Children's Place Inc (PLCE) 2003 Q4 法說會逐字稿

I would like to turn the presentation over to your moderator today, Ms. Heather Anthony. Go ahead please.

Thank you. Good morning, everyone. Thank you for joining us today for a review of our fiscal 2004 fourth-quarter and full-year 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 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.

Thank you, Heather. Good morning everyone, and thanks for joining The Children's Place conference call. To start I will give you an overview of our fourth quarter followed by a brief review of our 2004 initiatives. It will be my pleasure to introduce to you Neal Goldberg, our new President, who will make some brief comments on his initial impressions of The Children's Place and immediate areas of focus. Seth Udasin, our CFO will follow Neal and give you a review of our fourth-quarter financial results. Next you will hear from Mario Ciampi, our Senior Vice President of Store Development and Logistics, who will update you on our operations, and Amy Hauk, our Senior Vice President and General Merchandise Manager will highlight our merchandising trends. As always, we will be happy to take questions at the end of our remarks.

I am very pleased to report that our strategy to consistently deliver value and quality to our customers is well on target. Our fiscal 2003 performance reveals the successful execution of that plan. Our business today reflects a market share gain an enhanced brand message and very favorable customer acceptance of our product. The highlights of the past fourth quarter are sales growth of 19 percent to 234.6 million, comparable store sales growth of 9 percent, gross margin of 660 basis point increase in the fourth quarter, earnings per share of 55 cents compared to 9 cents last year and a strong balance sheet of 75 million in cash and no debt.

These results reflect the success of our strategic initiatives, which play to our core merchandising sourcing and operational strengths and have created a solid foundation for long-term sustainable growth. With a clear vision firmly in place we remain focused executing on the following four objectives. Further elevating our brand image with the consistent fashion value and quality of our merchandise selection; strengthening our marketing and visuals to clearly convey our brand message; planning and efficiently allocating assortments to maximize sales, and intensely focusing on the complete brand experience to drive customer satisfaction.

We remain committed to strategically investing in our future growth through attracting and retaining the best talent. We have a strong management team in place, and we are confident regarding our long-term success in the zero-to-ten age market. As you know, Neal Goldberg recently joined us as President, and we are delighted to have him on board. As a 24 retail veteran who joins us from the Gap, where he was President of Outlets, Neil brings to The Children's Place a unique mix of merchandising and operational expertise that is proving to be a tremendous asset.

During fiscal 2003 our strategy was primarily centered on creative design, focused merchandise assortment with quality and value, a positive customer experience and compelling marketing. Significant strides were made in all of those areas. In 2004 we will build on our solid foundation to focus on increasing store productivity as our number one priority. We have significant growth ahead of us and several key initiatives are underway that will continue to drive our existing business. Increasing our customer conversion rate to generate increased sales productivity and customer satisfaction, further elevating our brand image and customer recognition, enhancing the quality of our merchandise as a key competitive advantage, maximizing the strong performance of our outlet business, and further expanding into Canada, Puerto Rico and the western United States. Consistent execution of these initiatives will fuel our performance and increase our market share.

I want to thank all of our associates for all of their care, hard work and dedication. I also want to thank our shareholders and customers for their confidence and support. The Children's Place is committed to continuing its positive momentum and to making more and more kids look and feel good. Thanks for your attention. Now let me turn over the call to Neal Goldberg.

Let me start by saying that I am delighted to be part of this call this morning. Today is day 43 on the job, and I am happy to report that I am even more excited about the opportunity. The Children's Place is an exciting retail concept and a dominant player in its category with compelling growth prospects. Everyone here has been terrific helping me to settle in, and I am very impressed with the caliber of the team, which is as passionate and strong as any I have ever worked with. If not stronger. You probably want to know how I'm spending my time. Right now I'm concentrating on three key areas.

First, getting to know as many people as possible at headquarters, in the field, the DC's and soon in Asia. I'm listening to them and learning how everyone fits into the bigger picture. Second, understanding process. I want to learn how things get done and see what we can do to become even more efficient to achieve leverage and continue to grow sales and increase margins. Greater efficiency and focus stems from being more planful (sic) as a company and that is something I will be driving in 2004. Third, understanding who our customer is. One of the reasons I joined The Children's Place was due to its broad consumer appeal across demographics and regions, between store visits, mystery shops, direct-mail data, customer surveys, we have a wealth of information at our fingertips. We are digging into all this data to see how we can best utilize it for merchandising, marketing, store operations and really across every facet of the business to enhance the customer experience.

It is also important for everyone to know that I believe in and fully support the strategies that have been implemented over the past year, which have clearly shown results. A strong foundation has clearly been set so my charge is to objectively evaluate what has been put into action and make it even better. Though autonomy and team-oriented culture that exists will continue to exist. My goal is to make sure we remain extremely focused and consistently execute on our growth initiatives as Ezra mentioned. Such as increasing customer conversion, further enhancing the quality of our merchandise and generating operational efficiencies. If we continue to do that, we will be successful and produce strong results for our customers and our shareholders.

I look forward to meeting all of you in person over the days, weeks and months ahead and to updating you on our steady progress. Now let me turn the call over to Seth.

Thank you, Neal. Good morning, everyone. During the fourth quarter The Children's Place opened four new stores and closed two. As of January 31, 2004 we operated 691 stores and approximately 3.1 million square feet, for an average of approximately 4500 square feet per store. In the quarter net sales increased 19 percent to a record $234.6 million from $196.7 million last year. Comparable store sales for the fourth quarter increased 9 percent versus a 19 percent decrease in the prior year. The fourth quarter's comparable store sales increase was primarily the result of an 8 percent increase in our average transaction size, driven by increased full price selling.

In addition, comparable store sales transactions increased 1 percent in the quarter. We are very pleased with our strong gross profit results, which increased 660 basis points to 42.9 percent in the quarter compared to 36.3 percent last year. The gross margin increase was primarily the result of lower markdowns and occupancy costs, partially offset by lower initial markup. Markdowns and promotions substantially decreased versus last year, due to our customers' positive response to our merchandise offering. Full price sell throughs were strong throughout the quarter, which enabled us to reduce markdowns and push back months to sale. In addition consistent with our strategy to reduce promotional activity, we did not anniversary friends and family in November or bounce back in December.

Lower occupancy cost is a result of leveraging our positive comp store sales performance. And markup was slightly lower compared to last year as a result of our strategic decision to lower prices and increase the quality of our merchandise. SG&A expenses as a percent of sales increased to 28.1 percent compared to 27.5 percent last year. Excluding the $1.5 million of insurance proceeds we received in last year's fourth quarter, SG&A expenses as a percent of sales decreased by 10 basis points versus last year. This decrease is primarily due to the leveraging of payroll and favorable benefit costs compared to last year, partially offset by strategic investments made in marketing to drive sales and increase the brand awareness.

We took a special non-cash pretax charge this quarter of $448,000 related to the write-down of fixed assets at one underperforming store. Last year we took a special charge of approximately $3.2 million pretax related to 19 underperforming stores. Depreciation and amortization decreased 50 basis points versus last year as our comp increase enabled us to leverage increased depreciation expense related to new store openings. This resulted in operating income for the fourth quarter of $23.9 million compared to $4.5 million last year. Our operating margin increased approximately 790 basis points to 10.2 percent compared to last year's 2.3 percent.

Our tax rate in the fourth quarter was 36.8 percent compared to 50.3 percent last year bringing our 2003 annual tax rate to 37.5 percent compared to 42 percent last year. Last year we did not take a benefit in our tax rate for our Canadian stores losses because we did not have a track record of earnings in Canada. During 2003 we were profitable in Canada, and this year's tax provision reflects the benefit of our 2002 Canadian losses.

Net income for the fourth quarter increased by approximately $12.9 million to $15.2 million from $2.3 million last year. On a per-share basis, we earned 55 cents in the fourth quarter versus 9 cents last year. Moving on to our balance sheet, we ended the year in a strong cash position with approximately $75 million, more than double the $37 million dollars we ended with last year. In addition we had no long-term debt and no borrowings on our revolver.

Total inventory, of course, is up approximately 27 percent from last year while inventory per square foot is up approximately 17 percent versus a year ago. This planned increase in inventory is partially due to moving our Easter floor set forward into February this year. Our inventory position is very clean with older season merchandise representing less than 10 percent of our total inventory.

Capital expenditures for fiscal 2003 totaled approximately $32 million, a decrease from $49 million in fiscal 2002. Currently we are planning capital expenditures of approximately $40 million in 2004. Turning to 2004, as we have previously announced, we plan to open approximately 70 stores during fiscal 2004. We expect to open approximately five stores in the first quarter, approximately 20 stores in the second with the remainder opening in the third and fourth quarters. As a reminder, last year's first-quarter SG&A expenses also benefited from a onetime insurance proceed of approximately $1.5 million or 3 cents per share. We anticipate a tax rate of approximately 39 percent for fiscal 2004 while our share count was estimated at approximately 28 million shares.

In addition, as mentioned in this morning's press release, our February comp month-to-date is up 22 percent. We are very pleased with this strong start to the quarter which is consistent with our February plan. Given that last year's February comp was impacted by the severe winter weather, our current trend is likely to decelerate as the quarter progresses. We look forward to building on the progress made in 2003 and to delivering consistent, sustainable profitable growth over the long term.

Now I will turn the call over to Mario.

Thank you, Seth. During fiscal 2003 we opened 53 stores, 39 in the U.S. and 14 in Canada. We also closed five stores, bringing our total number of stores under operation to 691; 649 in the U.S. and 42 in Canada. Additionally we completed 6 remodels and 7 expansions. Comp store sales by region in 2003 were led by the West and Southwest regions, both posting double-digit positive comps. All regions achieved positive comps with the exception of our New York metro region; however, it is important to note that New York metro has shown recent positive trends, achieving a positive comp for Q4 and February month-to-date.

Our new store performance has been very strong. The class of 2002 produced average store sales of 1,000,050, a significant improvement over last year's run rate. This class produced a return on investment of 56 percent in its first full year of operations. Even more encouraging is our class of 2003 stores, which produced annualized average store sales of approximately 1.2 million, slightly above our average chain store sales.

Our 2004 store opening plan will consist of approximately 70 stores, 45 in the U.S. with the focus on outlets the West and Southwest regions. Eighteen in Canada and seven in Puerto Rico. Given our strong sales in Hispanic markets in the U.S., we are very excited to be entering Puerto Rico's underpenetrated retail market. 2003 was our first full year operating in Canada, and we are very pleased with our results. We produced total sales in excess of our plan and sales productivity on an average store basis reached 400 dollars Canadian per square foot. This yielded an operating margin in the high single digits. We are continuing to grow aggressively in Canada and are planning eighteen new stores for 2004, which will give us a national presence.

Additionally we have a new distribution center under construction in Canada, which will open in Q2. This automated facility mirrors our very successful West Coast distribution center and will be sufficient to handle our plans for 100 plus stores in Canada. Our e-commerce business also produced strong results in 2003. We had a 120 percent sales gain on top of an 80 percent increase in 2002. The results are attributable to a stable technology platform and increased marketing exposure and site enhancements such as new search technology and in-house e-mail capability.

Infrastructure projects for this year include tiered assortment planning capabilities giving us greater flexibility to better serve our diverse group of stores; a supply chain glass pipeline project that will give us greater visibility and functionality for our complex supply chain needs; a market optimization tool, which will allow us to better forecast sales of new and existing stores and minimize potential cannibalization. And lastly, the rollout of traffic counters to the balance of the chain to support our number one goal of raising conversion rates and therefore growing the topline.

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

Thanks, Mario. Good morning, everyone. 2003 was a year of building and implementing our merchandising strategy, creating a focused assortment balanced with the right mix of basic fashion and lifestyle, appealing to a broad customer base with a commitment to quality and value. Our second half results reflect the customers' positive response to our product offering and the successful implementation of our strategy. Immediately following a great back-to-school, we enjoyed a successful holiday season. The momentum began with our holiday dressy assortment and continued into holiday too as customers responded enthusiastically to our merchandise.

As a result we drove a better quality transaction through higher than planned full price sell throughs and created a sense of urgency with the customer to purchase at regular price. A habit that we would like to perpetuate. This in turn drove more profit to the bottom line. To give a little more color on Q4, some product information, all departments posted positive comps with our strongest performing business being accessories, followed by boys in the low double digits, girls in the mid single digits and newborn in the low single digits.

For holiday exceptionally strong product categories included sweaters, glacier, fleece and active across all divisions, graphic tees and denim in boys, key item knits and denim as well in girls. Layette, stretchies and blanket sleepers in newborn also performed exceptionally well. Shoes, cold weather, plush and Valentine's Day drove the business in accessories. Our spring one assortment fully set the third week of January and I thought that I would give you some initial reads on product categories that the customer is responding favorably to. Stripes across all divisions, which is really exciting for us as it was one of our big ideas for the season, bottoms and Valentines Day have also been strong across all departments. In boys graphics, cargo and ringer tees continue to drive the business. In addition, sports active and graphic tees are doing well in girls. In newborn, the customer is responding well to our sweet fashion pieces. For example, the patchwork group that we delivered in spring one.

Wrapping up spring reads on the business is accessories which continues its stellar performance with strong business in shoes, driven by flip-flops and sneakers. Our spring two floor set is complete in stores today, which includes our Easter dressy line. In support of the new product flow we dropped our spring two magalog which hit homes this week. Please stop in and shop the product, which continues to represent our commitment to fashion and quality at a value price. The Children's Place value equation.

As we move forward into 2004, we will continue to build upon the successes of 2003 with an eye towards leveraging the foundation already created. In addition, as I have mentioned in previous calls we are continuing to move forward with our good, better best strategy in order to elevate the brand and increase the average dollar sale. As Neal mentioned, we are committed to remaining focused and consistent and to speaking to our customer on a more formalized basis, listening to them and then responding to their needs, critical in this competitive environment. We know that our customers are recognizing that they can count on us for fashion, quality, value and fun, season after season. We are committed to delivering that on a consistent basis at The Children's Place. Thanks. I will now hand the call back over to Ezra for questions.

Gabriel, we are ready to take any questions.

(OPERATOR INSTRUCTIONS) Kimberly Greenberger of Lehman Brothers.

Good morning and congratulations on a great start to spring. A question just, I wanted to just make sure I heard Mario right, did you say you are currently rolling out traffic counters to the rest of the chain? And if so, can you tell us when those will all be in place?

That's correct, and they should be finished by the end of Q1.

Okay, great. On the inventory, we actually were looking at for inventory up a little bit more than it was up. And obviously February comps have been very strong. So I guess the question would be do you feel like you've got enough inventory in stock to do the business? Are your weeks on hand -- are you feeling comfortable with that? I'm just looking relative to sort of '98, '99, 2000 inventory levels. It looks like you're still about 25 percent below those levels, so just wanting a little more color on the inventory, if you could.

And I will just respond to this in general, we are actually very pleased with our inventory position, and we do, we are focused on running a profitable business. And maintaining our momentum going into Q1. And we feel confident we are positioned to do so.

Amy, is it a matter of narrowing the customer choices and that is where the inventory balance is coming in relative to where you've historically been?

Yes, that's partially it. And it's partially in allocating. We put in some new allocation systems and strategies, which have allowed us to maximize inventory in a more profitable manner. We've also adjusted and fine-tuned our investments based on opportunities. Last year, Spring was not very successful, so we have opportunity from a regular price sell through to maximize inventory again, as well. So we feel good.

Fantastic. And just lastly, if someone could talk about a sort of more specific way that you will be initiating these different strategies going forward. In other words, merchandise quality, is there one thing in particular that you are looking for, or two things in order to increase that? Any sort of brand image marketing that you are planning. And is there a way from an outlook strategy perspective, what is it that you are looking to accomplish there? That would be great.

As it relates to enhancing quality as you know that has been an initiative that we've put into play last year, and I think you will note that the quality in the stores has substantially improved. As we continue to focus our assortment, it makes it even easier for us to see to it that each and every individual style is looked at in as many ways as possible to make sure that we are giving our consumer the absolute best quality. So this is an initiative that will, in my view basically stay there forever and we look forward to continue enhancing it. We are also very focused, by the way, on our fit. We look forward to becoming known for having the best fit in the marketplace and staying consistent to it. So from that point of view, we look forward for you to see continued improvement in our quality.

As it relates to marketing, we have been very, very happy with the results, especially of our magalogs which we have increased somewhat especially in the fourth quarter, and are projected to increase as we move forward into 2004. We feel that they have been beside giving us a successful return they are very, very brand elevating. I think you probably have seen our visuals and windows in the stores have also substantially improved recently, and we look forward to continue to make those store visuals and windows as inviting to the consumer as possible. And strategically, again, we are just focused on building on everything that worked so well for us last year and taking it to the next step.

Great. Thank you, and good luck in '04.

Richard Baum of Credit Suisse First Boston.

Congratulations on another really fine quarter. And also to Neal for making a great move.

Thank you, Richard.

We think so.

Just a couple of questions. One, one of your goals is to increase conversion, customer conversion. You’ll obviously be able to measure that when you put in the traffic counters, but what are your -- let's call it proactive initiatives designed to improve conversion apart from obviously having better merchandise and quality and blah, blah, blah, anything specific to actually get the customers to purchase, when they are in the store?

I think that clarity and focus in the stores is an initiative we've got to focus on. Conversion comes from many places, but certainly at the point of purchase we've got to make sure what we offer the customers is a flawlessly executed store, where they can really find the merchandise that we believe is important, that they can see the price, that they can find their size, that they can find their color in a very easy and efficient manner. So it's a real clear definition of a selling proposition and taking a lot of the clutter out of the stores, and making it easier for someone to have a great customer experience and getting a reputation for that.

I guess just a follow-up on that would be given what Amy has done, it seems like the stores have come very, very far in already doing that. Are there areas that you think they could even go farther in?

I think we've got a lot of room to continue to reduce what I would call just clutter of information stuff and let the stores focus on customer service and giving the customer a great experience. Stores as you all know in the specialty arena are very complicated and the more we can take tasks away from the stores so they can focus on things that the consumer responds to, which is basically making them have a much more efficient experience is a big win. So we feel there is still room to develop and work on that. And between what Amy has done and the merchant team has done, to get stores to be at the same level we should give them a great customer experience.

Richard the whole organization is going to be our number one goal as I mentioned is to increase store productivity, which basically relies substantially on increasing conversion of course, as well as increasing traffic into our stores. And the whole organization for merchandise to planning to allocation to in-stores, is just going to be very focused on that one objective. And it is a big effort on everyone's involvement to get into the next level.

Let me just ask a question on full price versus markdown. Seth, I don't know if you have the data, but the fourth quarter mix between full price selling and markdown, percents of each and then more importantly, and I know it is difficult to forecast, but how are you planning that mix for the first half of the year?

I think Amy is going to help me on this on the planning piece. The full price versus markdown, certainly there was a shift to more full price in the fourth quarter versus last year. I don't have at my fingertips, what the amount of that shift was.

We actually had a reduction of over 30 percent cumulative in markdown inventory and sales over the previous year. Which is actually, was in hindsight something we could have had a little more markdowns available to drive some more sales into the back half of the year. So we saw a commensurate reduction in sales to go with that.

And as you look out into for the first half of this year I suppose you would be pretty happy if you had the same ratio that you wound up with in the fourth quarter, whatever that was, of full price to markdown?

Yes, we're definitely looking to drive more profitable regular price sales in the first quarter. And we are positioned inventory wise to do that. We feel like we have enough regular priced goods and a flow of merchandise to support the volume opportunity.

Okay, thanks.

Does that answer your question?

Without having the numbers, it is a little tough to.

We will look to give you the numbers as a follow-up.

Great. Thank you.

Dorothy Lakner of CIBC World Markets.

First, I just had a housekeeping question for Amy, and that was what the accessory comp was, I just missed that. And secondly, for Mario, I wonder if you could give us a little more color on the supply chain efforts, as well as the tiered assortment capability you were talking about and the markdown optimization tool. Just a little bit more color on those efforts. Thanks.

Accessories actually was our strongest in high, high double-digit comps.

Thanks.

Dorothy to give you a little more color. First of all, it is not a mark down –- market optimization tool. It is more looking at our real estate strategy and our sales planning strategy, and identifying markets where we have potential or that we are potentially over stored and making more scientific decisions when we open stores and we plan future sales stores. It will allow us to really better focus on achieving better on our lines at the store level.

It is a go forward tool, you are not looking at going back and closing stores in certain markets, are you?

It can help do that. We are going to look at markets in their entirety, and if we see a better place to put a store, it could lead to a potential store closing, although we do not plan on closing a vast number of stores. This year we will probably close to or less than we closed last year, which was only five. The supply chain project is truly a visibility project. As you know, we have a very complex supply chain in order to maintain ourselves as a leader in low-cost sourcing. We find ourselves sourcing from many different countries in all parts of the globe. This visibility project will help us give us more up-to-date current information, allowing us to see the product from the time it is completed at the production level all the way through delivery to the stores. Finally, the tiered assortment planning process, which a tool which is in production, will allow us to better focus on providing the right product in the right stores. For example, creating a hot store versus cold store strategy, creating an urban versus suburban strategy, allow us to give us that extra tweak to help grow the topline.

When do you expect that to be in place?

The assortment planning product will be in place during the first quarter.

Great. Thank you.

Marni Shapiro of Merrill Lynch.

Mario, if you could break out the new store openings for '04 mall by non mall? And if you could also talk about the conversions to the new format, what percentage of the store fleet is now in the new format versus the older format? And then finally if you can give a little bit more clarity on the new supply chain that you briefly touched on.

First of all, today about 7, 8 percent of our stores are in the new prototype as we speak. Every new non outlet store that we’re building going forward will be also in the new prototype, and obviously the remodels. The supply chain project -- it's not a new necessarily a new objective. It is just a tool that will help us, give us visibility to our existing supply chain. Will give us more visibility to our existing supply chain. We just see it as a way to make us more efficient to give us better information.

What exactly is it? Is it a new technology system that you're putting in? Is it a different way of doing business?

Its new technology a new software package that we are creating with people in the industry that are well-known and have created similar tools for other retailers. As I said before, as our supply chain becomes more and more complex, the more visibility we can have for the product during all sorts, during the whole process will make us smarter and certainly give us a leg up as to providing the product to the stores in a timely fashion.

Marni, this tool will also combine three major systems that we have in place today. FDMS systems was basically a style of management system that basically starts the process from design all the way to procurement and on will be connected to our purchase order system and to our import system. So we would have again much better visibility and much quicker visibility to where is our merchandise at any one time from the very, very beginning of the design stage until it is in the stores and selling.

Your last question if you exclude Canada and Puerto Rico which are mainly mall-based situations geographies, in the U.S. more than half of our new store growth will be non mall, probably looking at 55, 60 percent non mall.

Excellent. Actually can I just follow-up on these systems for one more second? Will you roll in with these systems, or are they separate merchandising systems to help you better allocate whether it be by region or by you were talking urban, suburban things like that?

It will just layer on to our existing allocation planning systems.

And how far along are you in all of these systems, as far as rolling them out, testing, and when is kind of your trigger date that you will like to have them all up and running fully?

All at different times. The assortment planning piece will be live during the first quarter. The supply chain and market optimization tools will be live during the latter half of the year, toward the end of the third quarter.

I'm looking forward to you guys being in stock and white socks. Congratulations.

I have the numbers for Richard's question concerning Q4 sales at markdown this year versus last year. This year was 21 percent versus last year's 34 percent. I just had to do some manual calculations here.

Margaret Whitfield of Brean Murray.

Good morning, and congratulations. A few questions. You mentioned you had achieved some share gains. Could you comment on what you believe your share is and the source of those gains? Also, you are moving to position the brand. Wondered what the market spend was last year as a percent of sales and whether it will increase. Also, you are focusing on deriving productivity. Could you tell us where you ended last year in sales per square foot, what the previous peak was, and whether or not you think you could go back to those levels? Thanks.

With regards to the market share, our information is that the market grew at approximately 8 percent last year. That's the total children's market, which was a very, very good year in general; probably the biggest gain that we have seen in quite a few years. As you know, our sales grew substantially ahead of that. So we certainly took market share from someone.

Specialty or all of the above?

I would say all of the above. You’ve got to be very scientific to figure out where it is coming from.

Does the market share data --?

Specialty in general also, Margaret, has gained substantial ground last year.

Who has?

Specialty, the specialty sector.

How much did specialty grow last year?

I think about 15 percent, something in that neighborhood.

Okay, that's helpful. Thank you.

Those numbers are courtesy of NPD. Those are the source. And I think it's also important to point out that like everyone knows, Kids R Us is closing down, so we definitely anticipate picking up some of their 300 to $400 million in volume since we are very well positioned in most of the markets which they operated in.

Okay, a lot of overlap.

Yes, there's a lot of overlap.

And Margaret, to answer your question about sales per square foot, actually the way we calculated, it comes in flat to last year at approximately $263 a square foot. And our former peak had been $414. I believe that was either 1999 or 2000. In terms of where we could go, our goal is to get in that 300 to $350 range. I think that is achievable.

And advertising -- marketing spend, I should say, in '03?

Last year, '03 advertising was approximately 3 percent of sales.

Similar this year or higher?

This year should be similar to slightly higher.

And gross margins were up huge. Do you think you could ever return to your previous peak margins?

We did have a big increase, and I think there still is upside. However, I don't believe we could get to the same levels that we peaked out at.

Which were?

I don't have -- approximately 43 percent and change. A couple of factors there. One is that occurred when our occupancy -- occupancy is included in our cost of goods sold, and we were achieving sales in excess of $400 a square foot. At this point, we are not certainly planning to get back to those levels and seeing that leverage. In addition, our product, we have lowered prices and that's been a strategic initiative of ours, and at the same time has been enhancing the quality of the merchandise. So we've been putting more back into it. So I think somewhere between where we achieved this year and our former peak is most likely where we will end up in the future.

Finally, the promotional planning short term, I know you said you just issued a magalog. Anything you can say about the March activity?

Margaret, we don't talk about go-forward activities. But, in general, you know that we have substantially reduced the number of promotions this past year from the previous. We will continue to look at opportunities to do that. At the same time, we will remain very active to make sure we are taking as much market share as we can.

John Zolidis of Buckingham Research.

Great results guys. A couple of questions for you, I apologize if you went over this already but could you give us the breakout for capital expenditures in '04 by major component?

We did not give it out. The vast majority is the new stores. We are planning on opening 70 stores in the year. Probably the second item we would have is with doing remodels, probably about half a dozen to maybe ten. And then there are other various corporate initiatives. Mario mentioned opening the Canadian DC will occur in the second quarter of this year. There is various MIS related initiatives, but by far the largest is the new store openings.

I was curious you had said that the Canada operating margin was in the high single digits. And that compares to about 4.6 percent for the overall company for '03. How are you calculating that high single digit number, and I guess what components are you leaving out, that is in the overall business? And then secondly going forward this is kind of a follow-up to Margaret's question, do you have a long-term goal for your overall operating margins?

I will address the Canadian issue. The operating margin is calculated just like we calculate the operating margin for the consolidated business. We, in addition to the direct expenses that Canada is responsible for, we layer on what is called transfer pricing which are Canadian percentage of the total Company's expenses. So it is, we think, a true operating margin. And as we have said the stores in Canada have been very productive. Margins have been growing; not up to the standards that we have seen in the U.S., but they are growing. The store margins have been better than in the U.S. primarily due to higher productivity. So we are very pleased with the result, and we think with some gross margin expansion we can even improve upon it.

It's probably fair to say that continuing expansion in Canada should have a positive overall impact on your overall operating margin?

That's right, correct.

With the overall Company and I know we still had a lot of room to go, do you have a target for operating margins? For the overall Company going forward?

Historically, John, we did in our peak hit the low double-digits, again because of a somewhat of a pressure on the gross profit margin we would expect today that our goal would be high single digits to about a 10 percent operating margin.

All right, well we just got a lot of room to go still to get there. And I guess in 4Q we got -- sounds like you lost a little bit of sales from being a little bit cleaner or you’re being less promotional than some of the other guys out there which probably had a positive impact on the gross margins. Looking forward into 1Q, if you had to make a decision would you make a decision to drive more sales at slightly lower margins or would you prefer to kind of over earn on the margins than have a lower sales productivity?

Yeah to the second half of your comment.

Thanks a lot and good luck this spring.

Paula Kalandiak of Wells Fargo Securities.

Good morning, great quarter. A couple questions, first of all on the magalog that dropped this week, is there a coupon in that and if so, what are the terms of that coupon?

There is a coupon in the magalog and I believe it is a 15 percent off. And that has been strategy that has been very successful for us. It is a onetime use.

And going back to the tiered assortment planning, Mario, how many different ways are you going to be slicing and dicing the store base? Is it just hot/cold, urban/suburban or are there others?

We have not decided, but we would knowing us, we are going to keep it simple. We are going to start with probably a very introductory, simple slice and then grow from there.

And then finally, your old season merchandise, there is so much less of it this year, so are you finding that there is less merchandise for the outlets and that you are offering more full price in season merchandise at the outlets than last year?

We are very comfortable with our balance of full price versus markdown in our outlet stores.

And Paula, as you probably know, our outlet stores sell a substantial amount of full price merchandise. Actually, we find them to move the goods even faster than the chain at times. So if we are missing some clearance merchandise because we are very, very clean, they just get more full priced merchandise and it actually improves their sales line because of the average unit retail.

Great. Thanks.

(OPERATOR INSTRUCTIONS) Kimberly Greenberger of Lehman Brothers.

Seth, I was wondering if you could comment at all on SG&A here in the first half of the year, obviously normalizing for some of the onetime items last year. Is there a sort of rule of thumb we could use in terms of planning our SG&A dollar growth like square footage or slightly more than square footage, slightly less than square footage? Any sort of guidepost you could give us would be real helpful.

Kimberly, as you know, we generally don't give guidance, but we did a lot of investing here at The Children's Place in the second half of 2003. And we are going to continue to prudently invest in our infrastructure so that we can manage our growth. Having said that, until we year-round on some of those investments, we would probably see SG&A deleveraging in the first and second quarter and then during the third and fourth quarter, we would see some leverage.

Great. Thanks, Seth.

At this time we have no further questions.

Thank you everyone, for your continued interest in our company. Seth, Heather and myself are available for any follow-up question. Thanks again, and have a great day and a great spring season. Thank you.

This concludes today's presentation. You may disconnect your lines at this time.