Children's Place Inc (PLCE) 2006 Q3 法說會逐字稿

Good morning, ladies and gentleman and welcome to The Children's Place third quarter financial results conference. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Ms. Heather Anthony.

Thank you, Operator and good morning everyone. Thank you for joining us today for a review of our preliminary fiscal 2006 third quarter financial results. Joining on this morning's call are Ezra Dabah, Chief Executive Officer; Neal Goldberg, President; Tara Poseley, President, Disney Store; and Sue Rile, Executive Vice President, Finance and Administration. 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 at Disney Store.

Today, Ezra will highlight the quarter and on-going business; Sue will cover our preliminary financials; Neal will review The Children's Place; and Tara will discuss Disney Store.

Before we begin, I'd 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. In addition, as you know, yesterday we reported the results of the investigation into the Company's stock option granting practices. Being that we are unable to expand beyond the information that was disclosed in the press release, we ask that you please keep all questions today to the fundamentals of the business.

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

Thank you, Heather. As you can imagine, we are pleased that the option investigation is behind us. Just to give you a short summary, this thorough investigation by a special committee brought to the Company's attention various errors in our option granting process. Yet, it found no evidence of wrong-doing, no self-dealing and no intentional back dating. As a Board, we are taking actions to employ best practices, to strengthen our governance and internal controls which will give us the foundation to expand as one of the nation's leading children's retailer. I'm pleased that my strong conviction and integrity of our Company as the foundation of our core values remains untarnished.

Onto earnings. Today's call, we will review our preliminary third-quarter results and include comments and guidance on fourth quarter and fiscal 2007. Our third-quarter performance was strong at The Children's Place and Disney Store, driving great results on a consolidated basis with net sales increasing 25%, comparable store sales increasing 14% and preliminary net income increasing 31%.

At The Children's Place brand, holiday sales were impacted primarily due to lack of unit inventory ownership and weather patterns. This was somewhat compounded in January, resulting in month-to-date comps tracking in the negative mid single digits.

At the Disney Store, we are pleased with our holiday performance. Business trends continue to be robust in January, with comps tracking in the mid 20's, reflecting strong ownership of holiday merchandise and positive guest response to our spring assortment.

We are also pleased to announce the launch of our new store-within-a-store shoe concept, which we plan to roll out during the upcoming back-to-school season. We believe our successful formula of great fashion, high quality and value prices will fill a large void in the marketplace when applied to children's footwear. At the Disney Store, we are happy to welcome Ivy Ross as Chief Creative Officer, adding to the strong management team that we have assembled at the Disney Store brand, and we are excited about the opportunities that lay ahead.

At The Children's Place, the fundamentals and competitive advantages that have made our business successful remain intact and we look forward to continue gaining market share in 2007 and beyond.

At this time, I'll now turn the call over to Sue who will review our financial results.

Thank you, Ezra, and good morning everyone. Before I begin a discussion of our results, I want to point out that these results are preliminary and may be subject to significant adjustment pending the review and confirmation of certain tax laws and other factors.

Due to the restatement, we are not providing year-to-date or full comparative financial results, and we are providing only selected balance sheet data. In addition, any comparisons to last year made today are subject to change post the restatement. As such, I'd like to point out that we are providing preliminary net income -- only providing preliminary net income results today.

Now, moving onto our results. We're pleased with our third-quarter operating results. Preliminary net income for the third quarter was $38 million, including equity compensation expense of $3.2 million, pretax, reflecting SFAS 123R adopted in the beginning of fiscal 2006. Excluding the impact of stock option investigation and related expenses, third quarter net income was $40.6 million. Preliminary diluted shares outstanding in the third quarter were approximately 30 million shares. Please note again that last year's results have not been restated to correct the accounting for past stock option grants.

On a segment basis, the Children's Place reported an operating profit of $78.5 million, up approximately 42% versus last year. This improved 250 basis points as a percentage of net sales. Disney Store reported and operating profit of $10.4 million, up approximately 316% versus last year, or an improvement of 470 basis points at a percentage of net sales. Shared Services reported an operating gloss of $27.9 million, an increase of 81% versus last year. The increase primarily reflects increased bonus accrual, equity compensation and option-related expenses reflecting the implementation of SFAS 123R and fees and related expenses associated with the stock option investigation.

Consolidated net sales for the third quarter increased 25% to $550.4 million from $441 million last year. Third-quarter sales were comprised of $397.2 million from The Children's Place brand, a 24% increase over last year, and $153.2 million from Disney Store, a 27% increase over last year. Consolidated comparable store sales increased 14% for the quarter, driven by a 9% increase in comparable store sales transactions and a 5% increase in average transaction size. Consolidated gross profit dollars increased 30% to $240.5 million. Consolidated gross margin increased 170 basis points to 43.7%, primarily driven by occupancy leverage and increased IMU at both brands, partially offset by higher markdowns at both brands.

SG&A as a percentage of net sales was 29.7%. Positively impacting SG&A this year was lower payroll expense at both brands and our decision not to anniversary television advertising at The Children's Place. Offsets to SG&A expense leverage were management bonus changes this year versus last year, equity compensation expense and the cost of the stock option investigation and related expenses. Excluding equity compensation and stock option investigation and related costs, SG&A leveraged 90 basis points.

Depreciation and amortization expense was flat as a percentage of net sales to last year. Operating margin increased 150 basis points to $61 million or 11.1% as a percentage of net sales. Our effective tax rate was 38.4% in the third quarter, versus 35.4% last year. Last year's tax rate benefited from tax efficiencies identified as part of our global operations review.

Moving onto the balance sheet, we ended the third quarter with cash and cash equivalents of $147.3 million, compared to a net cash position of $60 million, once factoring in the $55 million balance on our revolving credit facility. I'm sorry; $67 -- did I -- I'm sorry. $67 million. Sorry. Total consolidated inventory at cost was up 16% or 7% on a square foot basis. At The Children's Place, inventory at cost was up 8% on a square foot basis, in line with our previous guidance. Disney Store inventory at cost was up 7% on a square foot basis, below our previous guidance, primarily reflecting lower than anticipated merchandise in transit.

Looking ahead, we expect both brands to end the fourth quarter with inventory per square foot up in the low double digits. At the end of the first quarter 2007, we anticipate inventory per square foot at The Children's Place Brand to be flat. However, excluding the incremental denim inventory we carried last year, inventory is projected to be up in the low double digits. We expect Disney Store to end the first quarter 2007 with inventory per square foot in the positive high 20's.

At the end of the third quarter, we operated a total of 1,182 stores, comprised of 851 Children's Place Stores in approximately 3.9 million square foot and 331 Disney Stores in approximately 1.6 million square feet. We will end fiscal 2007 with 1,197 stores, consisting of 869 Children's Place Stores and 328 Disney Stores.

As stated in this morning's press release, we anticipate reporting preliminary fourth quarter fiscal 2006 net income of approximately $45 to $48 million, including approximately $3.5 million pretax and equity compensation expense reflecting FAS 123R in the beginning -- which we adopted in the beginning of 2006. This guidance reflects January comparable store sales in the negative mid-single digits for The Children's Place and positive mid 20's for Disney Store and an approximate $4 to $6 million tax benefit due to the utilization of certain foreign tax credits.

Also included in the range is approximately $9 million pretax in costs in connection with the stock option investigation and tax implications related to outstanding brands. The amount of these costs is subject to significant adjustment, pending the review of the Company's determination of the appropriate accounting for its previously issued stock options, related discussions with the staff of the SEC and clarification of certain tax laws and their accounting impact, an approximate $6 to $8 million pretax in write-offs due primarily to the reevaluation of a planned 42nd Street store location in New York City to configurations currently under consideration, and infrastructure investments which had been made in connection with Disneystore.com, as we now plan an affiliation with Walt Disney Company in order to present a seamless, branded presence online.

Excluding the tax benefit, costs of the stock option investigation, a tax impact of previously issued stock options and anticipated write-off, net income in the fiscal fourth quarter is anticipated to be approximately $51 to $53 million. Fiscal 2000 -- fiscal 2006, excuse me, net income is expected to be $83 to $86 million. This includes approximately $13 million of equity compensation expense under FAS 123R, approximately $14 million pretax of option investigation and related expenses and the previous mentioned tax benefit and write-off.

Turning to fiscal 2007's guidance, at this time we anticipate fiscal 2007 net earnings per share of approximately $3.55 to $3.65. We anticipate a tax rate of approximate 38% and 31 million shares outstanding. This guidance does not reflect any residual expenses the Company may incur as a result of the conclusion of the stock option investigation. This includes a provision of approximately $6 million of pretax expense to address issues with certain recently remodeled Disney Stores. We expect to open approximately 60 Children's Place Stores and approximately 20 Disney Stores.

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

Thanks, Sue, and good morning everyone. Today, I'll briefly review third-quarter highlights, discuss our fourth quarter performance and our future growth initiatives.

Our back-to-school merchandise assortments were well-received by our customers. We delivered consistently strong comps across all regions, all departments and all mall types. Our 15% comp was driven by a 10% increase in transactions and a 5% increase in average transaction size. Customer traffic was up over 7% and conversion in the third quarter increased 50 basis points. As many of you know, our goal during back-to-school was to be the denim destination. We went into the season with updated washes, fits and enhanced marketing. We added premium denim, which, importantly, did not impact our basic [2-4] business. The end results was an approximate 20% increase in denim sales over last year's third quarter.

Turning to the fourth quarter. As Ezra commented, our holiday season was challenging and has continued into January. Weather, lower unit inventory ownership and, in particular, a lack of depth in key volume drivers have impacted our results. That said, these issues are relative short-term in nature. Goods are available throughout the first quarter are projected to be in the high single to lower double digits.

Before I discuss Spring, I'd like to point out that our Canadian business had a successful holiday season, which we attribute to their strong unit inventory positions versus last year. We believe this validates our belief that lower unit inventory ownership throughout the majority of the chain was the main contributor of the deceleration of fourth quarter comps, given that Canada carries essentially the same assortments as the U.S. Canada has been a consistent growth driver for us and will end the year with over 70 stores that are closing in on $200 million in sales. E-commerce also drove strong sales this holiday season with business up 27% for the nine-week holiday season.

As we look at our Spring assortments, while near-term results are being impacted by weather, we have received positive feedback on our Spring assortments from our customers and our field team. In fact, in warmer climates like Puerto Rico, comps month-to-date are tracking in the low single digits. We believe our merchandise and marketing visuals are impactful and reflect who we are as a brand. Our Easter dressy merchandise will set the week of February 12th, two weeks earlier than last year, reflecting the earlier Easter this year.

Turning to growth. We increased our store count by 8% this year and we remain on track to achieve our sales per square foot goal of $350. We now believe we can reach a $400 level over the next few years. We believe strong growth is ahead of us as we continue to make the very best accessible to all children.

As Ezra mentioned, we are excited to announce that we are launching our newest growth vehicle, shoes. This store-within-a-store concept will initially encompass approximately 50 stores during the back-to-school season. We are incredibly excited about this new venture for several reasons. From a market perspective, there is a huge void for a retailer to fill when it comes to high quality children's shoes that offer fashion and quality at a value price, the same formula that has driven our success. It allows us to offer our customers head-to-toe dressing in a more meaningful way. And it reflects the success of our existing footwear category over the last several years. The shoe section of our stores will occupy approximately 1,000 square feet. Therefore, this year's class of new stores will be larger than in the past. We will have an online presence within Children'splace.com and we'll create marketing material as we get closer to launch to inform our customers of what's to come.

Lastly, during the third quarter we announced the groundbreaking of our new 700,000-square-foot DC in Fort Payne, Alabama. This new facility [conflects] to 1.2 million square feet and, together with our existing DC network, supports our long-term growth.

In closing, we are pleased with our strong third quarter. While the fourth quarter has been challenging, we have clearly identified the issues and have acted quickly to ensure that summer and back-to-school buys are maximized. The fundamentals of our business remain strong and between sales productivity and the new store expansion, we have a lot of growth ahead of us.

Thank you, and now I'll turn the call over to Tara.

Thanks, Neal, and good morning everyone. Before I begin, I'd just like to say the first few months at Disney Store have been exhilarating. My passion is branding and product, and to be with one of the most recognized brands in the world is a marketer's dream.

As we look to continue to maximize opportunities at Disney Store, my priorities are innovating and elevating the brand. Our goal is to set ourselves apart from our competition by exciting and delighting our guests in new and innovative ways. We will do this through -- product, by focusing on every detail; store environment, by making big ideas bigger and maximizing synergy events; driving sales through our targeted, direct mail program; and delivering on the expected Disney Store service model.

Second, as it relates to product, my priority is toys. We have made great strides in this category over the past year, and we look forward to continuing to innovate and elevate, especially in the toy category.

And finally, we have growth opportunities in e-commerce and real estate. In order to create a seamless experience for the guest, we are in discussions with The Walt Disney Company to host our Disneystore.com website. This alliance allows us to maintain our own site within the Disney.com site and we look forward to going live in the second half of 2007.

As it relates to real estate, we plan to open approximately 20 Disney Stores in fiscal 2007, primarily in A and B malls. We are finalizing the design of our new store prototype and expect to roll it out at the beginning of second quarter.

Now, moving onto discuss the third quarter. We are delighted with our third-quarter results at Disney Store. Comparable store sales increased 12%, driven by a 6% increase in comparable store sales transactions, reflecting increased customer traffic and a 5% increase in average transaction size. We achieved positive comps across all regions, all departments and all mall types.

Looking at fourth quarter, we drove a successful holiday season by applying our learnings from last year and implementing strategies that resulted in fourth quarter comps in the low teens. The DVD releases of Disney Pixar's Cars and Walt Disney Pictures Pirates of the Caribbean, Dead Man's Chest anchored our boy's offerings this holiday, while our homegrown big ideas like Royal Princess assortments was a key focus for girls.

Turning to Spring and current business trends, we are pleased with our comps month-to-date, which are tracking in the high 20's. We attribute our success this month to having more clearance on hand than a year ago, as well as a positive response to our Spring merchandise. Our [Spring to] assortments arrive in stores the week of February 19th and will feature our Easter collection including dressy apparel, home products and flush. In 2007, we look forward to maximizing synergy events, like the platinum DVD release of Peter Pan and the theatrical releases of Meet the Robinsons, Ratatouille, and the third installment of the blockbuster Pirates of the Caribbean franchise.

Finally, as we recently announced, w are thrilled that Ivy Ross has joined our team as Senior Vice President, Chief Creative Officer. Ivy's expertise in toy design and extensive fashion hard lines and soft lines background make her uniquely qualified for this new role. Amy Hauk now has a design partner, which rounds out my tremendous team.

Thanks, and now I'll turn the call over to Ezra to wrap up.

Thank you, Tara. Operator, we are ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Kimberly Greenberger of Citigroup.

Great. Thank you. Good morning. I was hoping you could talk about the fourth-quarter inventory ownership at Children's Place. You indicated you felt like you were -- lacked depth and key volume drivers. Was it planning more conservatively? Or what do you think drove that miss there?

And then on the Disney side, if you could just talk about, at all, the licensing renegotiation that you're doing? Does that have anything to do with trying to extend the deadline on the store remodels? Anything that you could add to that would be great. And then, just on the $6 million write-off for extra expense on the recently remodeled Disney Stores -- if you could speak to what is driving that expense, as well, that would be really helpful.

Kimberly, this is Richard. I'll deal with the inventory issue at Children's Place first. The issue with inventory in the fourth quarter was actually two-fold. First, we sold through more than we had anticipated in the third quarter, and as we've announced we had a very strong third quarter. But the second piece of it is we put some strategies in place where we felt that we could get a much faster inventory turn and in hindsight, it was a bad decision. So, we did buy more conservatively for the fourth quarter, anticipating that we could get the sales on the turn side. We've gone back and done a lot of analysis around that, and there is an extremely strong correlation. We've done even some statistical analysis between driving sales and inventory investment. So, what we've gone and done is rectified that go-forward. We've gone back and added some inventory to the summertime period and pulled some things forward. And we've also gone back and added to back-to-school.

So, it almost reminds me of last year. We had a tough fourth quarter at Disney. We understood what it was about, and then we fixed it for this year and saw the performance turned around. The good news is we really believe we have a handle on what the negative contributors were to the fourth quarter, and they really are fixable. This is not us sitting here saying, 'What did we do wrong?', and not being able to figure it out.

And to add to that, just Canada does validate so much of our thinking because it is essentially the same assortments and clearly the consumers in Canada voted very strongly, and we see with the inventory depth it really affected us in the states.

Great. And then just, [Les] -- I'm sorry, Richard. So does that mean you're going to try not to be as conservative as we get into 2007? And do you think that the pull forward of some of your summer deliveries will actually help Q1? Or when do you think you'll be at a better inventory situation?

Well, we already feel we're in a better inventory position from a go-forward perspective. So, from a February/March perspective, we are helped by the earlier Easter, and therefore Easter is sitting on the floor a couple weeks earlier in February. So that was a benefit to us.

Beyond that, we have moved up some product into the backend of March, early April and have been and are continuing to work that inventory to fill in in the middle of the year, and we've placed some additional orders for back-to-school. So we actually think we've got strategies to continue to drive positive business, starting with February. This is not like it's going to take us months before we feel we're back on track.

Fantastic.

And Kimberly, as it relates to the Disney license, as we mentioned in our press release, we are discussion with the Walt Disney Company about changes to the license agreement, which could be material. It's really premature for me to comment on the status of these discussions. But most importantly, I believe that it's in the best interest of both of our companies to resolve these issues, and we look forward to do so in the very near future.

Ezra, can you--?

As it relates to -- go ahead, Kimberly.

Could you just let us know, did you instigate the talks with Disney or did Disney instigate the talks with you?

Disney instigated talk with us.

Okay.

As it relates -- although we were both on the same wavelength at the same time. As it relates to the $6 million charge. [I don't want to say charge] -- estimated capital --

Well, it's expense. Basically, because we're going to have to make some changes to some stores that already have been renovated, we expect -- and this is very, very preliminary, but we felt that we had to factor it into our 2007 earnings estimate. We'll have to take some charges or accelerate some depreciation. We're not sure exactly what form this will take. It's pretty fair to say that because we had to make some pretty extensive renovations to stores that have recently been remodeled, we'll have to take some expense associated with that. And that's all in connection with these discussions that are underway with the Walt Disney Company.

And that's as it relates to the Mickey stores.

Right. The new Mickey [inaudible] prototype. And do you have a new prototype that you're looking to launch some time here in 2007?

We are just about finished with the design. We're working together, of course, with The Walt Disney Company and we believe that within the next couple of months we'll be ready for the roll out.

Terrific. Thank you and good luck in first quarter.

Thank you.

Our next question comes from John Morris of Wachovia.

Thanks. Good morning, everyone. I guess to follow up on that -- I understand, Ezra, you don't want to go into too much detail. We were looking back at the history, and my question on the license agreement with Disney, looking at that -- those terms related to uses of intellectual property, opening and closing stores and the approval of independent directors. Are your discussions centering on any of those terms, in addition to the remodels?

Yes, John. I'd rather not comment on what our discussions are centering on.

And then in terms of -- I guess a question for Richard -- on the inventory ownership question, you're very helpful in making it clear. I want to go a little bit deeper. You said you were trying to engage new strategies to get faster inventory turn. Can you give us a little bit more color on what those new strategies were? Was it, for example, driven by new marketing? What was it, specifically, in terms of the strategies to get inventory turned faster?

Well, some of the things related to the tiering strategy that we implemented. So for example, we made the leap that if we get more climate-appropriate product, just as an example, in stores, you would get a faster sell-through, which we actually did experience. We saw some very positive response in the tropical stores. But we found that we still need some level of promotional activity in the stores to drive the stores. So even when you get faster turn, you need the ammunition and the unit ownership to be able to continue to drive the business. So that's just one example. There's a few other things that we looked at and said based on changing the mix, we could speed up the turn. And in hindsight, it's not necessarily the best thing to do.

The other thing is we've had some success in increasing retail, not through taking prices up but through changes in mix. As we did that, and we said we'd get more growth out of retail, we cut back on the units, which we continue to find less units is not a good thing for us. We're just a very high unit velocity retailer. So those are some examples of things we implemented and took a calculated risk on lowering the inventory investment.

Okay. And then finally, within the context of your fourth-quarter guidance, do you see the Disney division as showing a profit margin improvement?

We can't comment on the segments in connection with guidance. I'm sorry.

Okay. Thanks.

Thank you.

Our next question comes from Janet Kloppenburg of JJK Research--

Hi, guys.

Hi, Janet.

Hi, Janet.

Hi. A couple of questions. Sue, could you clarify what you said about the first quarter? I think you talked about first quarter '07 ending inventories flat at Children's Place but if you take out a denim investment you're across low double-digits, and about the Disney business.

That's correct. That's correct, Janet. Recall last year we were carrying some extra denim inventory because we were transitioning out of some denim basics. So, there was a period of time coming out of the first quarter we were actually carrying more. And we spoke to that -- we had spoken to that at the time. Richard, I don't know if you care to supplement that at all. But if you take that out and then you look at our inventory, we're exactly we'd expect to be.

Yes, the other way thinking about this is, the flat is on the balance sheet at one day and time. When we run the business, we are less focusing on what are we going to own on that one day. What we are focusing on is what do we have in the pipeline to support the future quarter sales. And when you look at goods available to support the sales, that reflects the high single, low double digit number that we're quoting. If you look at where we project inventory to be on the balance sheet on that one day in time, it looks round about flat. What's driving that differential to Sue's point is significantly a difference in denim ownership related to back-to-school selling. So it really didn't benefit the sales in the second quarter or at least the summertime period and only really got set on the floor towards the end of June.

And recall, Janet, when we released our first-quarter earnings last year, there was some concern over the high inventory levels that was a result of carrying that double -- those extra units of denims that were transitional at that time. If you pull that out, you get to a more normalized inventory -- assessment of where our inventories are expected to be.

And Disney is supposed to be in the high 20s on a comparable store basis coming out of Q1?

Yeah.

Again, from a timing perspective, we're seeing the goods available being in the high teens, mid to high teens.

Okay. Thank you. And then, Sue, on the fiscal 2007 guidance?

Yes.

Where you talk about the provision of $6 million to remodel -- to address issues with certain remodeled Disney stores, can you talk about what's going on there, why that's happening? And secondly, if you think that we should consider that $6 million as an extraordinary item or whether it's part of operations.

Janet, we're all not happy with the Mickey store prototypes. It's not the first time we talk about it. This is why we have changed the design and look forward to roll out a substantially different design beginning in the summer of this year. So to address certain issues as it relates to the design, as well as the constructions of the store, we are going -- we are expediting some of the capital investments that we have made in the stores because we have to make some changes.

Okay. And could -- I have read the agreement that you have with Disney, and they do have some right to have say with respect to how stores are remodeled. So could some of this -- could that charge of $6 million be related to this negotiation that you're involved with with Disney?

We're working very closely with them.

Okay. I understand. And then Neal, if you could talk a little bit about the Spring sell-throughs right now. I think you said the Puerto Rico store comps were up low single digits right now. Is that a satisfactory level? Is that where you would think the Puerto Rican stores would be right now? And how transferable is that information to U.S. business, let's say a month from now?

Well, you know -- and I mentioned Puerto Rico. We're seeing some of the same positive swing versus the rest of the country in the some of the tropical stores too. As you all know, and you are quick to call out, when it's too hot, we tell you it's too hot; it's too cold, it's too cold. But clearly in the children's apparently market, parents buy more to need and we had a warm holiday season, and we talked about our inventory challenges then, and now we come into a new Spring season in January, and we get our coldest weather. So the places we look towards are, are there some signs in Hawaii, Puerto Rico, some really tropical areas. We are seeing positive swings, up to 10-point swings from the rest of the business. So we are pleased. I wish we could tell you we could look through our Spring assortment and not be happy with it. We're happy with it. We're getting positive feedback. So we believe a lot is weather-related.

: Just to add a little bit to Neal about the fact that we have a children's business and it's one of a need. It's important to note that our customer is more on the value end of the spectrum. And in view of that, they have a tendency to buy even closer to need. So the weather patterns play a pretty big - are a pretty big factor, especially because our customer is more so on the value end.

Great. And then lastly for Richard, if you could just assure us or talk a little bit about these key volume drivers and that when the customer is ready to buy, which I suspect will be sometime in early March, that you will have enough inventory in these key item drivers?

Yeah. The item drivers we referred to are part of the holiday line. And in fact, the evidence is we had a phenomenal Thanksgiving weekend. And what drove that Thanksgiving weekend was much greater than anticipated sell-through in those items. Those items weren't bought in as much depth, based on the explanation I gave earlier, which hurt us during the December time period. The items that are going to affect March are a completely different set of items. It's now Easter product. It's Spring product. It's not sweaters in holiday, as an example. So, it's not the same group of items and --

Well, I wouldn't expect it to be, Richard. But what I'm asking is, is the investment in the key items going to meet the level of demand for March? Or could this be a recurring problem?

We are in a substantially better position, going forward, than we were in the fourth quarter.

Thanks very much.

It's most important to say, talk about March. We did mention that our Easter collection is going to be in February, two weeks earlier than last year. And I think you all know that especially the dressy piece of our business, which we are so very well known for, is something the customers wait for. So, we look at February with great anticipation.

Thanks, Ezra. Good luck.

Thanks.

Thanks, Janet.

John Zolidis of Buckingham Research, your line is open.

Hi. Good morning.

Good morning.

Hi, John.

If I can ask questions about two different areas. With regard to the FY '07 guidance, is it possible that you can provide any more details on the assumptions behind that guidance? And specifically, what are you assuming for same-store sales or sales trends for either Children's Place of Disney or both?

And then, my second question is on the new shoe concept. I know you mentioned a little bit why you decided to go into that. Can you talk about why you think 1000 square feet is the right size space for that concept? Is this also going to imply a larger backroom? What other sorts of operational challenges might there be associated with the shoe concept? And what are you doing to address them? Thank you.

Do you want me to take the first one? John, at this point we can't provide more color on the 2007 guidance. We just -- we historically have not -- we haven't provided comp assumptions. So, I'm sorry; but I can't give you more than what we already have. And then I'll ask Ezra to comment on the shoe concept.

So, we're so excited about this opportunity. We've been, of course -- we've always said, as you know, that we want to make the very best accessible to all children. And as you think about the different categories that we are not yet in, as it relates to children, shoes is definitely one of them. And as we look at the marketplace, as Neal mentioned, there was just a tremendous void, especially as it relates, I think, in a mall arena, for a specialty children player that had fashionable merchandise at value prices.

We have studied this for quite a while. We have strategized this for quite a while, and we have found that something in the neighborhood of 1,000 to 1,500 square feet, which will include backroom space, is the right size for this, especially since it's a store within a store. It's not a stand alone store. So from our point of view it's the right size. But it's important for all of you to note that we are looking to have an assortment of approximately 200 SKUs per season. We are looking to actually be a shoe destination. So it's not just extending our shoe assortment in any way. We will have some exposure on the lease line with a shoe window, and we really look forward to become a force in the children's shoe arena.

And I just want to add, our customers have voted already on our shoes. They like what we've been doing, and to be able to offer her the ability to really have much more thorough head-to-toe dressing, we see as just a huge opportunity.

And you guys -- Ezra, have you brought on any additional management or people with expertise in the shoe area to help lead this effort? Or is this something that you feel that you can do with the current team?

No. As you can imagine, the shoe business is so substantially different than the ready-to-wear business, and we need what we call shoe mavens who have been in the business and really understand it, from A to Z. So we have put together a team that's been specialized in the shoe arena to handle this launch.

And did that involve new hires? Or is that mostly from existing staff?

No, no. They are new hires.

Designers and sourcing and such, combined with our existing --

Well, it's a combination. But new hires.

And they're already on board with the Company?

Yes.

Some are. A few are still to come.

Okay. Great. Well, that's pretty exciting, and we look forward to seeing the Easter dressy assortment when it gets in stores.

Great. Thanks, John.

Thanks, John.

We'll take our next question from Dorothy Lakner of CIBC World Markets.

Thanks and good morning everyone.

Hi, Dorothy.

Good morning.

Just a couple of questions. I wondered if Richard could clarify what he said, I thought, earlier when we were talking about the strategy that you used during the holiday period, as regard to inventory, and the fact that you felt you need the ammunition of promotions with units to really drive the business. So I wondered if you could just talk about what things you didn't do during holiday from a promotional standpoint? And when we look at the first quarter and the Spring season, is the kind of promotional cadence going to be comparable to what it was a year ago, assuming that units are back up where you want them to be?

And then secondly, I wondered -- just maybe to rephrase Janet's question -- are we, as we look at the $6 million charge for remodeling changes that you're making in the Disney Stores, are we to consider that an extraordinary item? And if -- I guess, just explain that a little bit more.

And then finally, just on the shoe business, what the price points you're looking at might be and where the footwear's going to be manufacturing. Thanks.

So Dorothy on the promotional strategy and the inventory piece of it, in the fourth quarter we did comp the promotional activity that we had last year, but just didn't have the units behind it. So the level of lift that we normally see, we didn't experience.

Okay.

Going forward into the first quarter, we continue to expect to be comparable in terms of promotional activity, as well. Promotion is less significant to the other three quarters than it is to fourth quarter, as well. So, the level of activity just isn't the same.

Okay.

And on the $6 million for next year, I just can't stress enough that's a very, very, very preliminary number. We just wanted you to know that we're thinking about something like that in our next year's guidance. As to extraordinary, we accountants try to stay away from that word because it has a very, very significant accounting meaning. Nonetheless, I would characterize it as -- it's an event that is not directly associated with the day-in, day-out running our business. And so as such, it's unusual.

Okay. That's helpful. Thanks.

Okay.

And on shoes, it is clearly going to be like the rest of The Children's Place. It will be a value shoe assortment, keeping quality, fashion, value. Figure most -- the majority of the assortment will be under $20. We will have boots and some things that potentially could be higher that are more fashionable, but we are so excited with this shoe assortment.

And understand again, just following up to the earlier question, we have brought on some people with many, many years, 10 to 20 years, shoe experience to round out our team. So with the team we have here and the team we brought in, we are very excited with this assortment. Again, in a mall environment to offer this kind of great value and quality that we've already been -- customers voted on in our apparel, we're just really thrilled with it.

Rob Wilson of Tiburon Research, your line is open.

Yes. Thank you. Can you talk about marketing in '06 and what you plan on doing '07 -- whether you'll increase your magalog circulation and maybe if marketing leveraged in '06 versus '05?

We definitely continue to see growth in our response rate from our magalogs and we are -- as we -- as said fairly consistently, we think magalogs are a key part of our future growth. So you will see some more circulation growth in that, more prospecting, which has continued to be very successful for us. And of all the marketing vehicles we've used before, we really believe that the magalog is our strongest. So, we will continue to do that. And we will continue to do some [out-of-home] billboards and some ways to get brand recognition, as well as national magazines, which we think the consistency of that is also helping to drive our brand awareness.

Tara, maybe you'll let us know a little bit about our marketing plans at Disney Store?

Yes. Just one of the things I want to call out is recently, with the organizational structure changes, bringing Ivy in as Chief Creative Officer, Amy Hauk now is in charge of all of merchandising, business marketing, as well as e-com. So, I'm going to let Amy comment on circulation for 2006 and then our plans going into '07. So why don't you take that, Amy?

Okay. Hi, guys. Circulation for '06 was at 8.4 million versus an '05 of 1.5 million. Currently we are -- [throughout the state that we have] an active database of over 5 million names, and it's growing weekly. And we'll be looking to incrementally increase our distribution into 2007 through direct mail and increased customer segmentation.

Did -- I'm sorry, Sue. Did marketing expense leverage in 2006?

The answer to that question is that it did not leverage in 2006 versus 2005. In fact, we de-leveraged a little bit. However, what I can say about both brands is that our marketing is much, much, much more targeted and directly associated with generating top line, not top line sales. So I think that focus on the magalog versus things like TV advertising is much more focused and much more closely linked towards generating top line than it had been in 2005.

And I have a question for Neal. On the footwear, is that a lower-margin business? Should we think that your merchandise margin structure may change?

No. Overall, we should not see the merchandise margin change. I mean, there will be initially it's a ramp up, as we place smaller orders and possible in some factories. But shoes are going to be a positive margin contributor to us in the future.

We believe.

We believe.

Thank you.

And Richard, your -- Richard's inventory-turn strategy, are you suggesting that you did not implement that strategy in Canada, and you still saw success in Canada?

That's correct. We didn't use the same investment strategy in Canada, so Canada inventory levels have been substantially healthier than the U.S. And as I've said, we ran some correlation and the strong sales in Canada were highly correlated to the inventory position where the weak sales in the U.S. were highly correlated to the weak sales in the U.S. So the thing that makes us feel comfortable is yeah, you've got two different divisions with substantially the same assortment but different investment strategies, one doing extremely well with that assortment and the other one struggling, makes us feel much more comfortable that it is inventory quantity related and not a qualitative thing.

One of the other items that caused the increase in the units in Canada was when we first bought the line, we were counting on having more new stores than we actually ended up with, with Canada, which is why we had heavier units inventory there.

I got it. And now one final question for Sue. When do you plan on filing your amended 10-Q's and will all financial statements on a quarterly basis change going back?

I'll answer the second part of your question first. There's a likelihood that the quarterly statements will change somewhat, and some of that has to do with just the nuances of being in a restatement mode where you have to reevaluate all of your accruals in light of -- and estimates in light of actual subsequent events. So there's a high likelihood that the quarters will change somewhat. And I cannot, unfortunately, at this point in time give you a date when we expect to have our financial statements filed. All I can tell you is as soon as practicable. And if you read the press release, you'll see that there are some steps that we have to go through, including discussions with the SEC, before those statements can be filed.

Fair enough. Thanks for taking my call.

My pleasure.

Thanks.

We'll go next to the line of Chuck [Grige] of Blue Line Capital.

Good morning. All my questions have been answered. Thanks.

Thanks.

Bye, Chuck.

We'll go to Jeff Black of Lehman Brothers.

Hi, Jeff.

Hi, thanks. How's it going?

Hi, Jeff. Good.

Nice to finally be hearing from you guys again.

[Inaudible]

I just had a quick couple of questions, I guess, Ezra or Sue. On the uses of cash -- we've got a decent cash balance here -- how much additional CapEx do we need, assuming we're going forward with some sort of new remodel program next year? Any color on CapEx for next year? And also, what about a buy back at these levels? Any thought related to that? And then I have a quick follow up.

Yes, Jeff, we look forward to giving you our CapEx expectations in our next earnings call for 2007. And as it relates to our cash position, we're a very young Company. There's so much ahead of us. And at this moment, the cash that we have in hand, we believe, is just necessary to continue our aggressive growth.

And given that, when might we see a ramp up in the number of Disney Stores and the square footage of Disney, assuming you get to the right remodel? Is that something we could look at in the '08/'09 time period? And sort of, how big can that store base be, based on everything you know today?

Our first priority at Disney Store is remodel. And we have to absolutely make sure that we remodel the chains as soon as we possibly can and then begin the expansion program. So not to say that we're not going to have some new stores over the next few years, but our focus over the next few years is totally going to be focused around the remodels. We have said before that we believe that the business store in North America can have something in the neighborhood of 600 stores, and we continue to believe that that's the minimum number that we could have, because the Disney Store thrives in any location where there's a lot of foot traffic. And there's at least such 600 locations and more in North America.

Great. Thanks a lot. Good luck.

Thank you.

We'll take our next question from John Curti of Principal Global Investments.

Good morning. I have a question on anticipated the tax rate for the fourth quarter of '06 and through the entire year of '06, please.

I can't give you the rate for the fourth quarter of '06 because we have that range I mentioned in the prepared remarks that we're expecting a tax -- what we expect to be a one-time tax benefit of $4 to $6 million associated with the utilization of certain foreign tax credits. Moving into 2007, we're expecting the tax rate to be about 38%.

Is the one time tax benefit of $4 to $6 million, would that be like a dollar for dollar?

Yes. It's dollar for dollar. It drops right down to the bottom line.

Okay.

Because it's after tax by its very nature. But I want to caution you that we're taking advantage -- making use of these tax credits as the tax law is changing. So that's not something that can be expected going forward. Nonetheless, it's a good thing for the Company to do and it improves our cash and tax rate significantly.

And then my second question was with respect to the provision for the additional expenses for certain of the remolded stores, the Mickey store prototype. How many stores does that encompass, please.

Tara?

That will -- right now it's probably going to be about 30 stores.

No, no. We have approximately 65 Mickey stores. 65 to 70 Mickey stores.

Yes.

Right.

Okay. 65 to 70 stores?

That's right.

Right.

Okay.

Is the total amount and of that --

That's a total. Of that about 50% or so.

Exactly, will be associated with that expense.

Only about half of the stores will --

It's premature to say. It's premature.

Yes.

It's under evaluation. It's premature to quantify.

Okay. Thank you very much.

We'll go next to Jim Chartier of Monness, Crespi and Hardt.

Good morning. '

Hi, Jim.

Morning.

Could you just talk about the performance of your micro merchandising efforts in fourth quarter? It looks like maybe it hurt you a little bit in this quarter. But generally are you pleased with it and what do you see as far as opportunities for next year with that?

We are relatively pleased with the, what we are now calling localization strategies, both in the third quarter and the fourth quarter. But we continue to learn. So, it wasn't a hundred percent success rate, but there were a lot of things that worked significantly well. For example, one of the issues we had in inventory is the tropical stores. What we call tropical is Puerto Rico, Hawaii, south Florida and some of the border stores in Texas, et cetera. There's about 30 or 40 of them. Those stores have traditionally struggled during the back half of the year, in relative terms, because they just don't do as well when we give them sweaters and outerwear and that type of thing. Some of the inventory shortages we experienced going into December resulted from those stores running for some of the weeks, 50% comparable store increases during the October, November time period. So, I think that the strategy is working. We still think it's an important strategy to give customers what they expect, where they expect it, rather than just force them to buy what's selling around the country, but we continue to learn. So I would say some great successes, some things that we've learned from, and we'll continue to adjust going forward.

And remember, a lot of this micro merchandising and localization, we really started the back half of last year, and we said we're going to have a lot of learnings. So we continue to have those learnings and we will continue to apply those to '07 and the future.

Okay. And then also you talked in the past about merchandising by store volume. Can you talk about the performance of that, as well?

Yes. So, on the store volume piece we are seeing even greater success than the climate piece. Essentially, what we've been doing is editing assortment out of the smaller group of stores and reinvesting that inventory in the top stores. And we have seen great success in that. We see that we get better turns, better sell-throughs and higher sales in those top stores and it doesn't significantly negatively impact those bottom stores. So we are very encouraged on that and actually feel that that presents even a greater opportunity than the climate piece that we focus on.

Great. Thank you.

We'll take our next question from Brian Tunick of JP Morgan.

Hi. Good morning. This is Anna for Brian. Thanks so much. You guys talked about your good, better, best strategy as it relates to Disney, especially this fourth quarter. Any learnings from that that you could share with us? And also, how should we think about it going forward for '07?

Hi, Anna. It's Amy Hauk.

Hi.

We saw great success in our higher priced point items for Q4 and that was reflected in our [inaudible]. We see continued opportunity through elevating and innovating the assortment and differentiating ourselves from the competition. We are continuing to focus on higher price pointed gift giving categories, based on the success we saw this year. So you'll continue to see movement in that direction. But what I want to qualify that by saying is that we believe in a value proposition. [Inaudible] products and assortment, the consumer's getting a great value for what they're spending, relative to the competition. So that remains incredibly important to us, and that's part of our core values.

Okay. That's great. And also I think you said at Disney you guys are focusing on toys and there will be a bigger focus on toys going forward. Could you share with us just what is toys as percent of the mix at this stage, versus soft lines and media?

We actually don't break it down to that detailed level. We do a split of hard lines versus soft lines. I can tell you, and Tara talked about in her speech, strong business this January and holiday season, toys definitely outpaced the Company. It's been a very strong performer for us.

And it continued to be so going into January.

Yes.

Okay. That's great. And are the margins on hard lines comparable to soft lines?

Yes, they are.

Okay. Okay, great. Thanks.

Our last question is a follow up from Kimberly Greenberger of Citigroup.

Great. Thank you. I just had two quick questions. Looking back to the Disney Stores purchase agreement. Can you remind us how many years you had to conduct the store remolding program? And was the agreement that you'd remodel the entire chain or invest, for example, $100 million in store remodels and kind of do as much as you could?

Yes, Kimberly, it was a complex dates for certain stores at certain times so it'd be hard for me to tell you one specific time as to when we had to do what. The thing that really threw us back, unfortunately, was the fact that we all were not happy with the outcome of the Mickey prototype, which delayed our remodel programs. So our intentions were to full force do whatever we can to complete everything we had committed to. But unfortunately because of the Mickey prototype that was not well received, frankly, both by us as well as the Walt Disney Company, is what threw us off that schedule. So we look forward to do our very best to complete that program as soon as we possibly can.

Okay. That's helpful. And then just lastly, on the Children's Place division in the third quarter, if you could just let us know sort of directionally on a year-over-year basis was the gross margin on an externally reported basis, up slightly from 3/2/05?

I would actually say it was up nicely from '05, at Children's Place. Both brands reported gross margin improvements that we're very pleased with in the third quarter.

Great. Thanks, Sue.

Thanks, Kimberly.

Okay. Thanks everyone. Thank you for your interest. Thank you for taking the time to listen to our results. Sorry we were somewhat late. Sue and the Investor Relation team are available if you have any additional follow-up questions. Have a great, great day. Thank you.