Children's Place Inc (PLCE) 2005 Q4 法說會逐字稿

Good morning. My name is Marvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth-quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). Ms. Anthony, you may begin your conference.

Thank you, operator, and good morning, everyone. Thanks for joining us today for a review of our fiscal 2005 fourth-quarter financial results. Joining us on this morning's call are Ezra Dabah, Chairman and Chief Executive Officer; Hiten Patel, Chief Financial Officer; Neal Goldberg, President of 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, Senior Vice President of Planning, Allocation and IT; Kevin Mead, Senior Vice President of Store Operations, and Mark Rose, Senior Vice President and 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.

In addition, we will be presenting this afternoon at 1:30 Eastern time at the Bear Stearns Retail, Restaurant and Apparel Conference in New York. For those of you unable to attend, a webcast of the presentation will be broadcast on the Investor Relations section of our website.

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

With that out of the way, I will now turn the call over to Ezra Dabah, our CEO. Ezra?

Thank you, Heather, and good morning, everyone. 2005 was another great year for our Company. The Children's Place continued to gain market share, and the substantial growth and leverage achieved in the fourth quarter was evidence of great teamwork across the entire organization.

Fiscal 2005 financial highlights include net sales up 44% to 1.669 billion, gross margin up 60 basis points, operating income up 49%, EPS up 47% to $2.28, and cash and equivalents up to 173 million. In 2005 we successfully integrated the Disney Stores, a business almost half the size of The Children's Place, while profitability fueling The Children's Place brand, a testament to our scalable system infrastructure, strong team and management depth. At The Children's Place brand, we have achieved a high single digit operating margin for fiscal 2005. We now believe The Children's Place brand is poised to deliver lower double-digit operating margin in the future, excluding option expensing. For the year, we achieved sales per square foot for activity of $329 driven by our 9% comparable store sales increase on top of last year's 16% comp increase.

Our brand growing appeal is further demonstrated by our continued market share gains. In fiscal 2005, The Children's Place brand gained 250 basis points of specialty retail market share and now owns over 17% of children's specialty retail or 4.2% of the 27.6 billion children's apparel market in the U.S., according to NPT. In 2005 Children's Place brand sales per average store increased to 1.5 million from 1.3 million last year, while new stores opened during 2004 averaged approximately 1.6 million.

Substantial growth is still ahead of us at The Children's Place through sales productivity and new store openings. In 2006 we are projecting square footage growth of approximately 8%. We continue to believe we can grow The Children's Place brand up to 1200 stores across North America, putting us at the two-thirds penetrated mark with up to 400 new stores still to be opened. In particular, Canada and our outlet operations, our businesses that continue to run at very strong operating margins and have lots of growth potential.

As importantly, we are focused on organic growth of The Children's Place brand. Neal will provide color on these strategies shortly.

Turning to Disney Stores, as you know, our holiday sales were significantly below expectations due primarily to the lack of compelling merchandise presentation, a substantial decrease in our average unit retail and our decision to reduce our dovetail offering. While we drove a significant increase in UPTs, the reduced initial price points did not translate into the transaction growth we had anticipated, forcing us to be more promotional than planned.

While the fourth quarter proved challenging, we have made progress in positioning the Disney Stores for success and we look to 2006 with excitement. Disney has to great lineup of new content coming out this year such as the highly anticipated theatrical releases of Cars and Pirates of the Caribbean II, and DVD releases of Chicken Little and The Little Mermaid. We have aligned our merchandising strategy to capitalize on this synergy event in a big way with compelling merchandise, inventory investments and marketing to drive traffic and guest excitement.

We remain focused on increasing Disney Stores' gross margin. During 2005 we cut the delta between The Children's Place gross margin and the Disney Store gross margin in half. Our goal remains to bring the Disney Store gross margin in line with that of The Children's Place over the next several years.

Lastly, we are thrilled by the news of the Disney proposed acquisition of Pixar. The combination of Disney and Pixar would give us access to all go forward Disney/Pixar characters and should further strengthen Disney's distinct competitive advantage of consistently delivering great creative content, compelling stories and lovable characters.

As discussed in our last call, our consolidated goals for 2006 are as follows. One, increasing marketshares through sales productivity and new store growth; two, enhancing the customer brand experience and three, achieving greater leverage and expense efficiency.

In closing, as we look ahead, our strategies to achieve our goals are well-defined. Over the past four years, we have delivered EPS growth of approximately 100% on a compounded annual basis. Both of our brands have substantial opportunity to deliver significant profitable growth for many many years to come. I extend my heartfelt thanks to all our associates, customers and shareholders for their continued support.

Thank you and I will now hand the call over to our CFO, Hiten Patel.

Thank you, Ezra, and good morning, everyone. I'm pleased to report our strong fourth-quarter results, one in which we continued our profitable growth. GAAP net income for the quarter was $45.7 million. GAAP earnings per share increased 85% to $1.57 over last year's GAAP earnings per share of $0.85. As a reminder, fiscal 2005 fourth-quarter results included 13 weeks of sales of Disney Store versus 10 weeks last year. Non-GAAP fourth-quarter earnings per share, which excludes the charges for the previously announced acceleration of stock option vesting and the adoption of the new rules regarding rent during construction, were $1.65, in line with our recent consolidated and divisional guidance.

For purposes of today's call, we will compare last year's GAAP results to this year's GAAP results as illustrated in this morning's press release. Consolidated net sales for the fourth quarter increased 17% to 539.7 million from 462.1 million last year. Fourth-quarter sales were comprised of 355.1 million from The Children's Place brand, a 19% increase over last year, and 184.6 million from the Disney Store brand compared to 163.4 million for the Disney Stores last year. Children's Place brand comparable store sales for the fourth quarter increased 11% on top of 17% increase in the prior year. Comps were positive across all regions, all store types and all departments.

By region Canada, Southwest and the West were strongest with comps in the low to midteens. By department, girls and accessories were the strongest, achieving comps in the low teens. For the quarter, comparable store sales transactions increased 8%, primarily driven by increased customer conversion. Average transaction size increased 3% lead by growth in units per transaction.

Consolidated gross profit dollars increased 30% to 235.5 million. Consolidated gross margin increased 460 basis points to 43.6%, primarily driven by higher an IMU and lower markdowns. Please note that 110 basis points of the improvement reflects the fair value adjustment to acquire Disney Store inventory last year.

On a divisional basis, both businesses improved IMU with Disney Stores improvement reflecting our sourcing initiatives. Markdowns also improved significantly for both businesses relative to last year. In fact, gross margin for The Children's Place brand was the highest quarterly gross margin achieved in any quarter in The Children's Place brands history.

Consolidated occupancy and related costs as a percentage to sales were essentially flat to last year, reflecting costs associated with our new East Coast distribution center which will not anniversary until the third quarter. Consolidated SG&A as a percent of sales improved by 130 basis points to 26.8%. The improvement primarily reflects onetime Disney Store transitional expenses incurred last year, lower employee benefits costs and lower marketing as a percentage to sales. Partially offsetting these gains was higher payroll reflecting the additional associates we have hired throughout the year to support our larger business and to enhance the customer brand experience.

Additional offsets to SG&A were the $2.1 million charge related to the previously announced acceleration of the vesting of certain stock options and $300,000 charge due to retrospectively applying rent during construction. Depreciation and amortization increased 10 basis points to 2.8%, primarily reflecting our 2005 new store openings and remodels and the fact that Disney Store had no depreciation in the fourth quarter of 2004. Our operating income was 75.6 million, double that of last year's fourth quarter. Operating margin increased 580 basis points to 14% compared to 8.2% last year.

Our operating income was 75.6 million, double that of last year's fourth quarter. Operating margin increased 580 basis points to 14% compared to 8.2% last year. Our effective tax rate was 39.7% in the fourth quarter versus 37.2% last year. This tax rate reflects the previously announced $2 million charge due to the repatriation of $46 million under the American Jobs Creation Act.

Moving on to the balance sheet, we ended the fourth quarter with cash and equivalents of 173.3 million compared to 165.2 million last year. We had no borrowings on our credit facility at year-end versus 37.3 million last year, which reflected the Disney Store acquisition. The $45 million improvement in liquidity is a testament to our cash generating capabilities, especially when considering our approximately 93 million in capital expenditures in 2005.

Total consolidated inventory at cost was up approximately 33% or 26% on a per square foot basis. For The Children's Place, inventory at cost was up 15% on a per square foot basis, above our previous guidance due primarily to the earlier flow of our spring inventory. Disney Store inventory at cost was up approximately 57% on a per square foot basis, slightly higher than previous guidance.

As a reminder, the increase at Disney Store reflected our depressed levels of inventory at the end of last year, as well as our planned unit increase in support of our value pricing strategy.

Looking ahead, we expect The Children's Place brand to end the first quarter with inventory per square foot up approximately 30% versus the 9% decline last year, which reflects earlier summer flows, as well as increased levels of basic denim as we cycle out of our existing program and prepare for our new denim assortment. At Disney Store we expect to end the first quarter with inventory per square foot up in the low 20s.

Importantly, we are very comfortable with our year-end inventory levels at both brands, which are fresher than last year, as well as our projected inventory levels. As of February 25, 2006, we operated a total of 1118 stores, 802 Children's Place stores and 316 Disney Stores and approximately 5.1 million square feet for an average of 4600 square feet per store. We are planning 2006 capital expenditures of approximately 120 million.

In addition, the Company expects to receive approximately 26 million in tenant allowances. Our CapEx plans primarily reflect store openings and remodels for both brands and the buildout of our new corporate headquarters.

Turning to fiscal 2006 guidance, as stated last week, we expect fiscal 2006 GAAP earnings per share of $2.67 to $2.77, including equity compensation, or $3.00 to $3.10 excluding equity compensation. We anticipate a tax rate of approximately 38% and a share count of 30.2 million.

In 2006 we anticipate opening a total of approximately 65 Children's Place stores and 15 Disney Stores. By quarter we anticipate opening approximately eight Children's Place stores and one Disney Store in the first quarter, approximately 20 Children's Place stores and eight Disney Stores in the second quarter and approximately 37 Children's Place stores and six Disney Stores during the third quarter.

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

Thanks. I'm pleased with The Children's Place fourth-quarter performance, which is a great ending to a terrific year. Over the past few years, we have established a solid foundation from which to continue to grow the business, and we are pleased with our continued positive results. Today I will review Q4 merchandise highlights and our merchandising store experience and branding initiatives.

Customer response to our holiday assortments exceeded our expectations. Strong sellers during the quarter included easy gift giving items like our famous rugby sweater and glacier fleece programs. During the quarter, reflecting our new micromerchandising capability, we edited a portion of our colder weather items out of our hot climate stores and set a spring transitional capsule at different times to our tropical, hot and cold climate zones. These efforts benefited the quarter, and the good news is that we have a lot opportunity to do more of this, which I will discuss shortly.

To date we're encouraged by the response to our spring assortments. Our Easter dressy line, which we have become famous for, arrived in stores the last week of February, and early response has been favorable. In support of our Easter dressy assortment, we sent our magalogue to approximately 4.2 million customer homes, up from 3.8 million homes last year.

Turning to organic growth initiatives, as Ezra mentioned, increasing brand awareness is key to our continued success. The focus of our 2006 marketing program is to increase both the frequency and depth of our successful direct-mail and print advertising campaigns. Further evidence of the brand's increasing popularity is increasing our direct-mail response rates. In an effort to capitalize on this high return marketing vehicle, we plan to send out approximately 35 million magalogues, a 20% increase over fiscal 2005. To further increase our brand awareness, we will have a major presence in print in 2006, which we believe is an effective means to communicate our brand to new and existing customers.

Perhaps most importantly is the position of Chief Creative Officer, which we have now ensured -- which has now ensured all design, trend and creative marketing teams approach a brand with a singular point of view. Under Nina Miner's leadership, we are making sure a seamless brand message is sent to the customer. From the merchandise to our windows, in-store signage and marketing campaigns, a cohesive message is being communicated.

Under the leadership of Kevin Mead, our Senior VP of Store Operations, our field organization and execution is getting stronger. As we move towards our 1200 store goal, top talent throughout the field organization is critical to our long-term success. We have strengthened the organization by adding zone Vice Presidents to ensure a higher level of execution and to enhance the brand experience.

In an effort to fuel sales, we have simplified the focus within the stores to a few critical areas -- acknowledging our customers, replenishment and keeping stores clean and neat, laying the groundwork towards our goal of flawless execution. Keeping it simple allows our store teams to focus on these few targeted areas, which is yielding positive results. Top conversion increased 40 basis points for the year and 110 basis points in the fourth quarter.

Finally, we continue to layer tiered assortment planning into our merchandise strategy. Rather than a one size fits all approach, it allows us to divide our store fleet by certain characteristics. The big win here is the potential to create merchandise assortments and allocate appropriately to better match customer needs. While only the beginning, we are very pleased with the early results of this initiative which contribute to our gross margin improvement. This coupled with markdown optimization should continue to benefit gross margin.

In closing, in 2005 we remain committed to the strategies that have fueled our growth, while at the same time strengthening our capabilities throughout the organization to drive our business to the next level. While we have more work to do, we believe we have the right strategies in place to further establish ourselves as the leading brand in children's apparel.

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

Thanks, Neal. Today I will highlight strategies we're putting in place to drive a successful 2006 and discuss some of the recent wins we are having within our product assortment. As Ezra mentioned, while the fourth quarter was challenging, we have learned a lot over the past year and believe we have developed strategies to improve our performance. Our go-forward strategy is to create new, innovative and impactful merchandise statements supported by clear visual marketing messages.

In addition, while we will continue to offer our successful twofer deals at Disney Store, we will elevate our merchandise assortments by introducing a good, better, best strategy across most product categories to make them more compelling, increase the AURs and appeal to a broader audience.

We are also increasing our adult apparel offering, creating freshness and innovation in hardlines and are planning impactful promotional messages for the holiday season.

Given our long lead times, the majority of these initiatives will impact the second half of the year. In the near-term, we have increased our softlines presence, particularly in the first and third quarters in an effort to reduce the seasonality of the business. In addition to the great lineup of new content coming from Disney this year, we plan to maximize the continued appeal of Disney's popular core characters such as the Princess franchise, the Pooh family, Mickey and Friends and Toy Story, which combined will make up over 60% of our planned 2006 business.

Turning to more recent business, we're encouraged by our performance in February. Guests are responding positively to our softlines merchandise; our new home bedding decor, My Room is My Castle; our commemorative merchandise and newborn collection celebrating Pooh's 80th anniversary and our product assortment based on the new Disney Fairies franchise. Our spring 2 assortments arrived in stores last week in March and marks our introduction of Easter apparel with merchandise such as dressy ready-to-wear for girls, featuring Princesses and Minnie, and dressy boys merchandise featuring Mickey.

In closing, our team has laid a solid foundation in 2005. While we have more to do, we are optimistic about 2006 and our strategies to drive the top line and continued gross margin improvement.

Thanks and I will now turn the call back to Ezra.

Thanks, Mario. Operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS). John Morris, Harris Nesbitt.

Congratulations on a great quarter. I guess the question, the one I want to kind of get to first year here, would be the inventory, can you talk a little bit about why inventory -- I guess it looks -- it was above plan. Let's take it divisionally above plan at place. I guess you said due to earlier receipts, when? In fact, I guess we've got the later Easter this year, and then also why is Disney inventory trending above plan so far?

John, I guess you're referring to inventory at the end of the fourth quarter, which was above our initial guidance, and I will deal with that first. Then I will talk about inventory projected at the end of this quarter.

I will start with Disney. Last year by at least the first half of the year even into back to school, we were chasing inventory at Disney. When we did the acquisition, Disney had bought inventory for the first part of the year based on a certain number of store counts. And in our hands, a certain number of additional stores were viable, so we ended up having less inventory per store than we needed. We knew that when we took over and we were continuously in chase mode last year.

So, for the first part of the year into the third quarter, you are going to see inventories up average store at Disney as part of our strategy to just rectify that situation from last year.

On The Children's Place side, we came in at about a 15% average store at the end of the fourth quarter. I think our original guidance was in the high single. And even though Easter shifted, instead of bringing in the dressy product as early, we brought some additional casual product in early to deal with that. We still had to sell product in that time period.

The one thing I just want to reiterate is our inventory was not up because we did not deal with carryover from the prior year. In fact, our aging of inventory was significantly favorable to last year. So all the increase in the inventory was in go-forward product.

We also did get some of our dressy inventory in on a more timely basis. Even though it incented us early, we had a tier ready to fit in its entirety when we did see it the back half of February.

And if I can say one more point on that, we did sit still in the third week of February versus the first week. So, at the end of January when the quarter ended, the inventories in New England regardless, that three weeks does not push it off the balance sheet at that point in time.

Okay. Well, with the Q1 guidance on Children's Place ending up 30%, I think that is what you said, is that what you said at the end of Q1, you had expected it to be up 30% per store?

That is correct.

And what is the mix of that? What is driving that to be up as high as you would expect? What is the mix? What is that about?

As Hiten said in his comments, there is really three reasons for that. The first one I will talk about is basics. For our back to school fit, we are changing out a significant portion of our denim program, which makes up the lion's share of our basics. We are improving fit. We are improving wash. We are improving marketing.

So right now, projected at the end of the quarter, we will be carrying the old inventory still. We are not that old. It is the current inventory on the balance sheet. However, we have a full setup of the new basics in concert to us.

We have a strategy to liquidate the old product. We have started that strategy in December. When we take that product to 9.99 and move to the outlet, it just disappears. So we are not concerned about it, but we are carrying both portions of the inventory at the same time. So that is the first piece, and that's a big chunk, maybe 25% or a 1/3 of the issue.

The second issue relates to timing. Last year we were bringing in summer product as late as May, even into the early part of June. Whereas this number that we project reflects all of summer product in the building by the end of April.

We are also changing some of our floor sets related to back to school, which some of that product is on the balance sheet, and it is in line with our whole strategy to micro-merchandise the stores. We felt last year for back to school that we did not have enough wear now product in June and into July. Even in the cold stores, what we call the cold stores, it is still in the '90s in July. So we have made our initial set of back to school a little bit more wear now, especially in the hotter markets. And because of that we actually moved up some of the initial fit to the early part of June versus the backup of June into July. As a result of that, we have more of that product in transit hitting the first-quarter inventory. The timing is a bit big chunk of the issue as well.

The last piece is an increased investment in summer, and that relates to us last year. I don't know if anyone remembers last year, but we were being questioned on why so low? Now we are (inaudible) inventories like Easter. Easter is never on-time. It is either too early or too late. Inventory is the same. It is never right. It is either too high or too low.

Last year we were down 9%. This year we wanted to rectify that. If you look at the product, if you back out the basics which I explained and you back out the timing and you look at the balance on a two-year basis, we are up mid single digits in inventory.

Obviously this has to have some implication for comps, and I know you guys don't talk about comps, but I would think it would potentially drive your comps double digit. Is that what we should expect?

You know, we do not comment on comp.

Okay. That is fair. Let me just ask one quickly for Hiten. You voided out guidance for next year. How should we think about SG&A spending next year on a year-over-year basis? Should we anticipate -- any kind of commentary you can give us given the Disney piece involved now on your thinking about SG&A commentary for next year that is baked into your guidance?

Sure. In the first half of the year, we were expecting it, frankly, slightly flat to slightly up as a percentage of sales as we continue to invest into the customer brand experience as both Neal and Mario alluded to, some of the specific elements there -- print advertising, our repairs and maintenance programs, our store infield payroll, etc.

Also, the addition of the equity compensation in our SG&A will obviously have an adverse impact there. In the back half of the year, we expect it to begin to leverage again. I think I commented maybe on the first or second-quarter call of fiscal 2005 that as we begin to anniversary the business effectively, we will begin to see leverage. So, in the back half, we definitely expect to see that as sales pick up, and we enter into the important back to school, Halloween and holiday seasons. On an annual basis, we do expect SG&A to leverage.

Okay. Thanks. Very helpful.

Dorothy Lakner, CIBC World Markets.

Congratulations. A couple of questions. One, if you could look at the competitive environment, and obviously you had incredibly strong comps in The Children's Place business last year. Where do you think the market share is coming from?

And then a question about operating margin, which I think you alluded to, if you could give us some color on the differences between the Canadian and the outlet operating margins versus the U.S. operating margin and The Place business. And then for Mario, just a question on giving a little bit of color on the hardlines strategy for '06. Thanks.

As you can imagine, the competitive market share is basically a zero sum gain. So it is coming from somewhere. At this particular time, we believe that is coming from our most immediate competitors within specialty retail. At least, the majority of it is.

As it relates to the operating margins at Canada and the outlet businesses, I don't have them in front of me right now, but our store contribution of those two businesses is significantly ahead of the U.S. stores.

So are you giving us any differential -- (multiple speakers)

It's only a nice double-digit. I don't have the exact number with us right now.

And as it relates to the hardlines strategy, as I said in my prepared remarks, one of the big learnings that we experienced in this past holiday season is really the need for new and innovative hardlines, especially toys and in the adult area for the fourth quarter, and we are working feverishly to develop this product and have a really compelling broad assortment ready for the guests when they come into the stores during the holiday season.

I think in addition Mario also mentioned good, better, best, and I'm going to add category dominance. I think by creating a compelling assortment that is really pulled together and focused and directional for the guests, along with innovative product, and we are working on some unique things that we will own exclusively in the market. We think we can be a destination for gift giving in Q4.

How should we think about pricing on hardlines this year versus last? You seem to be suggesting that prices won't necessarily be lower because you will be improving the quality and really trying to offer a more original product.

Yes, I think if you looked at the overall mix, the prices will be higher. That is our intent.

I also want to add that we saw strong guest response to some of our higher priced hardlines items, especially those that have big visual impact under the tree.

And it is important to also outline just the great content that Disney has in the pipeline for this year, and we feel very bullish about cars, about Pirates of the Caribbean. We have gone aggressively after these franchises. We feel great about them, and history proves out they should be big winners.

Kimberly Greenberger, Citigroup.

Thank you all, and my congratulations as well on a fine quarter. I was wondering if we could talk a bit about the gross margin. The initial markup, I think it was better than we had been looking for, and I just wanted to understand where are you in the cost reduction cycle at the Disney division, and what would be the additional opportunity to improve IMU and/or reduce markdowns at the core Children's Place division? If you could quantify the opportunity, that would be helpful.

And then on The Children's Place division external gross margin, I think you said this is your highest gross margin rate ever in this quarter.

In any quarter.

In any quarter, I'm sorry in any quarter. It looks to me, based on my analysis, it's up between 100 and 200 basis points above the prior peak. Could you just comment on that? Thanks.

Kimberly, as it regards to the IMU and gross margin at the Disney Store, certainly the IMU improved as Hiten spoke to, over the last year, and that is to do with our sourcing initiatives.

As it relates to the cost improvement and continuing to improve that IMU, we still have some way to go. So there's still more improvement to come, especially as it relates to the hardlines category and the toy category, which we are just starting to understand, starting to maximize. So we do look forward to continuing to see IMU improvements and, therefore, continue to see gross margin improvements at the Disney Store. As I said, we believe that over time the gross margin at the Disney Store can be similar to that of the gross margin at The children's Place brand.

As it relates to The Children's Place (multiple speakers) -- Mark, will take that.

It is Mark. We have some great improvement at The Children's Place IMU this year, driven dominantly by the opportunities afforded by the phaseout of the global (inaudible) quoted under the WTO, which afforded us some non-comparable sourcing opportunities that were not available in '04. We are comping on that condition in '06, but we still maintain our aggressive sourcing strategy in seeking out opportunities. We are not looking for the kind of impact in IMU that we had in '05, but we do see growth opportunities still out there.

And continued better full-price selling at Children's Place through our tiered assortment planning, the micromerchandising we spoke to, profit logic, all these things should afford us better full-price sell-through, thus less markdowns.

And a specific example on the Disney Store side was, in 2005 we were not able to impact the Halloween assortment that was purchased while we were here. This year we were able to impact it, and we have seen significant cost reductions for this product, and as you know, it's a big piece of our third-quarter business.

Kimberly, in response to your last point about the peak, if memory serves, you said 200% or sorry, 200 basis points?

Right.

That is directionally correct, but it is not that high. If you compare it to last year, it is actually a little bit north of that.

Great. Just so I'm clear on the Disney division, Mario, it sounds like what you're saying is that you had some sourcing gains in the third quarter but definitely not all. You really started to see the sourcing gains in fourth quarter, so we should see Q1 and Q2, along with part of the assortment in Q3 be impacted, and then you're just at the very beginning of trying to provide any in toys?

Yes, that is a pretty good summary. We are at the very beginning stages of toys, and we think you will see an impact this year. But it will continue for years to come as well as we really get our hands around this important category.

Jeff Black, Lehman Brothers.

I guess I have a question, a follow-up really to what we have been talking about on Disney. You mentioned the gross margin being able to reach parity with the core Children's Place business over time. How do you feel about the operating margins reaching parity? What kind of operating margin can we expect out of the Disney business? And what -- how much of that can we expect to gain in '06?

We feel that even with the royalty expense that we can reach operating levels similar to The Children's Place at Disney Stores over time.

Jeff, we are not going to comment on operating margins for the divisions in 2006.

Fair enough. Good luck, guys.

Margaret Whitfield, Ryan Beck.

Back to Disney, in terms of last year, you lost money in both Q1 and Q2. Obviously you were not in control of the merchandise at that point. And I know your objective over many years is to be profitable in all four quarters. I wondered where you see the opportunities in terms of improvement year-over-year in the Disney business in this year? And also, what were some of the reasons behind your decision to lower the number of remodels for Disney this year?

Mario, do you want to take the first?

Yes. Starting with the Q1 and Q2, we see as a tremendous opportunity, and if you will walk the stores today, I think you will see the beginning of it manifest, the first quarter has traditionally been the lowest volume and the lowest traffic quarter for the Disney Stores. And we feel that through a dramatically increased softlines presence and presentation, we can grow the business during this important quarter and hopefully be profitable. We think we have made tremendous strides this year, and we will continue to add to the assortment, and we are real excited about what we have seen in terms of Easter dressy. I think Amy would agree we could have even bought it deeper.

Absolutely.

And we see plenty of opportunities to continue to grow this quarter. The second quarter has been traditionally okay, but slightly dilutive for the business, and it is centered around the swim business. We think this year we are continuing to enhance the swim business, as well as we have got both of these important new properties coming onboard during the quarter. So we will see -- we hope to see a big increase in terms of sales and profitability for the quarter as well.

Are you saying that you can be profitable in either/or this year, Mario?

No, we are not saying that. But we are just saying that we are --

Improving on the loss.

Yes, yes.

And as it relates to the Mickey store prototype, we are in the process of, I would say, tweaking that, or more than tweaking that prototype as we speak to get it somewhat more exciting, and there has been some changes as to what we think about it. So although the Mickey store prototype is actually performing slightly above the chain, we are looking to enhance it, and therefore, we ratcheted down the remodels to the minimum that we could so that we have the opportunity to kind of tweak it, get it to be more satisfying to all before we roll it out.

Embedded in your guidance for this year, are you planning the Disney Store contribution to be equal to what you thought they could initially do last year?

Again, we are not going to comment on the divisional numbers for this year.

John Zolidis, Buckingham Research.

A couple of questions regarding Disney. One, I guess is a comment. I guess I think that I agree that giving guidance for the operating margin on a divisional basis probably is not the best move. Are you still going to provide us after the fact when you report the quarters with the operating margins of the two divisions?

Yes, we will continue to provide segment information.

Great. That is very helpful. And then could you talk a little bit about the difference in the sales trend at Disney from the holiday to February? What happened that made the business get so much better in the month of February? Thank you.

Mario, I will take that?

Yes, go ahead.

Okay. John, the holiday business is substantially different. The fourth quarter is substantially different than all the other quarters at the Disney Store. It is amazing. It is almost like there is a whole new customer visiting in the fourth quarter that does not necessarily visit throughout the year.

And so we have learned a lot from that customer as to what their needs are and what we need to do going forward in the next holiday season. As Mario mentioned, we have upped our software presence in the first quarter, and I would say the regular Disney customer is reacting very very favorably to that. So there was a pretty big change in customer base, as well as our merchandise to result in this big trend change.

And, as we have said in the past, Disney Store enjoys a very high-level of customer traffic throughout the year. And if you put forth a compelling assortment, they react very quickly, and we have seen that tide turn very quickly in February.

Okay. So looking out for the balance of the spring season, I know you were under inventoried throughout most of that period last year, and given kind of the recent positive reaction of customers, is there any reason to think that that February trend should really materially slow down?

Yes, that is really up to you to assume, John.

Okay. Thanks, guys. Good luck with the rest of the quarter.

Marni Shapiro, Merrill Lynch.

I have a couple of questions. Could you just break out of the 80 stores that you are opening next year what percentage of those or what number are outlet stores, and how many are Disney and how many are placed outlet stores? Could you give us a little bit more color on the outlet stores versus the core stores from IMU to traffic and conversion to UPTs or your average outlet store versus your average mainline store?

I don't think we have the breakdown of the outlet stores in front of us. So Hiten can certainly follow-up this year as it relates to the numbers. And as it relates to all the other KPIs, I mean top-line sales are substantially ahead of the chain average. Of course, UPT is substantially ahead in view of the fact that merchandise is sold at lower average unit retails. So, in general, most of the KPIs are up, and most importantly, the bottom line, which is store contribution, is very very very favorable compared to the full-price store in view of the top-line sales and the fact that the outlets cost us less to -- we have less capital expenditures, as well as some substantially less occupancy costs.

To add on the IMU in the discussion, those are the variables that you asked about. We buy a very very very small portion of specific outlet product, so they really are getting the same product that the core stores are getting, and therefore, the IMUs are fairly consistent.

The only real difference is the percentage of selling that they do of markdown product versus full-price product difference. And a portion of those markdowns are actually incurred in the full-price stores because the first markdown and sometimes even the second markdown taken in the full-price stores and some of that product is transferred to the outlets already marked down. Of course, they do take below their own markdown. So it really by and large is the same core assortments, just different mix of full-price to markdown selling.

And at Disney, roughly half of the stores we will open this year are outlets. As you know, we just launched the concept last year, and it exceeded our expectations. So we're trying to disproportionately grow it.

Right. Thanks, guys. And can you also just one more question on the Disney Store, can you talk a little bit about the soft goods inventory this spring versus where it was last year as a percentage of the overall inventory on the floor? And I guess where you do sort of feel like that should be? What is your ultimate goal where the softlines should be in the store?

Investment and actually I'm going to talk to contribution, we are looking at picking up about 500 basis points in contribution in the softlines over last year. We think obviously -- Mario noted that we could have probably bought even more in dressy, so we continue to see opportunity in softlines.

Should softlines be 50% of the Disney Stores, 40%? Is there any kind of (multiple speakers) surprise out there?

It definitely fluctuates by quarter, but the mix is we see as fairly close, equal, equalized, 50-50 contribution.

Right now the inventory is about 70% of the hardlines inventory right now.

Paula Kalandiak, Roth Capital.

Great quarter. I wanted to go back to the denim program and what was -- what is behind the changes? Exactly what are you doing? I was under the impression that you already had a really strong program with great fit, so what are you improving, and what made you make the decision to do something different?

Well, you're absolutely right that we have a great program. It was great fit, and we are very proud at the percentage of denim that we sell on an annual basis, and our target is to continue to increase that and become basically that denim destination for children's denim.

This year we decided to, one, change the marketing. We wanted to improve it. We decided to get out of a few watches that were not performing as well as they should and basically update the watches. And at the same time, we have about 3/5 in each boys and girls, and a couple of them stay the same, and one or two of them we kind of enhanced.

So, in view of that, we kind of decided that beginning this back to school season, we really want to become the denim headquarters for children's jeans, and all those improvements caused us to basically markdown or flush out some of the older merchandise so we can bring a whole new fresh assortment for the big upcoming back to school season.

Still two for 28?

Still two for 28. No change on that.

Okay.

Just improvements.

Okay. And then just really quickly, at the Disney Stores, as you are bringing the AUR up, I assume that's mostly related to layering in the good, better, best strategy. Will the price points on the good quality item still stay about the same and the prices on the multiple items stay about the same?

Yes.

Kimberly Greenberger.

I just wanted to know if you had done any sort of hindsighting on your television advertising program from last fall, and how you were thinking about the opportunity to build brand on TV as opposed to print as Neal talked about this year? Thanks.

We did do hindsighting on TV, and we were pleased with it. But, as we look at our return on our investments, our magalogues direct-mail campaign has been so compelling and just getting better and better, we really felt doing that and coupling that with a print campaign is really the best way to first reach our existing customers and also to get new customers into the franchise.

Again, it really shows the strength as the brand is taking hold of the direct marketing. The return has been fabulous. So we're going to continue with that as I discussed and be fed up quite a bit and couple that with a strong print campaign.

Great. Thanks. Could you potentially comment on what your redemption rate is on those does direct-mail magalogue coupons that you sent out?

Yes, Kimberly, we never comment on the actual, but as Neal mentioned, we are so happy to see that that is expanding over previous years. So the redemption is increasing and continues to increase. And to us, that is a sign that our brand is taking deeper and deeper hold because the customers are I guess keeping it in their wallet and using it in much greater percentage.

So you're actually seeing increased conversion or increased redemption on top of increased circulation in that direct-mail piece?

That is correct. That is in both the direct-mail, as well as our bounce-backs.

Janet Kloppenburg, JJK.

I had just a couple of questions. First, on the Disney inventory investment, and I think a much improved release schedule from Disney, as we move into the second quarter, would the outlook for the loss there be reduced? I mean I think -- I'm not asking for a quarterly number, but I'm saying, am I my right that the likelihood that the quarterly loss could come down a lot is a fair statement?

I think your statement that it could come down is fair, but I'm not sure if I would say a lot.

Can you discuss the release schedule from Disney for that period that may positively affect the business?

Mario, do you want to take that?

Yes, it is certainly public information. There is a Cars pick, which is a Disney Pixar movie that comes out in early June. And then in early July, the Pirates of the Caribbean II will be reeleased.

Versus last year, Mario, is that a much stronger schedule?

Yes, last year there really was not a -- Pixar had delayed the release of one of their movies, so there was nothing during the summer.

Okay. Great. And then, hey, Neal, on the marketing, I think you said -- did you say that the circulation on the magalogue would be up about 20%?

I said, on a full-year basis, we would say at least a 20% increase in our direct-mail. That is correct.

(technical difficulty)-- to any particular period of the year, or will we see it pretty evenly disbursed over the year?

Pretty evenly disbursed over the year. We will keep on assessing it, but right now pretty evenly across. (technical difficulty)-- again, that is going to be higher reach, more frequent reach than we did in 2005, as well as depth.

Will that be moving higher as well?

What will be moving higher?

Each count be moving higher on the magalogue?

Page count? Not necessarily, no.

And does that spend pressure SG&A, or do you think you will get immediate feedback, immediate sales growth from that?

Our return on investment on our direct-mail is extremely good. So whatever we spend we get a very substantial return on investment, and that is why we decided to increase to spend.

Okay. Great. Thank you. And then my last question is for Richard on the inventory levels for The Children's Place stores going into the second quarter. I know you said that you have invested more in the back -- it is going to be up that much because investment in denim and because of investment in summer, or can you just clarify it for me? I'm not clear on that investment.

It is denim, summer and the timing of flow are the three things that are driving that.

And you would be bringing back to school in earlier this year than last because you want it in the distribution center?

No, also we have an initial fit of early back to school, especially in the hotter climates at the beginning of June versus end of June last year because there is a timing shift as well. It is part of our tiering of assortment strategy.

Thanks for the explanation.

There seem to be no further questions.

Okay. Thanks, everyone. Thanks for your interest. Have a great day and a great quarter. Thank you.

This concludes today's conference call. You may disconnect at this time.