Children's Place Inc (PLCE) 2004 Q2 法說會逐字稿

Good day. All sites are now on the conference line in the listen only mode. [Operator Instructions] At this time, I'd like to turn the program over to your host, Heather Anthony. Go ahead, please.

Thank you and good morning, everyone. Thank you for joining us today for a review of our fiscal 2004 second quarter. Management will begin with prepared remarks followed by a question and answer session. Kevin will instruct you on the procedure at that time. Before we begin today I'd 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'll now turn the call over to Ezra Dabah, Chairman and Chief Executive Officer.

Good morning, everyone, and thanks for joining The Children's Place conference call. To start I'll give you an overview of the second quarter and progress we are making on several key areas. Seth Udasin, our CFO, will review our second quarter financial results in more detail and Neal Goldberg, our President, will discuss Companywide priorities.

Also on hand to answer any questions at the end of our remarks Ameria Champi (ph), our Senior Vice President of Store Development; Amy Hauk, our Senior Vice President General Merchandise Manager; and Richard Flax, our Vice President of Planning and Allocation.

Second quarter key performance indicators highlight our continued momentum. Total sales increased 19 percent, comp store sales increased 10 percent, comp store transactions were up 14 percent. Comp store traffic grew 3 percent and comp conversion grew by 220 basis points.

In addition, a continued gain in market share through a consistent delivery of fashion, value, quality and fun increased customer acceptance by fulfilling our customer needs in a convenient and pleasant shopping environment and a strong increase in store activity that produced a 12 percent year-to-date increase in sales per square foot.

While we're pleased with our continued sales momentum this increase did not fully translate to the bottom line because of investments we made in strategic areas of the Company to ensure continued and profitable growth for the long term.

I'm pleased to report that stores opened last year and this year are producing annualized sales of approximately $1.3 million. These resource give us a further comfort in our ability to grow to 1.5 billion in revenue over the next five years. We plan to achieve this through store expansion and key markets such as the West, Southwest, Canada and Puerto Rico. Our first store in Puerto Rico opened this past June, had an outstanding customer response confirming our strategy to expand in this highly productive market. We look forward to opening approximately 25 stores in Puerto Rico over the next few years.

In addition, customer initial response to our back to school season has been very favorable. Our customers depend on us for key items like our backpacks, cord skirts and graphic tees, making The Children's Place a key back to school destination. Importantly our inventory investment in key drivers position us to meet demand and ensure a strong in-stock position throughout the season.

In addition, favorable inventory mix combined with our good better best strategy should result in higher second half average unit retail, giving us another means through which to drive store productivity -- our No. 1 priority.

For your information, discussions continue on the potential acquisition of the Disney Stores and as we reported last week we have signed a non-binding letter of intent to negotiate possible purchase of the Disney Store chain in North America. Although we are limited as to what we can say, we believe that this opportunity is attractive for several reasons.

The Disney Store fits perfectly within our stated goal of becoming a leading player in the newborn to age 10 category. We believe our merchandising and sourcing expertise combined with one of the most recognized and magical brands in the world makes for compelling retail concept. Our operating structure as well as our customer demographics are extremely similar. It gives us immediate access to the growing licensed character apparel market and this acquisition will give us a spectacle (ph) with little risk of cannibalization. Important to note, that we see great opportunity to expand the Disney store chain over time.

We look forward to telling you more regarding this potential acquisition as soon as we can. Thank you for your attention. Now let me turn the call over to Seth who will review our financial results in more detail.

Thank you. Good morning everyone. This morning I will start with a review of our financial results, update you on our store openings for fiscal 2004 as well as the progress being made on infrastructure initiatives. During the second quarter The Children's Place opened 16 new stores. 1q1 in the U.S., 4 in Canada and our first store in Puerto Rico. We also closed one store and remodeled one store. As of July 31st, 2004, we operated 715 stores in approximately 3.2 million square feet for an average of approximately 4500 square feet per store.

In the quarter net sales increased 19 percent to $189.2 million from $159.1 million last year. Comparable store sales for the second quarter increased 10 percent versus 3 percent increase in the prior year period. Comps were positive across all regions, all departments and all store types. The West, New York Metro and Southeast regions were the strongest regions in the quarter.

By department, accessories and boys continued their strong momentum with double-digit comps. Newborn was next with a high single digit comp and girls had a low single digit comp for the quarter.

Increases in both traffic and conversion drove our 14 percent growth in the number of comparable store sales transactions while our average transaction site decreased 3 percent in the quarter. Gross margin in the quarter decreased 90 basis points to 30.8 percent. The gross margin decrease was primarily the result of lower markup, partially offset by lower occupancy costs and lower markdowns versus last year. Markup during the quarter was lower than last year, primarily due to continued investments in merchandise quality in addition to merchandise mix and higher cotton prices.

Lower occupancy cost is a result of leveraging our positive comp store sales performance. And our markets decreased versus last year due to continued positive customer response to our merchandise combined with enhanced allocation strategies.

SG&A expenses as a percent of sales decreased 120 basis points to 34 percent. This decrease was primarily due to leveraging store payroll and non payroll expenses as well as fewer store openings and remodels compared to last year. Partially offsetting the decrease in our SG&A expense was increased corporate payroll and medical expenses. Marketing expenses as a percent of sales were comparable with last year. 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. The net loss for the second quarter was $9.9 million versus a net loss of $9.4 million last year. On a per-share basis, we lost 37 cents in the second quarter versus a loss of 35 cents last year.

Moving onto our balance sheet, we ended the quarter with approximately $31 million in cash. In addition we had no long-term debt and no borrowings on our revolver. We continue to execute our new inventory strategy of bringing in goods earlier than last year which provides for greater flexibility, enhances product flows and improves floor set execution.

At the end of the second quarter our inventory is clean, with a third less old season merchandise per square foot compared to last year. We believe that inventory per square foot at $43 though up 48 percent over last year is well positioned and consistent with our strategy. While we expect to see our inventory increase by a similar amount during the third quarter, inventory at the end of the fourth quarter is projected to be up in the midteens on a per square foot basis.

Turning to store opening plans, we now expect to open approximately 62 new stores in fiscal 2004. Of the 36 doors remaining we expect to open approximately 20 in the third quarter with the remainder opening in the fourth quarter.

Before I turned the call over to Neal, I'll provide a quick update on our 2004 infrastructure initiatives -- all of which are proceeding on schedule.

Early in the second quarter we went live with our tiered assortment planning tool. This new tool will allow us to more effectively segment assortments to support our diverse group of stores. And we expect to see the full benefits of this tool during the second half of 2005 in conjunction with our fall deliveries. Our market optimization tool which will allow us to better forecast store sales, and minimize cannibalization, is planned to be deployed this quarter. And we are also on track to go live during the fourth quarter with Phase I of our glass pipeline project which includes purchase order management and supply chain visibility. We view this project as a strategic long-term investment towards enhancing our supply chain efficiency.

In closing we are encouraged that in the back half of the year we will begin to anniversary several of the strategic initiatives that impacted our bottom-line results in the second quarter. This, combined with our strong topline momentum, gives us comfort in a full year EPS guidance of approximately 40 percent growth over the 85 cents we earned last year.

This concludes my remarks and now I will turn the call over to Neal.

Thanks Seth. As I spoke about previously we are focusing on our ongoing efforts to enhance processes that will ensure consistent, steady execution across all aspects of the business and most importantly, results in a long-term shareholder value. I would like to update you on some initiatives that we have been working on to support this goal and I'll wrap up some comments on our girls' business and marketing.

As you know, at the end of the first quarter we completed the rollout of traffic counters to all stores. As Ezra mentioned during the second quarter comp conversion increased 220 basis points, a significant sequential build compared to the 80 basis point increase we saw in the first quarter. The power of the conversion has been a consistent message given to the the field and they in turn have really embraced the concept.

While we still have more work to be done we are pleased to see such significant progress to date.

During the quarter we completed our first round of consumer research. We view this information as an initial start in a continued effort to mind customer data. We are pleased to learn that consumers who know us recognize The Children's Place for what we believe we stand for -- affordable quality merchandise; colorful coordinated clothing; and clothing for all occasions.

In addition, we heard consistently that the most important factors considered when buying children's clothes are good value and convenient store locations which clearly play to our strengths. In addition, respondents said they want clear and focused brand messages. As a result, beginning with our back to school we've reduced the amount of market stimulus in our stores and streamlined our to convey a clear quality message.

As mentioned on the last call, invigorating our metro New York region is a key priority. We are studying common themes and opportunities to ultimately improve performance of this region. During the second quarter our metro New York business achieved a 13 percent comp compared to a 10 percent comp for the chain.

While 1 quarter does not make a trend we are excited by these strong initial results. Over the quarter we conducted talent and store standards assessment and have begun implementing solutions.

Regarding our girls business, we know that while much progress has been made additional work is needed to achieve consistent performance over the long term. During the quarter, our big girl business was stronger than baby girl particularly in Canada. While we have significantly reduced the style and SKU count over the last 18 months we believe we are still over assorted during the second quarter.

We have made some initial changes and tend to evolve the assortment in our design aesthetic toss to sync with a broader customer base. While early in the process each day we're gaining confidence that our girls business will deliver stronger results.

Turning to marketing. In support of our Back to school line, we have delivered our back to school magalog to approximately 3.4 million homes and distributed our class pass bounce back. Each has a 15 percent coupon, similar to last year.

Externally, as a result of the work we're doing with our PR firm, we have seen substantial amount of editorial coverage over fall line in magazines such as Parents and Baby Talk. Given the percentage of consumers that are still unfamiliar with The Children's Place, we believe that external marketing and/or advertising will enable us to cast a wider consumer net.

And we are excited about the opportunity of broadening our marketing reach. For the holidays we have planned a small 2 market test in New York and Chicago to increase brand awareness and enhance our image.

To wrap up. We're pleased with our steady progress as we continue to work towards consistent long-term profitable growth. Thanks and I'll now turn the call back over to Ezra.

Operator? We would like to open the call for questions.

(OPERATOR INSTRUCTIONS). Kimberly Greenberger, Smith Barney.

First off, I want to send my congratulations to Amy on the birth of her son. I just wanted to ask a little bit about the gross margin. I know that you were a little disappointed with a gross margin and the initial market this quarter and I'm wondering if you could give me an outlook for what we should be expecting in initial markup trends as we work into the third quarter and the fourth quarter and if you're seeing any abatement in cotton prices?

Kimberly, as regards to initial markup at the second half we see that about comparable to last year and the cotton prices have not come down to the low that we used to enjoy about 12 to 18 months ago; but have suddenly stabilized above that low by about 5 to 10 percent so it's substantially reduced from the 20 to 25 percent that they increased for a short while.

So you said in the second half IMU comparable to last year so that means the pressure that we were seeing in the first half particularly in IMU should abate and will be neutral?

As regards to IMU that is correct.

So if the markdown trend continues to come down we would expect that we would have some opportunity for some gross margin improvement for the second half. Is that a fair sort of assessment?

Not so fair as it regards to -- we are pretty aggressive with our inventory levels looking to continue to gain store productivity so we may see some pressure in markdowns compared to last year.

Kimberly, it's Richard. If I could just add to the -- we started seeing significant improvement in our markdown rate in the back half of last year, because of some of the strategies we put in place. So we don't in the ongoing basis continued to see the same rate of improvement year on year as we were seeing over the last three or four quarters.

Okay thanks, Richard, that's helpful. And then I just wanted to ask if you could tell a little bit more about your inventory composition with inventory up 47 percent per square foot, if you could talk to how much of that increase if you got it on hand is driven by cost increases vs. additional units that you got on hand? That would be helpful.

There's really 3 components that are driving inventory increases. The biggest -- the lion's share of it continues to be our strategy to bring product in early. So that is probably 2/3rds of that and I'm giving you very rough numbers because I don't have exact numbers in front of me. The balance of it is driven by the other 2 components. The bigger piece of it is the AUR increase. Ezra referred to that. So retail prices went up but this wasn't about raising prices of existing products. We've actually changed the mix so when you bring in more luxury product, obviously, the retail -- even the cost value of that is higher so the AUR increase is the next biggest component.

There is a component of unit increase but that is the smallest component. We continue to position the business for growth and not to just run flat comps -- or very low single digit comps. And then and I could go into the details we've spoken about on previous calls about how we mitigate the risks if those comp increases don't happen.

But to answer your question directly there's 3 pieces. The lion's share is early receipts, AUR increases is next bigger and then unit increases the smallest piece.

Okay, Richard, that's helpful. To wrap up as we look into the second half for gross margin -- actually just talk specifically about merchandise margin. Is your expectation that merchandise margin would be flattish up or down if we move through the second half of the year on a total basis?

I'm sorry Kimberly. It's Seth. We do not provide specific line by line guidance so we really can't answer that.

Tom Filandro with Susquehanna Financial Group.

Thank you and I must add my congratulations to Amy. I hope you're getting some sleep. I have two questions, Amy, and both are directed at you. Specifically can you give a little color on how the experience has been in some of these new -- guess you'd call them luxury lines of the good better best strategy and then my second question is, as it relates to the I think it was characterized as still being over assorted by Neal in the girls area.

How much of that is a risk and how quickly can you get that on course for your relative to what you have seen in boys and newborn?

I think you know it's an ongoing process and, obviously, I'm very happy with the current overall business and even though the girls business is a little softer from a comp perspective, it certainly is opportunity for next year. We know where we need to grow the business. And I think as Neal mentioned we have opportunities to be more focused but it is an evolution and we put a lot of things into place. I feel like, even going into the back half of the year, you'll see much improvement and more focus, we're much more edited? And Neal also referenced the marketing. We are definitely listening to our customer, reacting to our customer, and addressing a broader-based assortment means as we become a larger chain.

I think you'll start seeing things in the back half and into 2005 -- much more improvement.

(MULTIPLE SPEAKERS)

Yes, luxuries, we're actually seeing great response. We've launched newborn luxuries for fall which is obviously a very small part of our business. But with minimal marketing we have seen positive response especially on all the accessory items. And we do notice that our customers are walking out with multiple pieces. So it is helping with the UPTs and putting together the gifts. And then our higher tiered price item in boys and girls or fashion items. When the items are right they are not resisting $50 price points -- even our leather jackets involved.

So we are definitely seeing positive response to utilizing mix, helping increase the AUR through luxury products.

Janet Kloppenberg (ph) with JJK Research.

Amy, I had a couple of questions on the girls business. I think Neal said or someone said that you are going to be you were over assorted and you are becoming I think more edited but I think you just said the assortments would have a broader base. I'm a little confused about what you're doing -- the steps you're taking to get the girls business to improve.

Let me clarify. A broader base meaning a broader appeal. So to have broader appeal but we are -- we continue to see opportunity in reducing the program in SKU count and girls.

Does this mean to get better faster than the stores, Amy?

Just to have more appeal to a broader customer base.

Okay. Can you give us an example of what you mean?

Yes for example items like the cord skirt, which have been very successful. It registers fashion from a color point of view, texture from a fabric point of view and has the subtle rhinestone detailing but is not over the top and we're obviously blowing through many units in that item. That's a big idea for us. So items that combine elements of fashion but also can drive large units and appeals to mass customer base.

Also I was wondering on the inventory front I understand why you built the inventories but I do see a lot of heavyweight outerwear in the stores and I'm wondering what the strategy is behind having that in the stores in August when most stores are focusing on wear now products.

We did. We actually have found, historically, in the kids business that customers, parents buy proactive outerwear -- and the example I give is you might put off by a piece of outerwear for yourself until the first cold day but I know I'm not go to take my new baby out for the first cold day without his outerwear and then go that we can go pick up a jacket. So we know that customers for children buy outerwear proactively. We did invest in historical as an idea for the box. It was a big huge fashion statement. And we have seen some positive response, obviously. As the weather continues to turn on, we will continue to see pickup in that category.

(MULTIPLE SPEAKERS) I don't feel like it's overinvested in outerwear.

Your business in that category is turning the way you wanted it to?

Yes.

And Amy do you think the changes that you made in the girls business can affect the trend in that business in the second half? Or will we have to wait till next year?

Yes absolutely we feel that it can have positive impact in the second half and continue to build momentum into 2005.

The other thing we're hearing a lot about from other companies is that the late Labor Day this year will have an effect on the August comp trends. Can you guys talk about any seasonality issues you may have in August?

Yes that is correct. There is jeopardy to the last week of the month because of the shift of Labor Day. But we continue to proactively look at the calendar a number of months out and put strategies in place to comp those types of events. So a few months ago we were talking to a group of analysts about some of the jeopardy we saw in July for example where we didn't anniversary our friends and family events. And we had a tax-free shift out of the last week of the month into the first week of August. So we continue to do that and put strategies in place to comp the business. We believe we have sound strategies for the month of August to comp that business.

So in other words it's not going to affect the business?

For example, we got a tax-free benefit last week and it shipped out of the last week of July. So you might see a slight (indiscernible) last week of the month but for the whole month we really believe we have strategies to protect the month.

And for Ezra or for Neal, I'm a little confused on the announcements coming out of Disney and those coming out of The Children's Place in that I believe Disney has already announced what the charge would be for the sale of their stores to Children's Place. Yet your announcements seem to suggest that the deal is still not -- it has still not come to fruition.

The deal is, we are in the process of negotiation. They took a charge in view of the fact that the deal is maybe more likely to happen, based on what they needed to do but the deal is pending and still negotiations to be completed.

So is there a chance, Ezra, that the deal may not be completed?

There is a chance that the deal may not be completed.

And can you give us an outlook on the timing of when we would know what is happening? When we would know if there is a deal or not?

I would say in the next quarter.

During this third quarter that we're in?

End of the third quarter, into the fourth.

Richard Baum (ph), Credit Suisse First Boston.

I've just got a couple of follow-up questions. I may as well ask the one about Disney following onto Janet. You indicated and I know this may be a little bit premature but since you took the opportunity to lay out what the Disney store acquisition would do for you, I think more than half of the product in the store is not apparel. Given the fact that your expertise in sourcing is primarily as an apparel merchant and retailer. What support do you have for your statement that you believe that your sourcing expertise will be significant? If you are running these stores on the non apparel side of the business?

Richard we have a sourcing formula that we use and whether that formula is being used for apparel or for hard goods it's basically the same formula and based on our diligence and to some extent we've done some hard goods in the past. We've done some plush in the past. We feel very comfortable that our sourcing strategy will work for both.

I don't want to go too far on this but the formula is one thing but the factories are something else. And I mean, my sense is that you need to have a good factory base to be able to source a lot of this nonapparel product and -- ?

Absolutely Richard but again, we have a tremendous infrastructure in the Far East both in Hong Kong and Shanghai. We're just about ready to open India. As you can imagine we constantly bring in new manufacturing, new manufacturers into our base. So we feel very comfortable, based on our name and our infrastructure that we can identify good quality factories to continue to do what we need to do.

Okay. Thank you. That clarifies that. A question for Neal. About your consumer research that you're doing? You gave us a couple of tidbits about what you've learned. Could you talk about some of the other things that you have learned from this research that perhaps were not as favorable about Children's Place and, therefore, represents significant opportunities because you mentioned 2 things that conferred what you thought and were very positive.

Well one of the things, Richard, it's so hard for research. You don't get too many epiphanies in it, it just supports, usually, if you have your feet on the ground what you know. One of the things we felt strongly here in consumer research was extremely clear on was we overstimulated the customer. We had too much going on in our stores. And they were almost to every focus group and to every questionnaire they always said that, there's a lot happening in the stores and that's why if you go into the store for back to school we're a lot cleaner. Our magalog is a lot cleaner a lot more focused. I think that was one of the things we knew. But we -- when we heard it from the consumer it definitely told us that they thought we were just giving them too much stimuli. And that is probably one of the biggest things that we saw.

The other thing is all of the external opportunities. Non customers who didn't really know us. Their perceptions and/or lack of knowledge. And that's what we keep on saying. We really believe as we start doing some testing of trying to cast a bigger consumer net to reach more customers, because people don't know us. And if they know us maybe from years ago and we really are a different company than then.

Could you expand a little bit on that? I don't know if you want to share any of the numbers in terms of what the awareness was like, but obviously it is a big opportunity if the awareness is low. And then, secondly, you did mention that you are going to do a 2 test market to I guess either work on the inventory to expand the awareness. So this seems like the other major or a major initiative you are undertaking.

So could you talk a little bit about the kinds of things that you are going to do to improve awareness?

Well in the 2 test we are going to test some prints and some out of home, some billboards and different type of awareness techniques just to see what we can do to up the awareness of the consumer. The research of unaided customers we really are still mining that and working on putting that together. We do know it is significant but right now I'd rather not give the exact details of that until we're really get it fine -- cleaned up and scrubbed a little bit but clearly from everything we see and hear, there's a lot of customers who really don't know us -- No. 1 -- and if they know us they know us from many years ago. And we believe for our future it's a huge opportunity for us to reach and get them to understand who we are as much as the customers who have been our regular customers are in our 7 million plus consumer file right now.

Thanks Neal, and everybody else, congratulations.

John Zolidis with Buckingham Research.

Hi guys. Good morning. Couple of questions for you. First on the Disney transaction. Wondering if you can comment on whether you would make a transaction that was not going to be accretive in the first 12 months.

John we don't want to comment about that at this particular moment although we would say that whenever transaction we put into play is going to increase shareholder value.

And then, secondly, on the inventories. Looks like there's been a little bit of a change in philosophy here. Previously, I know you've been eliminating Friends and Family and other promotional events and reducing markdowns year over year and now it sounds like you're planning inventories up to a point where you're going to start to have increased markdowns year over year. So if you could just comment on why that is?

John that's not 100 percent accurate. What we're doing is we are positioning inventory to support a growth strategy. However, what we're looking at is what happens if the growth strategy does not happen. So the downside risk, and we are positioning markdown to support that downside position. If the upside happens and it happens to the extent that we believe it will happen, markdowns will come in really favorably. If it doesn't we've protected the inventory position on the downside. So it's not inconsistent but right now in terms of a plan we have to be a conservative in case of what if the downside doesn't happen how we are protecting the downside.

Okay and I mean I know, can you possibly breakout or excluding the bringing in goods two weeks early what the inventory increase is year-over-year?

We have stated that through the end of the year which includes all of our on hand plus all the on order plus our fourth quarter receipt which is really spring buys, we expect to end January with mid-teen inventory levels over last year. So that's the level of investment when you take out the timing shift. And, again, that (indiscernible) whatever percent whatever mid teen number is broken out between AUR increase being the bigger piece of it and units being the smaller piece of it.

And then shifting gears one last time. On the New York metropolitan area I know you closed at least one store recently. I wondered if you closed more than one store and what impact that might be having on the comps in the metro region? And then if you are going to close some more stores how over stored do you think the area is?

That was a unique situation John. We closed one store. We don't have any other plans to close any stores in the New York metropolitan area. We had a store that was seven blocks north from that store and although it's early we have seen a lot of the business from the closed store shift to the new store. So we think it was a very strong strategic decision and, overall, we have plans to close very, very few stores although we constantly evaluate our store performance but things are certainly on the upswing across the chain.

Marni Shapiro with Merrill Lynch.

Couple of questions. Although, John I'd just like to follow-up and say they closed my store and now I'm not sure I'm ready to forgive you yet.

I hate to harp on the girls business but you know that's been the place I focus my attention lately. When you look at the hindsight I know you guys have already made some changes in SKU and style and cleaned it up. Could you just walk us through where you had already made changes as far as SKU and style. Is there an opportunity while I may not always agree with the fashion direction of your brand you guys are known for fashion. And as you move away from what -- Amy, I think you called over the top fashion how close do you get to your competition? And then I wondered what's the appeal of Children's Place vs. some of the competition? Is it just price? And one last follow-up on there, is there an opportunity as you move away from some of the over the top fashion to merchandise the girls side of the business on a more regional and even more local level, given the broad base of your customer and particularly given the broad base of your store -- of your store base?

To answer your third question, first, that's the one I remember most. Absolutely there is opportunity regionally and from a weather standpoint even from metro New York and some of our more premier locations we're already addressing that and, again, part of what you'll see in the back half of the year is that we continue to refine and evolve that strategy. I think we will always have the Children's Place twist. We are known for colorful fashionable coordinated invented clothing to quote "the usual" quote and we will not be walking away from that. The statement was to make sure that we have a balanced assortment with a broader base and honestly if I put it into terms, I think making sure that there's an element of sweetness in the assortment. And a little more balance in the softness approach. And that's what we're really working towards.

Also I think in the good better best strategy adding a little more of that luxury detail has really paid off for us in growth and we will continue to evolve and refine that because we have seen little resistance to great fashion price pieces at a higher AUR.

And we don't -- just to add some -- we don't just view price, it's quality value equation and we think our quality is really standing out there. On your third question, clearly, micromerchandising by store, by region, by district is the future. And as we have the tools and expertise and process in place that is something we look forward to, that being a big part of our future successes down the road.

Can you clarify your first question or restate it again, Marni?

Absolutely. You have talked in the past about already cleaning up the SKU count and the style count on the girls side and, actually, I believe across the store. Could you just walk that through where you already touched that part of the business cleaning it up so to speak?

Yes basically we used to sit at about an 80 percent 20 percent fashion basic ratio in that girls business and we balanced that out. It looks more like about 40 -- 50 to 60 percent fashion and the rest the residual basically. We also reduced our flows from 12 full flows on down to 8. Remember I am just talking about the growth business not the total big box business. We've also reduced our program count, by over 30 percent in the girls business and about 18 percent in SKU count. We still think there's some additional fine-tuning we can do there. But that is kind of where we sit today.

And I guess one final question. On the styles that the stores oversorted we came into stores for fall you had leopard groups, crocheted groups, active groups. Could you talk about specifically the back to school set? How many different capsules and core groups you had on the floor and where you envision that going a year for now?

I think, again, it's a balance and that is critical to know and I think a lot of that all the product that you mentioned is selling very well. A lot of good things are big hits so part of it is to make sure the aesthetics flow from shop to shop and floor fixture and wall and we are not walking away from making sure that we maintain flow in newness which is critically important to our customer. So we will look to flow newness in our stores on the girls side every 2 to 3 weeks we have seen a measurable benefit from that from an AUR turn in a GMROI (ph) standpoint. I think it's just going to make sure that it continues to be focused at one season to the other and it will be more of a coordination effort and design. Again, I can't reiterate enough how the design team is passionate about the girls business and making sure that it all fits together and that it will maintain its unique positioning within the children's apparel market.

So for example the leopard group will come in and hit the floor. Maybe it sells through very quickly right away at least from the back of the stores and the crochet group comes in as capital and that hits the floor as opposed to both of them hitting the floor at the same time.

(MULTIPLE SPEAKERS) Absolutely. Exactly. Absolutely Marni.

Paula Kalandiak, from Roth Capital Partners.

Going back to inventory. I think you told John that, at the end of January, inventory would be up in the mid-teens if you took out the timing shift and I was wondering if you could tell us what would inventory have been up at the end of the second quarter if you took out the timing shift?

Around about the same level. We believe that about two-thirds of the increase is timing-related about 20 percent or so of the timing shift, now giving very round numbers is due to AUR and a very small piece maybe 10 percent of it is about what I would call unit increase.

So is it safe to say that this 48 percent increase on per store basis is probably about the peak that we're going to see?

Yes we expect it will be at a similar level at the end of the third quarter due to holidays coming in earlier. Part of what you're seeing in the 48 percent is holiday on the water earlier so it's in transit earlier and having it in very similar level and we start anniversarying the strategy by the end of the fiscal year you get to that mid-teen inventory level on an increased basis and we feel comfortable but that is where we want to be to position ourselves for February and March. We believe last year, we missed some winter opportunities in February and March. It is still pretty cold up in the Northeast in February and March.

And then with regard to the improvement you're seeing in in-store productivity do you think it is reasonable to assume that you could achieve maybe $300 a square foot for FY '04?

(indiscernible) if you continue at this strand you get close to that.

And then just without giving away any specifics can you just reassure us that you have some tricks up your sleeve to go up against that 30 percent September comp?

Yes.

Look back at what we did in February. We were comping a real decline from the year before and we delivered I think it was about a 25 to 27 percent comp in February. September -- a lot of September last year was rectifying where we were the prior year. So we believe that we can comp that business. And we do have strategy to do it.

And Paula we have as you know we have momentum in our sails and we have wind in our sails right now so that should make that easier. We have seen previous quarters even when we had a very strong quarter coming up and being able to comp up with that.

Margaret Whitfield with Ryan Beck.

Back to Disney. If you will know one or the other by the end of this quarter early next, would the earliest closing then be sometime early next year? And also you mentioned you thought there were opportunities to expand the Disney store base. Could you give us some commentary? And embedded in the Disney charge were there some store closings? And then I have a few more after that.

A few more? As far as the growth for Disney, we feel that there is potential growth. We wouldn't be doing the transaction unless there was. The Disney stores perform very well in the high traffic locations and there are many, many high traffic locations both in the U.S. and Canada that Disney has not does not operate a store. As you are probably aware they have not opened new stores for a while so there are many opportunities that we feel we can exploit once we get our hands around the business.

Would this be non mall locations as well as malls?

Some, yes, but in general we feel that the Disney model is predominantly a mall-based model.

Are there any stores likely to be closed before this transaction might be completed?

A handful but Disney's done a pretty good job at pruning the portfolio to date. As you are aware they had close to 600 stores in North America and now they're down to approximately 300. So the best 300 exist right now.

Any opportunities for you with Disney, in view of the planned restructuring activities at Toys R Us?

No, we're sort of absorbing the news since it just came out. We don't see any opportunities to tie those two together.

And I know Seth, that you subscribe to general mall traffic studies. I wondered if you could comment on what July was like. And how it's been trending here in early August in terms of overall mall traffic?

Sure, we subscribe to an outside service which showed mall traffic in the month of July to be flat to last year and the first week of August was down 1/2 of 1 percent.

Finally, I wondered if you could comment on how your outlet businesses have been performing, relative to the chain overall, here in Q2?

Outlet businesses been very good for us overall. Their comps for the quarter was approximately the same as the overall chain comp. They generally are more productive stores for us. And I think Richard and his team have modified the allocations and put more full-priced merchandise in there so we are seeing actually more profitability out of the stores.

Yes the margins are significantly better year-over-year in the outputs.

(OPERATOR INSTRUCTIONS). It appears that we have no further questions so I'll turn back over to our speakers for any closing comments.

I thank everyone for your continued interest in our Company. Seth and Heather are available throughout the day if you have any additional follow-up questions from our team. Have a good day and we look forward to see you shopping at the Children's Place stores for all of your back to school needs. Thank you.

Once again, this does conclude today's teleconference. You may disconnect your lines at anytime. We thank you for your participation and everyone have a great day.