Children's Place Inc (PLCE) 2005 Q2 法說會逐字稿

Good day, all sites are now on the conference line. (OPERATOR INSTRUCTIONS) I will now turn the program over to your host, Ms. Heather Anthony.

Thank you, Operator, and good morning, everyone. Thanks for joining us today for a review of the fiscal 2005 second-quarter financial results. Joining us on this morning's call is Ezra Dabah, Chairman and Chief Executive Officer; Hiten Patel, Chief Financial Officer; Neal Goldberg, President of The Children's Place; Mario Ciampi, President of Disney Stores. Also on hand to answer your questions at the end of our remarks are Amy Hauk, Senior Vice President and General Merchandise Manager; Richard Flaks, our Senior Vice President of Planning, Allocation and IT; and Mark Rose, our Chief Supply Chain Officer.

After our prepared remarks we will be able to take your questions. Please limit yourself to one question so that we can speak with as many participants as possible.

Before we begin I just want to mention that Erza is traveling today, so please be patient with us as we orchestrate the Q&A session.

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

With that out of the way, I will now turn the call over to Ezra Dabah, Chairman and Chief Executive Officer. Ezra?

Heather, I think you are turning over the call to Hiten.

I'm sorry, Hiten.

Thank you, Heather, and good morning, everyone. Overall we are pleased with the performance of both businesses from a top and bottom-line perspective. On a per-share basis, we lost $0.66 in the second quarter versus $0.37 last year. Consolidated net sales for the second quarter increased 68% to a record 318.7 million from 189.2 million last year. Second-quarter sales were comprised of 215.3 million from The Children's Place, a 14% increase over last year, and 103.4 million in sales from the Disney Store.

Disney Store's top-line trend showed nice improvement versus plan and compared to Q1. However, we believe we could have driven additional sales at Disney Store had we been in a stronger inventory position.

Children's Place comparable store sales for the second quarter increased 4% on top of a 10% increase in the prior year. The best performing regions were the West, Southwest, and Southeast, which comped in the high-single to low-double digit range. By department, boy's was the strongest with high-single digit comps. Girl's and newborns were next with low-single digit comps, and accessories up against last year's low-40s comp had a negative low-single digit comp for the quarter.

Average transaction size increased 9%, driven primarily by increased average unit retail, as well as units per transaction. Comparable store sales transactions decreased 4% in the, quarter which we partially attribute to having shortened the duration of our monster sale and $3.99 event.

As it relates to the Disney Store sales performance, we were particularly pleased with back-to-school, new key item baseball hats and kid's swimwear and sleepwear categories, to name a few. Mario will provide more color on the Disney Store sales performance in his remarks.

We are very pleased with our gross profit performance in the quarter. Consolidated gross profit dollars increased 63% to 99.1 million. Consolidated gross profit margin was 31.1% in the quarter compared to 32.1% last year due to lower gross margin at Disney Store, which carried a less favorable margin structure than Children's Place.

Children's Place delivered its best second quarter gross margin results since 2001, driven by increased IMU, lower markdowns and scaling of occupancy costs. In addition, we're pleased with the IMU improvements at the Disney Stores which helped to drive better than planned gross margins.

As anticipated, consolidated SG&A dollars increased year-over-year at a similar pace as the first quarter. Consolidated SG&A expense as a percent of sales were 36.4% compared to 34.0% last year. The deleverage primarily reflects Disney Stores' SG&A expense that we did not have last year, such as royalty expense. Other expenses contributing to the deleverage include higher employee benefit expenses and store maintenance, repair and remodeling expenses. Partially offsetting these as a percent of sales were scaling of marketing and continued scaling of store payroll.

For the third quarter we expect SG&A dollars to grow year over year at a slightly higher pace than was experienced in the first and second quarters before leveraging in the fourth quarter.

Depreciation and amortization expense decreased 260 basis points to 4.2%. The primary driver of the leverage was the acquisition of the Disney Stores which generated incremental sales but had only negligible depreciation and amortization expense. This resulted in a net loss for the second quarter of 18.3 million compared to a net loss of 9.9 million last year.

We continue to have a very healthy balance sheet. We ended the second quarter with cash and cash equivalents of 122 million compared to 31.3 million last year. In addition, we had 23.1 million of borrowings on our credit facility due to seasonal borrowings at The Children's Place.

Total inventory at cost is up approximately 32% on a 68% increase in sales, which is entirely due to the acquisition of the Disney Stores. For The Children's Place, total inventory at cost was down approximately 5%. Children's Place inventory per square foot was down approximately 12%. This is below our previous guidance, partially due to lower unit costs, which impacted balance sheet inventory dollars by approximately 4 percentage points. In addition, we have shifted inventory receipts into the third quarter, whereas last year they were received as of the end of the second quarter. Finally, it should be noted that versus two years ago inventory is up approximately 30% on a per square foot basis.

Importantly, we're comparable with both the level and composition of our inventory as we have significantly less old season merchandise on hand than we did at this time a year ago. Looking ahead, we expect The Children's Place to end the third quarter with inventory per square foot flat to last year with unit inventory up low-single digits to last year. In addition, Disney Store ended the second quarter clean of old season merchandise, and in fact we wish we had more fall product.

Regarding real estate, during the second quarter we opened 16 new Children's Place stores and closed 1 store. In addition, we opened 1 Disney Store during the second quarter. As of July 30, 2005, we operated a total of 1075 stores, 768 Children's Place stores and 307 Disney Stores and approximately 4.9 million square feet for an average of approximately 4600 square feet per store.

We now plan to open 53 Children's Place stores in 2005. We anticipate that the remaining 33 stores to be opened will be spread evenly between the third and fourth quarters. We now anticipate opening 16 Disney Stores this year, up from our original plan of 8 to 10 as attractive real estate opportunities have presented themselves. 12 of these new stores will be outlets, up from our previous expectation of 6. In addition, we plan to close a total of 4 Disney Stores and remodel 32 this year. 13 new Disney stores and approximately 24 remodels are planned for the third quarter with the balance of new stores and remodels for the fourth quarter. Based upon these expectations, we will operate approximately 1118 stores by year end, 800 Children's Place and 318 Disney Stores.

For fiscal 2006 we currently anticipate opening 60 to 70 new Children's Place stores, approximately 15 new Disney Stores, and fully remodeling approximately 75 stores.

Turning to guidance, we're doing two things today -- first, we're raising our fiscal 2005 consolidated earnings per share guidance to $2.20 to $2.30; and second, we are redistributing Disney Stores' anticipated first-year contribution to earnings of approximately $0.30 per share. While we typically do not provide quarterly guidance, third-quarter consolidated earnings are anticipated in the range of $0.86 to $0.91 per share and fourth quarter consolidated earnings are anticipated in the range of $1.61 to $1.66 per share.

Before I dive into the redistribution, let me walk you through Disney Store second-quarter operating results. On a GAAP segment basis, which excludes allocation of shared services such as finance, real estate, human resources, etc., Disney Store reported an operating loss of $0.23 in the second quarter compared to our original second-quarter guidance of a loss of $0.35. Since Disney Stores' first-half came in at a loss of $0.52 per share, $0.18 better than our previous guidance, we now expect third-quarter operating earnings of $0.05 to $0.07 per share and $0.75 to $0.77 in the fourth quarter.

Said differently, rather than the dramatic hockey stick change in profitability from the first half to the second half, profitability on an annual basis is a more gradual curve upward until reaching the powerful fourth quarter. We're recalibrating the quarterly Disney Store guidance because we have a much better feel for the quarterly trend line at Disney Store, and how our strategies are positively affecting the seasonality of the business.

In closing, we're pleased with our good start to 2005 from gross margin improvement at both businesses to the strong customer acceptance of our fashion-quality price-value equation. Our two brands are growing at a healthy pace and we're poised to deliver consistent profitable growth over the long term.

Thanks, and I will now turn the call over to Neal.

Thanks, Hiten. I'm very pleased with the consistent performance of The Children's Place and the continued gross margin improvement we're seeing. Our powerful fashion, quality, price-value equation continues to gain traction and differentiates us from our competition. Today I will review merchandising and update you on our store, logistics and brand-building initiatives.

Overall our summer assortments were well received by our customers. Strong sellers during the quarter include multiples, graphic tees and shorts and skorts. Also encouraging this quarter was a resurgence in our girl's business, which improved as the quarter progressed and comped in the high-single digits in July. We look forward to building on this momentum and believe we have the right balance of fashion and key item basics to fuel this business going forward.

Our first back-to-school assortment arrived in stores the second week of July. Our fall two assortment sets in stores next week, which builds on fall one with stripes as a key message across boy's and girl's. Newness in girl's will driven by novelty denim and dip-die, tie-dye with newness in boy's driven by polos, rugbys, and our thermal program. Building on our success from last year, our fall two floor set will also feature an expanded Halloween costume offering.

Back-to-school is the first season in which our tiered assortment planning capability was deployed, which gives us the opportunity to micro-merchandise our stores. Our primary focus is on climate, and we therefore have doubled the amount of region-specific merchandising programs for the back-to-school season compared to last year. While very early, we're pleased with initial results to date.

In addition, ProfitLogic has been fully implemented on our system as scheduled. We're currently using the system on a test basis with the intent of going live for fall sale.

We're pleased to note that stores opened during 2004 are averaging annualized sales of approximately 1.6 million, which is ahead of our average store volume of 1.5 million. Conversion was down 60 basis point in the second quarter, while comp store traffic was flat. As Hiten mentioned, we partially attribute this to our being less promotional during the quarter.

We have spent a considerable amount of time in the field over the past quarter to evaluate our store operations, share best practices across districts and regions, and identify opportunities to increase efficiency. Leading this effort is Kevin Meade, our new Senior VP of Stores, who over the past 11 weeks has visited all regions and approximately 90 stores across the US and Canada. While we still have much work to do, we're committed to flawless execution.

To that end, Children's Place is a highly unit intensive business. In order to maximize businesses' business we are evaluating the efficiency of our entire procurements-to-store process. At the store level some of our immediate efforts to improve efficiency, focus on replenishment, streamlining how our back rooms are organized and improving scheduling so that our payroll hours are better aligned with customer traffic.

Our new 525,000 square foot, fully automated DC opened in Central Jersey in July as scheduled, and will service both Children's Place and Disney Stores in the Eastern United States. The DC is operating as expected and with 125 bays and state-of-the-art equipment this new facility will greatly improve processing efficiency and speed to store.

As we have previously discussed, we view brand building as a huge opportunity that will contribute meaningfully to our long-term growth. We have taken a comprehensive approach to our marketing efforts this back-to-school season that includes external advertising, co-marketing partnerships and our traditional vehicles such as direct-mail and e-mail. Let me review some of the highlights.

We're significantly expanding our advertising and marketing presence this back-to-school season with a national cable TV ad campaign. Our plan targets women aged 25 to 49 with children under 10. This is a long-term investment in our business and we believe we will be an effective means to increasing our brand awareness. Our external advertising efforts this back-to-school season include national print, mall advertising in developing markets and out-of-home advertising in the New York Metro market.

In addition to external advertising we continue to utilize our traditional marketing vehicles and our pleased to see our database is growing at a healthy pace. We now have 8.8 million active customers in our database, an 8% increase over last year. Our total of 2.3 million customers now have The Children's Place credit card, representing a 10% increase over last year. And over 800,000 names are on our e-mail database, up 26% over last year.

In support of our back-to-school line we sent a direct-mail piece to approximately 3.75 million customer homes, up from 3.45 million last year. We will follow that up with a fall two back-to-school reminder mailer going to 1.25 million homes and our season pass promotion runs until mid-September, similar to last year.

Building off our efforts from last year, we remain committed to consumer insight and are currently wrapping up focus groups in five markets to understand the consumers' perception of our product.

To wrap up, we remain focused on consistency. Everything we're doing, from merchandising, to flawless execution, to logistics and brand building, is designed to fuel the growth and success of this brand and to deliver consistent results over the long term.

Thanks. I will now turn the call over to Mario.

Thanks, Neal, and good morning, everyone. As Hiten mentioned, better-than-expected gross margin results and good expense control drove our second-quarter results. Guests are responding positively to our value pricing and merchandise strategies as we continue to believe strongly in the long-term success and profitability of the Disney Store. Today I will provide a quick merchandise overview, discuss achievements in the quarter, and update you on the progress being made to improve gross margin.

Overall, our hardline business continues to do well, and we're seeing sequential gross margin improvement. As you know, our opportunity is primarily on the softline side of the business, which plays to our strength. Hardlines was driven by continued strength of souvenirs, family fun dinnerware and plush, while softlines was led by our kid's swim and sleepwear categories, similar to the first quarter. All of these categories grew from a sales and gross margin perspective.

Back-to-school represents the first line we were partly able to impact from a design and merchandising perspective. Our first back-to-school line set in stores the third week of July, and we're encouraged by the initial guest response. Fashion items such as boy's football jerseys and girl's ponchos and striped tees are driving ready-to-wear. Our key item baseball hats, a newly introduced category offered in many different character choices, are also performing extremely well as guests are responding to our multiple 2-for-12 pricing. We're experiencing continued strength in our backpack business, which for comparison is a bigger business than that of The Children's Place. Our denim business is encouraging, and in fact, we wish we had bought more.

Our fall two assortment set last week and features an increased selection of ready-to-wear and larger presence in Halloween costumes, a category that Disney Store dominates. In addition, we're excited to introduce newborn in September, which will feature Winnie the Pooh and include basics such as stretchies and blanket sleepers, as well as fashion product.

We continue to experience positive guest response to our pricing initiatives with significant increases in units sold, sell-through rates and gross margin dollars. Over the past two quarters, we've kept at a variety of value prices across several categories. Our value price strategy included in some instances multiple pricing and in other instances repricing basic product to everyday values.

An example is our mini beanbag plush. We offer these at $6.50 each, or 2 for 10, a reduction of $2 to $3.50 from the original price. The results were very positive; sales tripled and margin dollars doubled.

Another example is ceramic mugs, which originally offered at $8.50 cents, are now 2 for $12. The results, a 150% increase in sales and gross margin dollars. In fact, we achieved increases in sales and gross margin dollars in every instance where we implemented multiple pricing, including such important categories as graphic tees, PJ Pals and Princess Dolls.

Turning to our achievements, as previously discussed, all major IT systems have been successfully migrated over to our Children's Place systems with the exception of POS, which will be upgraded as planned in 2006. Clearly our sourcing and production teams are achieving our objective as we're seeing the benefits in merchandise cost reductions in the low-20% range on average. And as Neal mentioned, the successful opening of our new DC marks the third and final phase of our logistics integration, and disneystore.com will go live in the spring of 2006.

In addition to integration milestones, we completed the chain-wide rollout of our Magic Makeover visual merchandising initiative at the end of July as scheduled. All 300 plus stores now have the updated look which better delineates between boy's and girl's merchandise, makes the store easier to shop, caters to the four foot and under guest, and creates a much more impactful and focused key item and character presentation. This effort has improved the look and feel of the stores, and during the test we experienced increases in store traffic and sales.

In July, we introduced our new Mickey store prototype in Trumbull, Connecticut. Our objective was to create a new and contemporary look and feel to the Disney Store, as well as make the store more experiential relative to the more recent store formats. We're pleased with the outcome. The Mickey store features an iconic bright red Mickey silhouette as the entryway, and 11 foot high Sorcerer Mickey with an elliptical ceiling and sparkling lighting overhead, and a media wall with seating for kids. In addition, the capacity to hold more product on the selling floor is significantly greater than in the past. By the end of August we expect to have over 25 Mickey remodels under construction, in line with our plans. And the goal is to have all 30 Mickey stores open for business by holiday.

Finally, as you know, the opportunity we saw when we made the Disney Store acquisition was to improve gross margin. I'm pleased to say that our last two buying trips have shown that we are well on our way to achieving that objective. Through merchandise cost reduction, as well as significantly lowering the markdown rate, we're confident that over time we can bring Disney Store gross margin ex-media in line with Children's Place.

We've already secured merchandise cost reductions in the low-20% range across all hard and softline categories for the holiday and spring selling seasons. In addition, we will be in a much more aggressive unit inventory position for the holiday season, which will allow us to capitalize on our value pricing strategy.

In closing, we're pleased with the pace of our progress. We've learned a tremendous amount about our guests and their acceptance of everyday value pricing, which has happened sooner than we had expected.

We're also impressed with the store teams at Disney Store. This is a very tenured and passionate group individuals who have readily embraced the many strategic initiatives we've put into place. Experiencing their enthusiasm at last week's national conference was very rewarding, and we look forward to a bright future working together to achieve our goals.

Thanks, and I will now turn the call over to Ezra.

Thank you, Mario, and good morning, everyone. As you have heard from Neal, Mario and Hiten, our team achieved several important milestones that support our goals and bring The Children's Place and the Disney Store further along their respective growth tracks. Today I will briefly wrap up with comments regarding our growth, strategic vision, and the profitable future we see for both our brands.

The Children's Place is poised for continued growth and success. According to NPD, The Children's Place has continued its to increase its market share. During the 12-month period ended June 2005 we gained 140 basis points of the children's apparel specialty market share. Our powerful value equation of fashion, quality and price is being recognized by more and more consumers, and is further demonstrated by our 9% comp in the first half, which is on top of last year's 13% comp increase. As we embark on our first national cable network campaign, we look forward to introduce many new customers to our unique and powerful value equation. We're confident that our talented team, system infrastructure, and efficient processes will continue to raise the merchandise bar season after season.

As we look to the future, we're determined to continue our profitable growth at The Children's Place by remaining steadfast to our core purpose of making the very best accessible to all children. As we have previously discussed, the way we will drive our growth is through continuing to increase our sales per square foot productivity, our number one priority, and the many new store opportunities we still have in outlets, Canada and the West.

As it relates to the Disney Store, the more time that passes by, the more we recognize the great future potential of the Disney Store brand. The beauty of the character art, combined with its magical and emotional connection with children and adults alike, is incredibly powerful, as demonstrated by the significant growth in licensed product and licensed character apparel, and particularly of the Disney characters. By applying the right strategy, the right retail strategy, which we believe to be our powerful value equation of fashion, quality and price, to one of the top family brands in the United States, should yield significant customer loyalty. As Mario mentioned, we're pleased with progress we've made and at the rate at which guests are responding to our initial pricing, merchandising and visual strategies.

As we experienced our first back-to-school selling of ready-to-wear fashions, denim and basics, we believe significant opportunity exists next back-to-school season to make the Disney Store a key back-to-school destination. In addition, Disney Store is showing signs of being a highly unit intensive business, driven by the combination of our value pricing and the mass appeal of the adored Disney characters.

We continue to be incredibly impressed with the compelling content that Disney produces on an annual basis. In addition to the popular classic characters and the Disney channel favorites, we look forward to maximizing the upcoming merchandise potential of Cinderella Platinum DVD release, Chicken Little, the Chronicles of Narnia, Fairies and Cars.

Looking ahead, both brands have clear growth tracks with plenty of growth room. Not only do we see considerable store growth, we continue to believe that The Children's Place can return to high-single digit to low-double digit operating margins over the next couple of years, and that over time Disney Store should run at comparable operating margins to that of The Children's Place.

Before we take your questions I just want to add that while we recognize comparisons are difficult in the second half, we believe we can build off our first-half momentum. Through strategic planning over the past year we are executing strategies in areas such as merchandising mix, unit inventory, marketing and micro-merchandising, which should enable us to achieve our profitability goals.

In closing, I'm extremely pleased and proud of what our team has accomplished, and the smooth integration of the Disney Store acquisition. We've seen continued, consistent performance at The Children's Place while making substantial strides at the Disney Store. In addition, having two brands under our talented and cohesive management team allows us to share information, learn best practices and leverage our buys, making each brand a stronger competitor. Perhaps most gratifying is that our core purpose of making the very best accessible to all children creates a strategic roadmap for us as we maximize the potential of our current growth vehicles and contemplate future concepts down the road.

Thank you, and Operator, please open the call up for questions.

(OPERATOR INSTRUCTIONS) Jeff Black, Lehman Brothers.

Good morning. Could you perhaps give us some color on what kind of sales you're expecting in the third quarter and the fourth quarter for Disney? And secondly, what specifically drove the change in guidance from 3Q to 4Q? Was it sales? Was it on the gross margin? Was it on the SG&A line? And how quickly can you make this a full priced -- how quickly can you make this a profitable business across the year as was the original plan?

Mario, you want to take that one?

I'll take the last part of it, and then I will turn it over to Hiten.

But Jeff, again as we sort of reiterated today, it will be a profitable business this year. And it's the same $0.30 that we guided to when we purchased the Company. In fact, we're, I would say, more excited today about the opportunities for profitability than we were when we bought the Company. I think the only thing that's changed is, as Hiten said, that we've seen that the progress has been more steady instead of looking more like a hockey stick, sort of flat and then taking a big move up toward the fourth quarter. We saw better-than-expected results in the first and second quarter. We're quickly moving toward a full-priced business. Our markdown rate is dramatically lower than Disney has ever experienced in their recent history. Our gross margin growth is substantial. And I think if anything the opportunity existed in owning more units. We inherited not enough inventory going into the spring season. And again as Hiten said, we wish we had bought more back-to-school product.

Jeff, can you just repeat the first two questions there?

I guess I was wondering specifically what changed from 3Q to 4Q and why we're reallocating the EPS from Disney. Is it sales? Is it gross margin? Is it SG&A? And also, can you shed some light on the sales target for the third quarter and the fourth quarter for Disney?

As it relates to the sales targets, as you know, we don't really guide to sales targets, so I'm not going to be able to comment on Disney sales for Q3 and 4. But as Mario mentioned, there's really nothing that's changed in terms of the profitability targets. Effectively what has happened is we have flattened out the seasonality effectively.

Jeff, as I'm sure you read through my remarks, we're extremely excited about the Disney business. As every day passes by we recognize more and more the immense potential of that business. And this reallocation of quarterly guidance, you must appreciate the fact that our initial guidance was done even before we purchased the Company. And today, after being in it for the past eight months, we just have a much better understanding of how the quarters are going to fall, and that's why we're adjusting.

Great. Thanks for the clarity. Appreciate it.

We're reiterating the $0.30, just to be clear.

Yes, got that. Thanks.

Margaret Whitfield, Ryan Beck.

Good morning, everyone. Switching to the other side of the business, given the importance of the back-to-school season with a little over a week to go, I wondered if you could tell us how your August sales trends have been in The Children's Place.

That's one that we always like to answer, but we don't comment inter-month on sales, so we cannot do it at this time.

Well then can I ask a follow-up? You have indicated in your guidance on the Q3 that your SG&A dollars will grow at a higher rate than in Q2, I believe said. So could you comment on what the outlook is for gross margins embedded in that guidance?

Gross margins should see a similar improvement in the third quarter, as it did in the first and second quarters. We continue to see nice improvements in IMU and markdown management at both businesses. So we expect an improvement and gross margins for both businesses in Q3 and Q4.

How about SG&A in Q4? Similar to Q3?

No. We should see a significant improvement in SG&A percent in the fourth quarter as we cycle the Disney business. And we should in fact see some scaling relative to SG&A expense as a percentage of sales versus the fourth quarter of 2004.

And I take it the D&A line will be comparable to Q2 moving up a little bit?

Pardon me? What was that?

Depreciation and amortization should be a little bit higher than what we saw in Q2.

Yes, we will see continued increases in absolute dollars as we continue to build out our store throughout the year. But I don't think we will ever get back to that fixed percentage range, historical range that we saw, because, again, Disney doesn't really have any depreciation expense from the acquired store base.

Thank you.

John Morris, Harris Nesbitt.

Thanks. Congratulations, everyone, on a great quarter. I guess it's a question for Hiten. Looking at the numbers on Q2, if Disney was better overall -- I'm thinking about the pieces, Disney and Children's Place -- if Disney was better overall and gross margin was up at The Children's Place division, similarly to the first quarter, so that sounds like it was also kind of better than originally expected, that would imply I think that the SG&A at Children's Place was higher, maybe even significantly higher, if I can tell. Can you give us more color on that? What can you tell us about SG&A spending in Q2 at core Children's Place, Hiten?

I think it's important that when we start doing comparisons of the Disney segment information we should also understand that TCP needs to be carved out and shared services need to be carved out. So if I were to do that for you for the second quarter, on an apples-to-apples basis Children's Place would have lost approximately $0.05 this year versus $0.12 last year. So there was a significant improvement in their profitability.

And you're right in deducing that it's really SG&A of shared services that was the challenge in the second quarter. As I mentioned, there were some unusual employee benefits type expenses that hit us in the second quarter that were not anticipated, and some recon -- sorry, not reconstruction, but renovation expenses in the second quarter that we weren't expecting.

Are you guys -- just a little more color there. Why was it you weren't expecting them? Where was it coming from on the employee benefits and their renovation? Sort of what does that mean?

Well the employee benefits expenses is our health insurance programs and our, just generally speaking our insurance programs, as well as our performance bonus.

And the remodeling costs were primarily the costs of implementing the Magic Makeover at Disney. We like the resulted, so we really expedited execution of the program.

That make sense. Let me just ask, since you're good enough to give us Q3 for Disney expectations this year of $0.05 to $0.07, what does that compare to last year on an apples-to-apples basis?

We didn't own Disney in the third quarter last year.

I'm just thinking from a pro forma standpoint, just for comparative purposes. Would it have made money?

No.

And then, I certainly understand you don't want to talk about August at this point, but since you have given us the numbers for Q3 -- thank you -- for expectations, what is the implied comp in that Q3 guidance?

I'm not going to comment on the comp, but if you do the reverse math I think you can quickly figure out that it's a positive comp.

Okay good, because I guess that kind of led me to my final question, and I will turn it over. Inventory (multiple speakers) thank you. Inventory running a bit below, it sounded like you said in your prepared remarks. Excluding the shift that you talked about, what was it, if you can exclude that number? And why and how do you feel about what you have on hand to drive those positive comps looking ahead?

I'm going to let or Richard Flaks go over inventory, and just strap yourself in for Richard's inventory explanation.

I love it.

To answer your question, there are four issues. You touched on the one which was the shift. There are three other things that have driven the inventory lower than last year and slightly lower than what we were projecting.

The first is we ended second quarter cleaner in prior season goods than we did last year, which was planned, but even than we anticipated. So the first is we have less liable inventory summer and prior.

The second piece is we strategically decided or planned to plan back-to-school inventory down to last year. We did that purposely because we thought we slightly overdid it last year and we shifted some of that into holiday and '04 transitional inventory. Our goal is to end the end of the year approximately flat per average store in inventory. But between now and the end of the year, our holiday, it's a shift out of back-to-school and into holiday.

The third piece that is driving inventory down on the balance sheet is the improved IMUs. So obviously from a planning prospective what I worry about is do we have enough inventory at retail to support the sales plans. We do. When you look at it on a cost basis on the balance sheet, it's lower because we paid less for the goods, which is obviously a good thing.

So those are the three things. It's really cleaner carry over, a strategic decision to lower back-to-school but put it into holiday and transitional spring product, and lower costs on the balance sheet.

Richard, did you give us that number on what it would have been excluding the shift? Is that possible?

The shift was a small piece of the (multiple speakers)

Thanks. Good luck, guys.

Kimberly Greenberger, Citigroup.

Good morning, and I will add my congratulations. Just a follow-up on the inventory question. Richard, could you just talk to us about unit inventory on a year-over-year basis at the beginning of third quarter. And as I know you look at inventory dynamically throughout the quarter, can you talk to us about the way inventory is flowing through the third quarter, and how you expect on average your unit inventories will compare to last year?

And then Ezra, if I could just ask you a follow-up on your Disney margin opportunity comment? You indicated that Disney could achieve a comparable margin over time to that of The Children's Place in the high-singles to low-double digit range. Does that include the Disney royalty?

The answer to that is a quick yes.

In terms of the inventory, the inventory -- I can't give you one consistent answer over the hold back half of the year, because it shifts. In third quarter there's a number of dynamics going on. One is we have been successful, and you can see that out of the numbers in driving some of the growth through increased AUR. Last year the whole story was about selling more units. This year is a little bit more balanced between AUR and units. Having said that, in the third quarter we also lowered the content -- the outerwear and sweater content, which is much lower unit intensity, but much higher AUR. So with all of those shifts, the strategy is to get about one-third to one-half of our growth out of AUR growth and the rest out of unit growth. Now inventory position going forward is in line with that. It's not up as much as our sales plans because some of the growth comes out of AUR. I don't know if that answers the question.

That's very helpful. Thanks, Richard. Could I just ask a follow-up? Amy, you had some early success with some of your fall programs, and I'm just wondering if you can talk to us about your outlook for fashion here as we progress through the fall season and trends that you're identifying outside of decreasing outerwear and sweaters. Any other trends that you've identified that you think can drive business from the second half?

Definitely the whole dip-die, tie-dye thing is really important, and we're seeing that register phenomenally. Also, we're seeing purple as far as a trend color really start taking off, and that was a tough color for us in the first half of the year. So that's actually really exciting to see it kind of taking over pink. And if you look out in the competition like in Hollister and stuff you can tell that purple has really, really slowed down. So we think that's something important that we're capitalizing on.

Skorts continue to be really strong for us. And then embellished and washed denim in different creative washes are doing really, really well for us. And we will continue to build on that going into the back half of Q3 and Q4. We are doing some interesting things with denim that I'm really excited about. That's really what we're seeing happening out there.

To support that from an accessory point of view, and this is really kid-specific, is novelty tights have just been crazy. That balances out with the wear-now that's doing really well. But I think at 2 for $10 they're just picking them up now because they want them, but we are selling close to 100,000 units a week in novelty tights.

Great. Thanks, Amy.

Janet Kloppenburg, JJK Research.

Congratulations. I wanted to -- I'm a little confused. According to my numbers, it looks like the Disney operating earnings are now more of a hockey stick than they were for the third -- from the third to the fourth quarter. I guess what I'm saying is I thought you guys would have higher earnings in the third quarter than what you're now projecting. And I know you didn't project third-quarter earnings, so I'm not suggesting you've changed it. But I'm wondering if you could tell me if I am right there, or if I have just been off plan there, and if you could also tell me if you expect -- if the Disney inventory levels are meeting the sales expectations right now. In other words, have you planned the business correctly?

Let me just talk to the hockey stick, because that was my analogy. The original guidance that was given in October of 2004 was a $0.35 loss in the first and second quarters, a $0.20 cents a gain in the third quarter, and an $0.80 gain in the fourth quarter, which balanced out to the $0.30. So the visual that I was trying to paint with my words was that 35, 35, 28, which is a much steeper kind of shift in profitability from the first half to the second half, versus what we've actually achieved, which is a $0.29 loss in the first quarter, a $0.23 loss in the second, a $0.06 gain in the third, and a $0.76 gain in the fourth.

So the question I'm just asking then is -- and I understand what Ezra said, that you bought this a year ago and it's tough to plan the business. So when you look at that shift from your original expectation of $0.20 for the third quarter now going to $0.06, can you just give us some idea of what you found out about the business that led you to take that to that level? Thank you.

It's just a better understanding of what we're going to come in third quarter. We're just so much more closer to it today. There is nothing specific; it's a magnitude of things that make that happen.

Does it suggest that Disney will be a more seasonal business? Does it suggest that holiday will be the period, the only real period that's --?

No, absolutely not. Holiday in the past at the Disney Store was the only real period where they made money. And our plans, of course, are to find a way to make as much money and more as they made in the fourth quarter, but at the same time to flatten that out somewhat.

We are really excited about what we've seen from back-to-school today. We just dipped our toe and brought some fashions in, and brought denim in, even without having, for example, dressing room, and we're just seeing the kind of sales that no one at the Disney Store and us anticipated. So we are kind of a little short of goods. But that takes us believe what we originally believed, which is we can make the Disney Store a back-to-school destination and have substantial back-to-school business, something that they never had before.

At the same think if you think about that, if you can have a substantial back-to-school business, which is now being demonstrated to us, that if we had the goods we can be there, even during the spring season which is a week quarter for them, the first quarter, we can be spending for Easter and the like and make that a much better, much stronger quarter. So as we see the future, we see us making money and most hopefully in most quarters.

Ezra, what I'm worried about is if you we're thinking you were going to earn something around $0.20 this quarter, maybe you build inventories to that level of earnings and maybe a higher sales plan. That was my follow-on (multiple speakers)

Let me respond to the inventory. I think a piece of the third quarter is the fact that we don't have the inventory that we would like. So what happened is the first half of the year we were not able to really affect at all. We inherited what was coming, and we built our financial plan based on the inventory we had. The good news, and as we've tested different pricing and implemented different pricing, we know that if we had had more units we could have sold more. We were very constrained by inventory.

In third quarter a year ago when we were putting these plans together, we had anticipated having a greater impact on the third quarter than we ended up having. So that's a piece of why we're still chasing inventory into the third quarter. We really were able to impact the buys much more significantly for holiday, and we now have positioned a lot of units to support the increased sales that we're seeing, and those -- we bought those based on tests and actual performance that we're seeing in stores now. We have done some depth tests of inventory that we've done, and we've done some tests to understand how high is high and have bought the units to support that.

So I think a piece of it is more the other way around. It's not sales are our slower and therefore inventory is backing up; it's more that we weren't able to react as quickly, and therefore shifted into fourth quarter -- well, it didn't shift, but fourth quarter will be better positioned.

I want to emphasize something Ezra said. We see as big, if not even bigger, opportunity in Q1 to really make Disney the spring and Easter destination, especially with softlines growth.

Okay that's good. And on that note about inventory being less than where you want it to be, I was wondering if you could comment about August inventory levels at Place, The Children's Place stores, and wondering if there will be a constraint to comp growth because the inventories are down so much versus being so heavy last year. Not too heavy, Ezra, just heavier than they had been.

We're not going to comment on the comp side of it, and inventories in August are pretty much in line with where we expected them to be -- a little bit lower, but a lot of that is carryover of summer product.

Dorothy Lakner, CIBC World Markets.

Switching back I guess to the Place side of the equation, I wondered if Amy could give us a little more color on the resurgence in girl's. You did talk about the trends that we're working, but what did you do? What's made it get better?

And then secondarily, on the ProfitLogic implementation, are you expecting some benefit in this year, or should we more fully see the benefits of a ProfitLogic implementation in '06?

Just to address the girl's business, and then I will hand it over to Richard to speak to ProfitLogic. We invested very heavily in the summer in skorts, and that is really a business that we own. We kept not realizing how high was high in that category, and that really helped to drive our business to make it stronger. And also our fashion groups for us are smaller bienettes (ph) that are on the parallel bars had higher sell-throughs than they do historically, and that also helped to drive higher AUR and stronger comp performance. We still, though, have a long way to go as far as driving the girl's business to where it needs to be, and we continue to focus as a team on making that business even stronger going forward.

But you're pleased with the strategy of the smaller fashion groups?

The smaller fashion groups, yes, and the aesthetic outlook. They're more cohesively a part of the rest of the assortment. They're less isolated. They tie directly in. There's more outfitting available. They can outfit off of those into the basics. And we've seen that really work in our related selling.

But also, being that they are smaller you can move things faster, bring more newness in the store more frequently.

Absolutely.

And they hook up with our other goods, so it really is very consistent with who we are, a company that has everything to hook up to each other.

In terms of ProfitLogic, we absolutely are expecting some benefit this year. We really are for all intents and purposes live, although we are doing it on selected product right now. Within the next two or three weeks at The Children's Place we will be fully live on it.

One of the big benefits is out of the box, and I think I said this on previous calls, we went to zone pricing. So a lot of the benefit is being able to market things down differently by climate zones. And in fact, we're talking about when to roll this out at Disney because we believe there's a big benefit there as well.

So some benefit in the third quarter, you're saying, or more the fourth quarter?

A little bit in the third quarter, because already we took some markdowns this week, and the tool saved us a little bit of money. But it's less so in the third quarter, because it's more of a test mode. But I would think that fourth quarter would be where we see most of the benefit this year.

Okay great.

Marni Shapiro, Merrill Lynch.

Congratulations. A couple of questions. Again on the G&A, can you talk a little bit about any incentive bonus that might be baked into these numbers? Was it higher than your original plans for the second and maybe third quarter? And could you talk about the best sellers at Disney and your ability to chase them? Was it more core items like denim and tees, or was it also in more fashion items that you have brought in there?

As you know, we've taken up guidance fairly consistently over the last six months because of just our performance. So the incentive bonus has been higher than planned, and I think that's really what's impacting us.

On the Disney side, we're some real success on the hardline side in plush due to our value pricing, and we (inaudible) remarkable growth in mature businesses like the mini beanbag and our core plush, and we're chasing that business. We are, again, to our sort of general inventory point, we wish we had more. We will hopefully get back into some of our core plush business in a bigger way come September. We've seen a similar trend in ceramic mugs, where again the value pricing has just been widely accepted and we're chasing that business.

On the softlines side, it's harder to do. We've seen great results in some of the initial fashion and denim pieces. Those are harder to chase, and probably we can get back into the business on those. The graphic tees is a mature business. We're seeing consistent improvement there, especially on the gross margin side. But we have no inventory problems and graphic tees.

That to add to my own point on Disney, even on the softlines side is we are able -- now we're getting a baseline of what we can drive on a unit basis per store, we're going back and relooking at buys that we still can impact and relooking at the quantities to make sure that we can maximize the trend go-forward.

Can you just also talk about on the Disney side any marketing plans you have? You have very strong direct and print marketing campaign in place. I don't know if it's too early for that at Disney, but with holiday coming up any insight that you have there?

We're starting slowly on the marketing side, but we do have plans. We're currently in the process of building a database. We actually did our first direct-mail piece around back-to-school. It was significantly smaller than what we see at Children's Place. It was about a tenth of the size. We're doing some external marketing. About 40% of our malls have -- mall stores have in-mall banners talking to our value pricing and our authentic value Disney message. And then come closer to holiday we're going to do some more radio and some more direct-mail as well.

As well as print.

Thanks, guys, and I'd like to say a special thank you to whoever designed the new pajamas. They're much better.

It's only the beginning. They're going to garment wash come next holiday.

Thank you.

John Zolidis, Buckingham Research.

A couple of questions. On the Disney business, we've had a little bit of time with some of the somewhat revised assortments in the stores at least that were captured in the second quarter. Have you seen any improvement in conversion rates? And has there been any change in traffic trends at the Disney stores recently you can talk to?

We have seen sort of a subtle increase in conversion relative to previous weeks this year. As we compare to last year, we sort of see it up and down just because of Disney's promotional cadence last year. So it's tough to gauge against last year.

We're seeing -- on some of the other key performance indicators we're seeing significant UPT growth. We're seeing ADS now pretty close to flat when it was down earlier in the year. And we're focusing heavily on growing the conversion. It's our number one opportunity and our number one focus at the stores.

If I remember correctly, the traffic at Disney stores is about 2.5 times as high as that at The Children's Place. Is that correct?

That's correct.

But the sales per square foot only about 20% higher there. So if the conversion rates can get up, what do you think the potential is for sales per square foot at Disney?

The potential is immense, if I may take that one. At the same time, though, the average dollar sale at the Disney Store is substantially less than that at The Children's Place. Again, some more opportunity there provided we can manage to take that average dollar sale up.

Great. Well, I hope you guys will feel more confident about inventory buys for next year. I would love to see more of that denim in there, and I think it is a great opportunity.

Paula Kalandiak, Roth Capital Partners.

Good morning. Nice quarter. I just have a couple of questions, one as it relates to the national ad campaign currently running. What is the plan for that throughout FY -- or the third quarter? And are you seeing any early reads on it driving traffic to the stores at this point?

Right now it's way too early to tell. But we've done pre-advertising research. We'll do post, and we will look at our investment. In the next weeks to come we will make some decisions what is next. Obviously we still are very committed on a very broad marketing approach. We still believe very much in our magalogs, our e-mail campaigns. This is just another tool for us. We will keep on evaluating it. Initial just mother-in-law surveys, our people love the commercial. We're glad to hear that. And the print ads.

And then just a question for Amy. There's been a lot of chatter about their potentially being a glut of denim, and I know that you guys increased your denim spend for back-to-school. I'm not sure if this glut exists and if it just relates to the teen market, but I wanted to know how you feel about the denim business in general and as it relates to your back-to-school position.

Very interestingly enough we've seen huge success in fashion denim. And also with the introduction of the girl's modern flair we're seeing really strong growth in the girl's basic down business. Some of our boy's denim business has been a little softer, driven by the hot five pocket, but it is still early to say. Overall, we're not seeing erosion in overall denim business.

So you feel good about your increase in units for back-to-school?

Yes, we do. We still feel well positioned. And just Richard whispered to me we're also up -- we had a liquidation in boy's at $9.99 that we're up against from last year that has also had a little bit more of an impact than we might have thought.

We still fine, too, from an inventory position because with basics we can ship -- move in and out and react to the business fairly easily based on trend. So we still feel -- when we forecast into September and beyond we still feel that we're well positioned.

One of the things we also do is although we place denim fairly far out with the rest of the product, we reserve the ability 90 days out to recut (ph) it based on size needs and everything. So we do keep a little bit more flexibility in the denim program.

Okay great. Thank you.

(OPERATOR INSTRUCTIONS) Kimberly Greenberger, Citigroup.

Amy, just to follow up on the denim question, I noticed that Old Navy has recently reduced its price point on denim --

Yes, so did I.

(multiple speakers) it looks like they're taking a page out of The Children's Place playbook.

Yes.

Anyway, I don't recall the exact start date for that promotion, but I'm just wondering if you saw any impact or any downshift in the run rate on denim sales as a result of that impact.

No, absolutely not. They definitely went out aggressively in a lot of categories for back-to-school to price up against us directly it looks like to me. We have not seen that. And I'm not sure what's going on with their kid's denim right now. I don't know how their business is in denim. But we have not seen erosion from that, which is a good thing.

Great. Thanks.

If I may, we spent probably more time as a whole management team in stores over the last two or three months. We're very aware of what competition is doing in price. And one thing we're very focused on is continuing doing what we've done right, to stay extremely focused on being aware of the competition. But we're not changing our strategies or tactics. We're really staying focused. And if need be, surgical changes may happen but on the whole we're full steam ahead.

Great.

John Zolidis, Buckingham Research.

Two cleanup questions that I'm going to try to get answered. One, on Disney, I know you don't want to give sales guidance by quarter. Can you give us what sales were by quarter last year for 3Q and 4Q?

I think it's so substantially different. They had many more stores. It's just not comparable whatsoever.

Okay, I was just trying to get an idea of the seasonality there.

And then secondly, the guidance for the third quarter, you mentioned that it was based on the assumption of a positive comp. Is it based on an acceleration from the current run rate in August?

No comment.

I thought I'd try anyway. Good luck for the (multiple speakers)

(OPERATOR INSTRUCTIONS) Dorothy Lakner, CIBC World Markets.

Another cleanup question. You mentioned at the beginning in your formal presentation full remodels of 75 stores. I just wondered how that breaks down, whether that was Place and Disney, or if you can go through that. Thanks.

The 75 number was just Disney stores.

And any remodels on Place at all?

Just a handful.

Okay great. Thanks.

It appears that we have no further questions at this time. I would like to turn the program back over to our hosts.

Thank you, everyone. Thank you for your continued interest. Hiten and Heather are available to the extent that you have any additional questions. Thanks again. Have a great day. All the best.

Thank you. This concludes our conference call for this morning. You may now disconnect your lines, and everyone have a great day.