Children's Place Inc (PLCE) 2003 Q3 法說會逐字稿

Good day. (OPERATOR INSTRUCTIONS) I would like to turn the program over to your host, Ms. Heather Anthony.

Thank you, and good morning everyone. Thank you for joining us today for a review of our fiscal 2003 third quarter financial results. Management will begin with prepared remarks followed by a question-and-answer 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 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.

What 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 Childrens Place conference call. I will begin the call by providing you with an overview of our strategic initiatives and growth plans. Seth Udasin, our CFO, will then review our third quarter financial results. Mario Ciampi will update you on our operations. And Amy Hauk will highlight our merchandise strength. As always we will be happy to take questions at the end of our remarks.

We're very pleased to report the financial results for this important third quarter. We continue to build positive momentum with our cohesive brand message to the consumer, our merchandise assortment, our marketing initiatives, and our dedication to the customer experience. I will briefly touch base on the third quarter highlights.

Sales grew 29 percent to more than 223 million. Comparable store sales increased 14 percent. Gross margin increased 530 basis points. Earnings per share increased to 43 cents, seven times greater than the 6 cents reported last year. In addition, comp store transactions increased a strong 16 percent for the quarter.

We continue to convert more shoppers into customers. Our new stores in the U.S. and Canada are performing above plan, and our cash position of 44 million is strong as we enter the biggest quarter of the year.

Our merchandise assortment this back-to-school season was key item driven. Basics as a category was sharply priced and of superior quality. Our fashion assortment (indiscernible) right with strong sell through rates. We're also pleased to note that our rate of merchandise returned declined, reflecting the quality and fit of our garments.

On the marketing front, we continued to introduce new customers to our brands. Our magalows (ph) have proven to be an effective marketing tool, and the introduction of our Hopast (ph) and subsequent gift pass promotions were received very favorably. Our direct-mail campaign, combined with our compelling window displays, resulted in a 6 percent growth in customer traffic for the third quarter. As a comparison, overall mall traffic declined by almost 4 percent according to NRTI.

We also pleased to note that this year we sold significantly more basic denim jeans per average store versus last year, as a result of our enhanced attention to quality and value, as well as our successful Reading U.S.A. charitable benefit drive.

At the store level our customer service continues to improve. We're benchmarking our performance and are encouraged by the steady improvement of the past few quarters. Customer conversion rates are a good measure of the customer experience, and we are very pleased to see this key performance indicator rising.

We are investing in our planned growth by further strengthening our management team, and have made significant new hires during the past quarter. Our commitment to attract and retain the best talent to support our growth is an important cornerstone of our business philosophy. The following are our new and talented executives. Brian Kleinberg, a Senior Vice President of Marketing, brings a wealth of knowledge and experience to our organization, and is charged with steering our overall marketing strategy and executing programs that build long-term brand equity.

Dr. Elaine Eisenman, Senior Vice President of Human Resources and Administration, will focus on linking our talent and performance to our strategic objectives so that we are well-positioned to achieve our goals. Reporting to Elaine is Glenn Kaufman who just joined as Vice President, Chief Learning Officer, responsible for leadership development and building our training strategies. Glen will be an important partner to our store operations team as we strive to offer the very best in customer experience.

We are off to a great start with the positive customer response to our holiday one merchandise assortment, following the successful back-to-school season. The consistency demonstrated in our execution is key to building customer loyalty for the Childrens Place, as Amy will describe shortly.

An important role of our Company is to increase the productivity of our existing store base. We also continued to invest in strategic new store openings, primarily in under penetrated U.S. markets and Canada. It gives me great satisfaction to announce that our first stores in Puerto Rico will be opening in the spring of 2004. We believe that The Childrens Place brand will do well in that market, as it is a perfect fit from a demographic and price value perspective. Mario will provide you with more details shortly.

In closing, we believe that our performance this past quarter represents a realization and transformation of our ongoing strategic initiatives. The success we enjoyed reflects the tremendous effort and excellent teamwork across the Company, for which I want to thank our entire team. I also thank our shareholders for their continued support and interest.

I will now turn the call over to Seth, who will review our financial results.

Thank you, Ezra. During the third quarter we opened eleven new stores and closed one. As of November 1st, 2003 we operated 689 stores in approximately 3.1 million square feet, or an average of approximately 4500 square feet per store. In the quarter net sales increased 29 percent to a record $223.3 million from $173.4 million last year. Comparable store sales for the third quarter increased 14 percent versus a 21 percent decrease in the prior year.

The third quarter's comparable store sales increase was primarily the result of a strong 16 percent increase in the number of comparable store sales transactions. This was partially offset by a 2 percent decrease in the average transaction size due to our strategic decision to lower prices.

We're very pleased with our gross profit performance in the quarter, which increased 530 basis points to 40.9 percent this year from 35.6 percent last year. Similar to the second quarter, our gross margin results are even more encouraging given our commitment to higher quality and lower initial prices. In order of magnitude, this increase was primarily the result of lower markdowns and occupancy costs, partially offset by lower markup.

Markdowns decreased substantially versus last year due to the continued positive customer response to our merchandise offering, which resulted in higher full priced sell throughs. 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 a strategic decision to lower prices.

SG&A expenses as a percent of sales decreased 100 basis points to 27.8 percent. This decrease was primarily due to our ability to leverage our central and store payroll, even while making strategic investments in marketing, our management team and store payroll.

Depreciation and amortization decreased 90 basis points, as our comp increase enabled us to leverage increased depreciation expense related to new store openings. This resulted in operating income of $19.1 million compared to $2.5 million last year.

Our operating margin increased 710 basis points to 8.5 percent compared to last year's 1.4 percent. Net income for the quarter increased $10 million to $11.6 million versus $1.6 million last year. On a per-share basis, we earned 43 cents versus 6 cents last year.

Moving on to our balance sheet, we ended the quarter in a strong cash position with over $44 million compared to $14 million at the end of last year's third quarter. In addition, we have no long-term debt or any borrowings on our revolver.

Total inventory at cost is up approximately 14 percent from last year on an 11 percent square footage increase. Inventory per store at cost is up approximately 4 percent versus a year ago. We are in a very clean inventory position, owning approximately 30 percent less old season merchandise on a per store basis versus a year ago. We're very comfortable with our inventory heading into the fourth quarter, and believe we're well-positioned to drive a successful holiday season.

In closing, our third quarter results were driven by the effectiveness of our strategic initiatives. The margin expansion we experienced reflects the successful leveraging of our attractive business model, and we look forward to building on this trend in the future.

That concludes my remarks. I will now turn the call over to Mario.

Thanks, Seth. As Seth noted, during the third quarter we opened 11 stores, 8 in the U.S., and 3 in Canada. Additionally, we completed one remodel, one expansion, and closed one store. As of today, we completed all of our 2003 openings, adding 53 stores, 39 in the U.S., and 14 in Canada. Late in the fourth quarter we plan to close two stores, bringing our total closings for the year to 5, for a year end store count of 691.

We're pleased to see our new store productivity continue to strengthen. Stores opened this year are producing annualized sales of approximately 1.3 million. And stores opened last year are averaging annualized sales of approximately 1.1 million.

By geography, comparable store sales were positive in all regions led by the Southwest. Seven of eight regions had double-digit comps within a tight range, showing remarkable consistency and an universal acceptance of our back-to-school and holiday dressy offerings.

In addition, all property types achieved positive comps, led by outlets, with most in the low to midteens. And once again, the most recent classes of stores achieved the highest comps. Canadian stores continue to post impressive results. Stores are averaging annualized sales of approximately $2 million Canadian, with strong unit sales and growing margins. As Ezra highlighted, in October several Canadian stores entered comp status producing comparable store sales in the high teens. All of our 2003 Canadian openings have been completed, allowing us to completely focus our efforts on driving sales and profitability during the important holiday season.

Also of note, our online sales continued at a very strong pace during the third quarter, with an increase of over 100 percent. We're also very pleased with our Amazon.com sales, and look forward to capitalizing on the benefits of this relationship over the holiday season.

As mentioned on last quarter's call, we are now strategically looking at our business as three operating units, Place USA stores, outlets stores, and Canada. As we have started to study the potential for these businesses, we clearly see sales productivity as a priority for the Place USA stores, while focusing on new store growth for our outlet and Canadian stores.

Given our strong business trends and real estate opportunities continuing to open up, especially in Canada, we have decided to increase our store growth next year to approximately 70 stores. As part of this increase store count, we're excited to be entering Puerto Rico, a market that represents a great opportunity for us. It has a higher birthrate than the U.S. Sixteen percent of the population is under 10, compared to 14 in the U.S. Its population of approximately 4 million more than doubles when you factor in the 5 million tourists that visit annually. It has approximately one-third the retail space per capita compared to the U.S., and approximately 60 percent of Canada. And there is significant price sensitivity playing into our value proposition.

Looking at next year's openings in total, more than half of our store growth will come from Canada, outlets, and Puerto Rico. The balance of the U.S. store openings will be infill expansion, with emphasis on our extremely productive under penetrated Southwest and West regions.

As you know, we have spent the last few years making significant investments in our corporate infrastructure, and see plenty of leverage still to come. We're constantly upgrading and enhancing our capabilities across the board with recent investments, including a redesign of our merchandise planning structure, merchandise assortment planning module, and other logistics upgrades. As always, we will continue to invest in those areas where we see opportunities to improve our margins.

Our key metrics remain on track, with our increased number of transactions leading the way. Clearly the customers are returning to our stores. Our opportunities remain in increasing our conversion rate and growing our UPTs. To this end, we will implement traffic counters at all of our stores by the end of the first quarter 2004. This continued focus should result in higher conversion rights, translating into greater store productivity.

A renewed emphasis on training and educating, and added investments in store hours will also benefit our goals of driving more transactions, converting at higher rates, adding more units to each and every transaction, and reaching our main goal of increasing existing store productivity.

Now I would like to turn the call over to Amy.

Thanks, Mario. Good morning. What a difference a year makes. A little over a year ago on this call we presented our merchandising strategy, which was to create a focused assortment, balanced with the right mix of basics, fashion and lifestyle appealing to a broad customer base, with a commitment to quality and value. Third quarter results reflect the consumer's enthusiasm for not only the assortment, but our recommitment to quality, the price value equation, and our improved in-store experience.

Our goal at The Children's Place is to build on the momentum of Q3, continuing to listen to our customer, and fine-tuning our strategy in order to maximize our business opportunities and build long-term consumer loyalty.

For the third quarter we achieved positive comps in all departments. Our strongest businesses were boys and accessories, which posted comps in low 20's, followed by newborn and the midteens, and girls, which came in at the high single digit comp.

Now I wanted to move on to some product highlights. For back-to-school, corduroy was a big winner, exceeding our expectations with strong performance in the 5 pocket cord skirt, and leading trend pieces for girls -- cord pants throughout the brand, farm coats for boys, and all of our coordinating corduroy accessories. In fact, accessories have strong performance across the board, with a standout being our back-to-school bag system, which was an immediate hit with the customers.

In boys, all categories of business performed well, with sweaters being our most challenging classification. The customer responded exceptionally well to cargo, wind pants, graphic tees and our 3 in 1 jackets. In girls, our leading trend of fashion category exceeded our expectations, as well as our key item Limestone (ph) and Hamlin (ph) tees. Velour was our toughest category for the back-to-school season.

Now for some initial reads on holidays. Holiday selling in October consisted primarily of dressy. We believe that the early step up of our dressy collection helped to drive strong business throughout the month of October. The customer responded well to our picture- taking concept driven by our tartan plaid, and all of our embroidered velvet pieces in girls and newborns.

The holiday II floor setting is complete in store today. We invite you to stop in, take a look, and spend lots of money. Holiday II features our gift giving assortment, including Glacier Fleece, and our famous Rugby sweater with coordinating accessories. In addition, our commitments to basics paid off for the Company in Q3, driving 60 percent more sales than last year, with only 30 percent more average inventory.

Outstanding performers in this category included denim, which Ezra mentioned earlier, where we improved our fit, added adjustable waist and increased styles and washes at a new two for $25 price for fall. Key item, knit tops across the brand, and our stretchy and blanket sleepers in newborns.

Opportunities going forward are to continue to find out how high is high from an unit investment standpoint, building on our good, better, best strategy in order to leverage the average dollar sale, and continuing to focus in our girls and newborn business. All this, while at the same time, staying committed to our strong value message.

Thank you. I'll now hand the call back over to Ezra.

Thanks, Amy. Operator, we would like to open the call for questions.

(OPERATOR INSTRUCTIONS) Kimberly Greenberger of Lehman Brothers.

Congratulations on a really terrific quarter. Amy, I already stopped in and spent a lot of money.

Oh, good.

I am wondering if you can tell me, it sounded like you said traffic for the quarter was up 6, but transactions were up 16 percent. Is the differential there due to very high conversion rate?

The answer would be positive to that.

And did I hear you correctly that you said 30 percent less old season merchandise versus last year?

Yes (multiple speakers).

And then, Amy, just a couple of questions on apparel, or specific categories, if I could. You said sweaters and velour started out challenging here at back-to-school. Are you seeing any sort of improvement in either of those businesses? And then just a question on inventory. Given the comps that you guys have been putting up, it looks like inventory is little bit lean. How do your receipts look as we approach Thanksgiving? And do you feel comfortable that you will be appropriately in stock for the demand that is obviously there for the product?

Well, for the first question, sweaters were actually challenging in the boys' area. Actually girls performed very well with their key item sweaters like the short-sleeved turtleneck, and big and ruffled turtleneck and sweater in baby. While we have seen acceleration in sweaters, obviously the back half of October with the warm weather slightly negatively impacted that. But we have continued to see increases in sweaters. So we feel comfortable with our sweater position.

Velour, we did not over invest in velour. In fact, we kept it fairly lean. And that was a real disappointment, honestly, for us, Kimberly, we have not seen as big a pickup as we thought we would register off of that in girls. So it continues to be a little softer. And then, Seth, do you want to answer the first half of the inventory?

Sure. In terms of the inventory, we think we're well-positioned. Our inventory is very clean compared to last year. Actually in-store inventory unit ownership today is up in the low double digits right now. And we think with the flow of the merchandise coming in over the rest of the quarter, and the fact that we anticipate doing much more full price selling this year versus last year, we think the inventory is correctly positioned.

Yes. And I just want to reiterate -- I think we have -- we are up against rather horrific markdown numbers from Q4 last year. And we think we have a real opportunity from a regular price standpoint and turns standpoint to maximize sales and profitability going into fourth quarter. So we feel good about that from a product standpoint.

So just so I understand the inventory properly, it sounds like costs -- the cost basis of inventory, which is how it gets reported in your balance sheet, keeps coming down. So that is how your total investment can only be up 4 percent per store, but have double-digit increase in units?

Partly correct. The units are greater than the cost reflect. But I mentioned the in-store versus the balance sheets including in transit and inventory reserves and things like that. So really what we are selling is the units available in the store, and that number is up higher than the 4 percent.

I would just like to reiterate, Kimberly, again that we feel that we're very well-positioned to have a successful fourth quarter season as we look at our inventory today and what is coming in.

John Zolidus, Buckingham Research.

Fantastic results. A couple of questions for you. First on Puerto Rico. I was wondering if you can talk about what you see as the market potential there for the number of stores? And any specific challenges, especially like distributing products to Puerto Rico that you anticipate?

Yes, John, I will take the first half of that question. We see a potential in Puerto Rico for approximately 20 stores. And we think they will be higher than average volume stores as well. And if you could repeat the second half of that?

Any specific challenges going into that market, specifically getting the product to the stores, and how you are addressing those?

No, really aren't any more difficult challenges than we encounter, for example, in Canada. And our logistics team has been all over it. They have been studying it for almost a year now. So we think we're well prepared to handle the task.

And then on sourcing, I think Kimberly touched on this briefly. But can you just talk about the picture with regard to product costs, and how you see that going forward?

John, product costs, as you know, have continued to improve even though we are making pretty substantial improvements to our quality. You may know that today prices of cotton yarn have jumped up somewhat. So going forward, we may not continue to see the kind of price reduction we have been enjoying. We believe that we will least be at similar rates to similar rates to what we are today.

I would like to just add, what we are also doing that will help us is we are doing more direct sourcing. Our Hong Kong and Shanghai offices have been doing a couple of percentage points of our sourcing, and that has been increasing over the last several months, and anticipated even more next year.

Paula Kalandiak of Wells Fargo Securities.

Congratulations. A couple of questions. The first one is for Mario. You were talking about this year's class of new stores doing about 1.3 million versus 1.1 million for last year's class of stores. Is that what last year's class did in their first year, or is that what last year's class is expected to do this year?

That's what last year's class is expected to do this year. They were actually trending last year below $1 million, but we have seen a significant improvement in that as well.

And then another follow-up question on Puerto Rico. Are you going to be renting a distribution center there? And do you need to do tags in Spanish and English, like you had to do French for Canada?

We do not have to put the tags in Spanish. We may elect to do so for convenience purposes, and sort of the benefit of the customers. And we will not be opening up a distribution center down there. We will support it from our New Jersey distribution center.

Richard Baum, Credit Suisse First Boston.

Given that you have stepped up your new store openings next year to the 70 range from the 50 range, could you comment on what your expectations are now in terms of store openings beyond 2004? And also remind us of where the potential is in both the U.S. and Canada. I think you just addressed Puerto Rico, so that would be X Puerto Rico?

We think, looking at U.S. and Canada together, we have potential for approximately 1000 stores. And we're really not looking significantly past next year. We want to take it one year at a time. But we still see tremendous growth in Canada. Puerto Rico, we will just be entering, obviously, for the first time next year. And there still are substantial opportunities in our outlet division and in our Western and southwestern territories.

And the 1000 number includes outlets as well?

Yes.

For example, Richard, in outlets we have approximately 50 outlets today doing in excess of $100 million. We see that as one of our stronger growth vehicles where we're looking to double that number within about three years. They are extremely productive and very profitable.

Normally, there is a ratio in terms of outlet stores per regular stores. But if you double it that would be increasing the outlets per regular store because you're not going to double the number of stores in three years.

Richard, we're finding that the outlets are doing extremely well with full price merchandise. Actually, as we look at their turns, they are turning even faster than a chain in full price merchandise, again, because of our value oriented strategy. So we see ourselves driving full price units through these outlets, because they just have tremendous traffic, and are very, very productive.

Margaret Whitfield, Brean Murray.

Congratulations. I wonder if Amy could elaborate on her comments about the good, better, best strategy, while keeping the value proposition alive? And also maybe give us some hint as to what spring looks like, it is around the corner?

Boy, time flies. I can’t even believe we're beyond the holidays. I'm going to use an example couple. I'm actually going to use sweaters as a category, and of what we own now that might represent it. But that does not necessarily reflect what our long-term strategy from good, better, best is going to look like. We want to keep some things back pocket secret. We're very excited about some opportunities.

But for example sweaters, if you look at sweaters, our opening price point that we have currently, our solid mock neck sweater in boys, is 16.50. We just set up our Rugby striped sweater program for holiday, which sits at 19.50. We have a novelty sweater at 24.50. And then we have our washable lambs wool cable that we dropped in for (indiscernible) holiday I at 29.50. So you have a nice range of $14 in sweaters between your opening price point and your higher price point within one category.

How did that compare to last year?

We were actually for holiday of last year, we had lowered all of our sweaters at 19.50 and under for holiday last year. So that is an example, building on that good, better and best. And so offering without walking away from the value equation, which is important. But offering the customer continued value, but moving the price point out to support an average dollars sale -- an increased in average dollar sale.

Okay, spring?

And for spring, I think of spring as a glass of lemonade, iced tea, a big glass of water. Refreshing. We are excited about it. It is new. It is brighter, cleaner, clearer, more classic, and that is definitely what is happening out there direction-wise. These guys are laughing at me. But that is something merchandising.

Also, in the girls, could you discuss why it is underperforming the boys line? What are some of the factors? What is the outlook for girls?

I actually feel good about girls going forward. And as I said in my closing statements, we're going to focus -- we're continuing to focus and drill down in girls. We did have positive performance, comp performance, in the girls division, in the high single digits. So I think that that is important to note. It isn't like we haven't improved and made great strides. I think we're continuing to fine-tune.

And one of my closing statements was to figure out high is high. One of the things, even after having been here a year and a half, is that I continue to be amazed by the unit velocity of some of our key drivers, and the amount of success that we have in the units we're able to move through our stores on key items. And I think that is an opportunity where we can continue to maximize the girl's business.

Finally, could someone comment on the promotional calendar for the fourth quarter?

Margaret, we really don't comment on anything that is forward.

I mean, in terms of special offers?

(inaudible) program. So 3 million customers will be receiving a holiday II mailer before Thanksgiving. I think on the whole that you know that as we are enjoying more full price sell through, we're slowing down our promotional activity, and so on.

Dorothy Lakner, CIBC World Markets.

Amy, could you share with us the percentage by department, in terms of where the sales breakdown, girls, boy, newborn, etc.? And also just the percentage or the ratio of basics to fashion versus a year ago?

And lastly just, Mario, if you could talk a little bit more, give us a little bit more color on the store economics of the outlet versus the regular stores?

So basically how the business is breakout, about 47 percent of our business came from girls versus 50 percent a year ago. Newborn held strong about 9 percent, flat to last year. Accessories picked up almost a point in contributions, close to 11.5 versus 10.5 a year ago. Rounding out boys, which picked 2 points in contributions, close to 33 versus a little over 30.5 last year.

Basic versus fashion, if you include tee drivers in basics, we'd generated about 51 percent of our volume, and last year it was right under about 30 percent, slightly under 30 percent of our volume last year in Q3. That was it for me, right?

As far as the store economics or outlets. The average outlet produces significantly higher sales than our average store, albeit, at a lower gross margin. But we also have lower store expenses, lower occupancy expenses, so they have higher store contribution and a higher ROI as well.

And the size relative to your regular stores?

Size averages approximately 6, 6500 square feet. So they are larger than our average stores.

(OPERATOR INSTRUCTIONS) Miriam Meglin (ph), Goat Mountain Partners.

I have two questions. One is, as I tour your store, it has appeared to me that over the last year or so that you have shrunk the boys section of your store and expanded the girls. And I'm wondering with the success that you've had recently in boys whether there is any thought to -- I guess I should back up and ask you if that is correct -- a correct observation from your standpoint? And then if there is any thought to expanding the boys section given the success that you have had there?

My second question is about a change in signs. I have noticed recently signage doesn't seem to be as clear, and a little bit confusing. And I was wondering what is going on with that?

Actually we have not shrunk the boys or expanded girls. The allocation of space between boys and girls has remained the same. So maybe a store is going little crazy out there. No, we have not changed any space allocation. That was a joke. So that has not absolutely changed at all.

And actually, even though I am not marketing, I just would like to put my two cents on the signs. I actually feel like we've gotten -- personally we have worked so hard to get cleaner and clearer in our messages and how we speak to the customer, and really using our value equation and our quality message as a singular filter within which every decision is made as to what is the appropriate amount of signage, and what that signage should look like. So I am disappointed you feel that way.

Well, I'm not a merchant.

But you are a customer. So we continue to fine-tune and look at it and work on it. And as everything, we can continue to always get better and stronger at whatever we do.

Kimberly Greenberger, Lehman Brothers.

Mario, I'm wondering if you can comment, if you know at this point, on the timing of store openings by quarter next year? And then also for Amy or Ezra, did you all repeat the November Friends and Family promotion this year? And could remind us of the timing of it last year?

Kimberly, if I can give you that answer off-line. But I will say most of the openings -- one of the openings will be back end loaded next year than typical for us, as we have just made the decision to add to our store growth.

Generally, in regards to Friends and Family, last year it took place in November. Basically this weekend that is coming up on us, the second week of November. And we have decided not to anniversary our Friends and Family promotion this November.

Seth, if you could comment, I know you guys usually don't provide any kind of look forward guidance. I'm wondering if you would consider giving us any kind of assessment on where you think SG&A is likely to end up in the fourth quarter? And if you're willing to make any comment on November month to date comps?

I'm sorry, Kimberly. No, we're not going to make any comment on November's sales of this point. And again, we have taken a position not to give guidance on any of the items. So we won't talk about SG&A for the fourth quarter either.

Anne-Marie Peterson, Thomas Weisel Partners.

My question is with respect to the potential in the store productivity, it looks like sales per square foot in 1999 peaked about $415. Have you guys think about the success of this turnaround and the ability to get back to higher productivity, how do you think about the ultimate potential in terms of store productivity and operating margins? And again I know you're not giving any guidance, but if you could just sort of help us think about this directionally, that would be great? Thanks.

We look forward to ultimately, and I say ultimately, ultimately getting back much closer to the kind of activity we used to enjoy, which is in excess of $400 a foot. As I have mentioned, we see the biggest piece of our growth coming from increasing productivity in our existing stores, which they produce about 260, $270 a square foot. Last year it produced about 260, 270 a square foot. So we do see us getting to 350 somewhere not in the too distant future.

Like 2005, and would a low double-digit operating margin be a reasonable target on that type of productivity?

Yes, I think sales in the mid $300 range per square foot. We're probably thinking two to three years out. And we think operating margins would be high single digits to approximately 10 percent.

(OPERATOR INSTRUCTIONS) Margaret Whitfield, Brean Murray.

Margaret Whitfield Following up on that, is it possible over time you could get back to your prior gross margins, which were in the 42, 43 range going back a few years?

Yes, we absolutely see that in the near horizon actually.

Margaret Whitfield In the near horizon, before you hit the 350? Excellent.

I think we have to take that one back. Over the next few years, given that our model has changed somewhat, we think our gross profit margin could get back to approximately 40 percent. We had peaked out, I think, at about 43 percent a couple of years back. I think if we hit the sales numbers that we historically hit, north of $400, then it might be possible, but not at the mid $300 range.

But keep in mind, today our gross sales are a lot higher than they were when we achieved those peak margins. So from a gross margin dollar and an operating margin dollar perspective, we will produce much better number.

Finally, you seem to be gaining new customers. I wondered if you hadn't any thoughts on the source of the new customers are coming from?

Again, our windows have been substantially more compelling than ever before, so we're bringing more customers from the mall into the stores. Word-of-mouth is a big, big factor in our business. And as our assortment gets so much better, and the customers are enjoying the kind of values and qualities and fashion that we give them, they are telling their friends about it and bringing them as well. And we certainly getting back some of the customers that we lost over the last 12 to 18 months.

(OPERATOR INSTRUCTIONS) Dorothy Lakner, CIBC World Markets.

Seth, could you give us a little bit more about what your goal might be for direct sourcing? You mentioned that you were doing a couple of percentage points, and that would go up for next year. But where do you think that could go?

Yes. I believe last year we did somewhere between 5 and 10 percent. This year, I believe, it is somewhere between -- I don't have the number handy, but I think it is more about 10 to 15 percent. And I think in the future we could expect something north of 20 percent.

Over the next couple of years?

I think next year 20 percent is very doable, something north of that, and it could still grow from there.

Any kind of top end of the range, where you would cap it?

No cap at this particular moment, Dorothy. We were enjoying about 100 to 200 basis point improvement in our margins using our direct sourcing. So as we can continue to enjoy that and control that business, we look forward to growing it.

Any types of merchandise in particular that you are deriving from that or --?

Not specific. But the one thing to also mention is the fact that we have the presence in Hong Kong and now in Shanghai. That is also making it easier for us to purchase product from others at less cost in view of that presence.

At this time, this does conclude our Q&A session. I will go ahead and turn the program back over to our host for any concluding remarks.

I thank everyone for your continued interest in our Company. Seth and Heather are available throughout today should you have any additional follow-up questions from our team. Have a good day. And we look forward to see you shopping at The Children's Place for all of your holiday needs. Thanks to you, and a great holiday.

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