Children's Place Inc (PLCE) 2004 Q4 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. If you're experiencing technical difficulties with the audio portion of this conference at any time, you can press the star and 0 on your touch-tone telephone and an operator will be standing by to assist you. At this time, I'd like to turn the program over to your host, Ms. Heather Anthony. Go ahead, please.

Thank you, operator, and good morning, everyone. Thanks for joining us today for a review of our fiscal 2004 fourth quarter financial results. Joining us on this morning's call are Ezra Dabah, Chairman and Chief Executive Officer; Neal Goldberg, President of The Children's Place; Mario Ciampi, President of the Disney Stores; and Seth Udasin, our Chief Financial Officer. Also on hand to answer your questions at the end of our remarks are Amy Hauk, Senior Vice President, General Merchandise Manager; and Richard Flaks, Senior Vice President of Planning, Allocation and IT.

After our remarks we will be able to take your questions. Today's call will last approximately 1 hour. Please limit yourself to 1 question so that we can speak with as many participants as possible.

In addition, The Children's Place will be presenting this afternoon at 2:15 at the Bear Stearns Retail, Restaurant and Apparel conference in New York. For those of you unable to attend, a webcast of the presentation will be broadcast on the Investor Relations section of our website.

Before we begin, I'd also like to remind participants that any forward-looking remarks made today are subject to the Safe Harbor statements found in this morning's press release, as well as in our SEC files.

With that out of the way, I'll now turn the call over to Seth Udasin, Chief Financial Officer. Seth?

Thank you, Heather. Good morning, everyone, and thanks for joining us for today's call. Before I begin, I'd like to remind listeners, like many other companies, we are reevaluating our lease-related accounting practices in light of a recent SEC clarification. While our evaluation has not been completed, we believe that a restatement of the Company's previously-issued financial statements is likely. Although we believe any correction to a lease-related accounting practices will not have a material impact on net income for fiscal 2004 or fiscal 2005.

Financial results discussed in today's call exclude any potential corrections to our lease-related accounting practices. In addition, this morning we will be speaking to our fourth quarter adjusted results, which exclude the effects of a noncash item and a one-time extraordinary gain, both associated with the Disney Store North America acquisition.

We believe the adjusted results are a better indicator of the core business and that the adjusted presentation is a beneficial supplemental disclosure to investors in understanding our past and future performance. A reconciliation of net income to adjusted net income is included in this morning's press release.

In the quarter, net sales increased 97 percent to a record $462.1 million from $234.6 million last year. Included in these results were 10 weeks of sales totaling $163.4 million from our recent acquisition of the Disney Store. Children's Place comparable store sales for the fourth quarter increased 17 percent on top of a 9 percent increase in the prior year. For the fourth quarter we achieved double-digit comps across all regions, all merchandise departments and all store types. The Southwest and Southeast were our strongest regions, while accessories and newborn were our strongest departments.

Higher traffic trends and increased customer conversion at The Children's Place drove our 13 percent increase in comparable store sales transactions in the fourth quarter while our average transaction size grew 3 percent. Adjusted gross profit dollars increased 82 percent to $182.8 million. Consolidated gross profit margin was 39.6 percent in the quarter compared to 42.9 percent last year. As expected, this decrease was primarily the result of lower gross margin at the Disney Stores due to the product inherited through the acquisition, which carried a less favorable margin structure than The Children's Place.

Consolidated SG&A expenses as a percent of sales decreased approximately 20 basis points versus last year. We achieved this decrease even with the addition of the Disney Stores and the introduction of external advertising at The Children's Place. At The Children's Place the SG&A decrease as a percent of sales was driven by a leveraging of payroll and the favorable renegotiation of our private label credit card contract. Partially offset by increased marketing expenses. Disney Store expenses in the fourth quarter, which we did not have last year, were lower than anticipated primarily due to the smooth integration and transition of the business.

Depreciation and amortization expense decreased 220 basis points. The primary driver of the leverage was the acquisition of the Disney Stores, which generated incremental sales but had no depreciation and amortization. This resulted in an 80 percent increase in adjusted operating income for the fourth quarter to $42.9 million compared to $23.9 million last year.

Our tax rate in the fourth quarter was 37.4 percent compared to 36.8 percent last year. Adjusted net income for the fourth quarter increased 77 percent to $26.8 million from $15.2 million last year. Adjusted earnings per share were a record $0.95 in the fourth quarter versus $0.55 last year. Of the $0.95, $0.77 was generated from The Children's Place and $0.18 came from the Disney Store. This compares to a previously adjusted -- I'm sorry, this compares to a previous adjusted guidance of $0.74 for The Children's Place and $0.12 for the Disney Store.

Moving on to our balance sheet, we ended the year with a net cash position of $128 million compared to $75 million at the end of last year. Total inventory at cost is up approximately 68 percent, the majority of which was due to the Disney Store acquisition. For The Children's Place, total inventory at cost was up 27 percent, while inventory per square foot is up approximately 15 percent versus a year ago, in line with our previous expectations.

During the fourth quarter, we opened 17 Children's Place stores and closed 1. We also closed 7 Disney Stores, which was in line with our plans. As of January 29th, 2005, we operated 1,056 stores. 750 Children's Place and 306 Disney Stores.

Turning to 2005, we are planning capital expenditures of approximately $100 million net of construction allowances. This primarily reflects store openings and remodels for The Children's Place and the Disney Store, expansion of our headquarters in Secaucus, and the build outs of our new distribution center in New Jersey and Disney Store headquarters in Pasadena.

As we've previously announced, we plan to open approximately 60 Children's Place stores in 2005. We expect to open approximately 4 stores in the first quarter and 9 in the second quarter with remainder opening in the back half of the year. While Mario will elaborate further, we plan to open approximately 10 Disney Stores, close 3, and remodel approximately 35 this year.

Based on the performance of both businesses in the fourth quarter and a strong February comp, we currently anticipate consolidated fiscal 2005 earnings to be in the range of $2.10 to $2.20 per diluted share up from our previous guidance of $2.05. Please note that while we continue to believe that the Disney Store acquisition should generate at least $0.30 of earnings accretion in 2005, going forward any earnings guidance given will be based on consolidated results for the combined Children's Place and Disney Stores.

We recognize that by introducing this annual guidance, we have an obligation to update if our performance throughout the year is materially higher or lower than our expectations. Therefore, annual guidance will be confirmed or changed on each quarterly call or on a more frequent basis if necessary.

Finally, our earnings guidance excludes the impact of any lease accounting correction which we believe would be immaterial to fiscal 2005. In addition, our guidance is before a noncash item associated with the Disney Store acquisition and the effect of FASB statement number 123R. We plan to initiate the expensing of stock options prospectively beginning with the third quarter of fiscal 2005 in accordance with the requirements.

In closing, we are very pleased with our fiscal 2004 results as well as our strong start to 2005. Now I'll turn the call over to Ezra.

Thank you, Seth. And good morning, everyone. Fiscal 2004 was a remarkable year. We are pleased with our fourth quarter and full-year financial performance as evidenced by our strong revenue and earnings results. With our talented and dedicated teams leading the way and strong execution at all levels, The Children's Place brand achieved new heights, while the Disney Store acquisition gives us an extraordinary new platform for growth and earnings.

As Seth highlighted, our fourth quarter results capped off a great year. Our full-year results reflect the continued strength of our unique formula and the broad appeal of our brand. Total revenues for the Company increased 45 percent, sales growth of almost 200 million at 25 percent increase at The Children's Place stores, comp-store sales and transactions increased 16 percent and 13 percent respectively, and for the full year, we achieved double-digit comps, comp increases across all regions, all departments, and all store types. Adjusted net income increased 100 percent to 45.9 million.

Increasing store productivity was our number 1 priority in fiscal 2004. To achieve this objective, we focused on enhanced merchandise quality, delivering value, taking strong in-stock position, and increased customer conversion. I'm pleased to report that all of these initiatives were achieved with the following results. Sales per square foot of $300, a 15 percent increase over last year, and a market share increase of 60 basis points over last year to 3.2 percent. Our brand continues to take hold as evidenced by our most recent 24 percent comp-store sales increase in February, which is on top of last year's 25 percent increase.

Looking ahead, these are the priorities we have identified at The Children's Place. We will continue to focus on increased store productivity and on achieving our goal -- our sales goal of 350 per square foot. We look forward to introducing external advertising campaign in our biggest markets during the back-to-school season, as millions of consumers have yet to discover The Children's Place brand. And given our unique competitive positioning and broad customer base, we are targeting future 8 to 10 percent square footage growth in our Children's Place stores.

At the Disney Store, we are excited about applying our value equation to this business and have identified the following objectives. Increased gross margin is our first priority. Our recent buying trip to Asia has validated that even with lower retail prices and enhanced quality, we can significantly increase gross margin through reduced sourcing costs. We are focusing on improved merchandise assortment and presentation to make the visual look and feel of the Disney Store more impactful, and we remain confident that over time we can double the size of the Disney Store chain to approximately 600 stores.

Now let me turn the call over to Neal and Mario who will provide you with more details.

Thanks, Ezra. Our customers responded enthusiastically to our holiday assortments during the fourth quarter. The momentum began with our holiday special occasion merchandise and continued with strong response to our casual assortments. Exceptional categories during the season included glacier fleece, woven bottoms, denim and our rugby sweater program with matching accessories. Importantly, our momentum has carried into spring as we continue to surprise and delight our customers. The cohesiveness of our assortment across all departments has never been stronger and we are always looking to raise the bar in this regard.

Turning to Company initiatives. Our brand continues to take hold as evidenced by our 10 percent increase in comp customer traffic for the fourth quarter. This increase's strong sequential build from last quarter's 8.5 percent increase and 900 basis point above national mall traffic as measured by NRTI. For the year, comp traffic increased 9 percent. Customer conversion increased 20 and 80 basis points for the fourth quarter and fiscal year respectively. This, coupled with our significant traffic growth, drove our double-digit transaction increase.

While we made good progress, we know we can do even better. We remain focused on efficiencies and better processes at that the store level in an effort to better serve our customer. Our focus on increasing store productivity resulted in sales per average store of over 1.3 million, a 16 percent increase over last year. Importantly, the class of 2003 produced average store sales of approximately 1.4 million and a strong return on investment of approximately 85 percent in their first full year of operation.

In addition, we are extremely proud of our IT and logistics teams who, during the fourth quarter, accomplished the huge task of integrating the Disney Store operation. In January we began receiving and distributing Disney Store merchandise to our West Coast and Canadian DCs, and all systems have now been fully transitioned to The Children's Place. The integration was smooth and was completed within a very short time frame. Our new East Coast DC is on track to go live during the summer, which will support both businesses and enable us to flow merchandise to our stores more efficiently.

Regarding future growth, just like the tag line of our spring assortment, it's in the details. We are committed to executing at the highest level to continue to drive the business. Ezra briefly touched on levers that will fuel our growth, and I'd like to quickly provide some additional color.

Of our 60 new Children's Place stores planned for '05 2/3 will open in the U.S. We will continue to focus on new markets, such as California and Texas where only 14 percent of our stores are located, yet 25 percent of kids under the age of 10 reside. Of the U.S. stores approximately 12 will be outlets in an effort to further capitalize on the strength of that business.

We plan to open 15 stores in Canada this year and continue to believe this market can support over 100 stores in gross sales to 250 million Canadian dollars. In just its second full year of operation, Canada sales were in excess of 100 million Canadian dollars produced an operating margin in the mid teens.

7 new stores are slated to open in Puerto Rico this year, our newest market which we are very pleased with. Our Puerto Rico stores on average are producing annualized sales above the chain average and we continue to believe Puerto Rico is a 20 to 25 store market for us.

As we all know, merchandise is king. Spring 2005 represents the second anniversary of our merchandising strategy, and importantly, we have stayed consistent to that strategy. With the right people, process, and tools in place to continue to drive the business, we are now taking a more granular look at our business so we maximize each and every style's profit potential.

Our e-commerce business continues to grow at a rapid rate with sales of 82 percent on top of last year's 120 percent increase. In the short term, we believe e-commerce can grow to approximately 3 percent of total sales.

Regarding brand building, as Ezra mentioned, given encouraging initial results from our holiday campaign, we are moving forward with external advertising during the back-to-school season. As we have previously discussed, our large amount of consumers either do not know what The Children's Place brand stands for or haven't even heard of us, so clearly, we have tremendous opportunity to cast a wider net and introduce our brand to new customers.

In closing, we are pleased with the many successes of 2004, and as I’ve just laid out, we believe that many growth opportunities exist. We are intensely focused on delivering fashion, quality, and value to our customers and consistent long-term growth to our shareholders.

Thanks and I'll now turn the call over to Mario.

Thanks, Neal. I'd just like to say that with 3 months under our belt our enthusiasm for the Disney Store North America has only increased. The Disney Store is a perfect fit for our business. We are very confident in its long-term growth and success.

Today I'll review fourth quarter highlights and then update you on our strategic initiatives. We acquired the Disney Store North America during the all-important holiday season. We were pleased with our fourth quarter results, which were driven by continued strength in hard lines, particularly toys, souvenirs, and adult seasonal. Soft lines also posted solid results led by kids' sleepwear.

The media category was down significantly as it was up against the DVD release of "Finding Nemo" last year. And as a reminder, media represents 10 percent of the sales and it is our intention to significantly reduce this low-margin category going forward. Importantly, hard lines, soft lines, and media all generated increased gross margin dollars versus last year.

These results were better than expected and reflect higher IMUs, favorable shrink results, and our initial efforts to reduce the amount of promotional activity. From an expense perspective, store and administrative expenses were lower than planned, and as Seth mentioned, transitional expenses came in significantly lower than we had anticipated.

Turning to our strategies, we've conducted extensive market research, which has validated many of our initial impressions. The Disney Store guests perceive that there is a lack of price-value relationship. We are confident that we will address this opportunity by applying our value equation given our infrastructure sourcing and operational expertise. And as Ezra mentioned, our recent buying trip to Asia confirmed that we can enhance merchandise quality, reduce product cost, while achieving gross margin levels in line with our expectations.

Our value pricing is being introduced through permanent price reductions and the introduction of multiple pricing on key items, which has been so successful at The Children's Place. As was our experience at The Children's Place, giving the guests greater incentive to buy day in and day out should result in increased UPTs, better out-the-door AURs, and substantially lower markdowns. We are encouraged by the initial guest response to our price testing.

Turning to merchandising. Given the timing of when the transaction closed, we were able to have some impact on the back-to-school season. However, we are most excited about holiday, which is when you will see most of our strategies come together. Overall, our go-forward strategy centers on key item depth and focus. We will significantly grow the kids' apparel business during season-appropriate periods and will strengthen the already strong sleepwear business. On the hard line side, we are planning for toys to make a powerful statement during the holiday season, which will position Disney Store as the toy destination in the mall.

Visually, our market research tells us that the recipient drives the purchasing decision at the Disney Store, and as a result we are testing a merchandise presentation that better delineates between boys and girls merchandise across hard lines and soft lines, making the store experience easier to shop, as well as creating a much more impactful character presentation.

Beyond our focus to enhance the store shopping experience, we remain committed to our store remodel initiative. A new store prototype is in the final stages of development and approximately 35 store remodels are planned for this year. In addition, as Seth stated, we plan to open 10 Disney Stores this year, 6 of which are outlet stores. Our first outlet store is slated to open at the end of this month at Woodbury Commons. Given the power of the Disney brand and our performance in this channel, we believe the outlet venue is a great way to grow the business from a top- and bottom-line perspective.

From a character perspective, as we previously discussed, 70 percent of sales come from classic characters like Disney princesses, our core brand franchise, Mickey and Friends, and Pooh. Looking ahead, we remain excited about the full pipeline of creative content at Disney, including new characters from The Witch television series and the launch of Disney Fairies this fall.

Overall, we're very pleased with the results of the fourth quarter, the smoothness of the integration exceeded our expectations. We're making steady progress in key functional areas. The Disney Store acquisition represents significant incremental earnings power over the long term, and is an excellent compliment to the strong trends we are experiencing at The Children's Place.

Thanks. And I'll now turn the call back to Ezra.

Thanks, Mario. I'm so very pleased with our performance this year. Especially gratifying is that we achieved our strong results while consummating and seamlessly integrating the Disney Store business. This is a testament to the team, to the teamwork, and the quality of our infrastructure that we have in place. Our unique combination of fashion, quality, and value works extremely well in the children's arena and we look forward to applying that same powerful value equation at the Disney Stores.

We are intent on continuing our strong growth into 2005 and are confident that our business is well positioned to achieve profitable growth over the long term. I extend my heartfelt thanks to all of our associates, customers, and shareholders for their continued support.

Thank you. Operator, we would like to open the call for questions.

Okay. Thank you. (Operator Instructions). We'll go first to the site of John Morris with Harris Nesbitt. Go ahead, please.

Thanks. Good morning, everyone, congratulations on a great quarter.

Thank you, Jim.

Thanks, good morning everyone and congratulations on a great quarter. I guess beginning with the inventory adjustment as reported, maybe if you can give us a little bit more color on the thought process in terms of taking that -- the approach to it. I guess I'm really curious as to how it relates to the ongoing operations of the Disney business. Was this a result of the fact that you found better reaction to your approach to value pricing, or something other than that? And then a quick follow-up regarding the tax rate being lower, why? And also, what should we anticipate for next year?

Okay, John. This is Seth. First off, on the adjustment on the Disney inventory. It's really more of a purchase accounting related adjustment with the acquisition per purchase accounting, we have to do a fair value of the inventory and our inventory was marked up as part of the transaction.

As you can see in the footnote, the total mark-up was just over $6 million, of which approximately 80 percent of the merchandise was sold in the fourth quarter, so of that markup, $5 million was -- went through our P&L in the fourth quarter, was a noncash charge, but we felt it was warranted breaking it out. It is a nonrecurring charge other than the leftover piece, which will probably flow through during the first quarter of next year, or first quarter of fiscal 2005.

Regarding the tax rate, the tax rate came in lower than we had anticipated. We received some benefit based on the -- where the income came for the various companies we have, the various countries we operate in. We did have some carry-over Canadian net operating loss, a benefit that we were able to use, and all those factors came together and gave us a little bit lower rate for the year, and the whole difference was booked into the fourth quarter.

In terms of guidance on the tax rate for 2005, at this point we would anticipate the tax rate to be about 39 percent.

Okay. 39 for next year? I guess on the inventory, then, that helps, just a little bit more clarification. Can you give us examples within the inventory? For example, were you overestimating the cost of the inventory on the pajama sets? Why was it marked up in the first place? Was it just an estimation kind of a thing?

No, this was not -- this is a valuation done by a third party. They did an independent valuation and just their overall take on the whole inventory. They went down to lots of detail on it, was that it overall had to be -- it was valued higher. We received more value than was on the books at the time of the transaction.

Right. Okay. I got you. And then, Ezra, I guess by your commentary, 8 to 10 percent square footage growth in the future, are you revising or what is your current thought process about potential growth for The Children's Place store division over the longer term in terms of numbers?

Something well in excess of 1,000 stores.

Well in excess of 1,000.

Yes.

Great. Thanks, guys.

Thank you.

And we move next to the site of Kimberly Greenberger with Smith Barney. Go ahead, please.

Great. Thank you. Good morning. Terrific quarter.

Good morning, Kim.

Seth, I'm wondering if you can give us a little bit more detail on your gross margin, just so that we can understand what was happening at the -- for example, at the merchandise margin level for The Children's Place division versus the dilutive impact of the Disney acquisition. Any way that could you give us some break down or clarification in there would be helpful.

Okay. I guess, while the overall consolidated gross profit margin was down and was -- mostly down to the -- because of the fact that Disney runs a much lower -- currently much lower gross margin than The Children's Place. When you look at The Children's Place itself, gross -- merchandise -- the overall gross profit margin was similar to last year. We were able to leverage our occupancy expenses, and we had a little bit of lower initial mark-up, really because of the mix of the merchandise and the enhancements we keep on putting into the quality of the merchandise.

And how did markdowns compare year-over-year?

Pretty much flat to year-over-year.

Okay. Great. And as you look out into 2005 in terms of your view on the gross margin opportunity for just The Children's Place business, how are you thinking about initial markup, markdown rate, and your inventory plan as we work through the year? Thanks.

This is Richard. We've planned the margin up over the prior year and the improvement is coming out of both increased IMUs and slightly reduced markdown rates.

Kim, the increased IMU are coming from the -- mostly from the elimination of quarters.

Great. Thank you very much.

You're welcome.

And we move next to the site of Tom Filandro with SIG. Go ahead, please.

Mario, for you, I'm curious on the timing. You made that comment about how the shoppers shop at the Disney Stores, does that suggest that maybe by the back-to-school season we see a merchandise presentation that's more gender and age specific? And then a follow-up question to that is can you give us just a general sense of how pricing is going to look, meaning if we look at the first quarter where initials looked last year, where they'll look this year and for the remainder of 2005?

Sure. Yes, it's our goal by the back-to-school season to have all stores set in this new visual presentation which will clearly delineate the store by gender across both hard lines and soft lines. We're rolling out the test as we speak. We have a few stores set up and we so far have been very pleased with the results. Then, I'm sorry, second part of the question?

Just a general question on overall pricing, how the customer is going to see year-over-year pricing change.

Right. We're looking -- obviously we're going to roll out the price reductions over the course of the year with the biggest impact being in the second half of the year and during the second half of the year you'll see overall initial price points on average down by about 20 percent compared to the previous year.

And just one quick one. Any thoughts on the media walls in the stores, what you guys might want to do with those walls?

Yes, we think they're a great asset for the store environment. They bring a lot of energy to the store. They're a great way for us to show the synergy among the other Disney brands and it's really our goal even to make it a slightly -- a profit center, where today it's been somewhat of an expense.

Thank you very much. Best of luck to all of you.

And we'll move next to the site of Margaret Whitfield, and she's with Ryan Beck. Go ahead, please.

Good morning, everyone. Congratulations. I wondered within your guidance for the year if you could comment directionally on the trends that you see for gross margins and SG&A? And if you are comfortable at this time with Q1 consensus estimates of $0.20?

Well, we don't comment on consensus estimates out there. We're only commenting on our annual guidance of the $2.10 to $2.20. When you look at the business, as Richard said, The Children's Place margin will be up but we still have the Disney operation which runs a lower margin than us. So consolidated, the margin rate will look like it's lower, but --.

In '05?

In '05. But as Mario said, and Ezra, I believe, as we source and make changes throughout the year the margins should start to improve. The SG&A expense, we did leverage in the fourth quarter 20 basis points, and we believe that we should be able to leverage in 2005.

What was SG&A for Children's Place alone in Q4? How did it compare with the year earlier?

We didn't break it out, but obviously, the overall chain was down 20 basis points. I will say The Children's Place was down more than that. And as we mentioned on the call, the major things that we leveraged were our payroll and some of our credit card fees and we did invest at the same time in our marketing program.

And Mario, does it still look like the Disney Stores will lose significant money in the first half of this year? I think we were talking about $1.

I don't think we ever guided to $1, Margaret.

It was $0.70.

$0.70 rather, excuse me.

And it looks like that's going to be somewhat better than that.

Okay. And finally, Mario, could you discuss the key toy drivers that you have in place for the holiday?

Yes. We really, in addition to sort of the core princess franchise in toys, there's going to be a big expansion of the toys in the boys' area, built around the heroes concept and built around some new properties that we see, some new television properties, as well as an expansion of the Power Rangers franchise.

Okay. Thank you.

Thank you.

We move next to the site of Jeff Black from Lehman Brothers. Go ahead, please.

Yes, good morning. Just wanted to extend on the comments that were just made and talk about long-term operating profit margins. Where do we think we can be in 2005 on a consolidated basis? And what's the opportunity for getting significantly higher than that? What are your targets long term? Let's take it 2 years out for consolidated operating margins.

Our short-term target is to get to a high single digit, and our long-term target on a consolidated basis would be to get to double digits.

And you guys think a high single digit is possible in '05?

We would say in 2006 for sure, the guidance that we gave today, the $2.10 to $2.20, if you back into operating margin it would be something -- probably more of a -- on the verge of mid to high single digits. So I think really we have -- next year for sure, this year is borderline.

And then turning to just Disney, it sounds like it's going better than expected. Where are we seeing performance over and above that would lead you to believe the $0.70 dilution you talked about in the first half is going to be -- or at least the results are going to be better than that?

We just have substantially better understanding of the situation today than we did 3 or 4 months ago when we gave you the initial guidance.

And is it on the expense side, though? Are sales turning out to be better than expected? You indicated there's more margin. Can you give any color?

The color I would give is our expenses are under control and better than expected, and we're also seeing significantly lower markdowns, and therefore improvement in the gross margin versus our initial plans.

Okay. Good. Thank you very much. Good luck.

We'll move next to the site of John Zolidis from Buckingham Research. Go ahead, please.

Good morning. Fantastic results.

Thanks.

One follow-up to an earlier question. You said that you thought you could bring initial price points down 20 percent year-over-year at the Disney Stores. I guess -- I just want to confirm that you still expect substantial margin improvement after the benefits from improved sourcing even with the lower initial prices?

Yes, and that's it. I'm glad you asked the question. We'll clarify. Although we're bringing initial price points down by 20 percent, we expect the out-the-door AUR to be either at the same level or even higher. We'll achieve that through significantly less markdowns. And we do still expect the same gross margin improvement, especially as we look into 2006 when we have full control of the buying process.

Does that imply that you intend to change the promotional strategy in those stores?

Absolutely. And that's happening as we speak. We're really taking our foot off the promotion pedal and training the customer to shop at every day value pricing.

Great. And then one question on the new Children's Place stores, you said they came in I think at $1.4 million, the class of 2003 did on an annualized basis, generated 80 percent return on investment the first year. That was actually higher than the average sales per store. Wondering what you attribute the really fantastic new store productivity to. Is it location? Is it the new technicolor format? Is it all merchandise?

It's a combination of that, the technicolor format is certainly performing above expectations, as well as the fact that there is a more outlet mix, more outlet stores in the mix of 2003 and the outlets tend to have higher sales per average store.

Okay. Great. Thanks a lot. Good luck for the rest of the year.

Thank you.

We'll take our next question from the site of Marni Shapiro with Merrill Lynch. Go ahead, please.

Hey, guys. Congratulations.

Thank you.

Two quick ones. On the gross margins, Seth, you talked about it being lower overall, but shouldn't you start to lap the Disney gross margins in the back half, so if there's pressure in the first half we should see some relief in the back half with some sourcing improvements in the third, more in the fourth quarter, and as you've lapped the numbers from last year, even with better promotional cadence, you should see better gross margins at Disney in the back half? Is that right?

Yes. That's correct. As Ezra said, they made their first buying trip recently with the Disney buyers and that starts to affect back half and I think as Mario said, with fully in control of the merchandise holiday season we expect to see gross margin improvement during the back half.

Great. And then, Amy, since no one has talked about The Children's Place, despite the fact that it is the name attached to the ticker of the Company, congratulations on a great year. What do you do for an encore? And where are your biggest opportunities?

Well, I think that Neal really touched on it. It's about in the details and consistency and becoming more granular in our approach. I think that we feel really confident with our formula. Seems to be working and the customer is responding well, so now it's about we've set the strategy in place an it's about really getting into the details and fine-tuning the mix. We have opportunities in regional, assorting, and maximizing profitability by region and assortment. And then also we'll be continuing to focus on our newborn and our girls' business. We feel that there's opportunity to continue to grow those businesses exponentially to the rest.

The girls looks great this spring.

Thank you.

And I thought it was a big opportunity for you in the first half. Obviously, outerwear you had a few hiccups in the back half of last year on the girls side. Is there anything else that sort of stands out in your mind that maybe, either you left business on the table last year or you didn't feel it was as strong as you would have liked?

Outerwear was definitely the toughest as were sweaters. Some of the seasonal businesses where you hit that transition period, were some of our more challenging businesses, so we've already worked through fall and we're working through holiday of next year now and we are looking at timing, again, regional assorting opportunities between tropical hot, cold stores to maximize profitability and kind of lap those in a positive manner next year -- this year.

Marni, if I may add, we look at our traffic increases, we look at our transaction increases, we're bringing new customers into our franchise and we clearly believe there's so much opportunity just touching new people. That's why we said the back-to-school campaign. We really believe by casting a wider net we've got great growth potential.

Marni, it's Richard, if I could add my two cents as well, one of the opportunities we see for this full year which we started to experience in the fourth quarter of last year is growth through AUR as well as units. Last year was very unit and transaction intensive. This year we believe it can be a little bit more balanced that we can get both unit and transaction growth, but some AUR growth as well. I do want to qualify that doesn't mean we are taking retail prices up.

Absolutely.

What we are doing is lowering markdowns, changing mix, and we are not reducing the value equation, but we are counting on some increase in AUR. Right now it's less counting on. We've actually proven it, because for the last 3 or 4 months we've actually been getting that AUR increase out the door.

Great. That's good to hear. Then my final question is, how closely, as you guys integrate the Disney stores more and more, how closely is the apparel team from Place working with the Disney team so that we have, say polar fleece with the princess logo on it or something?

Well, clearly we believe in collaboration, and obviously we want to leverage off of the great success that we've had on the merchandising side at Children's Place, but at the same time we want to make the brands distinct, and Disney is all about the characters. We will definitely look into some of the great ideas and some of the great trends that Children's Place has had, but sort of put our own bent on it as well.

Great. Thanks, guys. Good luck with the rest of the season.

Thanks, Marni.

We move next to the site of Paula Kalandiak from Roth Capital. Go ahead, please.

Good morning.

Hi, Paula.

I have questions for Amy related to the merchandising initiatives. Can you give us information about how the good, better, best strategy is working out? Is that resulting in new customers or higher AUR? And what is the allocation towards good, better, and best, and also newborn luxury, how's that working out?

As Richard kind of mentioned, even in the back half of this year due to mix and we're expecting as well as reduced markdown rate, higher AUR, definitely a percent of that can be considered to come from the good, better, best strategy. About -- we look at it really from not only assortment but within categories, and best really constitutes about 15 percent of our mix if you look across all of the categories. That is an important initiative. And we are seeing that resulting in higher AURs, and we'll be continuing to grow that.

Newborn luxuries, we're definitely learning. We're seeing that we don't need to flow as frequently as we do, that we can maximize longevity in the product and drive higher sell-throughs. We definitely have seen a positive response to the higher priced goods because they still support the value equation, which is really critically important so we'll be continuing that strategy going forward.

With regards to the best part of the business, do you think your existing customers are trading up or are you bringing in a new higher income customer?

It's a combination of both. I think because the step-up in pricing is easy for our customer to understand, the current customer, we're seeing a lot of this is anecdotal, but just based on sales we think that they're stepping up in best, as well as increased transactions in traffic. We think that it's also drawing in new customers as well.

Okay. Great. And then regarding the television advertising over the holidays, can you give us some better information as to exactly what you were pleased with, with the results? Was the store traffic up in those markets, or what specifically made you think that you should continue this program?

As we said when we were doing the test, we really look at brand awareness, and we're pleased with the results in general with the brand awareness of what the campaign did, and we're really evaluating that, scrubbing that, and we're real excited by what kind of impact we'll have for the back-to-school season.

Thank you.

And, once again, if you would like to ask a question or make a comment, please press the star and 1 on your touch-tone phone. And we will move next to a follow-up from Kimberly Greenberger from Smith Barney. Go ahead.

Thank you. I just had a follow-up for Richard if I could. Richard, can you talk about your inventory plan through 2005? I think Seth indicated Children's Place inventory is up about 15 percent here at the start of the first quarter. Do you feel like that is a sufficient level of inventory to support the strong momentum you guys have in your business and how are you planning inventory for the rest of the year?

Yes, what a difference a year makes, Kimberly. Now being honest is, do we have enough. Again, we don't manage inventory based on LY. I don't look at what's the comp on inventory last year, of course, we look at that. What we do is we look at inventory positions over time to say, do we have enough to support the business we need to do over the next -- we were already looking out through the whole of '05 so we have projections of where we think we'll end in January as opposed to a point in time.

So over the months when you see inventory positions at a point in time on that one day at the end of the quarter, you're going to see some fluctuation in the industry -- in the inventory. At the end of the next quarter we'll be up in the mid-single digits, in fact at the end of the next quarter we feel we'll be even more conservative than that, because of where we were last year, it says less about this year versus what we had last year, but over time we really believe we have the inventory in-house and in the pipeline to support and exceed our plans. And we look at that from a unit perspective, because as I said we're looking at a piece of our growth out of units and then a piece out of AUR. We feel very comfortable that we have the inventory and we continue to look at it every single month and make adjustments as we feel necessary.

Great. Thanks, Richard.

Next we move to a follow-up from John Morris, Harris Nesbitt. Go ahead, please.

Neal, I think this is a follow-up for you. Maybe if you could talk a little bit more about the advertising plan for back-to-school, starting with what you saw from your test this year that -- the results of that that led you to decide to move forward and your plan in the back half, to the extent that you can quantify it in terms of increases and how will you allocate that across the different mediums.

As I said before, we're really just formulating the plans for our back-to-school in the back half. We look forward to communicating that to you in the future, but right now we're just formulating the plans. As we went into the test, we went in with expectations of just trying to see if we could raise brand awareness and we're pleased with those results. We're continually evaluating them.

We feel very strongly that we've got a great story to tell and we can't cast a much wider net because all of our research tells us that brand awareness is a great opportunity for us, so we do view that the back half, starting with back-to-school we'll start making some serious down payments on that.

At this point you think print and TV or print or still -- where are you along that spectrum?

We think much as we did for the test for holiday we will do outdoor, print, and TV. We're looking -- right now our initials are there will be a full spectrum of medium.

Thanks. Good luck.

It appears that we have no further questions at this time.

Okay. We thank everyone for your continued interest in our Company. Seth and Heather are available should you have any additional follow-up questions from our team. Thanks again, and have a wonderful day. Thank you.

Once again, this does conclude our teleconference for today. You may disconnect at this time. Thank you for your participation today and everyone have a great day.