Children's Place Inc (PLCE) 2003 Q2 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. I would like to turn the program over to your host, Ms. Heather Anthony.

Good morning, everyone. Thank you for joining us today for a review of our fiscal 2003 second-quarter financial results. Management will begin with prepared remarks, followed by a Q&A session. The operator will instruct you on the procedure at that time. Before we begin today, I would also like to remind participants that remarks made by management today may contain certain forward-looking statements. These statements are based upon the Company's current expectations 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 will now turn the call over to Ezra Dabah, Chairman and Chief Executive Officer.

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

Good morning, everyone. During the second-quarter, The Children's Place opened 19 stores and closed 2. As of August 2, 2003, we operated 679 stores in approximately 3 million square feet, or an average of approximately 4400 square feet per store. In the quarter, net sales increased 24 percent, to $159.1 million from $128.3 million last year. We are pleased to report that comparable store sales for the second-quarter increased 3 percent, versus a 9 percent decrease in the prior year. The second-quarter's comparable store sales increased was comprised of a 2 percent improvement in comp-store sales transactions and a 1 percent increase in the average transaction size. We achieved this despite our strategic decision to lower prices. For the quarter, an increase in the number of units per transaction, as well as in the number of full price units sold, more than offset our lower price points.

Gross margin increased 330 basis points to 31.7 percent, compared to 28.4 percent last year, which we are especially pleased with given our commitment to higher quality and lower prices. This increase was primarily the result of lower markdowns and occupancy costs, partially offset by lower markup. Markdowns improved versus last year, due to strong customer response to our merchandise offering, which resulted in more full price selling and therefore less need to take markdowns. The lower occupancy cost is a result of leveraging our positive comp-store sales performance, and 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 40 basis points in the second-quarter to 35.2 percent. The increase was primarily driven by strategic investments we made in marketing to promote our brand awareness and increases in-store payroll to enhance our customer service. These expenses were partially offset by the leveraging of our corporate administrative payroll and lower medical expenses. In addition, the impact of lower pre-opening costs associated with the opening of fewer stores this year offset the onetime insurance proceeds received in last year's second-quarter. Depreciation and amortization decreased 40 basis points, as our comp increase enabled us to leverage increased depreciation related to new store openings. Net loss for the second-quarter was $9.4 million, versus a net loss of $10.2 million last year. On a per-share basis, we lost 35 cents in the second-quarter versus a 38 cent loss last year.

Moving on to our balance sheet, we ended the quarter with approximately $25 million in cash and no long-term debt. We are pleased with our in-store inventory turns and believe that our improved inventory position has helped our sales performance. Total inventory is up approximately 40 percent compared to last year on a 16 percent square footage increase. Inventory per square foot is up approximately 21 percent versus a year ago; however, it is still 14 percent below 2001 levels. We are very comfortable with the level and composition of our inventory, owning approximately 30 percent less old season merchandise on a per-store basis versus a year ago.

Looking ahead, we believe that our business is moving in the right direction, as evidenced by our improved sales and transaction trends. While we believe business trends will continue to improve as our strategies continue to take hold, due to the challenging retail environment and our flat comp month to date, our outlook remains cautious.

That concludes my remarks. Now I will turn the call back over to Ezra.

The ongoing execution of our strategic initiatives drove our performance in the second-quarter. Our focused merchandising offering, enhanced customer experience and compelling marketing are the solid foundation of our sustainable growth over the long-term. The following are the highlights of our second quarter.

Comp-store sales have steadily improved, getting back to positive territory in June and July. Comp store transactions increased 2 percent for the quarter, despite mall traffic rapid falling 4 percent according to NOTI (ph). (indiscernible) transactions continued to rise. We converted more shoppers into customers. Our new stores in the US are performing above plan, while our Canadian stores continue to exceed our sales expectations. And as Seth mentioned, we increased our gross margin by 330 basis points, even while enhancing the quality of our merchandise and reducing prices.

We are very pleased that our key performance indicators point in the right direction, and we look forward to building on this positive trend during the second half of 2003.

Turning to our strategic initiatives -- the merchandise in our stores this back-to-school Susan is on target and reflects the stated objectives of addressing all of a child's lifestyle needs. Customer response to our (indiscernible) product has been favorable and they are embracing the incredible value of our basics and key items. In addition, customers are appreciating the quality enhancements we have added to our garments. Our fashion, quality and value combination is key to setting us apart from the competition.

During the second-quarter, the appeal of our merchandise resulted in a 15 percent faster in-store inventory turn as compared to last year. And as Seth highlighted, we are in a much cleaner position heading into the third quarter than we were in the same period in 2002. Additionally, it is important to note that the elimination of our fall transition line gave us the added benefit of owning much less short-sleeved, short-legged inventory heading into the back half of this year, versus last year.

Our marketing efforts, combined with our focus on presenting a positive customer shopping experience, resulted in continued growth in both customer conversion and transaction growth. Our window displays are elevating consumer curiosity and drawing them into our stores; in fact, Place traffic trends were up 3 percent in Q2, versus a 4 percent decline in mall traffic. In addition to our in-store marketing, our (indiscernible) allow us to showcase our product as a lifestyle brand while communicating our unique value proposition. The (indiscernible) is having a positive impact, especially on our e-commerce business, which experienced significant year-over-year sales growth in the quarter.

At the store level, our culture continues to evolve from one of tasking to that of engaging the customer, as our store associates are performing to a higher standard of service. As regards to broader corporate initiatives, we are very excited with the successful launch of our Reading USA program, a national literacy campaign for children. As part of the program, we are devoting 5 percent of all our denim sales between August 8 and September 30 to the PBS television series Reading Rainbow, as well as to other national literacy initiatives. Reading USA programs will introduce children to literature, primarily through reading aloud activities. Our goal with this and other marketing initiatives is to give our customers a stronger emotional connection with our brand. This growing connection will enhance our brand value as well as contribute to long-term company performance.

In closing, I am pleased with the positive momentum our business experienced in the second-quarter. Looking ahead, our primary growth initiative centers on building productivity of our existing store base to maximize the profitability of our stores, and of new store expansion in strategic markets to complement our organic growth. While we are encouraged by the strides we have made, our outlook remains cautious, given the challenging retail environment.

Thank you for your attention. At this time, I would like to turn over the call to Mario, who will review our operations.

During the second-quarter, we opened 19 stores, 13 in the US and 6 in Canada. Additionally, we completed 5 remodels, 2 expansions and closed 2 stores. We plan to open 54 stores for the year and close 5, for a total net increase of 49 stores. Capitalizing on our success in Canada, we are increasing our openings from 10 to 14, and plan to open 35 in the US. Of the remaining 16 stores yet to be opened, 11 will open in the third quarter with the balance opening in the fourth quarter. All new stores will reflect the new Technicolor design. Sales results from our new Technicolor prototype stores are exceeding plan, and we continue to make operational improvements in order to produce a stronger bottom-line.

We are encouraged by the performance of our new stores. Our US stores opened this year are producing annualized sales in excess of $1.2 million, and stores opened last year are averaging annualized sales of approximately 1.1 million. By geography, (technical difficulty) sales were strongest in the Southwest and West, producing double-digit positive comps. All regions achieved positive comps with the exception of New York Metro. To address this challenge, we have established a cross-functional team to focus on restoring our highest volume region to positive comp territory. All property types achieved positive comps in the quarter, except for street stores, which are predominantly located in our New York Metro region.

We are also pleased that for the second straight quarter, comps were strongest in our most recent classes of stores, a trend we have historically enjoyed. Our Canadian stores continue to produce strong results. Stores opened last year are averaging annualized sales of approximately $2 million Canadian, with unit sales approximately 25 percent greater than an average US store. We have also seen our merchandise margins in Canada come very close to our normalized margins in the US.

In addition, during the second-quarter we opened stores in three new provinces. With a year under our belt in this new market, we are excited by the reception our concept has received and look forward to further establishing ourselves as the premier destination for children's apparel in Canada.

Results in the second-quarter in our e-commerce business significantly increased. A more stable site, greater merchandise commitments and a more aggressive marketing campaign all led to sales that greatly exceeded last year's results. As we announced earlier in the quarter, we began a relationship with Amazon.com that allows us to sell our product on their site and puts our brand in front of a new customer base.

Briefly touching on operations -- given the growing complexities of our business, from now on, we will strategically look at our business as three operating units -- Place USA stores, outlet stores and Canada. We believe that by making this split and dedicating specific teams to focus on outlets in Canada, we will see stronger, more profitable results.

Our outlet stores have always been among our highest-volume stores, and with greater attention we believe there is opportunity to maximize sales and operating margins. With 55 outlets in operation, we believe we can double the size of this business within four years. In Canada, the focus will be on aggressive growth, highlighting our fashion and value proposition and addressing the specific needs of the Canadian customer.

Looking ahead, as Ezra mentioned, our primary growth objective is to increase the productivity of our existing store base. As a result, our real estate strategy will emphasize existing store economics first and new store growth second. This strategy will most likely include a modest amount of store closures on an annualized basis and repositioning of marginally-profitable stores. We will continue to closely monitor mall traffic patterns and performance trends in and outside of the mall to determine the best possible placement of future stores.

Given our concept's broad appeal and the opportunity for expansion in under-penetrated markets, such as the West and Southwest, we plan to open approximately 50 new stores in 2004, similar to this year. As reported today, many of the key performance indicators in our business are returning to positive territory -- comp sales, comp transactions, ADS (ph ), UPTs -- all while delivering a targeted reduction in our initial price points. We believe this trend bodes well for our future performance and are working hard to achieve even stronger results in these key measurements of our business.

Thank you, and I will now turn the call over to Amy Hauk.

Today I would like to talk to you about how the business played out for Q2, as well as the initial leads that we have seen in our back-to-school product. Overall, the customer is responding well to the Children's Place value equation, which offers a well balanced assortment of fashion and basics and a commitment to higher quality and service in our stores -- all at a price which makes our product accessible to everyone.

For Q2, including back-to-school, we worked hard to invest in our business more appropriately, with a clear focus on our product pyramid. We are seeing the results in stronger in-stock positioning in key items, higher regular priced sell-throughs and faster turns in our fashion product. We believe that for summer and back-to-school, we delivered a healthy balance between fashion and basics.

From that foundation, we built multiple investment strategies to support this product balance, with attention to the uniqueness of each of our businesses. We have also made strides in our inventory management initiative, buying in increased (indiscernible) has allowed for various allocation strategies to be put into place. We are now holding a higher percentage of goods and slowing, based on sales history, current performance and future demand curves. This is enabling us to respond to the business with greater precision to consumer wants.

Our strongest-performing business for Q2 was accessories, which posted a positive midteens comp. Our newborn division posted a high single digit comp, continuing to show strength as we capture the newest entrants into our market. Our girls business was in line with the Company, with the boys area generating a negative low single digit comp for the quarter.

As noted on our July sales call, we did see improved performance in the boys area towards the latter half of the month with the drop of the back-to-school line. Categories of business that performed well for the quarter were our company-wide multiple-choice program, comprised of knit separates targeted for customers stocking up for camp and summer playwear needs. The Americana collection is strong across all divisions. Other performers to note were (indiscernible) and Fashion (indiscernible) Newborn, as well as halters, capris and shorts in girls, and graphic tees and cargo in boys. In accessories, we saw strong performance across the board.

For back-to-school, we are pleased with the ambience of our stores. We maximized our new merchandising calendar to deliver a cohesive line in a timely manner, allowing us to speak to our customer with a strong, singular voice. We have also created a marketing and window package that enhances and highlights the product messages of the season.

Moving on to some early product reads for fall -- denim, which is performing well above last year in all divisions, the customer seems to be responding well to our expanded assortment of washes and fits. Corduroy as a fabrication has been strong out of the box, and we're seeing that translate into strong sales in our five pocket skirt, cord pant and (indiscernible) core fashion group in girls, as well as all of our corduroy accessories.

Our key item tees in all divisions have done nicely, led by the Solid Rhinestone Crew and stripe and solid (indiscernible) and girls, as well as our classic winter tee in solids and stripes in boys. In girls, the customer is responding enthusiastically to our fashion, especially those items that are embellished or pieced; and in boys, cargos, along with graphic tees, continue to drive the business in addition to denim and fleece. It's all about cargo.

In accessories, we continue to see healthy performance across all categories of the business. Back-to-school categories of business that have started slow include sweaters and active elements, including velour in girls and our wind pant in boys. Our fall 2004 set will be in stores at the end of next week, creating a natural transition and building on the key drivers and color palette of fall lines. In closing, I wanted to reiterate our commitment to offering fashion and basics that deliver true value and are accessible to a broad range of customers, of staying the course with our merchandising strategy, yet maintaining the flexibility to continue to evolve and grow with our customers.

Thanks, and I will now hand the call back over to Ezra.

Operator, we will now open the call for questions.

(CALLER INSTRUCTIONS). Kimberly Greenberger of Lehman Brothers.

I have a question first for Seth. In the growth margin line of 330 basis points, you indicated it was lower markdowns, lower IMU and some leverage on the occupancy. If you could net the overall merchandise margin for us, and tell us order of magnitude between merchandise margin and occupancy -- was it like a 50/50 improvement in each, or was it weighted toward one or the other, without getting too specific on it?

It was mostly driven by merchandise margin, more than 2/3 of the improvement were in merchandise margin.

So I guess my question is that it seems like in terms of restoring operating margin, it really will be a per square foot productivity issue -- in other words, getting the comps so that details per square foot return to more normalized or historical kind of levels. Is that a fair assessment?

Yes.

Looking back historically, it looks like you guys have carried roughly $40 or so in inventory per square foot going into the third quarter, at least back when you were doing 350-$400 per square foot. And it looks like even with the increase this year going into the third quarter, you are still only carrying about $29 in inventory per square foot. So I guess my question is to either Amy or Ezra, do you feel like you have got enough inventory, given the 10 percent or so price reductions that we are looking at here in the third quarter, to really drive a comp here in the third quarter, and is it possible that maybe not having enough inventory is leading to the kind of flat comps here we have seen in August so far?

We are perfectly positioned (indiscernible) the back-to-school season, and very well positioned to drive positive comps for the third quarter and for the fourth. The softness that we have seen this particular past week we think is somewhat general. We came into the month pretty strong. As you know, the last couple of weeks of July were very strong for us, mostly driven by back-to-school merchandise. So we feel that the inventory level, the content of the inventory, the creativeness of our marketing -- everything to support it was absolutely perfectly to achieve positive comps in the second half.

It sounds like you are pretty encouraged. Is it possible that a promotion in the second half of July maybe pulled foreword, some sales from the beginning of August, and we might see some improvement as we move through the month?

We think we are going to see improvement as we move through the month, because in the past few years, we have seen back-to-school get later and later. We believe that we will certainly see some improvements to the comp that we ever experienced in this first week, as we move forward, closer to the back-to-school season.

Amy, as you look at your merchandise content, it sounds like there are a number of categories that are performing really well. Can you talk about ownership -- inventory ownership -- and is that inventory ownership distorted to the categories that are performing well so far?

I think in general, yes, we feel good about that. We went aggressively after denim and that is paying off for us. Probably if I picked one area where there is continued opportunity we are looking at go forward season is net submit tops, and we have seen some strong performance. And in the girls area, we probably have a little bit of opportunity there. But we basically feel really good about where our inventory is performing, and the turns that we are getting relative to where that product fits in the continuum of either basic or fashion. We are very pleased. And it is going to help to maintain a clean position going forward in the stock, too.

So what you are saying in girls knits is that there is an opportunity to own more in that category?

(multiple speakers) an opportunity to own more in it knit tops.

John Zolidus (ph) of Buckingham Research.

Could we talk a little bit more about the month to date comp trend? It seems like, given the easier comparison and the fact that you are lapping some of the lower initial price points now, that it is surprising to see comps flat versus beating up 7 in July. If I remember correctly, you also did some extra marketing and other initiatives that put people into the stores in early August last year. I wonder if you could talk about some of the factors that are coming into play, or shed a little bit more light on the change in the trend -- if it is a traffic issue or what is going on?

The change as we see it is somewhat traffic related. We think it's actually somewhat across the specialty arena, as far as we have heard to date. There is really nothing that we pulled in July that we are giving back in August. It just so happened that as we look at last year, our first week in August was the strongest comp week that we had. So from that point of view, our comps are somewhat weaker last year towards the end of the month -- much easier comparisons.

Do you recall what made August, the beginning of August, so strong last year?

Probably dropped on (indiscernible), and then we had this 20 or $100 promotion, and that was the first week in play. Likely that.

That's definitely helpful. That's something that you can point to. On the SG&A, last year you had a onetime benefit related to insurance proceeds -- is that correct?

Right.

Can you quantify that?

Last year, we have received, I think, it was just over $1 million in insurance proceeds\; we had a loss in our West Coast DC the prior year, end the insurance proceeds came in last year's second quarter.

Looking forward, the payroll and other marketing expenses that you cited for some of the increase -- is that going to continue to increase on a year-over-year basis?

We are going to prudently invest where we think it is necessary. We have identified both marketing and store payroll as areas that we think is a good investment. And we will, as we move along through the year and into next year, invest what we believe is the appropriate dollars to support the business.

Dawn Stoner of Pacific Growth Equities.

About the inventory planning going forward, given the weaker same-store sales trends month to date, I'm wondering if you could share with us how you expect the (technical difficulty) to look at the end of Q3?

At this point, we are projecting inventory to be up approximately 10 percent at the end of Q3, still down about 5 percent versus the prior year.

Second, just looking at the gross margin improvement this quarter, I am wondering if you could comment on what you see as the longer-term gross margin and operating margin potential of this business, given your new pricing strategy? Do you see the potential to reach your historic margins, or is this just a lower margin type of business?

I think based on the decisions we have made and the strategies we are implementing, we will not achieve the historical margins of the low 40 percent range, but we would certainly think the high 30s to about a 40 percent margin is achievable.

What sort of sales per square foot would you need to reach those new targets?

In the mid $300 range.

Marni Shapiro of Merrill Lynch.

I just want to follow up on the whole August discussion first. A year ago, you ran your Friends and Family in August, if I am not mistaken. And this year you ran it in July. Would you just compare week two-week so we have a better feel of when it hit July and when it hit in August?

A year ago Friends and Family was in September, and this year it was in July. And I must say that to some extent it was somewhat of a disappointing Friends and Family event this early July, because maybe it was too early.

I shopped. So last year was in September -- what week in September?

It did not really add that much to our July performance.

What week was it in September?

I believe second week.

I had in my notes from earlier this year -- it could have been during your fourth-quarter conference call -- you guys talked about entering the back half of the year significantly less promotional than last year, and yet you have the Friends and Family, you have the hall pass running and things like that. Could you talk a little bit about the plans going forward, and, I guess, why you still plan to keep all of these drivers in place, and any changes we should see for the back half of the year that you're adding, taking away, etc.?

As we look back at our second quarter, our promotional activity in total was actually down to last year. So while we heated it up somewhat towards the end of July, we had very little, if any, promotional activity throughout the first couple of months of the quarter. So in total it is down, and as we go forward through the second half, we believe that we will continue to see that somewhat down to last year. At the same time, everybody else is -- it's a very competitive arena out there. Everybody is doing different things to bring customers to the stores, and we will continue to do what we need to do to get them into ours.

Any ideas or any thoughts about what is happening in the New York metro area?

That's a tough one. It has been down now for almost a year, and as you know, we used to tout that as being our very best region for many years before that. We are looking at it from all different angles and doing our very best to turn that around, and we look forward to see good results as we move forward.

Richard Baum of CSFB.

It's Tracy Kogan (ph) filling in for Richard. Amy, could you talk about some of the things that will be flowing in for your Fall 2004 set next week? And number two is a little broader. Now that you have been here for about a year, what are the two or three things that you feel you have left to do on your merchandising agenda?

I think for fall we actually will be flowing -- it gets a lot richer and textural in a more aesthetic sense than what you're seeing in fall one. We also layer in a lot deeper color palette, and we actually are building on corduroy -- which we have a very strong statement in now -- with some new body silhouettes. We will be introducing (indiscernible ) in girls, and then additional sweaters and outerwear, which is a new opportunity for us this year over last year. Also a lot of accessories to create newness and change. So we are definitely layering on fall to some additional washes and treatments in denim as well, and more fashion delivery. So that is the gist of what is hitting for fall 2, so (indiscernible) feel richer, warmer, more traditional in fall 2. And then the two or three initiatives -- I think we feel good about our merchandising strategies, and it is going to be refining those strategies -- and it's actually going to be focusing on building the good, better, best strategy in our business, continuing to layer on that top tier. And what I don't mean is raised prices, but creating product and businesses that can really speak to enhancing the customer experience in our store. And then working closely with allocation and planning to synch up those strategies as we continue to fine-tune those going forward to synch up with merchandising. We are also really focused on newborn as an opportunity in the baby business that's going forward as well.

Paula Kalandiak (ph) of Wells Fargo.

My first question is, I noticed that your jeans you are offering -- you're giving 5 percent to -- on jean purchases -- I forget what the organization was, but I was --

Reading USA.

Can you explain how that works for you guys, in terms of what it costs you?

It is going to cost us approximately $1 million during the third quarter. We are giving out 5 percent of our denim sales, devoting that to literacy; specifically, we are supporting Reading Rainbow, which is a PBS show which we will be sponsoring and addressing there, and doing many co-marketing with. And we look forward for that program to continue to evolve, as we go forward, in getting us more communicating with our customers.

Is there any way to quantify what you see as the benefits to you?

Again, we think that the emotional connection to our consumers of us doing well, them doing well, and not only in the store but also outside of the store, is extremely important. We believe that we will be exposed to many millions of people with this new initiative, so the brand name is going to build and develop. We think it is an extremely creative way to build our brand.

Amy, when you said that you were featuring corduroy gauchos in the fall 2 line, I was wondering -- have they been purchased as a key item or as a fashion item?

As a fashion item, but actually with a little more depth than a fashion item. But they were definitely purchased as a fashion item as a statement, and you know they are everywhere. So we actually feel good about it. We are taking a stand on them, but I think we have managed the risk potential very well (multiple speakers) strategy.

Dorothy Lakner (ph) of CIBC World Markets.

I wondered if Mario could talk a little bit about the new prototype stores and how those are doing, how they are comping relative to the older store prototype? And next, if you could also talk about the number of transactions you are seeing in August. I know the comp is flat, but you have been seeing some better trends in transactions? And lastly for Amy, just if you could give us the sales mix of business by department from the second quarter?

I will start with the prototype question. None of them have reached comp status yet, so they are not in the comp category. But we measure them against our plan, and they are exceeding plan by percentage points in the low single digits, and that is significantly better than the balance of the chain, which year to date is mid single digits down to plan. And then as we look at some other key metrics, the new prototypes are producing a higher ADS and higher UPTs, so we are very encouraged.

Mario, how many of them are there right now -- all of the Canadian stores are in that prototype -- but in the US, how many are there relative to the rest of the chain?

Approximately 32, and then I think comp transactions were up last week, and they are a little down this week.

As far as breakouts in the business, we saw pickups from -- in contribution and mixed from newborn and accessories -- newborn picked up about a point in contribution, accessories 2 points in contribution, and that really came out of the boys and girls mix, but it was very minimal. So girls still sits at close to 50 percent of the business, boys a little less than 30, and then the additional comprised of newborn and accessories.

(CALLER INSTRUCTIONS). It appears we have no further questions. I will turn the program back over to our host for any concluding remarks.

That was short this morning. Thank you, operator. We thank everyone for your continued interest in our company. Seth and Heather are available throughout the day, should you have any additional follow-up questions. For many of our team, have a good day and we look forward to see you shopping for all of your back-to-school needs in our Children's Place stores. Thank you.

This does conclude our conference call for this morning. You may now disconnect your lines, and thank you for participating.

(CONFERENCE CALL CONCLUDED)