Children's Place Inc (PLCE) 2002 Q4 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. If you need assistance at any time during today's conference, please press the star and zero.

I would now like to turn the program over to Heather Anthony, Director of Investor Relations.

Thank you, Jeremy. Good morning, everyone. Thank you for joining us today for a review of our fiscal '02 fourth quarter financial results. Management will begin with some prepared remarks, followed by a question and answer session. Jeremy will instruct you on the procedure at that time.

Before we begin today, I'd 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 or assumptions that 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, I'll now turn the call over to Ezra Dabah, the Chairman and Chief Executive Officer.

Thank you, Heather. Good morning to all, and thanks for joining The Children's Place conference call. Seth Udasin, our CFO, will being by reviewing the fourth quarter financial results. I will then discuss the state of our strategic initiatives, Mario will update you on our operations, and Amy Hauk, our VP of Merchandising, will speak about our merchandising objectives. As always, we will be happy to take your questions at the end of our remarks - Seth.

Thank you, Ezra. This morning, we reported fourth quarter financial results in line with our previously stated expectations. Sales of $196.7 million, a 1% decrease compared to sales of $198.7 million last year. Net income of $2.3 million compared to net income of $18.9 million last year. Earnings per share of 9 cents versus 70 cents in last year's fourth quarter.

Let me get into more detail. During the fourth quarter, The Children's Place opened 16 new stores and closed two. As of February 1, 2003, we operated 643 stores and approximately 2.8 million square feet, an average of 4,400 square feet per store. Comparable store sales for the fourth quarter decreased 19% versus a 6% decrease in the prior year. The fourth quarter's comparable store sales decrease was primarily the result of a 12% decrease in the average transaction size, coupled with an 8% decrease in the number of transactions.

When we sold more units per transaction in the fourth quarter this year than year, they were at a lower average selling price. This was due to aggressive markdowns on the holiday and all the season merchandise and our strategic decision to lower prices.

Gross profit in the quarter decreased to 36.3% this year from 43.6% last year. This decrease was primarily the result of higher markdowns in occupancy costs. Markdowns during the quarter were substantially higher than last year as a result of the need to clear out holiday 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.

In addition, markup during the quarter was slightly lower than last year as a result of our strategic decision to lower prices and incremental costs related to the West Coast ports labor dispute. Partially offsetting the gross margin decrease were the favorable results of our year-end fiscal inventory.

SG&A expenses as a percent of sales increased 310 basis points to 27.5%. This increase was primarily due to higher store payroll as a result of the negative comp store sales. In addition, we incurred higher marketing, medical, and insurance expenses than last year. Partially offsetting the SG&A increase were insurance proceeds.

You will note that we took a special charge of approximately $3.2 million pretax. This noncash charge relates to the write-down of fixed assets at 19 underperforming stores.

Depreciation and amortization increased 100 basis points versus last year as a result of the decline in comp store sales and increased depreciation relating to new store openings not yet producing average store revenues.

Our tax rate in the fourth quarter was 50%, bringing the full year tax rate to 42%. The increase in the tax rate was the result of the loss we incurred in our newly created Canadian subsidiary. It is prudent not to take a tax benefit for newly created foreign subsidiary until it has made a profit. All of this resulted in net income for the fourth quarter of $2.3 million dollars versus net income of $18.9 million year. On a per-share basis, we earned 9 cents in fourth quarter versus 70 cents last year. Excluding the special charge, the company reported adjusted net income of $3.9 million or 14 cents per share.

Moving on to our balance sheet, we ended the quarter with approximately $37 million in cash versus $45 million last year. The end of the quarter we had no borrowings on a revolving credit facility and no long-term debt. Total inventory at cost is up approximately 28% from last year, on the 27% square footage increase. Inventory per square foot is up 1% compared to last year.

As mentioned in our most recent sales call, our inventory position is clean, with all the season merchandise representing less than 10% of our total inventory, which is equal to last year's level. In fiscal 2002, capital expenditures totaled approximately $49 million.

Turning to fiscal 2003, as we've previously announced, we plan to open 50 stores during fiscal 2003 -- approximately 40 in the U.S. and 10 in Canada. We expect to open approximately 10 stores in first quarter, 20 in the second quarter, and 10 in both the third and fourth quarters. Capital expenditures for fiscal 2003 are planned at approximately $25 million.

As mentioned in this morning's press release, February comps month to date have declined 25%. While the improvements to our merchandise offering and our other strategic initiatives are well underway, our results haven't yet caught up with our efforts. In addition, weak consumer confidence, extreme weather patterns, and geopolitical uncertainties have made business trends difficult to predict, and therefore we do not belief it prudent to give earnings guidance at this time.

Now, I'll turn the call back over to Ezra.

Thank you, Seth. Fiscal 2002 was one of our most difficult years, but we believe we are on the right path. Our product offering will further improve as the quarters progress, and we will deliver the style, quality, and value our customers expect from The Children's Place. While our results have not caught up yet with our efforts, we are confident that our strategic initiatives will result in a solid foundation for long-term sustainable growth.

We are continuing to address the challenges that we faced last year to energize and strengthen our company. We entered fiscal 2003 confident about achieving our long-term objective of making The Children's Place the number one brand in children's clothing. With (inaudible) is our ability to deliver unique, colorful, and coordinated merchandise at great prices. Our customers have always responded well to that formula, and we intend to make that distinction the primary focus of our upcoming lines.

We have made improvement, as reflected in the merchandise offering that were introduced this spring, and we are just beginning to see the results of these improvements in their appearance of our stores. We are offering our customers more depth in the style they want, while reducing our overall SKU count, resulting in a clearer presentation. We have improved our product and delivery pipeline to ensure that we offer the right mix of fashion merchandise, quality, prices, and on-time delivery from the design stage to our stores.

The Children's Place represents fashion and quality in children's wear at value prices. We view the present state of the economy as an opportunity to sharpen our price points because no specialty retailer is best --better positioned to capitalize on offering value than we are. Our global sourcing and procurement expertise is second to none, resulting in the lowest possible product cost while maintaining very attractive gross margin results.

To that end, we are pursuing various in-store initiatives. We are committed to increase the level of service in our stores. Our goal is to deliver an even more rewarding shopping experience to our customers. We are focusing on tracking the flow of traffic in our stores, and we are closely monitoring our conversion and transaction rates to capture additional business. Incentives for our store management teams are tied to this critical objective.

Through our store windows, in-store environment, and direct mail, we are taking a more aggressive stance in communicating our compelling value position. We will approach the window presentation creatively to ensure the magnetic impact, drawing more traffic in our stores. The in-store environment will constantly reinforce the message of quality and price to our customers, and our direct mail program will further reinforce our brand image and value proposition. We are planning a gradual decrease in our promotional activity corresponding with the full implementation of our value initiatives.

I'm pleased to report that our stores in Canada continued to exceed our sales expectations. We look forward to grow our Canadian store base this year and to report a profit for our first full fiscal year in the Canadian market. By reducing to 50 the number of new store openings in the year 2003, we will focus all of our energy on growing our comp store sales and employing the many investments in IT and infrastructure that we made over the last years. This will ensure that we maximize our potential and properly leverage our investments.

In closing, we are confident that our brand is moving in the right direction. Given weak consumer confidence in the uncertain economic and geopolitical environment, we are cautious about the short-term outlook and remain conservative about our overall planning for the year. We believe that our strategies that are -- as our strategies take hold, we will create a strong foundation for long-term sustainable growth. I will now turn the call over to Mario.

Thank you, Ezra. While the fourth quarter and year were difficult, we made significant strides in operations and logistics in a short amount of time. We continue to see efficiencies in our three distribution centers on the East Coast, West Coast, and Canada, allowing us to operate at improved speed and higher productivity levels.

Last year, we reported delays in our merchandise deliveries. As our new merchandise strategy takes hold, we are pleased to report that over 90% of our spring 1 and 2 lines were delivered on time. We expect this to improve further during 2003 and beyond and have greatly enhanced our internal controls and procedures to ensure timely delivery.

Turning to year-end statistics, in fiscal 2002 we opened 126 stores, 98 in the U.S. and 28 in Canada. Additionally, we remodeled 11 stores, including eight expansions, and closed three. As Seth mentioned, we ended the year the 643 stores, 615 in the U.S. and 28 in Canada.

Full-year sales results for our class of 2001 stores averaged approximately 950,000, and the run rate for the class of 2002 partial year results averaged approximately 1 million. Given the difficult year we had, these results were clearly below our expectation. However, the spread between our new stores and our mature stores remains relatively consistent at 15% to 20%. Importantly, the vast majority of our new stores and mature stores remain cash flow positive and as a result we intend on only closing approximately five stores in fiscal 2003.

Results by geography and property type are consistent for the fourth quarter and full year, with the southwest region performing the best. As we have discussed, we'll be taking a conservative approach to our expansion plans in order to fully focus on improving comparable store sales.

In the second half of 2002 we entered the Canadian market and ended the -- ended the fiscal year with 28 stores. Sales results have exceeded our expectations, with unit sales continuing to exceed the average U.S. store by approximately 30%. In fiscal 2003, we will expand our store base in Canada by approximately 40%, and are projecting our first year of profitability.

Our e-commerce business experienced a substantial increase in sales of approximately 80%, benefiting from a more stable technology platform, cosmetic changes designed to enhance the overall shopping experience, and recent positive industry trends. We anticipate another strong year for e-commerce in 2003 as we grow our marketing expenditures for the sales channel.

We also introduced our new Technocolor (ph) prototype in 2002. We opened seven stores in the U.S. and all 28 of our Canadian stores in this new format. All of our 2003 openings will be designed as new prototypes, and we will also remodel eight existing stores. We're pleased to report that we have further reduced the capital costs for this new prototype and currently we expect costs in 2003 to be only about 10% higher than our traditional store format. We believe that it's still further room to lower these expenditures.

As Ezra mentioned, the major focus for our organization this year will be efforts to increase the sales and profitability of our stores. With a reduced store opening program and the IT systems in place and positioned for increased leverage, everyone is firmly committed to our goal of growing the number of transactions per store. In addition, through an increased investment in apparel and training ...

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Again, to all participants on the PLCE call -- we are experiencing a technical difficulty. Please stay on the line.

We apologize for that technical difficulty. Please go ahead.

Sorry about that -- I don't know what happened. As Ezra mentioned, the major focus for our organization this year will be efforts to increase the sales and profitability of our stores. With the reduced store opening program and our IT systems in place and positioned for increased leverage, everyone is firmly committed to our goal of growing the number of transactions per store. In addition, through an increased investment in store payroll and training, we are looking to increase our customer traffic conversion rate. All departments and levels of the company share the job of supporting the store team in achieving our transaction growth and customer conversion rate goals.

Thanks for your attention and I'll now turn the call over to Amy.

Thanks, Mario. Good morning. With the new year underway, I wanted to focus on our go-forward merchandising strategy, our commitment to staying the course, and the unique positioning it gives us and what is an extremely challenging retail environment. Our merchandising goal is to consistently create a focused assortment, which is bound with the right mix of basics, fashions, and lifestyle, appealing to a broad customer base with style, value, and quality.

Enhanced quality is a major focus of the new merchandising strategy. With the introduction of spring, you will find garment washing and increased fabric weight on a majority of our styles. This will mean less shrinkage for the customer, a loftier hand (ph), and increased (inaudible), all of which are critical to the children's business.

We have also tightened our factory base in fabric suppliers, allowing for better quality control. This, in addition to a reduced style count and increased unit investment, creates efficiencies and economy of scale. The end results of our rededication to quality is a garment that can be handed down. Some examples in spring are enzyme (inaudible) leggings, capris, and shorts in girls and baby girls, increased weight in our PK pull-up for boys and baby boys, and all of our underwear and PJs, which are now garment-washed.

As you know, basics are key components of the new strategy. However, a strong fashion message is a critical part of who we are. Unique, colorful, and coordinating merchandise is key to The Children's Place look, and will continue to be what differentiates us from the competition.

To help support this strategy and keep us moving forward, we have redefined the merchandising timeline. Instituted last year in support of the summer 2003 product flow, this new structure provides the framework and critical benchmarks necessary to deliver a balanced and cohesive line in a timely manner, supported by a strong marketing message.

Our positioning for spring and summer is as follows. We have invested 50% of our inventory in basic key items in Q4, allowing us to service more of the customers' needs and maintain a stronger in-stock position on these key drivers. We have also reduced our styles by approximately 30% and our SKUs by 15%, which should result in a stronger seasonal message, clean up presentation, and a more satisfying shopping experience.

Importantly, we have reduced the number of lines and readjusted the frequency of full floor sets to our stores based on seasonal and divisional needs, allowing our sales associates to focus on servicing the customer while maximizing product profitability. Regarding pricing -- while we have lowered our AUR by 20%, we have offset the lower AUR with a commensurate investment in units. This should position us more competitively.

Moving on to current business -- as mentioned in this morning's press release, February has been a challenging month. Trends have been difficult to read due to extreme macro issues -- the extreme macro issues our industry is facing. With that said, we have seen some small bright spots, including positive unit sales comps on spring merchandise, along with better sales trends in our hot weather stores, which should bode well once the extreme weather pattern breaks. In the meantime, we're managing our business responsibly, ready with current product once business picks up.

Lastly, I wanted to touch on our unique position at The Children's Place. As mentioned earlier, it is an incredibly competitive environment. When looking at the retail landscape, we believe The Children's Place has the unique opportunity to deliver the price of the chain stores with the quality shopping experience and presentation of a specialty store. This powerful combination is our value equation -- strong product, enhanced quality and a compelling price equal great value at The Children's Place.

With that being said, we'll be happy to take any of your questions.

At this time, if you'd like to ask a question, press the star and one on your touch-tone phone. You may withdraw your question by pressing the pound key. Once again, if you want to ask a question, please press the star one at this time.

We'll take our first question from Margaret Whitfield with Brean Murray. Please go ahead.

Good morning. For Amy to start with, have you noticed any differentiation in the results between the girls and boy and infant in February and I wondered if you can comment on what your estimate is of the snow effect on your comps to date in February?

As far as shifts in business with a new line, our strongest performance has come out of the newborn areas. And interestingly enough, probably initially out of the box we saw strong -- stronger performance out of the boys and baby boys area, but girls have been picking up momentum especially with the drop in the newest line which is -- which has hit our stores. As far as impact, we have seen -- once the weather started hitting more aggressively we did see some declination in our comp performance. But I think it's hard overall to give a distinct, appropriate amount. I mean, there are so many issues out there. We have seen better performance though in our hot stores. Nan in our cold stores. We have seen --

Could you quantify the difference between the warmer markets and the northern markets?

In our hot weather stores we have seen low double digit negative comps.

Okay. For Seth, can you comment on what a good expectation would be for the tax rate and also could you quantify the Canadian loss so we can understand what kind of a swing factor that might be this year? Thank you.

Yes. In terms of the Canadian loss, from a tax point of view, it was probably in the neighborhood of a dime. That is though from a tax point of view. From an internal cash flow point of view it was somewhat less than that. We do expect it to go profitable this year. In terms of the tax rate this year, it's going to depend on a lot of factors in terms of how profitable Canada is in relationship to the overall U.S. operation. We would -- we hope that it gets back to a normalized rate of approximately 38 to 39%, but that really depends on how the year falls out and how the income by various subsidiaries develop.

Chances are it will be higher in the first part of the year, the tax rate?

We generally try to keep it even throughout the year.

Okay.

I can't say how it's going to work out by quarter at this point.

Thank you.

We'll take our next question call from Kimberly Greenberger with Lehman Brothers. Go ahead, please.

Great. Thank you. Good morning.

Good morning.

Amy, you talked of the average retail price being down 20% is that sort of consistent throughout Q1, Q2, Q3 Q4, can you talk of that trend over the year?

Its fairly consistent for Q1 into Q2. We started last year lowering our prices in Q3. So the retail -- the lowering of retails is not as deep in Q3 as it would be in Q1 and Q2.

So would bit more like 10% in Q3 or do you have sort of an order of magnitude?

It would be approximately that. And, you know, part of it's just a reduction in retail but also a shift in investment, of course and how you invest in the goods. But, yeah, approximately.

Great. Seth, can you talk about -- Seth or Mario -- on the underperforming stores, you indicated you're writing off assets for 19 underperforming stores. Are there plans to close the other 14 of the five that you will not be closing in 2003? And Mario, you indicated that the vast majority of your store base is cash flow positive. Can you, you know, talk about and quantify the number for us of stores that are actually cash flow positive versus cash flow negative? And the ones that are cash flow negative are they sort of marginally cash flow negative or will it take substantial improvement to get them on the positive side?

Okay. This is Seth, Kimberly. In terms of the 19 stores, at least half of them are making money or are borderline making money. I would say on a cash flow basis. I would say there are probably only about three that are definitely losing money in a big way. So I think there's a lot of opportunity we believe to still turn around some of these stores and get, you know, cash out of them. Other than the three that I think are in pretty bad shape.

Kimberly, as we look at the portfolio, there's less than approximately 5% or less of the portfolio is at that marginal level where they are cash flow negative or close to that. And just a small increase in comp store sales would bring them to profitability. Except for those one or two or three stores that Seth alluded to. Just a marginal increase in sales would bring them back to a positive result.

Okay. Great some the three that are losing money in a big way as Seth put it, are those going to be included in the five closures that are taking place in '03?

I think one of them definitely. The other two are lease obligations. We at the moment can't get out of.

Okay. And then Seth, just a housekeeping, you indicated that 2.8 million was your quarter end square footage. Do you have the actual number for us?

Why don't we take the next question and I will dig it out as we -- actually, hold one second. I think I - 2,834,000.

Thank you.

Great.

We'll take our next question from Marcia Aaron with Pacific Growth Equity. Please go ahead.

Good morning. A couple questions. One on the investment in payroll. Can you give us a sense when you're going to do that and to what degree you'll be increasing store hours? Also on the promotional easing, any sense to when you'll start phasing that in? And then can we get an update on how the new store prototype is performing and what if any impact that's having on labor hours?

On the -- Marcia, on the store payroll question, the increase in hours is going to be gradual throughout the year. And as it relates to the new store prototype, as we've said, I think previously, we're happy from what we hear from customers and our field organization as to how the stores are performing. The financial results have been a little bit harder to read because of the general state of our business. But we certainly like the look and feel and the anecdotal information that we're hearing from everyone. It really as we have looked at it so far, its been early has not had a significant effect on store payroll.

Mario, are you going to -- have you put in actual counters in the stores? Are you -- when you look at the conversion rates, and is that allowing you to better match your payroll to traffic patterns?

The answer is yes, we have about 75 stores today that have counters. We will probably add some more throughout the year. And we also -- we also through our Campbell's software program within the stores match payroll hours to sales volumes as well.

Great. Then in terms of the promotional easing any sense as to when that might happen?

Well, beginning of the promotions as we speak. So you'll see that easing beginning the spring season and as soon as we are pulled very together as regards our strong value initiative with the customers that are coming into the store, and be so very aware of what we have done we intend to really slow that down at that time ...

And you'll still do ...

... beginning now.

Right. You'll still keep with the two that will be the other promotion promotional, the monster sale and ...

I think the (inaudible) will always stay. That's been a great strategy that we kind of started quite a many years ago. We see that staying with us in all of our basic and key items that the customer usually needs two of.

Great.

And physically delivered that value proposition to a stronger extent.

Terrific. Thanks and good luck.

Thank you.

We'll take our next question from Kindra Devaney with Fulcrum Global Partners. Go ahead, please.

Thank you. A couple questions. Amy, you mentioned that your units or your spring merchandise had positive unit sales. Is that in aggregate for the whole line or just in certain areas given the weather?

That's in aggregate for the whole line, and it's for go forward merchandise. So ...

The comps being down 25% is partly impacted by the carryover merchandise because that would say that your AUR is down 20% or 25% really.

Yes. That's a combination of heavy, aggressive markdowns, lower AUR.

Okay. So then you mentioned that you should allow you to offset the price points. Does that mean we look for inventory to be building up 1% right now? You want it up 15, 20% per foot, where do you expect it to be over the couple of quarters? How many units do you need to drive through the store in orders to offset the AU line?

We've invested to support the lowering of the AUR and we're managing our inventory to support the sales trend and try to build on the sales trend. So invested appropriately to do that.

And you can't look at the sales number -- I mean, you have to look at the unit number. So at the sales retail to go up that much.

Right. Right. I guess that's my third question is if you look at the margin down 500 plus basis points in the year, how much of that was marketed down because I would assume if you could sell more at full price, albeit lower full price that can offset some your comp decline.

Absolutely.

How much was the margin from markdown and how much was from deleveraging and what's your opportunity to go forward?

Kendra, is your question on the quarter or for the year?

For the year.

For the year. Okay. Just a second.

Ezra, maybe you can talk about the IMU not being up in the fourth quarter? Is that likely to continue through '03?

The IMU is -- that was done very, very little bit as Seth mentioned partially in view of the fact that we had to air merchandise in and be able to strike in the West Coast. And it was down very low.

So it wasn't related to ...

Plus, as we employed that new value strategy we'd expect our IMU to come down somewhat. Although we are getting -- we are still getting better costs going forward. So it's not going to go up -- go down in the same relationship as our prices do.

Okay. So your IMU for '303 should come in slightly?

Yes.

Okay.

Kindra, on -- the margin for the year it was done I guess 550 basis points. Similar to the fourth quarter the two major areas were markdowns and occupancy, really for the same reasons. During the year, our markup was up a little bit. And those are really the main drivers.

Can you break it down? Is it 50/50 on markdowns versus ...

Markdowns in occupancy were about the same, approximately the same. And combined were more than the 550 basis points and the markup was a little bit positive.

Okay. Great. Good luck.

Thank you.

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

Good morning, guys.

Good morning.

A couple of quick ones. Square footage of the new stores versus the old stores, and is there any change in staffing in the new format versus the old format? Then, Amy, you talked of changing the slower products seasonably. Does that mean we'll see less flow into the store or will there be seasons hitting and then newness every week? How do you plan to change that?

Well -- do you want me to go first?

Yeah.

I'll go first. I think it's combination of all those things we're trying to flex what's appropriate not only to the box as a whole, but to individual businesses. So boys versus girls, newborn versus big. Accessories. So not only as I have stated earlier are we trying -- we are eliminating some full-floor stats, but we're allowing goods also to live a longer period of time so question gain some momentum and traction and drive volume. That being said, we also want to maximize seasonality and category opportunities so we may be -- we will be flowing certain categories of merchandise say, for example, outerwear appropriate to its seasonality and potentially not necessarily hooked up literally with the floor set. Does that answer your question?

Well, something --just as we enter the spring season for example, historically places have a theme per season and they'll drop in a floor set. And then a couple of new items and then drop in the next floor set. How will that change? As you shipped in -- I was in the store, I saw spring and you dropped in shorts and T-shirts and things like that. Do the shorts now have a longer -- stretch shorts do they stay on the floor longer before getting marked down and do you flow in the next coloration of them and what kind of timing has that all played through?

Absolutely. So those shorts that you're referring to are a key driver going through into the summer period -- the beginning of summer. And we'll layer on to that. So if you think of the product pyramid we'll have the fundamentals and our core which will live historically 12 to 26 weeks, and then we will continue to use the floor fixtures to layer fashion to create new finance the store.

Then as you layer in fashion over the last 12 to 18 months we have seen things come into the store that it's just one that doesn't relate to anything else in the store. How does that change?

Well, we're obviously -- we talked about the product time line, the merchandising time line and we're trying to create more Synergy, not only within the different worlds, but within the box as a whole so it feel more cohesive to the customer and it can create more outfits.

Then I guess the last question and then I'll get back to you guys on the square footage is on the inventory planning, swim pants it seem to be a key item. And yet they were sold out in a lot of the stores that I was in. And then you had I think it was called a yoga skort which by the way immediately you can feel the hand difference in the quality of the fabric son an item like that and the leggings, but you have the yoga skort which seemed to have come in and sold out according to a couple of the people in to, the stores that I spoke to and there wasn't much inventory.

So as we go forward, should we see an improvement in how the inventory levels are managed that we don't see sellouts and things line that?

Yeah. Actually, these are the things that actually excite you, I think too, as an opportunity and skirts ...

Good problem, yes.

... for us to be chasing things and seeing things exciting in skirts took us by surprise relative to how they've been trending previously but we're excited about that that going forward. Then it is exciting to see a demand, and we've been in better position than we have ever been before. So we're actually really excited and with our relationship with vendors able to react on a lot of the items to get back into business quickly.

You'll see much more depth than being able to stay in business much longer than ever before, on many of our items.

Excellent. Then the square footage on the new stores?

The square footage on the new stores is relatively the same as the old store, and the question on payroll, we've -- we staff our store to volume not necessarily to store type or the store size.

So they don't require any additional staffing because of the layout change or anything like that?

No.

Can you remind for to go forward year, is that square footage about 4,300, 4,400?

Yes. That's right. One of things we've learned about is a center entrance does work a lot better and creates more visibility within the store. So as a go forward sort of tweak to our new prototype, most of them -- the vast majority of them will have center entrances.

As opposed the very first store was Livingston, maybe?

It was Paramus. It was skewed to the left side of the store.

Right. And I'm sorry, you said 4,400 square feet about should be to go forward size?

Correct.

Thank you. Good luck with the spring season.

Thank you.

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

Thank you. Good morning, everybody. Just a couple of questions. One is that -- I guess for Amy. On the twofer strategy, and Ezra said it was a very successful strategy, it seems like you have a lot twofer offerings in the store when you go in. And I was just -- just wondering if there are any metrics that you can provide as to how successful the twofer offerings have been as a strategy?

It's been incredibly successful and been driving disproportionate amount or quite a large amount of our volume. And perhaps you'd feel that because that's what we focused on marketing in the stores to create that sense of value when you walk into our stores. But we do use metrics to control the amount of twofers that we have within each shop as kind of an anchor. So we have been very pleased so far.

What is the metric that you use to come away with the comment that they have been incredibly successful?

Well, beating sales expectations. Beating the overall sales trend. So we look at several turns.

And looking at the fact that the majority of our sales are done at the twofer.

Right.

Majority of your sales in the store is done on twofer?

No, majority of the items are sold in multiples. Multiples.

Of those items are sold as a two.

Right. But the customer is picking up two, that they're choosing to buy more than one.

And then secondly, I don't know how you can help on this, but you know, you've decided not to provide any forward guidance. And we all know it's difficult and some companies have chosen to take that route, but others haven't. Are there any metrics that you -- I guess first I'd be interested as to why you're deciding not to provide guidance any longer.

And then secondly, perhaps there's some metrics that you can provide like what your --how you're planning inventories as you move through the year or anything that are helpful metrics that would allow us to monitor your business against some sort of guidepost that are established?

You know, at this time, we have not decided not to provide any guidance going forward. At this time it's more important for everyone and ourselves to focus on the business fundamentals and our strategies than specific guidance numbers. Especially in view of their uncertain economic environment, and the poor visibility that we have on sales right at this minute. So as we get some momentums we look forward to continue to give guidance as we have in the past.

Thank you.

Okay. We'll take our next question from John Zolidis with Buckingham Research.

Good morning. A follow-up on the other questions that were already asked. Can you give us units per square foot at the end of the year? And where they are versus last year? And also, can you tell us the number of deliveries, line deliveries you did last year versus the ones you're planning for this year? And we'll start with those two.

Okay. So the amount of full line deliveries we will be at approximately nine deliveries this year over 12 historically. For 2003. Full deliveries.

With the reduced line deliveries is that going to hurt inventory turns?

No, actually. I think it can maintain because we can actually build traction and manage our inventory better through receipt flow and timing of flow and not -- let the goods live longer and drive regular price sales. So, you know, I don't -- I don't think that we also don't have lines backing up on each other. So there's less competition at the floor on any given time with markdowns. So we stayed at a more -- higher regular price position than flow upon flow upon flow. So less backup on markdowns as well competing with regular price opportunity.

OK. And inventory at year end on a dollar basis was up 1% per square foot. On a unit basis, how does it compare to last year?

John, we're trying to find it here. I'm not sure if we have it in front of us. Let us just look.

Then I guess while you're looking at this, one other question. For the fourth quarter, I know that there's been some sourcing improve. s, how are merchandise margins this year versus last year, how big of a shift was there?

Merchandise margins were down in the fourth quarter I believe 730 basis points.

That's merchandise margins or gross margins?

I'm sorry. That was the total gross margin. Certainly, you know, more than half of it was merchandise margin.

Okay.

Total unit were up 6% on an average store basis.

And do you think that that's enough to offset the decline in AUR so you can start driving for positive comps?

Actually, you know, it's --that's a snapshot in time for February BOP but based on the total receipt flow and deliver more on time, we're confident that we have the units throughout the season to support. Go forward our goals in the lowered AUR.

I understand it's a snapshot on time. Looking on an average basis, units should be up what, 10%, 15%?

It should be within that range, absolutely, to support the lowered AUR.

Thanks a lot.

You're welcome.

We'll take our next question from Paula Kalandiak with Wells Fargo Securities.

Good morning. Mario, could you comment as to -- of your store base approximately what percentage is currently mall versus street or strip and actually A, B and C within the mall stores if that's possible?

Approximately 75% of our stores are malls. And within the mall, types --this is somewhat of a good guess but about a third are A malls. About -- at the same -- probably a little more in B malls, probably 35 - 40% and the balance would be in Cs.

Okay. What happened to the combo stores? Is that still being rolled out?

We currently have 35 of those stores, and they're -- their performance still consistent with the balance of the chain. However, the new prototype because it really delineates the departments a lot more clearer than the old prototype, it doesn't -- it really isn't the need to have a side by side combo format. So we solve the same issue with the new prototype. And if a store warrants more square footage if we think it's going to be a high volume or is a high volume situation we'll tack on additional square footage. So we can solve that issue.

Okay. And then finally, with regards to the tracking of the conversion rate going forward, that is that something you will be sharing with us?

Not in great deal. But we will supply some directional information.

Okay. Great. Thank you.

And we'll take our next question from Dorothy Lakner with CIBC World Markets.

Thanks, good morning, everyone.

Good morning.

Could you tell us --I'm not sure whether -- I don't think you did at the beginning of the call talk about where you -- UPTs were in the fourth quarter and maybe for the year. And then since there is this focus on unit sales in '03 where you think they should go for 2003? Then I wanted to go back to the -- to the reduction in promotional activity in '03. Again, I'm still not clear on how we're going to be seeing this. I understand that the twofers obviously are a main stay in your new strategy, but I'm -- I guess I'm unclear as to what's going to happen to the things like the chill chaser and the monster sale and so forth.

Then connected with that, what you're going to be doing in terms of the window displays and just other things that will drive traffic into the stores as these promotional activities that you run in the past are reduced. Thank you.

Okay. I'll answer on the units per transaction. In the fourth quarter, it was up in the high single digits. For the year, it was up in the low single digits.

And for 2003, we planning on seeing a high single digit increase on that as well.

Relates to the promotions, Dorothy, we don't consider the twofer a promotion. That's basically a mainstay of our business, and the monster sale that we do twice annually is basically an -- you know, a semi-annual sale. As it relates to real promotions meaning such as the place, at this moment we have no intentions to repeat that. On the whole, we are looking to bring down the number of promotions they we do. We have coupon, 15% of 50. You're likely to see that, you're likely to see that go forward in a reduced basis as it relates to last year. Generally in our marketing, we plan to introduce our enhanced value proposition in a clear and creative way to our customers. Special emphasis is going to be directed towards high image, but more importantly quality. As we are aware that our customer may perceive lower quality in view of our lower pricing.

How are you going to be driving that message? I guess through the window displays and so forth, but direct mail, for example, will there be an increased am of direct mail to get that message out?

Direct mail ...

Early in the year?

... somewhat increased this year. I think you'll start to see some blubs (ph) on our signage regarding the enhanced quality of our goods. You're going to begin to see some hang tags on the garments as it relates to the features of the specific garments. So we're going to do everything we can to have the quality shining through the garment at the same time supported with whatever marketing vehicles we can. For the customer to truly understand that they're getting a tremendous value.

Take the next question from David Berman (ph) with Berman Capital (ph). Please go ahead.

Hi, good morning. This is Christine Henry (ph) from Berman Capital. I was hoping you could share with us your thoughts on the competitive environment and how you feel it is right now, how it's changed over the past year? You know, both in terms of the specialty stores as well as the mass merchants and department stores. Thank you.

Yeah. The environment has of course gotten somewhat fiercer as it relates even more importantly to children's wear. To a great extent we have seen last year some movements from specialty into mass merchant as the quality conscious consumer has traded down somewhat. Our strategy, especially as it relates to lowering our prices, is there to combat that. And give those customers the kind of prices that they may find at mass merchants with quality more similar to that of let's say GapKids. And sold under specialty environment together with the kind of service that we look forward to given this year.

And I think that's what's so exciting about what we offer. Because it's very unique and it puts us in a unique position on the continue numb and allows us to stand out, I think. It's a great opportunity.

Okay. Thank you very much.

Thank you.

And we'll take our next question from Ted Lynch (ph) with Sigma Capital (ph). Please go ahead.

Hi, guys. I was just wondering, given the environment, what it's going to take to get to flat comps by the end of the year? I mean, you have some great initiatives going.

We certainly look forward to getting there, and we believe that (inaudible) as our strategies take traction you will see improved improvements throughout the quarters. And we'll see how things develop as we go.

You know, just what we have been saying all along, we're focusing on our marketing efforts to drive more people in this store, store people are going to work on the higher conversion rate. We'll look into the lower prices actually increase the units per transaction. So I think as all this evolves throughout the year, we will get you know, closer to that goal of flat and then ultimately positive comps.

Great. And with the lower units, would gross margins be flat to '02 or will there be expansion because of less discounting?

Yeah. At this point, we're just not, you know, commenting on how the -- any financial guidance.

Okay. Great. Thank you.

Thanks.

We'll go next to Simon Wahlberg (ph) with Sampson Partners (ph). Go ahead, please.

Thank you very much for taking the call. Can you go over one more time store openings and closings for the coming year? I just didn't get those numbers. If you can do it again.

Sure. In the first quarter, expect to open about ten stores. Second quarter 20 stores. Third quarter, ten stores. Fourth quarter, ten stores. The five closings will probably be towards the back end of the year.

Okay. Very good. Thank you.

Thank you.

And we'll take our next question from David Koffo (ph) with Deutsche Management. Go ahead.

Good morning, guys. One question, and maybe a follow-up question. The question is if you can provide a break down of comps between your mall locations where 75% of your stores are located and the other 25% which are non-malls?

For the year, the non-mall stores performed at a better comp than the mall stores. We don't break out the exact numbers, but the difference was pretty substantial.

And given the fact that you can't quantify it, can you give us some sense of magnitude versus prior years?

Well, this was really -- this past year was a first year where we really had a substantial number of non-mall stores. So I think prior years are not a good indication.

And do you expect that gap to improve in the coming year?

I think so, yes.

Thank you.

Especially in view of our --again, our value for proposition. We look forward to actually bringing customers into our store and a little bit more of a destination. So we hope for that Gap to decrease.

Thank you, guys. Have a good day.

Thanks.

Next we'll take a follow-up from Kimberly Greenberger. Please go ahead.

Great. Thank you. I had a couple of questions about the special charge that you're taking. Can you talk about the thinking behind writing these assets down and can you confirm whether or not these were effectively store construction costs and cost of fixtures at store locations?

Yes. The special charges part of what's called -- part of Financial Accounting Standards the way it's pronounced, the number 144. The assets that were written down were the net book value of store level assets so it would be the construction costs, fixtures. That was the primary items that were written down. And the FAS 144 gives criteria about the projected future cash flows both on a discount and undiscounted basis. And based on those projections, the determination is made to --you know, what has to be written off.

So, Seth, it -- that assumes I guess that those 19 stores would be negative free cash flow, or that you would not be able to recoup your asset?

The assumption is that over the future life of the store it would not generate enough cash to recoup the value of the asset.

Okay. Great. Can you give us if you haven't the average life of those assets so that we can sort of figure out what the impact would have been over the next several years on that depreciation expense?

I would believe it's probably in the neighborhood of five to seven years. On average.

Great. So we could just essentially divide the $3 million charge by, you know, five to seven years and figure out what the D&A impact would have been?

Right.

Great. Thanks.

We'll take a follow-up from Dorothy Lakner. Go ahead, please.

Yes. I was wondering that given you're not providing any earnings guidance going forward if you could give us a little bit of help, Seth, on what your plan for SG&A dollars in '03, how should we be looking at that? Then secondly, just going back to the fact that you're counting or looking at traffic in conversion are you going to be sharing any of that traffic information with us as we go through the year? Thanks.

In terms of SG&A, while we're not giving specific guidance you can somewhat see how we trended during the year. We also made the comment that we have most of the systems and infrastructure in place. So there shouldn't be any, you know, major surprises of that nature. Somewhat just a factor that will grow as we add 50 stores this year. And, you know, continue to operate in an efficient manner.

And as far as the traffic information, again, we won't share the specific details but we can possibly give some directional information.

Of course, you'll get the transaction count on a monthly basis as to ...

Yeah.

... how many more transactions we are in the process.

Yeah. I just wondered if you might be sharing the traffic -- at least some direction on a monthly basis as well.

Yeah. The direction -- yes.

Okay. Thanks.

We have no further questions at this time. I'd like to turn the program back to management for concluding remarks.

Okay. Thanks, Jeremy. We thank everyone for their continued interest in our company. Seth and Heather are available throughout the day for any additional follow-up questions.