Children's Place Inc (PLCE) 2006 Q2 法說會逐字稿

Good day and welcome to today's teleconference. At this time all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. As a reminder this call may be recorded.

It is now my pleasure to turn the program over to Ms. Sue LaBar. Please go ahead.

Thank you operator and good morning everyone. Thank you for joining us today for a review of our fiscal 2006 second-quarter financial results. Joining us on this morning's call are Ezra Dabah, Chairman and Chief Executive Officer; Neal Goldberg, President; and Sue Riley, Chief Financial Officer. Also on hand to answer your questions at the end of our remarks are Richard Flaks, Senior Vice President Planning, Allocation and IT and Amy Hauk, Senior Vice President General Merchandise Manager.

Today Ezra will discuss progress we have made on key Company initiatives and review the Disney Store business. Sue will cover our financials in more detail and Neal will review The Children's Place business. After our prepared remarks we will take your questions. Please limit yourself to one question so that we can speak with as many participants as possible.

Before we begin, I would like to remind participants that any forward-looking remarks made today are subject to the Safe Harbor statement found in this morning's press release as well as in our SEC filings. With that out of the way, I will now turn the call over to Ezra, our CEO.

Thank you, Sue, and good morning everyone. We are pleased to experience the continued strong sales momentum in both brands. Second-quarter financial highlights were net sales increased 24%; comparable store sales increased 16%; gross margin increased 280 basis points; and SG&A leverage 70 basis points resulting in a loss per share of $0.53 versus a loss of $0.68 last year.

I'm extremely proud of our team's achievements in delivering strong results and making substantial gains in our key initiatives which are increasing market share, increasing store productivity and increasing Disney Store's gross margin. Our ability to attract new customers is reflected in our continued market share gains. According to MPD for the year-to-date period ended June 2006 The Children's Place brand gained 130 basis points of market share and represents 18.4% of the children's specialty apparel market.

During the first half we have increased our store productivity by approximately 4% and we are on track to meet our or exceed our 350 sales per square foot goal this year. We now believe sales per square foot can reach $400 over the next few years at both The Children's Place and Disney Store.

During the second quarter, gross margin at a Disney Store increased as the result of stronger merchandise execution and leveraging our sourcing expertise. We have further narrowed the delta between The Children's Place gross margin and Disney Store's gross margin. This is giving us further confidence in our ability over time to bring Disney Store's gross margin up to that of The Children's Place.

At The Children's Place we are making the very best accessible to all children. We are elevating our product and brand-name while driving greater value to our customers. Neal will expand on The Children's Place shortly. I will now give you some color on the Disney Store.

We are delighted with our second-quarter results at the Disney Store. Our 15% comp increase was driven by an 8% increase in comparable store sales transaction primarily driven by increased customer traffic. We also experienced a 7% increase in the average transaction size driven by UPT growth. Hard lines and soft lines were both strong comping in the mid teens while media reported a low single digit comp.

Guests responded favorably to our unique and broad assortments of Cars and Pirates of the Caribbean Dead Man's Chest merchandise as well as to our Hawaiian family (indiscernible) wear assortment and our summer fun dinnerware. We are especially pleased by the initial guest response to our back-to-school assortments featuring our new studio collection including Deco Denim as well as our enhanced backpack system. Our (indiscernible) states that arrive in stores next week and features Halloween costumes for which the Disney Store is famous. This year we will introduce upgraded quality and design of favorite classic character costumes and add new favorites from Disney's recent hit films. Also in support of our Halloween stage set we will be dropping 1.65 million of our Halloween magalogs to customers at the end of the month.

In July, we moved into our new Disney Store headquarters in Pasadena, an exciting milestone. Our new facility is open and allows for much greater creative interaction among our teams. We have added full [prioritized] store which gives us the ability to maximize the visual and marketing impact of our floor sets.

Looking ahead, we are excited about the DVD release of the Walt Disney pictures, the Little Mermaid platinum edition which arrives in stores October 3rd. The movie's popular princess, Ariel, will make a big splash at the Disney Store as we introduce a unique, broad and compelling merchandise assortment across both hard lines and soft lines. Importantly, we are leveraging the ideas and talent across The Children's Place and the Disney Store.

As an example, during the quarter the Company held its first joint national store conference where we brought together the field organization from The Children's Place and Disney Store. The conference created valuable opportunities for the teams to collaborate, build relationships, strengthen teamwork and leverage each brands respective core competencies.

I'm excited to report that our back-to-school assortments have been well-received in both brands for our customers and guests. We have very talented design and merchandising team who continue to raise the bar season after season and perform at high levels. I'm very proud of what our associates have accomplished. As we recently announced, I'm delighted that we have found two talented individuals to take an important leadership position within the Company. The recent hires of Tara Poseley, President, Disney Store; and Jill Kronenberg, Senior Vice President, GMM The Children's Place, round out our strong management team and I'm confident in our ability to deliver continued strong results.

Finally, today we announced the appointment of James Goldman, President of Godiva Chocolatier to our Board of Directors. We are delighted to welcome Jim to our Board. Jim's expertise will be invaluable to our Company as we continue to grow our brands and take each to the next level.

Now I'd like to turn the call over to Sue who will review our financial results in more detail.

Thank you, Ezra, and good morning everyone. We are pleased with our second-quarter and first-half results. Net loss for the second quarter was $15.2 million compared to a net loss of $18.9 million last year. On a per-share basis, we lost $0.53 including equity compensation expense of $2.7 million pretax versus a loss of $0.68 last year. Last year's loss per share as originally reported was $0.66 prior to the adoption of SSP FAS number 13-1, which require the expensing of rent during construction and increased the loss per share by $0.02 to $0.68.

On a segment basis, The Children's Place recorded an operating profit of $3.5 million versus an operating loss of $2.1 million last year. Once again Disney Store narrowed its operating loss to $4.5 million compared to an operating loss of $11 million last year. Operating margins at both brands improved in the second quarter versus last year. Shared services reported an operating loss of $24 million including $2.1 million of equity compensation versus an operating loss of $18 million last year.

Consolidated net sales for the second quarter increased 24% to $395.6 million from $318.7 million last year. Second-quarter sales were comprised of $269.4 million from The Children's Place Brand, a 25% increase over last year and $126.2 million from the Disney Store, a 22% increase over last year. Consolidated comparable store sales increased 16% for the quarter driven by a 12% increase in comparable store sales transactions and an approximate 4% increase in average transaction size. The Children's Place Brand's comparable store sales increased 16% on top of a 4% increase last year. Comparable store sales for Disney Store increased 15%.

Consolidated gross profit dollars increased 35% to $134.2 million. Consolidated gross margin increased 280 basis points to 33.9% primarily driven by occupancy leveraged at both brands, increased IMU at both brands and lower markdowns at Disney Store. Partially offsetting the increase were higher markdowns at The Children's Place.

SG&A as a percentage of sales was 36.3% which represent 70 basis points of leverage versus last year. The leverage primarily reflects lower payroll and employee benefit expense as a percentage of sales at both brands and store maintenance and repair expenses at Disney Store incurred last year as a result of the magic makeover which were not incurred this year. Partially offsetting the leverage are higher marketing costs as well as equity compensation expense and the expensing of stock options.

Depreciation and amortization expense was 3.9% flat to last year. Operating loss for the second quarter was $25 million compared to an operating loss of $31.3 million last year. Our effective tax rate for the quarter was 37% versus 39% last year primarily reflecting tax law changes passed in certain states during the quarter. We continue to expect the full-year tax rate to be about 38.2%.

Moving on to the balance sheet, we ended the second quarter with cash and equivalents of $110 million compared to $122 million last year. We had no long-term debt and zero borrowings on our credit facility at quarter end versus a $23 million balance on our revolving credit facility last year.

Total consolidated inventory at cost was up 42% or 33% on a square foot basis. At The Children's Place, inventory cost was up 38% on a square foot basis versus a 12% decline last year, a slight increase from our previous guidance. As we have discussed previously, this primarily reflects increases in merchandise in transit and our strategic decision to introduce fall product earlier this year. Importantly, approximately 60% of the increase in inventory is due to timing as a result of the strategic decision to introduce fall product earlier this year supporting our wear now strategy as well as our bringing in inventory earlier to ensure that adequate product is in the store to support our floor sets and subsequent replenishment.

We are comfortable with the level and freshness of our inventory as we move into the third quarter. Most importantly, spring and summer represents 3% of the total inventory versus 4% last year. Disney Store inventory at cost was up approximately 18% on a square foot basis below our previous guidance primarily reflecting lower than anticipated merchandise in transit as well as stronger sales. Looking ahead, we expect The Children's Place Brand to end the third quarter with inventory per square foot up in the high single digits in line with previous guidance. At Disney Store we continue to expect ending the third quarter with inventory per square foot up in the mid teens in line with guidance.

During the second quarter, we opened 14 Children's Place Stores, closed one and remodeled seven. In addition, we opened five Disney Store's and remodeled seven. As the July 29, 2006, we operated a total of 1142 stores comprised of 822 Children's Place Stores and 320 Disney Store's in approximately 5.3 million square feet.

As stated in our July sales release we raised our fiscal 2006 earnings per share guidance to a range of $2.85 to $2.95 which represents a 26 to 30% increase over last year. Our full-year guidance includes equity compensation expense of approximately $14 million pretax.

In closing, I'm happy to say that for the year-to-date period earnings per share were breakeven including equity compensation expense of $5.7 million pretax versus a loss of $0.33 last year.

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

Thanks, Sue. This is a great quarter for the Children's Place Brand. Through our formula of great fashion design, strong merchandising, best-in-class sourcing and improved customer brand experience, we are yielding great results. Our second-quarter performance at The Children's Place Brand reflects strong customer response to our summer assortments as well as a positive initial response to our back-to-school offerings which is a reflection that our wear now and climate tiering strategies are working.

Early back-to-school bestsellers include basic denim, graphic tees, backpack system, our famous cord skirt now at two for $18 as well as our newly introduced premium denim. Our 16% comp was driven by a 14% increase in transactions reflecting increased traffic and 160 basis point increase in customer conversion as more new customers discover our brand. Average transaction size increased approximately 2% in the quarter. Consistent with last quarter, The Children's Place achieved positive comps across all regions, all departments and all store types.

Our marketing efforts were focused on brand awareness helping to introduce more new customers to our stores. We continued our focus of increasing the frequency and depth of our direct-mail program. As we have discussed previously, our return on investment from our direct-mail program has been high. As such, we mailed a total of 6.3 million back-to-school magalogs to homes through July and August reflecting an approximate 54% increase over last year.

In addition, we've increased our presence in print advertising for the back-to-school season. Our ads can be found in magazines such as Redbook, Parenting, O the Oprah magazine, with twice the number insertions over last year. Our external advertising efforts also include out-of-home advertising which we have expanded into three key markets, L.A., Chicago and Canada.

Our fall 2 assortments are being set in stores this week which be followed by Halloween costumes next week. Complementing our fall 2 offerings, we sent 3.7 million mailers to customers this year versus 1.7 million last year.

Turning to stores, our strong performance, consistent increases in customer traffic and proven conversion indicate we are making significant progress out in the fields. We have simplified the focus of our store team to welcoming customers, replenishing merchandising and keeping stores clean and neat. We've increased our staff on weekends and key volume days. We've implemented the customer ready environment in our stores to streamline merchandise processing and floor replenishment. In addition, we have substantially increased our store's stockroom efficiency and added high-capacity fixtures to most of our outlet stores. We believe these strategic initiatives will increase our customer's ability to find sizes and leverage our payrolls on key periods.

In closing, we believe our great merchandise, clear focus and strong teams position us to continue to drive strong sales. Thanks. I will now turn the call back over to Ezra.

Thanks, Neal. Operator, we would like to open the call up for questions.

(OPERATOR INSTRUCTIONS) Kim Greenberger with Citigroup.

Thank you, good morning. Congratulations on a very nice quarter. I was wondering if you could repeat -- I missed the Disney division inventory per square foot increase at the end of the second quarter.

Sure, just a second, Kimberly.

18%.

18%.

18. And you were looking for something I think in the low 30s, is that right?

That is correct.

That is right.

So, Richard, if you could just tell me if you feel comfortable with your inventory there? And it sounds like it was a timing of deliveries issue?

Yes, it's a timing of in concept as well as receiving deliveries. What we're finding is a lot more product coming out of China which is a shorter lead time as opposed to The Children's Place as we put more product into India, some in Africa, those type of things which are much longer lead time. Some of the Disney products getting into on a ship much later than we had anticipated.

But in terms of being comfortable with the inventory, we continue to have a process at Disney which is consistent with The Children's Place where we look at our inventory position as far as eight or nine months out. And as we're learning more about the business and understanding what is working better we are reviewing inventory on a monthly basis and reacting to it. So we believe we are well positioned to continue the momentum.

Okay. And then if you could just talk about the 60% I think you said 60% of the increase in The Children's Place division inventory was timing. What, as I look at the stores throughout the quarter, what will be the on floor average increase in inventory at The Children's Place division?

The on floor average, I don't know that I know an average over three months but if I just explain it just because we have it here earlier doesn't mean we're necessarily putting it out on the floor when it arrives. Let me try and explain this. From a timing perspective we moved up the 4-1 floor sets by a week; we moved up the fall 2 floor set by a week; and we are positioning some initial holiday previews to set on the floor in the middle of September versus the end of September last year. So the first thing is we did move the calendar up as we transition into this wear now strategy.

Second last year as we reported we were down 12% in inventory so we were actually chasing goods to get them in. We had some back-to-school product coming in as late as the early part of September last. This year we had to almost 100% of our goods here or in transit at the end of July. In addition to that last year at the end of July we had about 5% of our holiday goods on the balance sheet. This year we have about 33%.

Just because it's getting here more on time doesn't mean we necessarily just put it out earlier. But it facilitates getting those earlier floor sets that I spoke about and better replenishment not having to wait for late goods.

Okay, so if I look at the 38% increase and I say 60% is timing, the other 40% equates to maybe a 15% increase -- sort of 15% planned increase in inventory --

That is about right. And of that, about one-fourth of that is our expanded presence of basics, specifically denim.

Okay. So I should compare the 15% increase relative to the 12% decline last year? Is that the apples-to-apples comparison?

Yes. Although -- that roughly is the comparison.

Okay, great. And any color on month to day comps? And then just lastly, Sue, if you could comment on The Children's Place division external gross margin just directionally how does it compare to last year? Thanks.

Okay, on the month to date comp, we don't disclose month to date comps. I can tell you however that on The Children's Place gross margin we are pleased to see an external margin increase which was primarily driven by three things. Firstly, we had occupancy leverage; second, we had improvements in IMU and that was partially offset by higher markdowns year-on-year.

Thanks, Sue.

Janet Kloppenburg with JJK Research.

Good morning everyone and congratulations. A couple of questions. Sue, maybe, for Children's Place could you give us an idea of the direction going forward? Maybe Richard, you could talk a little bit about what remains of the denim clearance that I think drove some of that gross margin decline in the second quarter. And also if you could help us understand in this increase in denim if you are carrying product not just for fall, for holiday. It sounds like you might be Richard. And if that is -- I just wanted to understand why you would tie up your capital so far in advance holding that inventory?

And, Sue, I wonder about the marketing expense. It sounds like it's going up pretty significantly at The Children's Place and if that was pure SG&A or if your leverage point was higher now because of that expense? And then I have some Disney questions to follow on.

Janet, there is really no gross margin decline during the second quarter. As Sue just mentioned, gross margin is actually up at both brands. (multiple speakers) So we are not -- our denim business as Neal mentioned is actually doing better than our plan so we are very happy with sales in our basic denim especially as well as our new premium denim introduction. And no we are not carrying holiday denim at this particular time. So denim to us is a basic commodity which we order on a need basis and a monthly basis.

Ezra, can you hear me?

Yes.

I didn't get the new denim wasn't selling. I wondered if you could comment on the liquidation causes of the old program which I think did have some affect on your merchandise margin in the second quarter.

I can comment on that. First of all the old denim, all the markdowns have been taken so we owned it at the end of the season at the markdown price. It has been on about between three and four weeks of supply on a weekly basis so it is really liquidating, we're selling a big chunk of it. We've got weeks not months of supply. And all of that inventory except for a handful of pieces is sitting in the outlet not in the place stores anymore, not in the full price stores.

The increase in denim that we are carrying -- so that is not the significant piece. We did expand our ownership of basic denim over last year. Part of our strategy for back-to-school was to become the denim destination and we actually expanded the on floor presence of full price denim on the floor. If you walk into our stores now you will see a much bigger presence than you were last year. We are pleased to say that we are getting rewarded for that because we are seeing the full price denim comping up nicely even though it's up against some clearance product that we needed to get rid of.

And even though we've got premium denim also, both are doing extremely well.

Yes.

On the product margin for Children's Place, forgive me for saying gross margin, I did recognize that it was up, Ezra.

Okay.

And maybe about the marketing --

Yes, I will just briefly touch on the marketing expense. Basically we had higher marketing expense in the second quarter this year versus last year primarily due to the expansion of a direct-mail program coupled with more sign packages in the stores which are driving traffic. Last year recall that we didn't really start the TV ad -- we ran a TV campaign which really didn't start until August so that primarily hit in the third quarter of last year.

Okay, but the marketing expense in the third quarter, Sue, for Children's (technical difficulty)

We don't disclose the individual quarter line items. We are holding to our guidance for the year.

Great. And, Ezra, I was wondering if you could just talk about the progress you see at Disney in terms of (technical difficulty) sales assortments for that back half? I think the good, better, best strategy that you had talked about and how you feel about the go forward there? Thank you.

Yes, we are ecstatic about the momentum that we are experiencing at the Disney Store as we speak. And as you have I guess recognized in our comp performance year to date, our good, better, best strategy is something that we are building up toward and you will see more of that as we continue to evolve especially during the holiday season.

Thank you and good luck.

Jeff Black with Lehman Brothers.

I had a question looking deeper out into Disney into Q4. And just what were the misses you think last year in merchandise? And what are we doing specifically differently to the extent that you can talk about some of those strategies to rejuvenate sales? Thanks.

Yes, Jeff. There was lots of learning from last year and I'm not going to talk about them in particular. All I would say is that we have put together based on those learnings quite a few many strategies whereby we are feeling very confident about the fourth quarter this year at the Disney Store. Especially also in view of the fact that we had just come off two very great hits, both Cars and Pirates of the Caribbean, both of those DVD releases are scheduled in the fourth quarter. So on the whole we are feeling good about our strategies and our merchandise for the fourth quarter.

Just a follow-up for Sue on that SG&A question. For the year it looks like we would have expected a little more leverage to the earlier caller's question.

Bear in mind as you compare SG&A to last year, you have the equity compensation program which you didn't have last year. So we are leveraging despite the fact that we are absorbing that fairly significant cost this year. So we are actually pleased with the leverage that we are seeing.

Yes, I'm not saying it's not impressive. And we expect some leverage as the year progresses in the second half as well on the SG&A line?

You'd have to model out -- we don't comment on the individual line items as they pertain to the year as you model it out you draw your own conclusions about the individual line items based on the earnings per share guidance that we have given you.

Okay, fair enough. Good luck. Impressive quarter. Thanks.

Tom Filandro with SFG.

Thank you and my congratulations as well. To quick questions. My first question, I guess it's for Richard, the climate tiering strategy you talked about Neal mentioned at CCP, can you kind of expand on that concept? How it is impacting early back-to-school selling and how we should view the positioning for fall holiday?

And just a second piece of that is Disney utilizing that strategy at all? And then I have a follow-up question.

So, first, in terms of Disney, no we are not using it yet. We truly believe you have to fix the base first before you can get into optimizing in tiers. We anticipate using it but we really want to get through this holiday and make sure that strategies we put in place are sound and working.

From a Children's Place perspective, this whole notion or concept of localization of assortments is a complex one and a lot of organizations are just getting into it. So what we've opted to do, which I've said in the past, is pick a couple of areas, one being climate, start localizing. What we do is we break the climate into effectively three different zones. We have tropical zones, hot zones, and cold zones. We have found that in non hot time periods, or not in summer, the hot zones don't perform as well as they do when it is summer where all stores are hot. And we believe that it is because we've been giving them the inappropriate product. That doesn't mean 100%; probably 70% or 80% of the product does work consistently. But it's that differentiation that we focused on.

So, for example, instead of giving them heavy fleece in Puerto Rico in October we're giving them more T-shirts or more climate appropriate products. So it is a switch of the assortment. In terms of magnitude, we were probably -- and I'm just giving you rough numbers because it differs over time. But we were in the single digits in terms of the amount of product last year that we differentiated between hot and cold and cold zones. And this year we are in about the 30% or so range that we've differentiated.

And our belief is if you give customers product that is more appropriate to what they are looking for, you've got more chance of selling it at full price. And when you mark it down on the back end, you are not going to have to be as aggressive on a T-shirt in the hot climate as you are on fleece in a hot climate. So we believe there is a gain on both ends.

Terrific update.

Tom, as Neal mentioned, early results of that strategy has proven to be successful.

Great, I have kind of a quirky question. I'm just curious if you are seeing an improving trend at all in the upper end of your size range in particular in girls?

That is a bit quirky. We don't have the answer to that.

All I can say, Tom, is every quarter before we start the buying process we reassess sizing and we make adjustments based on what we are seeing. There is no specific trend that I've noticed when we look at that that says oh, bigger sizes are suddenly working better.

Okay. And just one final one for Ezra. I've asked it before; I have to ask it again. Lots of cash in that balance sheet keeps growing, no debt. Is there a range of cash you would consider that is within your comfort zone?

I would say that it is not within the near future.

Okay, congratulations and continued success.

John Morris with Wachovia.

Hey, guys, congrats. Ezra, kind of a follow-up on Disney in fourth quarter, I know you were obviously understandably a little reluctant to go into details. So let me ask the question I think a little bit more specifically. A lot of us are thinking back to last year in Q4 remembering the kind of competition that the Company gets during that holiday period from some of the big box operators. Really going out advertising, loss leaders, very I think very sort of broad advertising campaigns to drive traffic.

Can you tell us -- obviously you'll have a terrific product assortment, learn from your lessons last year. But in as much as some of these other guys will be carrying the same kind of DVD releases, how will you attract that traffic into your store, into the mall? How will you reach out, how will you talk to those guys? And then I had a quick follow-up for Neal.

I mean one of our big learnings last year is especially in the toy category the market is quite promotional. We stayed true to our value prices at least at the beginning of the season. So our intentions are to change that and to be somewhat more aggressive in a very planned promotional strategy early on in the season to basically state to the customers what we have.

At the same time, John, I think you know that we are in the malls and there's tons of traffic in front of our doors every day. So we look really forward to using our lease lines as a big draw to move customers into our stores, as well as now we have quite a big database of customers that we have begun to direct-mail, so we look forward to using that vehicle to attract customers and let them know what we have in store and at what prices. So we have quite a few vehicles that we look forward to use in order to get -- to continue the kind of momentum that we are enjoying as we speak.

That makes a lot of sense. Neal, the premium product we've noticed has been met with a good deal of success from the customer. And I'm curious to know what your thoughts are in terms of how that will evolve, how far you can take it? Right now, you've got the premium denim, the premium layette; we've seen the corduroy. Where does it go from here? How much of the mix could it possibly be? Will you extend this program on into the spring? Thanks.

I will give you two answers. One, we've had a good, better, best, so we do have product in almost all categories; the best, which we add a lot of quality to and we still believe it is great value. Premium in denim has started off strong. We are very pleased with it. We felt our customers were looking for elevated denim products. We will keep on looking at premium in denim; we will keep on looking at best throughout the assortment. Again, wanting to make sure we always represent value.

And I think consistent with what we've been doing over the last couple of years, we will keep on looking at ways to improve and evolving our product. But premium right now, we're very pleased where it stands and we are pleased where our good, better, best strategy is. And we are just strengthening that, because we don't want to use the value formula that has made us win over the last many years and customers really responding to.

And we did buy it for spring.

And do you see taking it to other classifications?

Premium, right now not yet. Again, premium is best, and we have best in other things. We don't necessarily have to call it premium. We like it very much in the denim category.

Good luck for the rest of the season.

Brian Tunick within JPMorgan.

Thanks, good morning. It's [Anna Andreva] for Brian. Turning to Disney, could you guys comment about the gross margin? You said it was up for the quarter but if you could just provide us some color between composition for March margin and occupancy? And then I have a follow-up as well.

We don't disclose a precise amount by division between March margin and occupancy. But I can tell you that the Disney growth margin was in fact up nicely based on several factors. Firstly, there was clearly occupancy. Second, the IMU was up. Third, our markdowns were in fact down on Disney. So overall we saw nice margin improvement at Disney that contributed to our overall margin improvement.

Okay, that is great. That makes sense. And also one more if I may. Did you guys comment what was AUR at both divisions for the quarter?

We don't typically comment on AUR.

Okay, great. Thanks.

Dorothy Lakner with CIBC World Markets.

Thanks and let me add my congratulations. Just another question about gross margin if you can answer this. You talked about the gross margin gap between Place and Disney narrowing. Could you talk about where that was and where it is now?

Secondly, I think for Neal, you talked about the desire to -- the strategy actually to bring in inventory earlier to ensure that your factories would -- some of the newer factories I think you said you were using would get the product to you on time. And I wonder how that is working and if you think you can let up a little bit on that going forward?

And then lastly, there has been considerable talk in the market about macro concerns and obviously your results have been very, very strong. What are you thinking in terms of the overall consumer environment? Thanks.

Dorothy, as it relates to the gross margin number at both companies, as Sue just mentioned, we are not giving that out. Again I'd like to say that we have made significant progress this particular quarter in closing the gap. And we feel quite confident that over time we can get the Disney Store gross margin up to that of the respectable gross margin that we enjoy at The Children's Place.

As it relates to the macro stuff, again as you just mentioned, we have not seen it ourselves as demonstrated by the comp that we have reported. And at this particular moment we have momentum and we're just not seeing any macro issues hurt our business.

Thanks.

And the second question?

There was an inventory timing question. I guess the best way to answer that you are trying to gauge if you expect to see this level of increase go forward? I think we've indicated that at the end of the third quarter we see the level of increase coming down significantly from where it is now. We don't see the significant inventory increases that you saw at the end of last quarter and this quarter continuing largely because of less timing impact at the end of next quarter.

Okay, great. Thank you.

Paula Kalandiak with Roth Capital.

Good morning, great quarter. A couple of questions. The first one relates to some of the merchandise that you featured for back-to-school which had slightly higher price points than where you featured them last year. And I recognize that you've added more to the product this year which would account for some of the price increase. But I was wondering with the higher prices in mind did you cut back on the unit volume that you purchase this year or did you plan similarly or higher? And are you seeing any resistance to the higher prices? And I'm thinking specifically about like the cord skirts and the backpacks?

Well, I -- we'll team this with Richard. But we really -- we've said before we surgically look at items and make sure we're pricing it right. The corduroy twirl skirts that are now two for $18, which was to two for $15 is a really different corduroy skirt. We felt we put more value into it, it was more special, we could get a higher retail for it. The backpack system much the same thing. We really improved the quality, took it to the next level and felt we deserve to get a little more retail for it.

But be very clear, this is not our fall sale strategy. We love our value positioning and we hold to our good prices, better and best. We sometimes try to with the better value that we're putting in better quality we may look for a higher retail. But on the whole our prices are staying where they are. And surgically we will look at specific items where we do quality changes. But the rest of the products we're going to stay value we are very happy with the sector the customers were getting and they seem very pleased with us.

In terms of the investment on the individual styles, there is no one answer. It's a case-by-case. There are some instances where we believe there's a lot of opportunity where we took some prices up, and as Neal said, surgically and still invested in similar or sometimes even more units. There are other cases where in taking those prices up we did cut back on some of the units. Overall in terms of the whole buy we did not cut back on the unit investment.

And, Paula, what's really rewarding to see is as both those items you mentioned, the skirt and the backpacks, we are actually enjoying even at the higher price we are enjoying unit increases as versus last year. Sales unit increases.

That is great. Okay. And then my last question is -- I'm sure you are aware of a couple of new higher end Disney children's lines, the Classic Disney and Walt Disney signature that are going to be featured in some of the higher end department stores in the fall. I was just wondering if you had any thoughts on that and whether that would help or hurt your business at Disney?

Yes, I'm not sure. I don't think it's going to hurt but at the same time we are looking at that to see if we want to introduce something of that nature, some kind of a newborn (indiscernible) -- Amy, do you want to take that one?

Yes. I mean I think, Paula, that I think elevated product actually helps enhance the Disney brand because we talk a lot from a competitive standpoint that Disney fits in the mass-market and how do you compete with that. So I think distribution of a higher level newborn line only helps. I think we've seen our newborn line and currently in the Disney Store's is fairly elevated as well and we are looking from a tiered assortment strategy especially in some of our higher profile stores to add a little bit of luxury into newborn as well. We think that's an opportunity.

And really to go back to what Richard said about getting the fundamentals of the business right, we feel that we've spent this year really laying a strong foundation for a business model that works. And then in go forward seasons we will be continuing to look at opportunities such as an elevated newborn line to continue to differentiate and elevate the overall assortment at the Disney Stores.

Great, thanks very much.

John Zolidis with Buckingham Research.

Sorry, all of my questions have been answered. Great job on another good quarter, guys.

Marni Shapiro with [The Retail Tracker].

Congratulations on a great quarter. Can you talk a little bit at the Disney Store's -- Halloween seems to be coming in later than last year -- later than I remember it historically. What was the thinking behind this? And the selling period is so short, so I guess what kind of a risk is there?

And last year you moved the markdowns on your Halloween -- you pushed them out a little bit, you took a few markdowns right before Labor Day and then you pushed most of them until after Labor Day which was a shift. So with Halloween coming later how does that all play out? And then just one follow-up on Children's Place.

Amy, do you want to take that?

Yes, absolutely. You are correct, Marni, previously at the Disney stores Halloween had become -- was setting -- role play was setting earlier and earlier and it was moving into the entire month of July. Strategically in growing the back-to-school business and growing the soft lines businesses and other businesses where we saw opportunity, we actually pushed Halloween back to where it traditionally peaks. Obviously it we looked very carefully at the weeks and what the investment and inventories versus the return in sales looked like. And we felt very comfortable with where we now have positioned role play.

We've adjusted our inventory accordingly but also feel that this will be a huge boost because its newness in the back half of August driving into September which we previously didn't have. I also think in addition the assortment is incredibly elevated and it will create a lot of newness at the front of store compared to what the competition looks like.

Are you buying it less deep than you have in the past because it's a much shorter selling period?

It's actually, if you look at the volume that was actually driven by role play, there are slight decreases in investment. But overall we see positive comp net in this category.

And did you change the markdown strategy for it because you shifted the whole delivery?

We have back pocket. We ran through multiples scenarios so we have everything ready to go but we think that the product is compelling and we think that the customer will react strongly to it. There is no reason to think otherwise. We actually currently right now have four princesses in our stores and the role play for Pirates of the Caribbean, which is beating plan right now.

Great. And then can you guys -- you had a great magalog for back to school. Could you just talk about plans for holiday? Because I recall you did something last year. Will you anniversary that?

Is this Disney stores or Children's Place?

I'm sorry, for Children's Place.

Okay.

Absolutely. We continue -- we've said our direct mail has been so strong for us we are looking forward to increasing both depth as well as spread of the magalog. We're very excited about it and holiday looks great.

And the redemption rates continue to be very strong beating plan?

Yes.

Excellent. Congratulations, guys.

Rob Wilson with Tiburon Research.

Thank you, good morning. Sue, when I look at your divisional profitability chart on your press release, I'm trying to understand why the shared service costs are rising faster than the increase in sales?

Bear in mind that there is about a $2.1 million charge at shared services this year for equity compensation that you didn't have last year. When you take that out you get to a more normalized rate of increase and that is the rate of increase that we feel we need to invest in shared services to support the two businesses and the growth rate.

When you take that out it's basically in line with sales -- or lower than sales.

Fair enough. And also the impact of the 53rd week, are you going to provide any commentary on the 53rd week this year?

Yes, we've factored the 53rd week into our guidance and it is really as you look at the 53rd week is -- it doesn't impact the earnings per share by very much at all, a couple of cents we think at the most.

Thank you, good luck.

Jim (indiscernible).

Good morning. I was just curious if you could comment on the impact of the new distribution center on second quarter and how we should think about that going forward?

Yes, the DC in the second quarter we have brought the DC on the latter part of the second quarter last year. We pretty much -- it didn't have as significant an impact in the second quarter this year as what it had in the first quarter. We were able to in fact leverage the DC.

And then going forward, do you expect to continue to leverage the DC?

Yes, because bear in mind we -- on board at Disney -- we took on the DC to manage, to accommodate capacity in the third and fourth quarter. So, yes, we do expect to leverage it --.

As of the third quarter, we are year rounding it.

Exactly.

So absolute leveraged.

-- anniversaries in the third quarter.

Okay. And then on the advertising front, is the increase of the magalog and the billboard ads and such in the new markets, is that to offset -- or I guess to as a substitute for the TV campaign you ran last year?

To some extent, yes.

And the cost associated with that was that taken all in second quarter?

Well, wait a minute. The cost of the fall mailing was in fact absorbed in the second quarter along with some of the outdoor advertising and the magazine advertising that Neal referred to. There will be some -- there will be more marketing expense in the third quarter for other mailers. Last year, however, in the third quarter we had the cost of the TV advertising campaign.

Okay, so we could potentially see a decrease in advertising in third quarter versus last year?

We can't comment on that.

Okay, thanks. Congratulations.

Okay, if there are no further questions, thank you very much. Thank you for being a part of us and taking your time this morning to listen to our results, Sue and Sue. If you have any additional follow-up questions, thanks again. Have a great day; have a great summer. And let's all look forward to peace in the world. Thank you.