Children's Place Inc (PLCE) 2005 Q3 法說會逐字稿

Good day and welcome to today's teleconference. All participants are in a listen only mode at this time. I would like to turn the call over to your moderator, Mr. Heather Anthony.

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

Thank you Heather and good morning everyone. I am pleased to report our strong third quarter results, one in which we continued profitable growth. Net income for the quarter was 29.3 million, or $1.02 per share. Earnings per share before extraordinary gain increased 48% to $0.96, over last year's earnings per share of $0.65. The third quarter also benefited from a lower effective tax rate than previously anticipated. Disney Store recorded segment earnings per share before extraordinary gain of $0.08. The Children's Place plus shared services recorded segment earnings per share of $0.88. These results exceeded our previous guidance given on our second quarter earnings call. Excluding the benefit of the lower effective tax rate both businesses hit the high end of our previous guidance.

Consolidated net sales for the third quarter increased 57% to $441.1 million, from 285 million -- I'm sorry, 280.5 million last year. Third quarter sales were comprised of 320 million from The Children's Place, a 14% increase over last year, and 121.1 million from Disney Store. Children's Place comparable store sales for the third quarter increased 6% on top of an 18% increase in the prior year. Comps were positive in all regions, led by west and southwest, which were up in the low double digit to low teens. By department, accessories was the strongest with a low double-digit comp followed by girls with comps in the high single digits. Our 6% comparable store sales increase was driven by a 6% increase in average transaction size. A balanced increase in average unit retail and units per transaction drove this growth. Comparable store sales transactions were flat which we attribute to unseasonably warm weather throughout the majority of the quarter, and fewer promotions.

Consolidated gross profit dollars increased 59% to 185.2 million. Consolidated gross margin increased 50 basis points to 42% despite a lower gross margin structure at Disney Store. This is the first quarter in which we were able to positively impact the merchandise cost structure at Disney Store and we are encouraged by this year-over-year improvement in consolidated gross margin. The increase in consolidated gross margin was primarily driven by significantly lower markdowns and higher IMU, partially offset by deleverage from our new East Coast distribution center. SG&A dollars increased by 74% versus last year, which is below our previous guidance. Due to lower variable and discretionary expenses. Consolidated SG&A as a percent of sales was 29.1% compared to 26.4% last year. The deleverage primarily reflects Disney Store's SG&A expenses that we did not have last year and significantly higher marketing expenses at The Children's Place due to our First National TV ad campaign partially offset by lower employee benefit costs. We continue to expect fourth quarter SG&A to leverage as we annualize the Disney Store acquisition.

Depreciation and amortization expense decreased 150 basis points to 3.1%. The primary driver of the leverage was the acquisition of the Disney Stores which has generated sales but only negligible depreciation and amortization expense related primarily to store remodels and openings. This resulted in operating income for the third quarter of 42.8 million, a 45% increase compared to 29.5 million last year. Our effective tax rate was 35.4% in the third quarter which I previously mentioned was lower than originally anticipated versus 40% last year. Relative to our originally anticipated effective tax rate of 39%, the actual effective tax rate yielded additional third quarter earnings per share of $0.05. In the third quarter, we finalized the purchase accounting for the Disney Store acquisition and recorded an incremental extraordinary gain of 1.7 million or $0.06 per share.

Moving on to the balance sheet we ended the third quarter with cash and equivalents of 122.4 million compared to 45.3 million last year. In addition we had 55.3 million of borrowings on our working capital facilities. As we have previously stated, we planned to increase inventory for the fourth quarter which is reflected in our quarter end balance sheet. Total consolidated inventory at cost is up approximately 82% which is primarily driven by Disney Store. For The Children's Place, total inventory at cost was up approximately 16% on a per square foot basis -- forgive me, that cost was up approximately 16% and on a per square foot basis was up approximately 7%. We are very comfortable with the level and mix of our inventory as we head into the holiday season. Looking ahead, we expect The Children's Place to end the fourth quarter with inventory per square foot up mid to high single digits to last year.

At Disney Store, we expect to end the fourth quarter with inventory per square foot up approximately 50% which reflects our planned unit increase in support of our value pricing strategy as well as the depressed levels of inventory at the end of last year. As of October 29, 2005, we are operated a total of 1107 stores, 786 Children's Place stores, and 321 Disney Stores, in approximately 5.1 million square feet, or an average of 4600 square feet per store. During fiscal 2005 we will have opened a total of 55 Children's Place stores, remodeled approximately 5, and closed 3. In addition, we will have opened a total of 18 Disney Stores, remodeled 32, and expect to close 4.

Turning to guidance, we continue to anticipate fourth quarter earnings per share of $1.61 to $1.66 after an anticipated fourth quarter tax charge of approximately $2 million for the American Jobs Creation Act. We also now anticipate full year fiscal 2005 earnings of $2.35 to $2.40 per share reflecting the extraordinary gain realized in the third quarter and a lower expected annual effective tax rate of 38% from 39%. Thanks and I will now turn the call over to Neal.

Thanks, Hiten. I am very pleased with the consistent profitable performance of The Children's Place, contributing to our strong gross margin in the quarter were newly deployed tools such as tier assortment planning and profit logic both of which are proving to be effective and important components of our growth. I will review merchandising and update you on store and brand initiatives.

Our back to school assortments were well received by our customers and we continue to be encouraged by the resurgence of our girls business which comped in the high single digits above the chain average. Our commitment to offering outfitting options across fashion and basics is helping to drive this momentum. As we hindsight the season we see clear opportunities for next year. First, we will infuse more transitional goods into our fall one assortment. Second, given the success of micro merchandising we will roll out this initiative in an even bigger way next year. Third, incremental inventory investments should drive additional businesses next year.

We took a comprehensive approach to brand building during the back-to-school season which included proven marketing vehicles such as direct mail and in-store visual as well as external vehicles such as print and for the first time national cable TV advertising. We are pleased with the results of our TV campaign. We experienced positive increases in top of mind brand awareness from existing and potential customers. Additionally, we saw positive movement on key brand attributes such as good quality, value for the money, and clothes my kids like to wear. These results validate that TV advertising is an effective means for building awareness and we look forward to rolling out another TV campaign next back-to-school season.

Customer response to our holiday assortment was very positive as our customers continue to turn to us for their special occasion needs. Our deeper investment in skirts as opposed to dresses paid off and is consistent with the trend in skirts and skorts we have been experiencing all year. Our PJ program has also been well received by customers as a category that continues to grow year after year. Our holiday 2 assortment sets in stores this week and features gift giving items such as our famous rugby sweater program which is also the focal point of our holiday print campaign. The ads will run in 16 magazines such as Parents, Red Book, and Essence, versus only four publications last year.

Our key focus areas during the holiday season include great execution of our floor sets, in turn better replenishment in stores, and being appropriately staffed for the holiday season, all of which should translate into a better shopping experience and increased sales. In addition, our active customer database of approximately 9 million names continues to serve as effective business driver, we have several planned promotions scheduled throughout the holiday season and also plan to send approximately 5.5 million direct mail pieces to our customers which is a substantial increase over last year.

Turning to stores, as you know increasing customer conversions is the key contributor to our top-line growth and a metric that we have been driving in the right direction for the past two years. Comp conversion was up 20 basis points in the third quarter and is up 10 basis points year to date. Comp store traffic was down 1% for the quarter, however for the year to date period traffic is up 1.3%. In fact, it should be noted that through the nine-month period all regions, all store types, and all key performance indicators were positive, demonstrating our brand's broad appeal. 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. We anticipate celebrating our 800th Children's Place store opening next week representing store growth of approximately 7% over last year. 60 to 70 new Children's Place stores are planned for 2006, and we continue to believe that we can successfully operate approximately 1200 Children's Place stores across North America.

In closing, with every quarter of profitable growth, The Children's Place is further establishing itself as a leading destination for children's apparel and creating value for our shareholders. Our unique combination of fashion, quality, and value is attracting new and existing customers, and we look forward to driving a successful holiday season. Thanks and I will now turn the call over to Mario.

Thanks, Neal, and good morning, everyone. We are very pleased with our third quarter performance at the Disney Store. Significant gross margin growth combined with good expense control drove our results. Guests continue to respond positively to our value pricing and merchandise strategies, and great cross functional execution led to a strong finish to the quarter. Today I will provide a merchandise overview, discuss achievements in the year, and update you on our plans to drive a successful holiday season.

Consistent with our number one priority we once again drove increased merchandise margins in both hard lines and soft lines. As you recall this was what we highlighted as our biggest opportunity when we made the acquisition. Hard lines had another strong quarter led by toys, souvenirs, and kids home. It was a landmark quarter for our kids soft lines business as we delivered strong sales and margin growth across almost all categories. The growth of our boys, girls, and accessories department was impressive while kids sleepwear and Halloween, two core categories, delivered strong results. Importantly, we achieved strong Halloween sales without anniversarying several promotions from the prior year. Finally, all departments participated in the celebration of the Cinderella platinum anniversary driving strong sales, margins, and guest satisfaction.

The initial success of back to school supports our belief that the Disney Store can become a destination for day in/day out ready to wear and we look forward to making the 2006 back-to-school season much bigger and even more successful. Winners during the season included ponchos, varsity jackets, denim and knit tops. Our back to school bag program, underwear, and our newly introduced baseball hats were strong accessory categories, and stretchies and blanket sleepers were wins in new born. New born apparel was a new category that we've introduced to The Disney Store and we continue to see positive guest response. Today's only four days shy of our first anniversary of the acquisition and I think it's appropriate to revisit some of the many milestones we've achieved over the course of the last year.

Mickey store prototype rollout. As of the end of the third quarter 27 stores were in our new Mickey store prototype. Initial response to the format has been positive and the remodels are performing above the chain average. The growth of Disney store outlets. The introduction of an outlet strategy was one of our core initiatives. We are pleased with the performance of our outlets which are also performing above the chain average. During the quarter we opened 10 outlets in premiere locations. We'll end the year with 12 outlets in total, and we believe we can grow our outlet business significantly over time.

Sourcing initiatives. As previously discussed, we have achieved merchandise cost reductions in the low 20% range across all hard and soft line categories for the holiday and upcoming spring selling seasons. We still see opportunities to continue to lower product costs into 2006 as our vendor base broadens and our infrastructure continues to develop. Looking to the fourth quarter, this is the most important and exciting time of the year for Disney store and we believe we have the right strategies in place to drive a successful season. Our second holiday assortment arrived in stores this week and features an extensive selection of toys and plush as well as popular seasonal items such as snow globes and ornaments. We have a series of planned promotions that you will see throughout the season that we believe will drive traffic and increase sales. Importantly, our increased inventory position for the holiday season will enable us to capitalize on our value pricing strategy.

I'd like to also take a moment to thank the teams at both brands and shared services for helping to make these results possible. We have accomplished a lot in a short time and could not have done it without their hard work and true team approach. It is their dedication that makes our goal of making the very best accessible to all children possible. I give thanks. And I'll now turn the call over to Ezra to wrap up.

Thank you, Mario and good morning everyone. I'm proud of our results and the increased profitability of our business which is being driven by the strong execution of our management and our teams. Our remarks this morning concern our vision for the future and where we see opportunities to continue to drive our business in 2006. Our core progress of making the very best accessible to all children is growing deep roots within the organization and will continue to serve as the engine that fuels both of our brands. It is what connects us to our customers and makes us unique. .

As it relates to The Children's Place, we anticipate achieving the high single digit operating margin goal this year and we are on track to achieving double digit operating margin over time. Our powerful value equation of fashion, quality, and price is being recognized by more and more customers, demonstrated by our 8% year to date comp which is on top of last year's 15% comp increase. Our strong growth is further evidenced by our continued market share gains. According to NPD during the 12 months period ended August 2005 The Children's Place gained 160 basis points of the children specialty apparel market share. We still see plenty of opportunity to grow our business profitably.

Looking to next year we are extremely focused on the following. One, continuing to increase market share through sales productivity and new store growth. Two, enhancing the customer brand experience. And three, pursuing greater leverage and expense efficiency. At the Disney stores, the results are on track to deliver our annual earnings accretion targets. As you know, the appeal of this acquisition lies in the strength of our sourcing, merchandising, and operating expertise combined with the power and creative engine of the Disney brand. This year, as Mario highlighted, we have been infused by our retail expertise. From integrating The Disney Store operation into our systems to lowering product costs, to introducing our value pricing, merchandising, and marketing strategies so that in 2006 we are positioned to capitalize on this opportunity.

Also next year, in addition to the continued success and substantial popularity of the core characters like Pooh and Friends, The Princesses, and Mickey and Friends, we look forward to capitalizing on Disney's creative engine with key events such as Winnie the Pooh 80th birthday, the theatrical releases of Cars and Pirates of the Caribbean 2, and the DVD releases of Chicken Little, the Chronicles of Narnia, the Little Mermaid, and Cars. In addition to all the wonderful merchandising opportunities at The Disney Store we see further opportunity to increase gross margin by driving merchandising costs, driving them down of course. We continue to believe that over time The Disney Store should run at comparable operating margins to that of Children's Place.

In closing, over the past year The Children's Place has further established itself as the leading children's specialty retailer while we have simultaneously achieved the goals and objectives we set for The Disney Store acquisition. This is a testament to our dedicated team. It is their extraordinary talent and commitment that has made these results possible. As you heard we are well positioned to continue to gain market share, drive a successful holiday season, and most important grow our profitability. Thank you. Operator please open the call for questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Margaret Whitfield from Ryan Beck. Go ahead, ma'am.

Good morning and congratulations. I'm pleased to hear you plan to hit your accretion targets for Disney for the year but that's still a massive step-up from the $0.08 to more than $0.70 in Q4 contribution. I wondered if you could tell us some of the elements as to how you achieved that level of growth.

Margaret, it's Mario. The fourth quarter obviously is clearly the peak sales period for Disney. As we mentioned in the prepared remarks, we're seeing results of our sourcing strategies really take hold and we're seeing product costs come down significantly. We've managed markdowns much better over the last year, so we're seeing the results of that continue. And obviously, we're -- with the inventory that we've built up for the quarter, we're expecting top-line growth to carry us through to that accretion level. We feel very, very comfortable with the approach.

Were there any unusual expenses in last year's Q4 during the hand-off period to Disney?

Yes, there were transitional expenses and start-up expenses, and as you remember, we also inherited their cost structure on the inventory, so the margins were significantly lower than what we're achieving today.

There was one other item, Margaret. The purchase accounting adjustment of $5 million also flowed through in the fourth quarter last year, and there was also 1.2 million that flowed through in the first quarter of the current fiscal year. So if you're looking just at the absolute GAAP financial statements, there's $5 million of gross margin impact last year.

I know it's early, but could you give us some idea what level of accretion Disney might contribute next year?

We're not ready for that, Margaret. But again, just going back to your fourth quarter issue, as you may know, basically The Disney Store was all about fourth quarter in the past quite a few years. And it's our drive and belief that we actually can smooth out the quarters a little more as we head into next year and the following based on the recent experience and success that we've been having in some of the specialty ready to wear product that we have more bigger introduced into the stores. So it's been a fourth quarter business, it's always been the successful quarter, so we believe that accretion that we are targeting is -- we're going to meet and yes, absolutely it's mostly fourth quarter driven, but it's where they made the profits in past years.

Okay. Thank you.

We'll take our next question from Jeff Black from Lehman Brothers. Go ahead, sir.

Yes, good morning. I guess a question for Hiten. It looks like the SG&A rate came in lower on just a year-over-year basis than we had talked about out of the third quarter, and we were wondering, was that leverage related? Is there something structural going on there that we should know about? And looking into Q4, what's your target for year-over-year growth for SG&A? Thanks. Just on a dollar basis.

On your first question, Jeff, the areas basically we managed our discretion ear and variable expenses I think more tightly than we had in the past. There were -- primarily around payroll, shared services, and consultants, et cetera, the things that we could impact very quickly without negatively impacting the long-term prospects of the business. In terms of what are we thinking about in expenses going forward, as Ezra mentioned, one of our key goals for 2006 is to continue to leverage expenses and drive efficiency in that area. And we are putting in place procedures at the Company to manage that much more effectively. As it relates to the fourth quarter question, I'm not going to necessarily give year-over-year growth guidance other than to say what I have, which is we plan to leverage the expenses in the fourth quarter this year. So as a percent to sales, you should see that coming down.

All right. Fair enough. Thanks and good luck.

Thank you.

We'll take our next question from Janet Kloppenburg from JJK Research.

Hi, guys. Congratulations.

Thank you, Janet.

Just to stay on that for a second, it says that the '04 numbers are restated. Can you tell us where the restatements are in the P&L?

The restatements were related to the lease accounting that we processed at the beginning of this fiscal year. I don't recall the exact amounts, Janet. If you want to touch base with me afterwards I can give you the Q3 numbers. But the adjustment was to record the lease inducements that we receive from landlords as a rent expense as opposed to a reduction of depreciation expense.

Is the fourth quarter SG&A number that we're supposed to be basing our estimates off of, is that going to be a restated number as well, or is that the actual from last year?

That's the actual that's from last year as we we reported it.

So that would be about $129 million exclusive of depreciation and amortization?

Let me just get it real quick for you. Last year's fourth quarter SG&A was 128.3, exclusive of depreciation.

About 11 million?

What was 11 million? I'm sorry?

Depreciation and amortization.

Depreciation was 13.4 million.

And Janet, just as a remainder as regards the restatement for the landlord allowances, that is something that affected the whole industry.

No, no, no, I understand that. That's great. The next question I have is whether or not Hiten things that these cost savings and payroll, shared services, consultants, can continue into the fourth quarter and maybe provide some incremental leverage than had previously been thought about on the SG&A line.

I think I covered in that my answer to Jeff's question, which is we are definitely focused on SG&A leverage and efficiency rolling into Q4 and into 2006. As I mentioned, the expense items that we did impact were ones that we didn't think were going to negatively impact the growth prospects or the investments that we as a company needed to make to drive our profitability in the future. So I've touched on some of these items. For example, leveraging vendors in one chain across the other chain, so there's a lot of those types of opportunities that we continue to target, and over the course of the next 18 months, 24 months, we'll be knocking them down like pins in a bowling alley.

My point is that it looks like there's more opportunity than you had originally thought, and I'm just saying, could that help incrementally, even above the leverage that you had already forecast for the fourth quarter and beyond.

We've not identified incremental short-term opportunities. I think there are long-term opportunities that we can -- when we originally did the Disney acquisition that we didn't necessarily have full visibility to.

Okay. And then just -- my next question is on the gross margin, is my assumption is that you're looking for a higher rate of gross margin improvement in the fourth quarter than in the third quarter that some of the sourcing benefits that you've implemented will begin to show up in an even bigger way in the fourth quarter. Is that a correct assumption?

Yes.

Thank you very much.

Thank you.

We'll take our next question from Kimberly Greenberger of Citigroup. Go ahead.

Thank you. Good morning. I'll add my congratulations.

Thanks, Kimberly.

So you're finally back in stock on inventory. Who do we credit with that?

The team.

Okay. In terms of your dollar per square foot increased investment at Disney at the end of fourth quarter I think you indicated up 50%.

Approximately 50, yes.

Approximately, okay. And could you just either -- if you're not comfortable releasing the actual dollars per square foot that Disney had last year versus this year, if you could maybe just compare it to what sort of inventory ownership Children's Place has, just so we can put that increase in perspective.

Okay. So we're not going to share the actual numbers, but I can share with you the comparison between the two brands. At retail dollars, what we were reflecting there is obviously balance sheet at cost, but retail dollars which support the go forward business, the two brands will have comparable levels of inventory per square foot.

Great. Thanks, Richard, that's helpful. Then, Hiten, on your gross margin performance in the third quarter, I'm trying to understand the differential between The Children's Place divisional gross margin and the Disney gross margin. My initial estimate is that The Children's Place gross margin had about 250 points of improvement year-over-year. Am I in the ballpark on that?

It was actually slightly better than that.

So that means that the Disney gross margin even with the cost improvements in the third quarter was still trailing Children's Place by close to 800 basis points?

I'm not certain of that differential, but, yes, it's still trailing.

Okay. And then if you can -- sorry?

We're just saying that it's not as big as you just mentioned. It's trailing and it's substantially improved, but it's not as trailing as your number you just mentioned.

So it's not 800 basis points of trailing?

No.

Okay. And then Mario, can you remind us what cost of goods sold savings did you secure in The Disney Stores, the rough range for the third quarter business? And you indicated that you've got kind of low 20% savings in fourth quarter and into the spring with still some opportunities after that. So how far out into the spring have you already negotiated and secured pricing on and when might we see an opportunity for even slightly more price savings relative to this range.

As we've said previously, the cost savings for the fourth quarter and for the spring selling season are in the low 20% range. The third quarter of this year, we saved about 20 -- between 20 and 25% on about half the assortment. The big piece that we did not affect for this quarter was the Halloween assortment. It was already purchased when we made the acquisition, and as you know, the Halloween business is a big business for Disney. So we look forward to making some substantial strides in cost savings in the Halloween business for Q3 of '06. And we're placing summer buys, as we speak, we're seeing the range continue in the mid 20% range for summer, and I wouldn't venture a guess now into third and fourth quarter, but we still see pretty significant savings. Again, mainly coming from our effects on the Halloween business and further reductions in the hard lines area.

Okay. Great.

That's especially where we're going to see more reduction is really on the toy end of the business and the hard line end of the business. Which -- coming in, we didn't affect as much. We have learned much more about that business today and we believe that for especially next fourth quarter the big quarter for toys, we will have some substantial savings in that category.

Okay. Great.

Also, you know, those businesses are longer life products, so the ability to cycle through the inventory that's committed takes a little bit longer. A lot of the toys live for at least six months, where as obviously ready to wear, a lot of it has shorter life.

Okay. Great. That's helpful. Thanks, Richard. Lastly, Disney comps, when do they roll ba your comp base? Any sort of initial thoughts on the treatment there? Secondarily, what sort of remodeling plan do you have in mind for the Disney Store division in Q1 and Q2? In other words, how many stores are you going to have to pull out of your revenue base in the first half of the year next year and any initial guidelines on options expensing for '06?

Sure. You covered a lot of buckets there. It is a relates to comps, under our current definition of comp they would roll in in February of '06. As it relates to the number of remodels, the 75 stores will hit Q1, Q2, in terms of when they're going to be removed from the sales base, and they will return into the base mid Q2 to Q3, primarily, or that's when the main numbers of stores will return. In terms of option expense, Mario is going to touch base quickly on the comp question in a second, but as it relates to the options expense, we're not really providing '06 guidance right now, but if you look at our pro forma footnote disclosures in our Q's and K's, I think you'll have a decent basis to make an estimate.

Just a little clarification on the comp stores, the vast majority of the 75 stores will close in the first and second quarter, reopen in the second and third quarter, but they will reopen as non comp stores and won't fall into a comp status until 14 months after their grand opening. The stores that we remodeled this year, the 30 plus stores, will show up 14 months from their grand opening, so not until late next year and even into early '07.

Okay.

So we will have a substantial portion of our portfolio in the non comp status next year.

Okay.

Again, that's based on our current comp policy.

Okay. Great. Thanks, and good luck this holiday.

Thank you.

We'll take our next question from John Zolidis from Buckingham Research. Go ahead, sir.

Hi, good morning.

Good morning.

Question about Disney for next year. I know it's been touched on a little bit, but with inventories planned up 50% per square foot, and obviously you guys are up against easy comparisons for Disney, at least over the first nine months of next year, why do you feel comfortable that we should be in the inventory position, that it's up that much? How much do you think the business has the potential to comp up?

So John, before I get into that, I want to tell that you although we're enjoying the success of Chicken Little at the box office right now, the sky is not falling on our heads.

That was a preplanned comment. [ LAUGHTER ] You were waiting to get that in somewhere.

We had to weave it in somewhere.

Nice setup.

The reason why we feel comfortable with the Disney inventory levels is, there's a few pieces to this. One is we're not going to be comping these levels through the whole year. It really is the front half of the year where we were very deficient last year. We've rectified that now coming into fourth quarter. Your first comment, it's not a year-round thing, it's a first half of the year. There's a couple of pieces to the 50% going into first quarter of next year. Some of it is timing. Probably around about a third of it is timing related. What I mean by that is there's inventory last year that was showing up on the balance sheet in the February-March time period that's actually showing up in the fourth quarter this year because we've got more goods in.

The second piece of it relates to what Disney was doing when we took over. They weren't sure what was going to happen with the business so they had taken a very conservative view of inventory. They also had the intention of closing many more stores than we ended up closing, so they were buying for approximately 10% less stores than we ended up having. So all of those things contributed to much less inventory than the prior year or than what we needed. So what you are seeing in the 50% is rectifying that. Obviously we're counting on that 50% translating to some sales increase without sharing the actual comp number.

And I would add to that John that we see the biggest opportunity in the business during the first really first quarter and third quarter of the year, those are some classic ready to wear apparel seasons. So it's not a business in the past that Disney has really seek to maximize and we -- based on our success during this back to school season, we think -- we feel strongly that we can capture this business, so we're really going after it.

John, I'll just remind you, I think Kimberly asked the question this gets us back to comparable inventories based at The Children's Place stores are at.

Those are very helpful comments, and I have one follow-up question. Just looking at sales per square foot, at The Children's Place stores in the first quarter of this year, I get about $82. Whereas the Disney Stores in the first quarter of this year did about $61. So if you're planning inventory levels per square foot to be equivalent at the two chains, does that mean that you think that sales per square foot at Disney can improve to similar levels at Children's Place in the first?

No, not similar levels. Obviously we're looking for improvement, but the composition of the inventory is different as well. Almost half of the inventory at The Disney Stores is longer life type product, more basic type product. I mentioned earlier toys live longer. So what we consider is not just a level of inventory but the implicit risk in the inventory, and at The Children's Place, a lot more of that inventory after Easter doesn't live. Disney is a little bit different, especially on the hard goods side. So the composition causes the turns of the sell-throughs not to be comparable.

Great. Thanks very much and good luck for holiday.

Thank you, John.

Your next question is from Marni Shapiro from Merrill Lynch.

Hey, guys, congratulations.

Thank you.

You didn't touch on Canada at all for Children's Place. Would you have any update there for how those stores are doing? Could you also talk a little bit about the apparel success that you saw in the third quarter, what will that translate into for spring '06, were you able to make changes and add enough apparel that you feel comfortable with it? Then could you just talk about--?

Does that relate to Disney Stores?

I'm sorry, at the Disney Stores, yes, sorry. Then could you just give us a little bit go-forward look at the tax rate going forward?

Just on Canada, that's been a phenomenal, phenomenal business for us. The stores are extremely productive, they do substantial more business than the average store in the U.S. average store, and they continue to do that. Actually, for both brands. So we see substantial opportunities there to continue to grow our store base and continue to increase our productivity. We're really proud not just of the top-line numbers but the bottom line numbers are extremely, extremely favorable. The store contributions are really almost unheard of as we look at them. So we are really ecstatic about the Canadian businesses, and the -- especially even more so for the Disney brand, since they only have 15 stores, substantial room for growth there.

The year to date count is running about 7% comp, and as Ez just echoed and what Ezra said, we just -- the opportunity -- they love our brand, they have loved it from day one, and we just see huge potential there.

Then, Marni, it's Amy. About product for Disney, we actually, even prior to seeing the successes in fall we were very aggressive in planning Q1 ready to wear. We thought there was an opportunity with Easter, and just in general referencing Mario's earlier comment opportunity to build the business in both Q1 and Q3 which had been relatively soft for Disney in the past. So we were very aggressive in building those plans initially. We did make some changes in strategy once we saw the initial selling and volume and were able to react on the back end so we feel very well positioned to recognize the opportunity in Q1 from a ready to wear standpoint.

Regarding your question on the tax rate, we're expecting under the current accounting rules for taxes, as you may know, the FASB is considering changing them, but under the current rules we'll probably have a tax rate in the 37 to 38% range. You may want to model somewhere in the middle there.

Great. Just one quick follow-up. You mentioned that circulation for Children's Place, direct mail, was 5.5 million expected this fourth quarter. Could you give us the comparative, what that was last year, and the composition of the circulation, is that coupons or just the mag allowance? Then following on the direct mail question, have you given any thought to a full-fledged Children's Place catalog?

I'll answer to the first question, the 5.5 million is just about double last year. It is coupons. It is really varied pieces, but it is mailings. We know, as we've been saying over the last many years, the success of our direct mail campaign, we just feel really great about it. It does play a part in our existing customer base. With the nine million customers it's really a great tool we have in our tool belt so we're really excited about the ability to double the mailings.

Marni, can you repeat the questions?

Any thoughts to the Children's Place catalog, full-fledged catalog?

Potentially some day in the future. Not right now.

Thanks, guys. Good luck with holiday.

We'll take our next call from Paula Kalandiak from Roth Capital.

I think all of my questions are related to Disney. I have a follow-up on Kimberly's question. When you do give a Disney comp is that going to be a separate comp or blended in with The Children's Place comp?

Separate.

Okay. And how does the holiday promotional activity for Disney compare to last year?

I would say some of the events are similar, but the depth of the promotions is less, we're certainly enjoying much more full-price selling than Disney has historically. But some of the events that drive the hard lines business during this time of the year and our guests have gotten used to, we will anniversary some of our Thanksgiving weekend events and some of the events during December. But we are shortening the time periods and lessening the discount.

Okay. And do you have any special gift items this year at Disney that did you not have last year?

Well, we have Chicken Little.

And what about the ferries program? Are they still doing that?

The ferries program is in stores in a small way and will build throughout the spring season. The ferries program is centered around the very popular Tinkerbell category -- character. So we feel strong about that as well. We've got a whole host of really exciting products, that if you're with us on December 6, we'd be happy to show you. But it's really too long of a list to talk about right now.

But I think huge is growing the ready to wear business, it makes us more of a gift destination like sweaters and warm wear and those categories that were not present in Disney Stores historically are in addition to the traditional gift giving items of the toys and plush categories.

Finally, are you using profit logic at Disney also or is it just at The Children's Place right now?

Just at The Children's Place right now. We are looking at the rollout plan for Disney.

Okay. Thank you.

Thanks.

We'll take our next question from John Morris from Harris Nesbitt.

John?

Yes, can you hear me okay?

Now we can.

Hear, let me do this. Is that better?

Sure.

Congratulations. Great quarter. First question relates to your margin goals, Ezra, unless I missed it, because I had to hop off there for a second, your long-term margin goals for Disney and Children's Place, did you say double digits?

I said that we believe that the Disney operating margin can, over time, meet that of The Children's Place, and as you know, our target at The Children's Place is double digits.

So that's up from your previous expectation of, I guess you had been talking about an 8% operating margin goal over the next year or two?

Again, this is over time, John. So at The Children's Place, we hit high single digits, or will hit -- projected to hit high single digits this year. Over time we look forward to get to double digits, and we believe that The Disney Store should be at the same level down the road.

Okay. Great. And the advertising campaign, the back to -- the advertising campaign, what are your thoughts about that in terms of what you've learned from it and how you would or would not think about continuing with some kind of marketing initiative like that going forward?

Well, as I said in my comments, we were very pleased with the results of the advertising campaign, we look forward to back to school next year to go back to cable TV campaign we really saw the top of mind brand awareness went up, that the customer understands this better and really had effect both on existing customers as well as new customers, so we're very pleased with the results of that. We will continue to use a basket of external marketing techniques, whether it's our direct mail, which is great, whether it's magazines, and whether it is TV, cable, as well as our in store windows and in store marking, so we think all of those together really will make a very solid marketing campaign.

Okay. And then finally, any update for us on bringing in merchandising talent at The Children's Place division, Amy, focusing on Disney a little bit more, so kind of where you are with that process and also to what extent is Amy totally focusing on Disney, how is she working with Children's Place, if you can kind of give us an update on that.

I know she's working with Children's Place, she's very friendly actually. We really take a great team approach to everything. We all, at a senior level, are involved in keeping an eye on both businesses but clearly we are in conversations with a couple of top candidates and look forward in the near future to announce someone to take over the GMM role but right now we've always -- we're very proud of the talent we've got in both brands and we will keep on nurturing that as well as looking for external talent to bring in.

Great. Good luck for holiday.

Thank you.

We'll take our final question from John Cutty of Principle Global Investors.

Good morning, I was wondering if you could tell me how much you're going to be repatriating from Canada after taxes.

The American Jobs Creation Act, we're actually not contemplating taking or bringing back much if any from Canada at this point. We have other jurisdictions obviously, we have a large Asian operation, which is really where most of that cash will come from.

Then can you give us approximately how much you will be bringing back?

My estimate of 2 million is -- the tax charge is predicated on a $40 million repatriation.

Okay. Thank you very much.

Sure.

Thanks.

okay. If that's the last question, thanks, everyone, for the continued interest in our company. Hiten and Heather are available should you have any additional follow-up questions from any of our team. Thank you again. Have a healthy and a happy holiday season. Thank you.

Bye.

This concludes today's teleconference. Please disconnect at this time.