based. If you could talk about what the mix of two-fours were this fall and where that should change going into the spring season and summer season and where you think it will settle out in compared to the total assortment? And then could you also walk us through what I call the merchandise recovery plans aside from the quality, what are you tackling first? Is it girls? Is it boys? Is it fashion? Is it basics? And when should we really start to see 50 percent of the mix improve, then 75 percent? And when do you think you'll be really on target?

Well, as I stated earlier, Marnie, about 50 -- a little over50 percent of our investment going forward into spring and summer is in what I would phrase our basics in 24 mix and it was a third going into the fall and holiday season. As far as what we're tackling, as far as we're tackling it, it's really strategic. From a fashion standpoint, we've got that under control, and the PCT style and what we're trying to do and Ezra mentioned the key word is balance. We're approaching that with all of our businesses across the board, whether it's quality, value and assortment mix. And obviously we're applying separate filters (ph) to the individual businesses to ratchet them up or down or adjust the mix appropriately based on the business needs. So I think it's a very individualized approach, honestly.

Okay. And then as far as timing, and actually I think we've talked about this as well, we feel like spring, you know, starting in the end of Q 4 into Q 1, we feel really good about, and as I mentioned earlier, summer of 2003 was where we launched our merchandise timeline. So obviously, we feel exceptionally good about that.

Congratulations (ph). Thank you.

You're welcome.

Next question from Margaret Whitfield with Brean Murray. Go ahead.

Margaret Whitfield, Brean Murray: Good morning. October better than expected and mall traffic, I guess, was somewhat less negative than before. I know you'll face difficult comparisons in November toward the end of the month, but I wonder if you could make some preliminary comments on your assessment of overall mall activity and any comments you might make on your start to November would be one question. And secondly, do you have any marketing plans in conjunction with the hopefully improved spring line that will be in stores by the end of the year?

Regarding the sales question, we don't like to talk about current-month sales, so we'll just, you know, have to wait until our November sales are released in a few weeks. And --can you comment on mall traffic, though?

It's been still negative. The negatives are getting smaller, but still down from last year.

Yes.

And Margaret, we are working on a marketing strategy to support the change in our merchandising strategy, specifically with regards to the value on enhanced quality.

Yes.

We are really (ph) indicating some of our marketing expenditures and making sure that we have agood marketing plan to supportthe change.

Okay. Finally --We're working on both things at the same time.

There's been no comment, or I haven't asked recently about any difference between your mall-based stores and your streetfront and strips. Has there been any different indifference in recent comps reported in those areas?

Actually, in the third quarter, they sort of evened out you know, prior to that our non-mall stores were performing better. Again, in the third quarter we saw it more even across the board.

And you mentioned competition earlier. Can you comment on the competitive pressures right now?

Well, the competition, you know, is stronger. They have --they're promoting more so than ever before, as you have seen, Gap, GapKids promote really heavily during the third quarter. Even Gymboree is promoting these days, something they've never done, and Old Navy is using everything they can to advertise and stream out low prices. You know, the competition on the whole has become somewhat stronger, which is exactly why we are decided to reduce our prices and enhance our quality at the same time.

Okay. Thank you.

We'll take our next question from John Zolidis with Buckingham Research. Please go ahead.

John Zolidis, Buckingham Research: Morning. A question about the new store prototype. When you first launched it and showed it to us, you told us you needed about 10 percent higher sales to get the same ROI from your exist --your previous store prototype. And now you're saying that you'd be able to bring those costs down, which is great. So I'm wondering if you still need tosee higher sales level to get similar ROIs or if it's now about equivalent.

We still need, you know, higher sales, but I would say just slightly higher sales. And that 10 percent number that we quoted was based on a 25 percent difference in store costs. So as we narrow the gap and lower the 25 percent, obviously we need less sales to support the difference.

Okay. Great. And the fourth store you have in the U.S., have you seen any meaningful difference between those (ph) stores and other similar stores that you can talk to at this point?

It's really too early to tell and we think it's such a small example that it's not meaningful.

Okay. And then just wanted to confirm one thing. I guess Amy's going to take full ownership of the merchandise which will be in the stores by -- you said ended of Q 4, so that means mid-January deliveries.

Yeah, starting with January deliveries. That sounded so dramatic. Starting with spring2003.

Okay. Great. Thanks a lot, guys.

Thank you.

We'll take our next question from Kindra Devaney with Fulcrum. Please go ahead.

Kindra Devaney, Fulcrum: Hi. Two quick questions. One just a follow up on the prototype. It sounds like this time (ph) that you're much happier with the Canadian ,same prototypes with Canada than the U.S., what do you think the differences is going on there? Are the Canada stores planned out (ph) for the same square foot levels as those in the U.S.? Could you answer that? And then secondly model (ph), you indicated that Q 4you thought would be maybe a bit better than the Q 3 number, given your expense controls that you exhibited this quarter, I'm wondering if that implies that your gross margin's still down 800 or so basis points which would seem surprising given that you sound more optimistic on what the product is doing now.

I'll take the question on the prototype. Again, to repeat, we said it's too early to tell in the U.S. And remember, in Canada, in addition to the new prototype, we have much sharper, much more aggressive pricing, which is, you know, something we're going forward with in the U.S. So it's not a good apples to apples comparison. And we're brand new in the country. We're sort of the shining star of the malls up there right now. So it's not a good comparison. And we're as excited about the prototype in the U.S. as we are in Canada. It's just Canada's whole strategy is much further along than it is in the U.S..

Okay.

And Kindra, regarding the fourth quarter, you know, facing our guidance that the comps would be similar to third quarter, we see, you know, a similar story where we're going to be very aggressive in markdowns and the gross margin, we believe, will decrease by more than 800 basis points versus last year.

Okay. And just a follow-up on the store prototype, can you maybe walk through, Mario, the store model for Canada? I hadn't realized that the price quotes were that much more aggressive than the U.S., versus that of the U.S. store model?

The -- you know, the store model is, you know, in the aggregates (ph), pretty similar to our model in the U.S. You know, we're expecting store contributions in the, you know, the mid-20 percent when we see an annualized sales base.

So sale levels similar to just implies far more units going through those stores?

Yes. I mean, our price is compared to the U.S. are lower after you do the currency conversion. And so far we're seeing, you know, significantly more units pass through. One of the other very pleasant surprises are the capital costs are significantly lower in Canada than they are in the U.S.

And the markdown, Kindra, are significantly lower than the U.S. And that's part of our pricing strategy.

Is that, though, because your price points are lower to begin with?

Exactly.

Okay. Great. Thanks very much.

You're welcome.

We'll take our next question from John Curty (ph).with Principal Global Improvement.

John Curty, Principal Global Improvement: What are the expected capital costs for the new prototype?

It's going forward, we're approximately 10 percent right now higher than our U.S. stores than our previous prototype.

Yeah.

With respect to the deleveraging of occupancy and distribution and buying costs of the third quarter, can you quantify how much that is or was as?

We normally don't give that out. It was not -- there's the biggest impact on our margin was in the markdowns, and occupancy was the second biggest. I mean, we're talking hundreds of basis points down. But.

Okay.

We don't get more specific than that.

Okay. And then as you transition the company to this new merchandising and pricing model, where do you kind of anticipate your gross margin kind of leading out to on an operating margin?

What kind of goals are you looking for relative to where you have operated in the past?

We're looking to similar goals to those that we achieved in the past. And we will be making that happen by the fact that our prices continue to decline, and on the other side, we look forward to higher sales to reach regular price and less markdowns. So between those two, we believe that we will have very similar gross margins to what we enjoyed before.

And under the past merchandising and pricing program, what would you estimate the amount of markdowns would have been?

Can you say that again?

I'm trying to get a sense --if you're going to have less markdowns going to the low everyday pricing strategy, but kind of a high-low or whatever you did.

Right.

In the past, how much markdowns did you take in terms of what percentage of your inventories were maybe sold at full price versus some sort of markdowns?

It's a different year, a different season, that's a hard one to answer. But certainly in the past, we were quite promotional. We were playing the quality (ph) high-low game.

Yes.

We were giving more coupons. We were giving a substantial amount of coupons, and we look forward to not totally eliminate everything, but to substantially reduce that. So clearly we look forward to the markdown rate as a percentage of sales to comedown.

And I think it's also critical to note it's not just the new pricing that will reduce markdowns but also our slow strategies as well.

I'm sorry, I didn't hear the last part.

But also what else will help reduce markdowns is our flow strategies as well.

Okay. And then do you anticipate any kind of a transitional period, I guess, traffic-wise as you transition into your new strategy that customers coming into the store who are used to coming in and getting these phenomenal bargains, or whatever, just there's a little bit of different feel to the store and it's going to take a while to attract people back into the store.

Yeah, we slowly anticipate some of those issues, and this is exactly why we're planning a marketing program to support the changeover and look forward to welcome many new customers to our brand at the same time. But, again, as the customers walk into the store, the prices are going to be so clear to them, and basically, we're also doing this because the customers asked us that they would like to come into our stores every day and know that the item they buy today may not be promoted tomorrow. So I mean, basically doing it for the customers and believe that they will see it, enjoy it, and hopefully take the merchandise to the cash register the day they come in. So there will certainly be some change, but we look forward to the market (ph).

Once again, if you have a question, you may press the one on your touch-tone phone to register. We'll take our next question from sigh Mandy Wahlberg (ph). Please go ahead.

Hi. Thank you very much. Great quarter, guys. Very impressive. Just going back to traffic in the malls, where are you seeing the best traffic, you know, in terms of the A malls (ph), B morales (ph), C morales (ph), and where are you seeing, you know, the people lacking? Thank you.

We said before, for the quarter, that the traffic was pretty evenly spread across mall property types.

Thank you.

You're welcome.

We'll take our next question from Tom Filandro with Goldman Sachs. Please go ahead.

Tom Filandro, Goldman Sachs: Hi. The question first is for Amy. Two questions, Amy. Can you give us a better understanding by classification where we're going to see the greatest reduction in SKUs or styles? And then on the other 50 percent of your business, the fashion side of the business, which I think is still a critical driver here, can you discuss how we should view flow in 2003, meaning, you know, new collections versus, I think you doing one now, like, every month, or at least you have in the past.

Right. So actually, the SKU count reduction falls across in program across all categories. Based on our current trending in the bottoms business we see an opportunity to probably see less reduction in those categories than some of the other ones that we've had. And it hits across all of the businesses, probably most dramatically in the girls areas. As far as the other 50 percent, you're absolutely right. That is critical to our assortment, and we built a product pyramid. As you get to the top or the more fashion items, those actually flow more frequently and would follow our more traditional historical flow pattern than our basics in Q 4 and our core items. And we're obviously utilizing very visible fixtures, floor fixtures and smaller fixtures to how's those which will be cycling through on amore frequent basis?

Can you be more specific? Should we continue to see every month a new look to the store or is it more of a spring season, transitional spring?

Well, I like to think of it one occur tin for season for the big ideas and then we will be refreshing the store, and certainly more so in the girl's side of the business and the boy's side on a regular basis.

Okay. Great. And this may have been answered. I apologize if it has been. But Seth, can you give us color on inventory outlook at the end of the fourth quarter both on a per-store average store basis as well as your -- giving your lower cost unit on a unit basis?

Sure, Tom. On a unit basis, I think Ezra may have mentioned this earlier. The units will be up at the end of the year on a per-store basis, probably in the high single digits, low double digit range. In terms of cost, I think at the end of the year we're going to see costs on a per-store basis down versus lastyear, probably, again, in the mid single-digit range.

Okay. Best of luck to you all. Thank you.

Thank you.

Thank you.

We'll take a follow-up question from Kimberly Greenberger with Lehman Brothers. Please go ahead.

Great. Thank you. A quick question for Mario. The 50-storeopenings for 2003, can you talk about the pattern of openings by quarter? And then just a quick follow-up for Seth. The SG&A savings initiative that you talked about going forward, you know, can you talk about sort of the low-hanging flute there? Then when to you begin to anniversary the SG&A cuts that are already been put into place? Thanks.

The openings next year are very much front-end loaded to the first and second quarters. I don't have it exactly by quarter but I would say, you know, of the 50 openings we're planning, approximately 35 will be in the first two quarters.

Yeah. And Kimberly, on SG&A expenses, what really is, I think, the -- what's going to benefit us in SG&A is lending (ph) and that we have the organization and structure in place, and just as we increase our sales and increase our store count, we believe that we will be able to leverage the expenses. There are always ongoing expense initiatives. There's nothing that major or one that's going to drive the SG&A down. But I think it's just being able to leverage the essential losses and the, you know, personnel that we have already.

Yeah, we made our cuts gradually over time so there's not really one big event anniversary.

Okay. Great. So does that mean that we need to start seeing some revenue growth? And, you know, does it necessarily mean positive comps before we'll start seeing some more SG& A leverage?

I don't think we need positive comps. We need, you know, sales to be increasing.

Kimberly Greenberger Okay. Great. Thanks, Seth.

That's all the time we have for questions today. I would now like to turn the program back over to management for closing comments.

Thank you, operator. I'd like to thank everyone for their continued interest in our company. Seth and Heather are available throughout the day for any additional follow-up questions. Have a good day and a healthy and happy holiday season. Thank you.

This concludes today's teleconference. Thanks for participating. You may now disconnect.