Children's Place Inc (PLCE) 2004 Q1 法說會逐字稿

Good day. [Caller Instructions]. I'd like to turn the program over to one of your hosts today, Ms. Heather Anthony. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today for a review of our fiscal 2004 first-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. With that out of the way, I will now turn the call over to Ezra Dabah, Chairman and Chief Executive Officer. Ezra?

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 the first quarter and review our plans for continued growth. Seth Udasin, our Chief Financial Officer, will review our first-quarter financial results in more detail. Neal Goldberg, our President, will then discuss company-wide priorities. Mario Ciampi, our Senior VP of Store Development and Logistics; Amy Hauk, our Senior VP and General Merchandise Manager, and Richard Flaks, our VP of Planning and Allocation, are also on hand to answer any questions at the end of our remarks.

We are very pleased with our first-quarter financial results. We showed strength and consistency across all areas. For the quarter, total sales increased 25%. Comp store sales increased 16%. Comp stores transactions increased 13%. Average transaction size increased 3%. Comp customer traffic increased 9%. E-commerce sales increased 175%. In-store inventory turn increased 12%. Gross margin increased 210 basis points. EPS increased 100%.

Our first-quarter results reflect the customers positive response to our spring and summer offerings and to our overall merchandising strategy. Our assortments were well-balanced, focused and fashioned right.

In addition, our spring line was an important milestone for us as it represented the one-year anniversary of implementing our new merchandise strategies. We are also capitalizing on the significant color trend in fashion, giving our brand core competency of colorful coordinated looks.

Looking ahead, we are continuing to refine our merchandising strategy with emphasis on our good, better, best strategy as a way to further elevate the brand, increase the average dollar sale and capture more of the gift giving customer.

Turning to the stores, we are encouraged that during the first quarter the run rate for all of our technicolor format stores was similar to the average store. Further evidence of the success of our technicolor format is what we are seeing with the remodels, which are experiencing with much stronger year-over-year sales increases than the average comp store.

We recently introduced the modified version of our technicolor format at our store in Linden, New Jersey. The modified version is less expensive to build, easier to maintain, and makes for a more open and inviting shopping environment, while still keeping clearly defined, focused shops for each department.

Last quarter we spoke of several infrastructure initiatives to support our continued growth that will further strengthen our best of breed system and open system architecture. While Seth will provide an update, I wanted to point out that our new automated Canadian DC is in the final stage of testing and expected to go live at the end of this month, ahead of schedule. This DC will fully support our long-term growth plan in Canada.

We are encouraged by the momentum and excited about our continued growth. We believe that we can increase the size of our existing business over the next five years to $1.5 billion, by staying focused on our strategic vision and through the implementation of the following growth initiatives.

Increasing store productivity remains our number one objective. I'm pleased to note that we are showing immediate progress with sales per square foot up 15% over last year's first quarter.

At the end of the quarter we only had 15% of our stores located in Texas and California; given that approximately 25% of kids in the U.S. reside in these two states we have significant opportunity for growth and plan to increase our presence in these markets, while continuing to infill nationwide. Our outlet stores are extremely productive and highly profitable.

Over the next three years, we are aggressively accelerating our outlet store base to more than 100, with expected sales in excess of $200 million. In Canada, 18 new stores are planned for this year on top of the 42 stores we operated at the end of 2003.

Our goal of going to 100+ Canadian stores over the next three years remains on target. And lastly, we are very excited to open 5 to 7 stores in Puerto Rico this year with the first one opening next month. Our success in the Hispanic markets in the U.S., the consumer's appetite for fashion, and our value equation gives us great confidence that our brand will be well-received in this market, which we believe can support 25 very productive stores.

In addition to our growth prospects, the positive trends in the children's apparel market which accelerated in 2003, particularly in the specialty retail channel, have continued into 2004, giving us even more confidence about our long-term growth.

In closing, our business is clearly on the right track. We are committed to continuing our profitable growth momentum, and to further strengthening our positioning in the newborn to 10 age category.

Thanks for your attention. Now let me turn the call over to Seth who will review our financials in more detail.

Thank you, Ezra. Good morning, everyone. During the first quarter, The Children's Place opened 10 new stores, 9 in the U.S. and 1 in Canada. We also closed 1 store and completed 3 remodels.

On April 30, we celebrated the opening of our 700th store. At the end of the quarter, square footage was approximately 3.1 million square feet, for an average of 4500 square feet per store.

In the quarter net sales increased 25% to $225.8 million from $181 million last year. Comparable store sales for the first quarter increased 16% versus a 13% decrease in the prior year. Comps were positive across all departments, all regions and all store types. Regions were led by the west, southwest and Rocky Mountain regions which all reported comps above 20% for the quarter.

By department, Boys, accessories, and notably our Girls business, all reported double-digit comps for the quarter. Increases in both traffic and conversion drove our 13% increase in the number of comparable store sales transactions. In addition, our average transaction size increased 3%.

As Ezra mentioned, our technicolor stores continue to exceed expectations. Stores opened during 2003 are averaging annualized sales of approximately $1.2 million, while stores opened this year are producing annualized sales of approximately $1,250,000.

Gross profit in the quarter increased 210 basis points, to 40.7% this year from 38.6% last year. The gross margin increase was primarily the result of lower markdowns in occupancy costs, partially offset by lower initial markup.

Our markdowns decreased versus last year due to continued positive customer response to our merchandise, combined with enhanced allocation strategies which has led to faster in store turn.

Lower occupancy cost is the result of leveraging our positive comp store sales performance. Our markup was lower a compared to last year, primarily due to continued investment in merchandise quality, and an increase in basic unit receipts, due to the Easter shift which resulted in our summer merchandise setting earlier this year.

SG&A expenses as a percent of sales decreased to 27.8%. Excluding the $1.5 million of insurance proceeds we received in last year's first quarter, SG&A expenses as a percent of sales decreased by 140 basis points. This decrease was primarily due to leveraging of payroll and nonpayroll expenses and lower preopening costs due to fewer new store openings compared to last year.

Partially offsetting the decrease in our SG&A percent was increased marketing expenses. Depreciation and amortization decreased 70 basis points versus last year as our comp increase enabled us to leverage increased depreciation expense related to new store openings.

Operating income for the first quarter increased by nearly $10 million, to $18.9 million. Our operating margin increased approximately 340 basis points to 8.4% compared to last year's 5%. Net income for the first quarter more than doubled to $11.5 million, versus net income of $5.5 million last year. And on a per share basis, we earned 42 cents in the first quarter versus 21 cents last year for an increase of 100%.

Moving on to our balance sheet, we ended the quarter with approximately $84 million in cash compared to $47 million last year.

In addition, we had no long-term debt and no borrowings on our revolver. At the end of the first quarter, our inventory is clean, with approximately 50% less old season merchandise per square foot compared to last year. Heading into the second quarter, inventory is well positioned, with inventory per square foot up 34% versus a year ago. A significant piece of this increase is related to merchandise in transit as well as early receipts of back to school key items. If we exclude these two categories, inventory per square foot is up approximately 18% versus last year. The reason for this increase is our new strategy to bring goods in earlier, for greater flexibility, so if need be, we are in a position to set our floor set two weeks earlier than scheduled.

Our store growth plans for 2004 remain on track, with approximately 70 new stores planned. Of the 60 stores remaining we expect to open approximately 15 to 20 in the second quarter, with the remainder opening in the third and fourth quarters.

Before I turn the call over to Neal, I'll provide a quick update on our 2004 infrastructure initiatives, all of which are proceeding on schedule. We completed the full roll-out of traffic counters to all our stores by the end of the quarter. This important tool will play a key role in our efforts to further increase conversion. This week, we went live with our tiered assortment planning tool. This new tool allows to us more effectively segment assortments to support our diverse group of stores.

Our market optimization tool, which will allow to us better forecast store sales and minimize cannibalization, will be deployed later this year. And lastly, we anticipate going live with Phase I of our glass pipeline project, which includes purchase order management and supply chain visibility during the fourth quarter. That concludes my remarks. Now I will turn the call over to Neal.

Thanks, Seth. Over the past three months I've traveled around the country visiting stores to gain a deeper understanding of store operations, our customers and our associates and visit our offices in Hong Kong and Shanghai.

In listening to our associates, I am excited by their enthusiasm, their commitment to our strategies, and to the tremendous effort they have put forth to drive our improved performance.

I want to talk today about three areas of opportunity -- customer conversion, customer insight, and our metro New York region. Then I will wrap up with some brief comments on marketing and merchandise.

Number one, customer conversion is a critical aspect of our ability to increase store productivity. Our entire company, from corporate to the field to our DCs, is intensely focused on this key metric. In fact, we estimate a one percentage point increase in additional conversion over last year would translate into approximately $30 million in additional sales. This being the case, we are pleased to see the needle pointing in the right direction, as comp conversion during the first quarter increased 80 basis points over last year. Our associate education, enhanced marketing, appealing merchandise and an elevated store experience all contributed to the increase.

As Seth mentioned, the recently completed roll-out of traffic counters to all stores which gives visibility both in our stores and headquarters to track conversion on an hourly basis will be an important tool in driving customer conversion.

Two, as I mentioned on the last call, getting a deeper understanding of our customer is a key priority and the logical next step in our company's progression. Through the further utilization of the current 8 million names we have in our customer database, feedback from stores and our customer service department, and recently conducted focus groups in four major markets across the country, we are connecting with our customers. Though still early in this process we see this as a down payment on our ability to make more informed, customer directed decisions across all facets of the business.

Three. Invigorating our metro New York business clearly represents an opportunity to further fuel our performance. While comps in this region have turned positive the past two quarters, we want to accelerate the turnaround as historical volume and profitability of these stores have been substantial. We have identified 30 target stores and are taking a laser like approach to identify common themes and opportunities. We will be looking at these stores from all angles, from merchandise, to people, to the store environment, amongst others, and we look forward to updating you on our progress. Turning to marketing.

We are certainly encouraged by the effectiveness of our strategies, as evidenced by our ability to drive a 9% increase in comp traffic in the quarter, while national mall traffic was flat. That said, we are challenging ourselves to really look at how we can take our marketing to the next level, to more clearly communicate our fashion, quality, value and fun, elevate the brand, and enhance our value equation to a broader consumer audience. Of course the amount of consumer information we are gathering right now goes hand in hand with this effort and is critical to achieving our objectives.

Finally, some comments on our merchandise. Our summer one line has been well received by the customer and we are encouraged by overall sell-through lines. Our summer two line will set in stores next, a week earlier than last year. The line builds on summer one and introduces richer, more saturated colors and will also include our Americana capsule. In support of the line, we will send a direct mail piece to approximately 2.5 million customers.

In closing, our first-quarter results reflect our commitment to delivering consistent execution across all aspects of the business and to sticking to our strategies, critical to build the customer choice and loyalty. Thanks. I will now turn the call back over to Ezra.

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

[Caller Instructions]. First question, Kimberly Greenberger with Lehman Brothers. Please go ahead.

Congratulations on a fine first quarter. I'm wondering if you can talk about, it looks like you've, you are already seeing some increased conversions. If I read this right, your traffic was up 9%, the transactions are up 13%. I'm just wondering if you can talk about the in-store initiatives, the investment in SG&A that you've been making in order to heighten the awareness of your selling force and to allow you guys to increase those conversions?

Secondarily, if you can talk about, I don't know if you can provide any color at all on May month-to-date sales, but if you have that and are willing to share it, we would obviously love to hear it.

Let me just talk about conversion. First of all, we really made a major focus throughout the organization on driving what our conversion is. What I said earlier, that a one point increase adds $30 million in sales.

We really have in every communication we talk about it, we have the new tools that Seth spoke about that we really have traffic counters inside all stores married with the reporting on an hourly basis in stores, so they can really change our behaviors. Tied to the associate education we are doing is really a focus. We know the number one factor in stores is driving the sales, but you have to have the tools to do it.

Now with traffic counters and the reporting mechanism we really are seeing a beginning down payment on changing behaviors and how we are driving it; tied with great merchandise and also just clear offerings in our store we really think this conversion number will keep on growing.

And as you know we shy away from giving current comp numbers.

Okay. Just thought I would check. Seth, if you could talk to us a little bit about the gross margin?

I know last year your IMU and therefore your gross margin wasn't down as much as it was for Q3 through 4, so if you could just talk to us your outlook for the initial markup here for the rest of the year, and as we are looking at the gross margin rate throughout 2004, how should we be thinking about that?

Yes, well, in gross margin, as I've mentioned, there's a couple of drivers. Markdowns were down during the quarter, and we see opportunities to continue to reduce markdowns throughout the year. Occupancy is a large component.

And as we continue to deliver, hopefully strong comparable store sales we'll be able to leverage the occupancy. And markup, markup was down a little bit in this quarter due to our investment in the quality of the merchandise. That investment will continue during the year, but probably towards the back half of the year will not be as much pressure on the I. M. U. because of the quality component.

Okay. And last year mid-year you guys said you were investing more in SG&A, some of the in-store initiatives that you have in terms of training. It looks like the SG&A rate actually was lower than what we were looking for. How should we think about SG&A as we work through the year?

Well, as we said in our prior call for fourth quarter, we see the first half of the year challenging on the SG&A line, while we were able to leverage this quarter, because of the strong comps. The first half is going to be challenging until we year round on some initiatives, particularly marketing and several new executives that we hired in the second half of last year. It's going to be tough to leverage SG&A first half and a little bit easier in the second half.

Great. Thanks.

Next question from Janet Claupenberg with JJK.

Congratulations on a wonderful quarter. A couple of questions. I would like to talk a little bit about the inventory. I guess you are saying it's up about 34% on a per square footage basis. It seems a little high to me. Did you go into the second quarter last year with a very low level?

Is it necessary to be owning back to school inventory at this early period, or when do you set up back to school or is this something that you would traditionally do, and where do you see inventory levels coming out of the second quarter? Then I have a couple other questions.

This is Richard Flaks. I am going to handle the inventory questions. I'm not surprised that I've got an inventory question. First of all, I want to give reassurance that this is a planned offensive strategy of ours to drive the inventories to where they are. We really feel comfortable with the levels we are at. I want to go into a bit of the details of why we felt that we needed to be a little more proactive to getting the inventory into the distribution center.

First of all I think in earlier comments, it was commented that we set summer one, which is already set, and summer two which is coming up, earlier than we did last year and that's partially driven by the earlier Easter, which shifts up the calendar earlier. That had the result of driving some of the summer items, more of the summer items into the first quarter than we saw last year.

So that was a piece of the shift in inventory. The other strategy that we put in place was to actually deliver our inventory at a time that we could set the goods up to two weeks earlier than we have planned to on a go forward basis. We did that for flexibility purposes. If we look back to holiday after seeing a great third quarter and the start of the fourth quarter, we wished we would have had more inventory in December, more spring go forward inventory in December, to set on the floor and we left some business on the table, we lost some momentum.

We made a decision in the short term to at least have the goods here a little bit earlier so we have the flexibility should we need to set the goods earlier. We also, through last year, felt that we were not as complete at the time of floor set as we would like to have been. We were having products still showing up in the store after the floor set, and we want the stores to really focus on selling the new floor set, not dealing with the [past] inventory. So we wanted to be more complete, and that was part of our thinking.

The other strategy that we put in place is we are doing a lot more selling of, allocating of SKU by size. We're shipping a lot more goods at the size level to the stores, and we built in a little more flexibility in the distribution center, because rather than dealing with prepacks of goods going through the distribution center, shipping a lot of single units through the distribution center. We see that as a big positive and one of the reasons why we are seeing improvements in gross margin.

I need to give you some reassurance. We are not overboard. We've looked at our inventory over the next few months. In fact we've pretty much had our P.O.s out there through holiday, and we have run our inventories right through that time and feel that we are very well-positioned to support the growth strategy that we have out there. We are in a growth mode. We want to continue to grow, and we really feel we have the right level of inventory. Timing is a lot of the inventory issue.

The increase that we have right now is in go forward product, not in prior season goods. As somebody mentioned, I think it was Seth mentioned, in prior season goods we are more than [50]% down on an average, on a square footage basis. So it's not in past goods, it's in go forward goods.

Where do you see the level being coming out of the second quarter?

Can I give you a couple more points, then I'll answer that question?

Yes. Sure.

The other two things that I just wanted to mention, is we are not committing purchase orders to the vendors earlier than we were, because that would be a bad thing. If we were making our commitments earlier in order to get it here earlier, we are not. In fact, against last year, we are committing the orders later than we were last year. So we are not putting the company on the line any earlier for any product than we were last year. It's just about getting it here quicker.

And the last most critical thing to us is this is not, you heard, the in store turns are up. We are not shipping this product out to the stores before they need it. We have it there in case, but we are not committing the goods. The last thing we would want to do is have the wrong goods in the wrong stores. So we are holding it back, and the increase is really all sitting either in transit, on ships coming here, or sitting in the distribution center and that's the smaller piece of it. We are not risking the turns in the stores and having the goods in the wrong places.

To answer your other question, in the shorter term, we see the inventory levels continuing to be at the levels that we have them now.

We believe that there is an opportunity to better refine our whole logistics function and not have to have them here earlier. But in the short term, to get all the benefits that I've just gone through, we thought the easiest and quickest way to do that, was to build the flexibility in by having the goods here. You are probably going to see a similar level coming out of the quarter, but on a go forward basis we will be looking at opportunities to enhance our logistics function to still get the same benefits you are seeing, but without the same levels of inventory.

Thank you. I was also wondering if I could learn more about the marketing expense in the quarter, how much it was up versus last year and how much it will be up on a go forward basis? And I was wondering if we could expect the Girls comps to continue to keep pace with the growth in Boys and accessories as we move through the second quarter?

The marketing expenses in the quarter were up approximately 100 basis points over last year. It was due to increased circulation of our Magalog during the quarter, and we are for the year, going to run approximately the same as last year, but the first half of the year there's a little bit of catching up, and then the second half will be a little more similar to last year.

The 2.5 that were mailed on the summer catalog, was that higher than last year?

Do we have a (inaudible)? Yes.

Last year we mailed 1 million. This year we are mailing 2.5 million.

And the Girls comp?

Hi Janet, this is Amy, how are you? I just wanted to clarify a little bit. We talked about accessories and Boys kind of leading, from a comp perspective. We are very pleased with Girls performance relative to the company in those businesses, and we expect to continue to see that.

As I said before, Girls is one of our major focus strategies from a product and in store training and customer service perspective. So as we continue to refine that strategy, we will expect to see bigger returns on our investments.

Thanks very much.

Thank you.

Next question Richard Baum with Credit Suisse.

Hi, everybody. I've got a couple of questions. Actually three. One is, with regard to the customer research that you mentioned, this is for Neal, to the extent that it is complete, can you share with us any of the insights that you garnered from that research?

First of all, I wish it was complete. We really just finished the focus group last week, so we are still collating that information. And right now it is intuitively a lot what we thought.

One of the exciting things is we clearly know that we've, we have the ability to cast a bigger net, that there are a lot of people who remember us from three, four years ago and we view that as an opportunity. Frequent customers to us are seeing positive changes in value and quality, and we have a great opportunity to pull in a lot more customers who really don't know us. And if they know us they know us from the past.

So it's very, very initial as I said before. It's just the beginning down payments, something we are going to continue to mine. The good thing is we have got a lot of data points, and we are going to pull that together and hopefully it will continue to help us make choices through all of our facets of our business to really run our business more efficiently.

How will you get that message out? That would require getting old customers back in or new customers into the store?

We are clearly looking at what we are doing right now. We are exploring some opportunities for external types of marketing, and we are in the exploratory stages of that.

I know there are going to be a lot of questions on inventory, so I want to toss in mine. I appreciate Richard's explanation, which I thought was quite good.

But I wanted to ask Amy, from her perspective having spent many years at the Gap and Old Navy, this notion of bringing in merchandise early to maintain the flexibility, obviously this has an offset of if sales don't happen, number one or number two, if they happen in categories or classifications or styles other than what you have anticipated and so in a sense you have less flexibility. I'd love her to comment on that.

And then secondly in that regard, I know you don't normally share this, but I think in this case you may want to just help us with the comp, your comp expectations in order to obviously support the increase in inventories that you have because you are planning to sell these items mostly at full price. Thank you.

Hi, Richard, it's Amy. A couple of things. I think as Richard mentioned, we actually tightened up our lead time and gotten more refined, and also we've positioned ourselves a little more proactively up front so we are able to react to the business.

The second thing, and Richard didn't really mention it, a lot of these goods again are more basic goods that live for a longer amount of time. When we reduced our floor sets from twelve full floor sets down to eight, we really increased the longevity of our goods. One of the things that contributed to our lower markdown percent or our higher maintained MMU is that the goods live longer and we drive less markdown sales. This also allows us flexibility to react so we can push out or pull out goods and the liability. Because they live for a longer time period, they are more valid. We can also chase business more profitably.

To reiterate what Richard said in under ten seconds, I think we all feel really comfortable that we are we well positioned with inventory to support the current trend in our business.

Richard, it's not a question of any additional liability. It's the same goods that we would have had two weeks later. It's just --

Timing.

Just a timing issue.

Okay. Then --

As it relates to our comp store projections, it's something that we can't shy away from, so. Richard, obviously we are not expecting a 34% comp, okay?

Nor would I expect you are looking for a 3% comp. Or at least I would hope not. A question for Ezra. I know you've laid out some -- do you know what the growth opportunities are, in terms of number of stores and your penetration and so on? Is there -- I just want to make sure I understand this -- is there any scenario under which you would be embarking on a growth strategy that would involve anything other than The Children's Place brand growing in the U.S. and Canada?

Again, Richard, we have I think first and foremost tremendous opportunity ahead of us to basically double our business over the next five years. At the same time, we have and continue to look at the next growth vehicles and what else we can be doing. Basically there are three potential things for us to do.

One is international expansion and you know that we've been very, very successful in Canada. We always believed in focus, and that's basically just taking the brand the way it is today to other countries that we believe will be successful.

Another is to incubate some other concept. Again, as we look at our future growth, we always want to stay within the one to ten category. It's what we look to dominate in the future, so we are looking for potential product expansions within that.

Lastly we continue to look at potential acquisitions as they may come in front of us. So while our business has still got tremendous growth ahead of it, we are looking at continued growth. We have a very, very strong management team and a great aggressive culture within the company, and we are all young and looking to continue to grow.

And the reason that you might pursue a potential acquisition would be? With these other opportunities it would seem a lot more valid if you will, or certainly easier to execute, what would be the philosophy behind going out and making an acquisition.

To the extent that it's very opportunistic, if it comes in front of us.

Okay. Great. Thank you, guys. Good luck the rest of the year. Great start.

Our next question comes from Paula Kalandiak with Roth Capital Partners. Please go ahead.

Good morning, great quarter. I have a couple of questions. One is going back to the gross margin. Can you give us an indication of how the change in IMU in the first quarter compared to the fourth quarter, and was there a significantly different investment in quality in the first quarter than the fourth quarter because sequentially there was a big difference in the gross margin improvement?

I believe that the IMU was down more in the first quarter than it was in the fourth quarter. And I do believe it was more investment in the quality of the merchandise in the quarter.

Okay.

In addition, also, Easter [inaudible] fell into our spring quarter versus summer last year.

And I guess also the summer receipts came in earlier, the basic items, that also.

At lower IMU.

With regards to the direct mail piece, the 2.5 million pieces that are dropping, what is the coupon or whatever that is included in that, and how does it compare to last year?

Same, 15% off.

One time use?

One time use.

Okay. And then finally, can you talk about how the sales associates and store managers are being incented to help increase the conversion rate?

Well, number one, I'm a strong believer, you have to incent on the number one goal, which is driving sales. I've been around too long to see incentives for other actions to drive those actions, and sales don't go up. So we are incenting on top line. What we have done is spent a lot of time on the focus of how to drive the conversion; what are the behaviors that are necessary; what are the actions taken from the reports they have now? Number one.

Number two, we have looked at incenting. How we are incenting sales to make sure that it is rich enough to drive different behaviors? So the combination, but I never want to take the eye off the ball. I've seen it too many times, where you talk about another lever and that's the focus. We are focused on sales conversion. We believe it's the number one tool to drive sales and get us to that increased store productivity we need.

Okay. Thank you.

We will take our next question from Marnie Shapiro with Merrill Lynch. Please go ahead.

Congratulations. I have a couple of questions, I am going to hit you on inventory again, but I will start with the back to school. If you could just refresh our memory as to when you plan to set back to school and what the marketing efforts were last year and what your plans are this year?

I'll address floor sets. We are setting back to school activity the middle of July. That's a little later than last year, and the reason we are doing that is we want to position ourselves for more of a wear now standpoint. Key items we will set fairly flat to last year at the end of June, as well as uniform, which is at the middle of June, to maximize early back to school [regen].

And on the marketing side?

I am really excited about the marketing both in-store and whnt we are sending out. We have really taken a great step of getting a lot cleaner, both in-store presentation, the store floor sets which we just really are completing right now is extremely strong, the clarity of [inaudible] is great, one.

Number two, we are now talking externally a lot more about the quality we are putting into our product. We feel from a value quality equation, we really have to talk more about the garment wash, the durability of our products. We know that our customers are responding to that. Lastly, we just started a relationship with a new PR firm, Trachtenberg, and we just had editors in yesterday and the response from 12 to 15 magazines was sensational. So we think we are going to be a lot more focused, a lot clearer, much tied to our overall strategy of just offering the customer what they want and trying to get rid of some of the clutter. We are very excited about it.

The PR firm is going to be focused more on the editorial, but will you guys continue to run select ad campaigns in kid's magazines?

We haven't really run select ad campaigns for a while now, Marnie, so.

No?

So we are not projected to do that for back to school at this moment.

You didn't have any last year for back to school?

Not that I recall.

Two years ago.

Two years ago.

Time flies.

It does. As we get back to the inventory question, I guess as you are holding the inventories in there, is part of that a case in which summer sells down very quickly or it gets broken pretty quickly and you want to be able to set fall maybe a couple days early? And in a case like that, I guess these inventories now sitting in your DC, what's the turn time from your DC to the stores and the stores onto the floor? So how quickly does it actually happen?

It varies to different stores, and obviously there are stores that are further or closer into the distribution center. The transit time ranges from a day to four days. The turnaround in the distribution center is really under a week turnaround.

The important thing to talk about the distribution time to the stores is the average is under two days. The lion's share of our high volume stores was in 1 day. That's why we established that whole [metro fleet] program that we talked about. And the turnaround time during peak periods could be 3 to 5 days. We can turn pretty quickly.

Depending on the floor set, the complexity of the store, but we can do a store from 2 days to 4 days, a complete soup to nuts, window included floor set. But we can do 2 days.

Even the two weeks earlier of inventory that you are sitting with, it's still a week generously a week until it actually would hit from your DC into stores fully set anyway?

Correct. Chainwide.

Average.

If you can just, two more things to touch on, if you could just refresh our memories, walk us through new store economics, if you wouldn't mind? And then if somebody, I'm not sure who, would just talk to us a little bit about your thinking about quota at the end of year and how you plan to ensure flow and any opportunities for next year as you guys are obviously a lower cost retailer out there, and so much more highly sensitive to these changes in prices and probably stand to benefit from them?

Right. I'll take the new store economics question. We are modeling our new stores pretty similarly to our past practices, and interestingly I think as Seth pointed out, the results of the new stores have both exceeded plan, and have been very close to an average mature store's volume. So we are very excited about that result. And as it falls down in the P&L, the ROIs are projected in the 60, 70% range.

And can you talk a little bit about the investment in the store, the build-out, and then the portion that's inventory?

The build-out would be sort of the modified technicolor prototype. It's pretty much back in line to our old prototype within a couple percent. The gross numbers are around $400-$450,000, but again we would receive a substantial portion of the capital as a contribution from the landlord. So it nets out to around $200,000. And the inventory is approximately $100,000, and then there is about $30-40,000 of preopening.

Excellent. Thank you.

And Marnie, as it relates to the WTO and what we all look forward to happening in 2005, first I know there's some concern about the ability not to borrow a quota from next year and some pressure on spring merchandise.

As you probably know, we, on the whole, do not purchase our goods from markets that have quotas to begin with. So as we look at our needs for spring and strategize that based on our factory base, we are very, very comfortable that we will have no issues.

What's kind of surprising to me is that some of us in the marketplace are somewhat concerned about the uncertainty of what 2005 may bring. And 2005, as far as we see, will only bring increased IMU and to some extent a better price for the consumer.

As we see it, we look forward for our prices, even with China not opening up, we look forward to our prices to decrease a minimum of 5 to 10%, just for the fact that we can go into India and many other countries that are not quota free today and purchase goods that we couldn't do last year. That's cost price money. So we think that that should be extremely positive to our future results.

Do the factories you are currently working with today or your relationship in the sourcing market, do they already extend to places like India and you just have not done business there, or are these new relationships you're looking to develop?

In India we are doing business. We just look forward to grow that business to substantially higher heights. As a matter of fact, we are under planning to open an office in India as we speak. So that will be our third office in the Far East.

Thanks. Congratulations. Good luck with summer.

Our next question comes from Dorothy Lackner with CIBC World Markets. Please go ahead.

Thanks. Yes, I wondered if you could just go over the 210 basis points improvement in gross margin and just break it down by the impact from occupancy lower markdowns and then the offset of the lower IMU? And then I guess this would be a question for Amy, just give us the penetration by departments, Boys, Girls, accessories, and so forth, versus a year ago?

And finally another question, I think for Seth, would there have been some pressure in SG&A from presumably from increased incentive compensation versus a year ago? Thanks.

Seth?

Okay. Dorothy, on the gross margin we don't give specifics, you just, the biggest item that in fact the 210 basis points improvement was the decrease in the markdown rate.

But more than half was three quarters?

Well, it was offset partly by the markup, but I would say that all the factors here are, let me put it this way, moved by more than the 210 basis points that we saved or leveraged. We had significant movement in markdowns, markup and occupancy, with markdowns being the largest one item.

SG&A?

On the SG&A, yes, there was actually more incentive paid out in the store level, and we are also accruing more for management bonuses, too. Both of those put pressure on our SG&A for the first quarter.

Okay.

Dorothy, I always count on you to ask this question and actually last time you didn't. Boys picked up almost a 1.5 in contribution, at 28.2 versus 26.8. Girls actually decreased by a 1.5, but still over half of our business at 50.5 versus 52. Newborn was at 8 versus 8.5, and accessories we continued our year trend, at a little over 13% picking up .5 point in contribution there. Also last year's was 12.7%.

Thanks.

You're very welcome.

At this time I would like to turn it back over to management for concluding comments.

Thank you, operator. Thank you for your continued interest in our company. Seth and Heather are available for any follow-up questions. Thanks again and have a great day and a great summer. Thank you.

Thank you. This does conclude today's teleconference. We thank you for participating, and you may now disconnect your phone lines. Have a wonderful day.