Children's Place Inc (PLCE) 2003 Q1 法說會逐字稿

Good day. All sites are on line in a listen-only mode. I would like to turn the call over to your presenter today, Ms. Heather Anthony, Director of Investor Relations. Please go ahead, ma'am

Thank you, operator, good morning, everyone.

Thank you for joining us today for a review of our fiscal 2003 first quarter financial results. Management will begin with prepared remarks followed by a question and answer session. And Kristy will instruct on you 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 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 now turn the call over to Ezra Dabah Chairman and Chief Executive Officer

Good morning to all and thanks for joining The Children's Place conference call. Seth Udasin our CFO will begin by reviewing our first quarter financial results. I'll discuss the state of our strategic initiatives, Mario Ciampi will update you on operations and Amy Hauk will speak about our merchandising trends during the quarter. As always, we'll be happy to take your questions at the end of our remarks.

Seth?

Good morning everyone. During the quarter The Children's Place opened 19 new stores. As of May 3rd, 2003 we operated 662 stores in approximately 2.9 million square feet or average 4400 square feet per store.

In the quarter net sales increased five percent to 181 million dollars from 173 million dollars last year. Comparable store sales for the first quarter decreased 13 percent, versus an 11 percent decrease in the prior year. The first quarter comparable store sales decrease was primarily the result of 14 percent decrease in the average transaction size, due to our decision to lower prices.

I'm pleased to report that our strategic initiatives have been successful in growing units per transaction and also resulted in a two percent increase in comparable store sales transactions for the first quarter. We achieved these results without anniversarying the Play Still event we ran last year.

Gross profit in the quarter decreased to 38.6 percent this year, from a record 45.7 percent last year. This decrease was primarily the result of higher mark downs and occupancy costs. Mark downs in the quarter were higher than last year, primarily due to severe winter weather and the challenging external environment.

To address these issues we were proactive in taking mark downs to ensure a clean inventory position throughout the quarter. The higher occupancy cost that resulted in 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 lower than last year, as a result of our strategic decision to lower prices.

SG&A expenses as a percent of sales increased 160 basis points to 28.4 percent. This increase was primarily due to our decision to invest more store payroll dollars in customer service initiatives and associate training as well as other store expenses.

Partially offsetting the increase were insurance proceeds and lower pre-opening costs. Depreciation and amortization increased 50 basis points versus last year, as a result of the decline in comp store sales and increased depreciation related to new store openings not yet producing average store revenues.

Net income for the first quarter was 5.5 million dollars, versus net income of 15.2 million dollars last year. On a per share basis, we earned 21 cents in the first quarter, versus 56 cents last year.

Moving on to our balance sheet. We ended the quarter with approximately 47 million dollars in cash and no long-term debt. During the first quarter we amended and renewed for three years a credit facility with Wells Fargo, which provides for borrowings up to 75 million dollars. The facility also contains provisions to increase borrowings up to 120 million dollars, subject to certain terms and conditions.

Total inventory of cost is approximately up 41 percent from last year on a 22 percentage square footage increase. Inventory per square feet is up 16 percent compared to last year however it's still below 2001 levels.

It's important to note that inventory per square foot at the end of the first quarter last year was down 21 percent, and we believe our sales results last year were negatively impacted by our low inventory levels.

Our inventory position is clean heading into the second quarter, and in fact we own approximately 50 percent less old seasoned merchandise per square foot than we did at this point last year.

A larger percentage of our inventory this year is invested in basics, and we are comfortable that our go forward inventory level is appropriate to support our lower average unit retail prices.

Looking ahead, we remain confident that our business is moving in the right direction, as evidenced by our improved sales and transaction trends, particularly over the last nine weeks of the quarter. While we believe business trends will continue to improve as our strategies further take hold, given the early stages of our turnaround and the challenging retail environment, our outlook remains cautious. And therefore we do not believe it prudent to provide earnings guidance at this time.

With that said, a few items worthnoting. We expect to open approximately 20 stores in the second quarter, with about half of them opening in the last two weeks of July. The remaining 11 stores of the 50 planned for the year are expected to open during the third quarter. Capital expenditures for fiscal 2003 are projected to be approximately 25 to 30 million dollars. And we believe the tax rate in the second quarter will be 39 percent, the same as in the first quarter. That concludes my remarks.

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

Thank you, Seth. We're pleased with the progress we made in the first quarter. With comparable store sales trending significantly better as the quarter progressed.

We are further encouraged by the two percent comparable store transaction increase we experienced in the first quarter.

As Seth mentioned it's important to note we achieved these results without rerunning one of our major promotions event last year our play still event.

We made progress in our strategic initiatives and they remain on track yielding positive results in the following key performance indicators as compared to last year.

Customer conversion rates are on the right.

Units per transactions are increasing.

Inventory levels are now well positioned to support our business.

Our in-store return is faster.

Our product flows and target yielding timely flow and execution of our new lines.

Our comp trend is headed in the right direction, and most importantly comparable store transactions in this challenging environment increased nine percent over the previous Easter selling season.

Our merchandise assortment has improved. We're listening intently to what our customers are telling us about their needs and the changes we are implementing are based on what they tell us.

We are concentrating on the following initiatives: A continued commitment to deliver unique merchandise, value prices, as the premise that distinguishes The Children's Place from its competition. Our customers understand this basic formula.

A determination to drive top line sales by offering competitive assortments through better editing of our merchandise lines.

A simplified pricing program of everyday best values with fewer coupon promotions and more emphasis on the value we deliver relative to the competition.

And an improved grommet as far as style and material are concerned.

A better shopping experience and enhanced communication with our customers, to strengthen our merchandising message and further leverage The Children's Place brand.

A commitment to increase the level of service in our stores and in-store initiatives designed to give our teams a means to fulfill these expectations.

Our executive team is spending considerable time in the field taking the messages to our store teams, paying close attention to our customers and monitoring the competition.

Our marketing strategy focuses on intensifying our brand awareness among customers and reinforcing proven traffic drivers.

We believe that The Children's Place brand is uniquely positioned to capitalize on the ongoing shift to value, rising requests for quality and growing style sensitivity expressed by the consumer.

We see many growth opportunities of our brand, as evidenced by our business in Canada, which continues to exceed our expectations, as customer acceptance of our brand is high.

We have learned to operate with greater efficiency as we grow in this market.

Our performance in the West and Southwest markets continues to outperform the chains and we believe there's significant growth potential in this brand for our markets.

Reflecting the progress we've made in our merchandise assortment, the performance of our new stores has improved and is exceeding our expectations.

In addition, we are further streamlining our operations to leverage our infrastructure while at the same time supporting our growth.

As we reflect on the challenges that we have been facing, we look forward to the many opportunities that lie ahead of us.

Our early signs of progress encourage us and we remain confident about achieving our long-term objective of making The Children's Place the number one brand in children's clothing.

We believe that we have the right formula and the right strategies to achieve this ambitious goal.

Thanks for your attention. And now I'll turn the call over to Mario

Thank you, Ezra. During the first quarter we opened 19 stores, 16 in the U.S., three in Canada. And in addition we remodeled two stores and expanded one.

We're on target to open approximately 50 stores for the year, 40 in the U.S. and 10 in Canada. We project we will open approximately 20 stores during the second quarter, with the balance to open during the third quarter.

Stores opened during 2002 are averaging annualized sales of approximately one million dollars. A slight improvement from last year.

The stores opened during 2003 are producing annualized sales of approximately $1.15 million. Comparable store sales are strongest in our West and Southwest region, producing low to mid single digit negative comp.

By property type our outlet stores are the strongest group.

It is note worthy to point out that comparable store sales results for the more recent classes of stores are performing better than our more mature stores, a trend we've historically achieved.

As we reported during the year-end call, we continue to improve our merchandise flows yielding timely deliveries and complete (inaudible) for the introduction of our new line.

We've not seen any interruption in our manufacturing process due to the SARS virus, we'll continue to monitor the effects closely.

Our Canadian stores performed very well with sales exceeding plan and unit sales approximately 25 percent higher than U.S. stores.

We are on course to open approximately 10 stores and reach profitability for the year.

Our E commerce business is gaining deeper acceptance as we experience sales growth of approximately 50 percent for the quarter compared to last year.

We now operate 17 stores in our new technicolor prototype in the U.S. and are pleased with the results. These stores produce sales of approximately 10 percent ahead of plan for the quarter, significantly above the balance of the chain.

Additionally, these stores experienced a higher average -- the highest average dollar sale and higher average unit per transaction than the balance of the chain.

Feedback we received from our customers indicate a very favorable response for the new prototype.

Our new store prototype will further enhance the improvements we're making in our merchandise, elevating the total customer experience.

As we discussed during the last call, our efforts will be heavily focused this year toward growing the transaction count and conversion rate at all of our stores.

Our efforts have begun to pay off, with positive two percent comp transaction growth for the quarter, and then improvement in our conversion rate.

We are pleased with this early turnaround performance and remain very focused on our transaction goal.

I will now turn the call over to Amy.

Thanks, Mario. While the quarter started out rather tough we believe our spring and summer deliveries are beginning to hit their strides.

The strategies are beginning to hit their strides. It's been incredibly rewarding to see a lot of our hard work from our merchandising and design perspective has begun to pay off. And as Seth mentioned earlier inventories are well positioned to support the business going forward.

Our strongest performing business for the quarter was Newborn (ph) which posted a positive low single digit comp. The performance in Newborn was driven by the expansion in Layette and Stretchie and the strong business in Newborn boys area.

We also saw strong builds towards the latter half of the quarter by baby boys which was driven by bottoms and underwear. Accessories which has been a challenging business due to over assortment in the past has posted a strong come back with a tighter assortment focused on category dominance and pricing. Examples include flip-flop, sunglasses and hair accessories.

Additional successes for Q1 were the Easter dressy line, our play look which allows the customers to buy a outfit at a great price, our three in one jacket which was a company program and graphic Tees (ph) in boys. In general our basic categories have seen tremendous growth over last year across the brand.

Initial reads on summer one has been are promising with good performance in multiple choice program which runs across the company as well as our place look short all and matching T and baby. In boys graphic Ts and cargo shorts have been strong along with Polos which are also performing well in big girls as a sleeveless style

In girls the belted shortened escort and a in dress category have been strong along with net halter top.

In Newborn we've seen great response to reintroduction of our tiny T (inaudible) big idea which used to be a staple in that business.

In accessories we continue to see sandals, flip-flops and sunglasses do well.

Today we set in store our Americana (ph) Capital that includes our famous five dollar T program along with an assortment of fashion items and accessories. This is followed by our summer two line which is in store the week after Memorial Day, infusing our stores with a hit of fun, hot color with a tropical serve feel, building on our successful summer one categories and key items.

To drive traffic and build customer awareness in the first quarter we dropped our Easter magalog with the flip-flop postcard. We also held a friend's and family event at the end of March and we're pleased with the results.

We're building on our spring marketing successes into Q2 with summer one mailer which dropped April 30th and a magalog which hits home at the end of May.

In conclusion, while we're pleased to see the customers starting to react to our new merchandising strategy, we still feel that this is an evolutionary process, not revolutionary. And we look forward to creating a strong, consistent and long-term relationship with our customer as we continue to build on our successes and refine our strategies going forward. Thanks.

I'll hand the call back over to Ezra.

Thanks, Amy. And we're now, we'll be happy to take your questions.

If you would like to ask a question, press the star 1 on your touch-tone telephone. To withdraw a question that has already been answered, press the pound sign. Once again, to ask a question, you may do so by pressing the star 1 on your touch tone phone.

We'll take our first question from the side of Kimberly Greenberger with Lehman Brothers. Please go ahead

Good morning. I was wondering, Seth, could you comment on your mark down rate, historically where has it been? It looks like based on your pattern by quarter last year that it saw some deterioration in the second quarter. So I'm just wondering, as we move into the second quarter this year, are we sort of anniversarying substantial markdown rates and sort of for a more broad perspective what are the variables in play that could move your comp closer to flat or even slightly positive? Obviously one of those things is customer traffic, thats clearly moving in the right direction. Could you just talk to us about what are the other variables there

Regarding mark downs and how we've trended in the past, second quarter, yes, was substantially higher last year than the prior year's and was probably a record second quarter for us. Actually, the remainder of the second, third and fourth quarters last year I would believe were record high marked down rates for us. The best quarter would be in the first quarter. We will be anniversarying these very high mark down rates as we hit the second, third and fourth quarter

Okay. Great.

And as we also said, we're much cleaner as we're going into the second quarter this year than we were last year at this point.

Okay. So we have -- can you just talk to us about the interplay between anniversarying the very high market down rate versus bringing your average unit retail price down here in the second quarter but hopefully selling more at full price? I mean what do you think -- obviously none of us has a crystal ball but what do you think the opportunity is in terms of average retail price in the quarter is it possible we might see the average retail unit price go newspaper the second quarter?

We believe the merchandise is much better than we had last year, and even with the lower average price we are, believe we'll have better or more full price selling than last year. At this point, you know, I'd be cautious to guess at whether we would have strong enough full price selling so that the average unit retail actually is higher than last year. But I believe we are pretty aggressive on lowering the retails and it would have to be substantially almost all full price selling to offset last year's marked down rate.

Great. Ezra, you mentioned that there was the play still bounce back proceed more in Q1 you chose not to anniversary and traffic improved despite that. Can you talk about second quarter promos, what did you do last year? Are you going to be anniversarying all of those promos this year or are there certain ones you're not going to anniversary?

Second quarter of last year -- second quarter is usually not a very promotional month for us to begin with. And it wasn't last year. And it's going to be somewhat lower this year. One thing that's really working for us, raising our image and give us the opportunity to relate to the customer the new quality message and new price message and all the other value that we have is the magalog. And that's successful and we look forward to actually make that substantially higher than last year in the second quarter. The number of pieces being sent are higher. But in general, promotions are going to be somewhat lower than last year. Again second quarter is not a big promotional month.

Great. Last question on the SG&A side, Seth you're not providing earnings guidance for second quarter, but can you help us think about SG&A dollars in the second quarter, the SG&A dollars here in Q1 grew just over 10 percent. How do you see SG&A dollars working in the second quarter?

Kimberly, we're really not providing the guidance on it. Certainly we will continue the initiatives that we are doing and investing in customer service and associate training. We will continue also looking to reduce expenses wherever we can. And we'll prudently manage the SG&A line to maximize our business.

Okay. Thanks, Seth

Our next question comes from the site of John Valisdis with Buckingham Research, please go ahead, sir.

I wanted to make sure I heard something right. You said that stores opened in the current year are trending on an annualized rate of 1.5 million versus stores opened last year at about one million; is that correct?

We wish that would be the case. 1.15 million.

I don't know if you can but I think it would be helpful in terms of modeling if you could give us some kind of a breakout in the first quarter for the decline in the gross margin, how much was occupancy, how much was merchandise margin and if there's any other items in there. And then on the SG&A line, did I understand right when you said that you had received a positive benefit from insurance? If so, how much is that? And is that something that's going to continue going forward?

John, on the gross profit breakdown, we don't specify the amounts, but we do list them in order. So of our decrease in the first quarter, mark downs were the largest and were more than half of the decrease was due to mark downs. Followed second by the occupancy and third was the lower markup.

In terms of the insurance proceeds, it was money we received for the World Trade Center, business interruption, we will at some point in the future we believe will receive more, but at this point I do not know an amount or the timing.

And the amount was slightly in excess of a million dollars.

And just as a point, also, the World Trade Center store, prior to its last year, full year of operation, was earning in excess of a million dollars a year.

Okay. But you received that -- that's on the SG&A line, the million dollar benefit?

Yes.

Okay. All right. Thanks a lot and good luck.

Our next question comes from the site of Marni Shapiro with Merrill Lynch. Please go ahead.

Hi, guys. A couple questions. At what point, at what comp level do you begin to leverage your expenses? And at what point in the future does the lower price point or I guess lower IMU begin to flatten out? Is the fall product planned at a higher IMU because you're able to buy into the promotions?

In terms on the leveraging, I believe a comp in the low to mid single digits we would see expense leveraging.

As a reference to IMU, that has not decreased anywhere in the same levels as of our average unit decreased that's decreased very little in view of the fact that we continue to get the benefits from reduced costs. So the average, the markup is not going to be substantially reduced going forward.

And just following up then on that same question: I've noticed I think it's fairly obvious when you walk in the store and you touch and feel your product that your quality is significantly improved over a year ago. So where are you gaining that benefit? Is it different factories, different means of negotiating with the same factories, that you're able to take your prices down, just take a smaller hit on the IMU and then increase your quality?

One of the main things going through us right now is the reduced number of stores, reduced number of SKUs, our quantities per styles is substantially ahead of last year and that's been helping us a lot in reducing our costs. Of course, at the same time we are going to new countries. We are doing some pretty good business now in Africa, which is duty-free. And that's been helping us. And in general there's much less demand for -- much less demand in the supply. So that's continuing.

Great. One final question for Back to School. When do you set your first Back to School, what kind of marketing are you doing for it and where are you planning inventories for the fall?

For back to school we start our initial floor set in the middle -- we'll drop key items and uniform at the end of June. And then our first corset will be the middle of July for full Back to School. And we're planning marketing to support that. We're up against a Back to School mailer from last year. And we planned inventories commensurate with the drop in retail to be able to support retail sales. So we feel well positioned.

You said commensurate with the drop in retail.

Average retail. The AUR (inaudible). Exactly, to offset the drop in AUR. And as we said before average retail is down about 10 percent for Back to School.

Great. Thank you.

You're welcome.

Our next question comes from the site of Dawn Stoner (ph) with Pacific Growth. Please go ahead.

Just a follow-up question on the last AUR comment. You said that you're looking for AURs in the back half to be down 10 percent year-over-year.

Yes

I guess I was asking when you envision AURs to stabilize, because I thought strategy to lower pricing began in the fall of last year?

It did but it did not hit where the correct exact positioning we were feeling our way through that period of last year. We expect them to level out next year or spring of '04.

Just, to follow up on the SG&A comments, are you saying that you see the rate of increase in SG&A in two2 Q similar to the first quarter?

No, I did not give any guidance for what we expect in the Q2 for the first quarter. We prudently manage the expenses, we did not have the benefit of the insurance proceeds we're continuing to invest in our store experience so the customer has a better feel when they walk into the store and more customer service. We'll do our best to manage it, what we think is appropriate.

Okay. And then just lastly, on the girls business, I'm curious if you could assess your progress so far in repositioning that business specifically as it relates to changes to the product, where is it in relation to where you'd like it to be.

I think it continues to get better. And we feel like we make great strides. I mean I've said before that I think it's probably the one area or the one opportunity that we're continuing to refine. We've been pleased with the results so far with the newest summer line that's dropped and we feel like while we can still tweak and fine tune that we're getting closer, that we're closer. I'm happy with the product right now and how a lot of it is performing.

So as we look forward to back to school, your confidence level continues to rise?

Absolutely.

Great.

And that's always been our strongest division and we believe it will continue to be the strongest department.

Absolutely.

Thank you

Our next question comes from the site of Richard Baum with CSFB. Please go ahead.

Good morning, everybody. I have a few questions. One is, just clarification on the inventories going forward. I know this may be the third time, but inventories per square foot going into the second half are expected to be down about 10 percent in line with the AURs?

Inventory is expected to be, per average store, about 10 percent higher in units.

How about in dollars? . I thought Amy just said AURs down about 10 percent. Was she talking about units offsetting it?

Say it again, Richard?

I'm confused whether Amy was talking about AURs down about 10 percent. Was she talking about units offsetting it?

Say it again, Richard?

I'm confused whether Amy was talking about the units being up 10 percent to offset the dollars, the AURs being down 10 percent. The critical number is what are the dollars expected to be per store per square foot.

We expect dollars per square foot at the end of second quarter to be up over last year in the approximately 10 plus percent.

Okay.

And I guess that's to offset the lower average retails and we also had very low inventory levels last year at this time.

Secondly, could you talk about the current state of the super stores, the side by sides and dual entrance stores, how they're performing, what your plans are with regard to that prototype

I think we've said previously that these stores, the new prototype really obviates the need to create these double door entrances because the new prototype delineates by department and creates some of the advantages that the combo stores created. The combo stores continue to be our better performing stores. They tend to be our highest volume storms in bigger malls. Some places where we can definitely use larger square footage.

Fine. Lastly, a question for Amy. I know that a lot of the merchandising problems that you guys have had have been of your own making. Actually a lot of the problems have been of your own making. But competition I believe has gotten much more intense, as you had Old Navy recovering. You've got more Kohl's out there. More target more aggressive Wal-Mart, etceteras.

And I just noticed that the five dollar Ts, for example, Old Navy is already out with them so is Kohl's with their last cover. Any commentary you can provide us with about these competitors getting stronger, how you feel that what you're doing is really providing the customer with a point of differentiation because it's certainly not showing newspaper the numbers, vis-a-vis the numbers that they are putting up at the moment, particularly Old Navy.

Right.

It's probably something you know a little bit about.

Absolutely, it is. And they're tough competitors. I think it gets back to the unique positioning. I mean we offer specialty store experience, we hope, that we know that the store environment is conducive to servicing the customer.

Our merchandising skills, the neatness in our stores, the customer service, where we're positioned in the mall, along with the quality of our product. The visual, the marketing, makes us competitive with someone more competitive than someone like Old Navy and that's where it's unique.

So if you can look at it as competitive with the price of Old Navy but offering the quality, value and experience of a GAAP kids or Jamboree, we think that's what makes us special and we have been as Ezra mentioned we've been spending a lot of time out in the stores as a executive team meeting with the customers, talking with the associates, we've seen some positive builds and transactions and the feedback we're getting is the customer is starting to really recognize when they touch the product now that it's garment washed, they can't be the prices and we just need to continue to build on that and get the customer back into our store in a consistent basis.

Richard, this leap we're taking as it relates to our price decrease is really strengthening our competitive positioning, substantially. It would also be important to note that Old Navy, who is our foremost competitor, we find that we do very very well with them next to us. So -

Do those stores do better than the rest of the chain?

They do better than the rest of the chain when we are next to old Navy.

Okay. Got a new real estate strategy emerging. Thanks.

Our next question comes from the site of Dorothy Lakner with CIBC World Markets.

Good morning, everyone. Could we go back to the marketing that you did in spring and what you're planning as you go into the summer and back to school. You talked about the success of the magalog a number of times. Could you share with us the numbers that you're going to be mailing out and is that going up as we head into the back half of the year, just what are the numbers like there?

And also you talked about some positive trends in some of the metrics. Could you talk about where UPTs were, where they were in this quarter relative to last year, how the trend is evolving and also just the average dollar sale? Thank you.

In reference to magalog, directionally we're planning to send more pieces out because it's been successful, giving us incremental sales from the customers who received it. Again, marketing wise, we were substantially less promotional in the first quarter this year than we were last year. We intend to continue to lessen our promotions, as our everyday best value strategy takes hold. So you'll see less promotions going forward. UPTs are increasing quite nicely, as it relates to last year.

In general, we sell almost 4.4 units per average transaction, which is quite substantial in the specialty store arena. So we're making many mothers and many children quite happy with our merchandise. Bottom line is we're selling many more units than we have before.

What was that last year, Ezra?

UPT? 's it was approximately four

So it's gone up to 4.4.

4.35 is basically where we are for the first quarter.

Okay.

And again most of the indicators, as we look at conversions are up, everything is really heading in the right direction, Dorothy.

And again the absolute number of magalogs that you're mailing out relative to last year?

We don't usually share those specifics

But it will be going up for the back to school

It will be going up but many other things are coming down.

Okay. Thank you.

Our next question comes from the site of Kindra Devaney with Fulcrum Global Partners.

Couple questions, Amy you talked about a AI lot of things that were working, can you talk about what's not working in the summer line and how you're changing that going forward. And also on May business, you sound encouraged by it. Seems like you have enough inventory to drive a positive comp. Sort of what's your thoughts on that?

As far as what the challenges are and what we do differently, just in talking about hindsight in Q1, I think that we have, first of all, and even in summer, is in some of the big buys we stepped out on I think there's even additional upside opportunity, which is actually really exciting and supports even more of an opportunity to drive additional UPTs.

So there are a couple of styles out there that I could have stepped up and invested even more in and I felt like we really stepped up to the plate on most everything. So buying more of the big stuff. I think also continue to get more focused in girls from a flow and assortment standpoint. And I think we have an opportunity to drop Easter early. We were a little late on the back end, and I think that's going to be a volume opportunity for us next year. As far as challenges in the business currently, wovens have been a little bit of a challenge in category outside of the short category. Boys woven shirts have been a little bit tougher than we'd like.

So those are some businesses and girls graphics have been a little soft. So those are some businesses that we'll be continuing to tweak and refine.

So are the categories we made big buys that are obviously, what you're saying do well enough to drive your business or are the challenges going to keep your comps in a negative territory?

I think it's driving our business, I just think there was an opportunity to have it drive even more business. But again as noted from the inventory position, we feel well positioned. But I just think there was even more that I could have had

Kindra in reference to May, we don't share the sales data during the month but it's safe to assume that our positive trend is continuing.

Great. On the IMU, down to last year, I'm assuming your occupancy from my estimation was down about 150200 basis points was it safe to say that IMU was about 200 basis points going forward?

Kindra, we don't disclose that information

We don't disclose that information. Going forward, as Ezra said before, it will flatten out as we get to the back half of the year. It's FERL as we move forward

Even though prices are down 10 percent it will flatten out in the back half?

Yes

On the SG&A line it's notably less than the store growth which was somewhat surprising to me. I'm wondering, are there things that you're cutting that are sort of one time cuts are or these sustainable as you're going forward. I'm looking at SG&A growth versus that of store growth should that tick up towards the store growth or are there things you can continue to cut as the year goes on?

The only real one time thing in the SG&A quarter is the insurance proceeds. We - pre-opening was down year-over-year because we opened less stores this year than last year in the first quarter and the rest is just managing the expenses and doing the best we can

One last question the inventory up 10 percent per foot that's less than for the back half that's less than where you are now. Is where you are now on your plans and why does it get less so during the back half of the year

Can you repeat it again

The inventory increase you mentioned for the back half that's up 16 percent I'm wondering if that was planned that way, why it's decreasing as you get into the back half.

Well, I believe if you recall our numbers from last year, a lot of it is how we're comparing up against last year. We had some struggles last year. It's an issue of delivery times too we included our inventory merchandising trends that we are getting more timely deliveries and some of this is just the matter of the timing of those deliveries or when it hits the water even. But we think approximately 10 percent should be appropriate for our business beginning in the third quarter

Thanks very much. Good luck.

We'll take our next question from the site of David Koffo with Deutsche Management

Good morning. Couple questions, first one is just kind of follow up to Richard Baum's question on promotional environment. What I'm curious most about is really philosophical and essentially relates to the fact that the new pricing strategy was formulated a bunch of months back. And only just this week do we hear about a Wal-Mart with a serious inventory glut largely concentrated in apparel. I'm curious how you think about that dynamic.

And the second question is for Amy, just as it relates to your comments about the Newborn comp being I think a positive low single digit, and I was curious what that was up against last year. And if you can give any other color on any other categories and what percent of the mix the Newborn is.

David, Wal-Mart, of course, is substantial competitor on -- the biggest piece of the children's business in apparel. And almost no one can come close to their level when they're even at regular price. Of course the merchandise quality and everything else is substantially different than what we offer. We don't see Wal-Mart having to flush out some inventory hurting our business going forward. And we haven't seen that in some of our immediate competitors had to flush that inventory.

Okay. So that announcement comes out this week and it really, in your mind it really is not, they just are not kind of in your competitive path because you guys are in the malls because of the higher quality and the higher level shopping experience?

Yeah and based on past experience, when one of our competitors has substantially more goods that they need to sell out, that has not disturbed our business.

Great. How about the newborn question for Amy.

Can you repeat the question again?

I think you had called out newborn comps as being the stand outs, actually positive. And I was curious what they were up against last year and what percent of the business they are and other categories, what those comps were this year versus last.

Other categories. We're pulling the number for all wide for newborn. Actually newborns hits slightly 10 percent of our total contribution and we saw up point in contribution from its last year positioning. Other strong positive -- other categories that we saw in comps we actually saw some positive comp movement in three of our accessory, a couple of our accessory divisions.

So we saw some good growth there and we also saw growth from a general standpoint in the positive comp range in ready to wear it was driven primarily across the brand off our three in one jackets. Drove some good volume for us and high AUR.

All right. Do you have the comparison from last year?

I don't have it as a percent but I looked up, it was not -- it was not LIATT and Newborns did fairly well last quarter last year did better than the chain by several hundred basis points

If Newborn Sunday 10 percent of the business currently, first of all, can you give us a specific number there, I know you said it grew a little bit, what's the biggest percentage of the business which category is biggest?

It would be girls.

Okay. And is there an exact number for newborn percentage.

Eight to 10 percent give or take a little

One final question Amy could you remind me your experience over at GAP, Inc. was that focused on Newborn?

It was previously. I started at Baby GAP. And I was at Baby GAP for four years. So a little over four years and I ran Newborn for part of that time.

Is it fair to assume part of what is going on here could be just your own learning curve as it relates to the other categories?

I mean I also ran businesses at Old Navy and I ran all of the baby businesses. So no.

Thank you very much

You're very welcome.

Once again if you would like to ask a question, please press the star 1 on your touch-tone telephone now. We do have a follow-up question from the site of Kimberly Greenberger with Lehman Brothers. Please go ahead.

Great. Thanks. Just a couple of housekeeping questions. Can I get the total square foot at the end of the quarter, and also Seth can you let us know the 75 million dollar credit facility, is that securitized or not

Square footage at the end of the quarter two million nine hundred and twenty six thousand and yes it's fully secured facility.

Then lastly, on direct sales, Internet sales, can you comment on the level there in Q1.

We don't disclose the absolute level but we said there was a significant increase quarter to quarter.

Sequential increase from Q4 or a year-over-year increase from Q1 last year.

Year-over-year, first quarter to first quarter. It was about 50 percent. But as you know the E com business is a pretty big piece of our business

We have a follow-up from Dorothy Lakner from CIBC World Markets

Just a clarification Newborn category in year in the first quarter was just under 10 percent and it's up from eight percent last year?

No, it's just actually over eight percent it was up from seven percent the year prior.

Okay. Great, thank you.

We have a question from the site of Paula Kalandiak from Wells Fargo Securities.

Good morning. With regards to the magalog I know you stated you're moving away from doing coupons and other promotions besides your two semi annual clearance sales, but is there any kind of coupon or anything in that magalog?

Yes, there is a coupon in the magalog. We find that to actually drive our customers in. So the magalogs will continue to carry a coupon.

What is the exact benefit of the coupon? Is it like 20 percent

We do different things. Usually it's in the range of 15 percent off.

Okay. And then finally, I feel like we haven't discussed the credit card in a long time. Is there anything going on there in terms of the percent of customers using it or an increase in the average transaction of people who do use it or anything new there?

Well, the credit card customers continue to be our most loyal customers, driving more than three times the average customer in sales for the year. It's about the same, about 17 percent of our business last year and about 17 percent of our business this year, down on a credit card. So somewhat the same.

Thank you.

Once again, if you would like to ask a question, please press the star 1 on your touch tone phone. Once again, if you would like to ask a question, please press the star 1 on your touch tone phone. .

It appears we have no further questions at this time. I'd like to turn it back to management for any closing comments.

We thank everyone for your continued interest in our company. Seth and Heather are available throughout the day if you have any additional follow-up questions from our team. Thank you and have a good day.

Thank you, this concludes today's teleconference. You may disconnect at any time.