Children's Place Inc (PLCE) 2006 Q4 法說會逐字稿

Welcome to today's teleconference. At this time all participants are in a listen-only mode. Later there'll be an opportunity to ask questions during our Q&A session. Please note this call may be recorded.

I will now turn the program over to Heather Anthony. Please go ahead.

Thank you operator, and good morning, everyone. Thanks for joining us today for a review of our fiscal 2006 preliminary fourth quarter financial results.

Joining us on this morning's call is Ezra Dabah, Chief Executive Officer, Neal Goldberg, President, Tara Poseley, President of Disney Stores, and Sue Riley, Executive Vice President of Finance and Administration. Also on hand to answer your questions at the end of our remarks are Richard Flaks, Senior Vice President of Planning, Allocation and IT, Amy Hauk, Senior Vice President, General Merchandise Manager at the Disney Store and [Mark Crystal], Vice President of Planning and Allocation for Disney Store. Today Ezra will review highlights of the quarter and the year. Steve will cover our preliminary financials, Neal will review the The Children's Place business and Tara will discuss Disney Store.

Before we begin, I would like to remind participants that any forward-looking marks -- remarks made today are subject to the Safe Harbor and can be found in this morning's press release. After our repaired remarks, we will be able to take your questions. Please limit yourself to one question so that we can speak with as many participants as possible.

With that out of the way. I'll now turn the call over to Ezra Dabah. Ezra.

Thank you, Heather. And good morning, everyone.

2006 represented another year of strong growth for our company. The Children's Place brand continued to produce strong results and market share gains. And at Disney Store, we enjoyed the type of early success we envisioned when we first made the acquisition.

Fiscal 2006 financial highlights include consolidated net sales up 21%, breaking the $2 billion mark. Comparable store sales up 11% on top of last year's 9% increase. Gross margin up 150 basis points, and preliminary net income up 29%, including the unusual items highlighted in today's press release or 44% when those items are excluded.

Our 2006 goals included increasing market share, enhancing the customer brand experience, and achieving greater leverage and expense efficiency. We made progress in all areas. The Children's Place brand gained 40 basis points of children apparel market share in 2006 according to MPD. In addition, we surpassed our $350 per square foot goal with Children's Place, ending the year at $356 and Disney Store at $395 per square foot. We always envisioned Disney Store generating higher sales activity, given the premium nature and emotional connection of the Disney brand.

Over the next several years, we believe we can grow sales per square foot to $400 at TCP and $450 at Disney Store. Both brands were elevated this year through enhanced merchandise, marketing visuals, and a [inaudible] direct marketing campaign as demonstrated by our top and bottom line results.

In 2007 we'll continue to elevate the brand through our continued focus and creating compelling assortments strategically supported by impactful marketing, the rollout of our updated version of the expended technicolor prototype, which will not include our new store within a store shoe concept, the anticipated launch of Disney Store e-commerce as part of an alliance with The Walt Disney Company. And the rollout of our new Disney Store prototype, which captures the Disney magic.

An expense leverage, SG&A, the percentage of sales leveraged 20 basis points in fiscal 2006, excluding the unusual items discussed in today's press release and equity compensation expense. We remain focused on driving greater expense control and efficiency in 2007 and beyond.

At The Children's Place, while the fourth quarter was somewhat challenging, we believe the issues which Neal will discuss are somewhat short-term in nature. The competitive formula that has made us so successful and which our customers depend on us remains intact. Fun, fashionable, coordinated outfits with high quality at great prices.

I'd like to congratulate the Disney Store team on delivering a phenomenonal fourth quarter and year. Strong gross margin improvement and expense leverage drove Disney Store's earnings per share of approximately $0.25 in 2006 or $0.60 when excluding the write-off and asset impairment charge. A significant improvement over the prior year. Disney Stores accretability to generate a mid-single digit operating margin gives us further confidence in our belief that the brand should generate a double digit operating margin over time.

As we mentioned in our press release this morning, we have received notice from The Walt Disney Company that the company has failed to comply with certain of its obligation under the license agreement, including obligation to renovate and maintain stores. And Disney has assorted that these failures constitute material breaches of the license agreement. So although there can be no assurance that we will resolve these issues, our discussion with The Walt Disney Company has progressed, and we believe that it's beneficial for both parties to come to an amicable resolution.

As we look ahead, we are optimistic about our brand, both have significant opportunity to deliver profitable growth for many, many years to come. My confidence is further strengthened by the strong teams we have at both brands. We extend our heartfelt thanks to all of our associates, customers, and shareholders for the continued support.

Thanks, and I'll now take -- turn over the call to Sue who will review the financial results.

Thank you, Ezra, and good morning, everyone.

Before we begin a discussion of our fourth quarter results, I want to remind everyone 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 our previously announced restatement, we are not providing 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, we're providing preliminary net income results today.

Now, moving on to our results. Preliminary net income for the fourth quarter was $46.8 million. Net income includes equity compensation expense of approximately $3.3 million pretax, reflecting FAS 123(R) adopted in the beginning of fiscal 2006. Preliminary net income is in line with previous guidance. As previously announced, included in net income are: an approximate $9.5 million tax benefit due to the generation and utilization of certain foreign tax credits.

Approximately $9.4 million pretax in costs in connection with the previously announced stock option investigation, estimated tax consideration, and other stock option related expenses. An approximate $8.3 million pretax write-off, due primarily to, first our decision not to proceed with the 42nd Street store location in New York City. And second, infrastructure investments made in connection with Disneystore.com as we now plan to form an e-commerce alliance with The Walt Disney Company as Ezra mentioned.

In addition, fourth quarter net income includes a pretax impairment charge of approximately $9.4 million related to the writedown of fixed assets at 28 recently remodeled Disney stores. Excluding the four unusual items I just mentioned, fourth quarter net income increased 17% to $53.6 million, above our previous guidance. Preliminary diluted shares outstanding in the fourth quarter totalled approximately 30 million shares.

On a segment basis for the fourth quarter, The Children's Place reports -- reported an operating profit of $73.8 million, flat versus last year or down 310 basis points reflecting higher markdowns in marketing expenses coupled with lower than expected top line sales. Disney Store reported an operating profit of $10.8 million below last -- below last year reflecting the previously mentioned unusual item. Excluding these items and the implementation of FAS 123(R), Disney Stores operating margin improved 260 basis points to 12.9%.

Shared services reported an operating loss of $29.8 million, up 70% versus last year, primarily reflecting fees and related expenses associated with the stock option investigation and equity compensation and stock option related expenses reflecting the implementation of FAS 123(R). Excluding these items, shared services increased approximately 6%.

Consolidated net sales for the 14 weeks ended February 3rd, 2007, increased 20% to $645.2 million compared to $539.7 million for the 13 weeks ended January 28th, 2006. Fourth quarter sales were comprised of $416.8 million from The Children's Place brand, a 17% increase over last year, and $228.4 million from Disney Store, a 24% increase over last year. Consolidated comparable store sales increased 6% for the 13 weeks ended January 27th, 2007. The Children's Place brand increased 3% on top of last year's 11% increase.

And Disney Store's comparable store sales increased 14% in the fourth quarter. Consolidated gross profit dollars increased 22% to $287 million. Consolidated gross margin increased 90 basis points to 44.5%, primarily driven by increased IMU and occupancy leverage at both brands, lower markdowns at Disney Store, partially offset by higher markdowns at The Children's Place brands.

SG&A as a percentage of sales is 31.6%, representing 480 basis points of deleverage. Negatively impacting SG&A this year, were the costs related to stock -- the stock option investigation previously mentioned -- I'm sorry previously mentioned write-off, higher marketing expenses at both brands and the recognition of equity compensation expense under FAS 123(R).

Excluding these previously mentioned unusual items and equity compensation expense, SG&A would have been 28.4% of net sales representing 160 basis points of deleverage.

We recorded a pretax impairment charge of $9.4 million related to the writedown of fixed assets at 28 recently remodeled Disney stores. Depreciation and amortization expense increased 20 basis points to 3% reflecting higher capital expenditures primarily related to Disney Store. Operating margin decreased 550 basis points to $54.8 million or 8 -- 8.5%. Excluding the four unusual items, however, operating margin was 12.7% versus 14% last year.

Our effective tax rate was 17% in the fourth quarter versus 39.7% last year. The tax rate benefited from certain foreign tax credits mentioned earlier as well as the underlying tax rate coming in lower than our previous estimate.

To summarize, notwithstanding the challenges of the fourth quarter, we were still able to achieve a 2% increase in year-over-year net income for the quarter with all the unusual items and a 17% increase if you exclude those items. And overall, 2006 was a strong year as Ezra highlighted. Total sales increased 21%, consolidated comps increased 11%, gross margin increased 150 basis points, our overall operating margin increased 100 basis points to 7.2% excluding the unusual items, preliminary net income grew 29% to $84.6 million or 44% to $94 million excluding the unusual items.

Moving on to the balance sheet, we ended the fourth quarter with cash and short-term investments of $192 million compared to a cash position of $173.3 million last year. We had no long-term debt or borrowings on our credit facility at the end of -- at the end of either year. Total consolidated inventory at cost was up 13% or 3% on a square foot basis. At The Children's Place inventory at cost was up 3% on a square foot basis while Disney Store's inventory at cost was up 5% on a square foot basis.

Inventory at both brands came in below our previous guidance, primarily reflecting lower than anticipated merchandise in transit. At the end of the first quarter, we continued to 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. Last year we were transitioning into new denim styles, and as such, we were carrying more denim inventory than usual. We now expect Disney Store to end the first quarter with inventory per square foot up from the high teens to 20s.

At the end of fiscal 2006, we operated a total of 1,194 stores comprised of 866 The Children's Place stores, and approximately four million square feet, and 328 Disney Stores and approximately 1.5 million square feet.

Turning to fiscal 2007 guidance, we now anticipate earnings per share of approximately $3.63 to $3.73, $0.08 cents higher than previous guidance, due to an approximate $4 million reduction in the previously anticipated $6 million pretax expense for fiscal 2007 to address issues with certain recently remodeled Disney Stores. We anticipate a tax rate of 38% and diluted shares outstanding of 31 million shares. This guidance does not reflect any residual expenses the company may incur as a result of the conclusion of the stock option investigation.

Reflecting store openings, as we have previously stated, approximately 60 new Children's Place stores and approximately 20 new Disney Stores are planned for fiscal 2007. The majority of The Children's Place store openings will fall equally in the second and third quarter, while the majority of the Disney Store openings will occur in the third quarter.

Turning to Capex, 2006 capital expenditures total $157 million and we are planning 2007 capital expenditures of approximately $230 million. Approximately half of which will be allocated to store openings and remodels, approximately 40% towards the build out of our Alabama distribution center and new corporate headquarters and the remainder for IT and other projects.

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

Thanks, Sue. And good morning, everyone.

I'll be discussing the fourth quarter and go forward merchandise strategies, which we believe will provide opportunities for continued profitable growth. Comps increased 3% in the fourth quarter, reflecting a 2% increase in comparable store sales, transactions, and flat average transaction size. Our fourth quarter results were impacted by lower unit inventory ownership, in particular -- in particular a lack of depth and key volume drivers as well as adverse weather. We believe these issues are relatively short-term in nature as goods available throughout the first quarter are projected to be in the high single to low double digits.

Looking forward, substantial growth is still ahead of The Children's Place, which we will drive through, continued sales productivity gains, approximately 60 new stores in fiscal 2007, nearly half of which will be an underpenetrated markets like Canada, the west, and southwest. We continue to believe the chain can grow to 1,200 stores. We believe we have significant opportunity to continue to build our e-commerce business, enhance the site, which is such an important touch point for the brand. E-commerce grew 46% in 2006.

We are excited about the launch of shoes and are focused on being a shoe destination by offering approximately 200 SKUs per season. Not only will this new business give existing customers a great ability to create head to toe outfitting, but it will also serve as a means to introduce new customers to our brand. We believe this business is noncannibalistic and will enhance our current business. I would also like to clarify that any stores with an expanded shoe assortment will measure approximately 1,000 square feet larger than our typical stores and will not take space away from apparel.

Finally and very importantly, some of our key merchandising strategies for 2007 are: focusing on clarity of offering in key items, reducing the amount of floor sets we executed in 2006, especially during the fourth quarter, and continuing to roll out of our micromerchandising initiatives such as climate and volume tiering. We learned a substantial amount about these efforts in 2006 and look forward to building on those learnings in 2007.

In closing, we are passionate about continuing to deliver on our unique successful formula of fashion and quality at great prices and executing our core purpose of making the very best accessible to all children.

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

Thanks, Neal. And good morning, everyone.

We are delighted with our fourth quarter results at Disney Store. Our 14% comparable store sales increase was driven by a 13% increase in average transaction size. Primarily reflecting higher average unit retail and a 1% increase in comparable store sales transaction. During the quarter, we achieved positive comps across all regions, all departments, and all mall types.

By department, soft lines comped in the mid teens, hard lines achieved high single digit comps, and media generated strong comps, driven by the DVD releases of 'Cars' and 'Pirates of the Caribbean: Dead Man's Chest'. As we move into spring, dressy apparel and swimwear have been well received by our guests, further strengthening our continued efforts to smooth the seasonality of the business. Our go-forward strategy at Disney Store continued to be innovating and elevating the brand through product, supported by strategic marketing, including targeted direct mail, store environment, and delivering the expected Disney Store service model.

Regarding product, our focus remains on innovation and elevation in toys. However, not at the expense of soft lines. We are building a successful soft lines business, which we will continue to enhance. Our Disneystore.com website is scheduled to launch during the second half of 2007. We are moving forward with the Walt Disney company to form an e-commerce alliance in which Disneystore.com would maintain a presence within Disneyshopping.com.

In addition we've approved the design concept for a new prototype, which we plan to begin rolling out in August. Our new design is modern and fun and captures the Disney magic we all know and love. The Walt Disney company has an exciting lineup of theatrical releases for 2007 that we are thrilled to be part of, starting with 'Meet the Robinsons' on March 30th. Our 'Meet the Robinsons' stage set arrives in stores the week of March 26th and will feature an extensive assortment of product including: toys, such as action figures, science kits, and art sets, and a wide array of kids' apparel and costumes.

Following up 'Meet the Robinsons' is the third installment of 'Pirates of the Caribbean: At World's End' in May, 'Ratatouille' in June, and finally 'Enchanted', featuring Giselle, a new princess from Disney will arrive in theaters in November, just in time for the holiday season. Each movie release will be supported by exclusive, impactful merchandise assortments, and compelling marketing presentation.

Finally, we believe the strategies we have put in place at Disney Store are taking hold. Evidenced by our strong fourth quarter and full year results, which continued into February. We continue to drive substantial margin improvement in 2006, and we have further opportunities to do so in 2007, particularly in the toy and home category.

In addition, we believe we have opportunity to increase conversion and we'll be testing various methods to convert more visitors into transactions. In closing, we've made great strides at Disney Store over the last year. And I'm so proud of the team -- of the team we have put in place. We strengthened our team with terrific new talent and -- and have identified significant opportunities for us to continue to elevate the brand and position ourselves for future growth.

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

Thanks, Tara.

Before we open up to questions, I'd just like to summarize a couple of highlights. $2 billion in sales, an exciting milestone for us. Consolidating operating margin 100 basis points when we exclude the unusual items. We continued to believe both businesses are poised to deliver low double digit operating margins over time. A new store productivity goals of $400 for the TC -- TCP and $450 for Disney.

We have exciting new opportunities ahead of us, like shoes at The Children's Place, and e-commerce a business store, and as you know, lots of store growth ahead of us. We believe we have can grow TCP chain to over 1,200 stores, the Disney to over 600 stores. So when you think about the fact that we are just about 1,200 today, certainly lots of growth ahead of us. Thanks.

Operator, please open up the call up to questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Tom Filandro with SIG. Please go ahead.

Thanks. Couple of questions. First, on the shoe -- on the shoe hire, the teams there. Can you just tell us -- have you hired any industry experts? Are you just sort of leveraging your current merchandising and design team? And then I have a Disney question and two quick follow ups.

I'll take the question on shoes. Yes, we have hired many people with experience from the shoe industry. One gentleman is over 35 years in the shoe industry, different people he's worked with. So we are very excited, some Nordstrom hires. We're very excited with the team.

We have blended expertise from the new hires to our expertise in sourcing, which we're extremely proud of, which is a -- is a strong core competency of the companies. And we think we've got an extremely strong team and very excited about the future.

Thanks, Neal. And a question for Disney for Amy and Tara, probably. Can you just tell us a little bit more about the details of the Easter dressy, the offerings there and the inventory commitment? And maybe just some initial comments on shopper response?

Hi, Tom. It's Amy, I apologize for my voice. We aggressively increased our inventory in dressy this year over last year. And we've seen tremendous response from the consumer. We're very pleased with how our dressy assortment is doing across all ages and all genders.

Terrific, Amy, hope you feel better. And two final ones for Ezra. Just a further -- further thoughts on longer term. Any comments on potential new concepts down the road? And my second question to you Ezra, are you pockets yet on fire with all that cash? Burning a hole in that pocket.

I don't see any fire around me.

I don't either.

As it relates to anything new, I think you know that is the core purpose for being is making the very best accessible to all children. We have said before that we look forward to dominate every category within the children's industry, and we look forward to do so on the value end of the equation by making it accessible to all children. We are of course extremely excited about the shoe launch because we believe that's like a no brainer, as to the fact that there's such a tremendous void, a specialty -- especially in the specialty retail arena for fashionable footwear at value prices, which is basically our formula.

So we look -- we are looking very, very forward to see the results of that. And of course, Tom, we constantly think about the future, although we have so much growth as I mentioned in stores and square foot productivity, sales gains, we are constantly thinking about what's next. But nothing to talk about at this time.

Cash.

The cash.

The cash. We are a young company, Tom. There's so much ahead of us. There's so much we want to do. And we believe it's not right for us to do anything else with our cash other than for the growth -- for the growth of the company at this time.

The plan is to reinvest it back in the business.

Thank -- thank you, Sue. Thank you, Ezra. Best of luck.

We'll take our next question from Kimberly Greenberger with CitiGroup.

Great, thank you. Good morning.

Good morning, Kim.

I was hoping that Richard could help us with an inventory question on, I think Neal said the in-store goods available for sale would be up high singles to low double digits throughout the first quarter. Just help us understand if there's anything else other than the lower-end trends that's -- that's making it look like you've only got 3% more inventory in the stores. That would be helpful.

And then, it looks to me like based on my analysis that the Disney Store division saw somewhere between a 400 and 500 basis point improvement in the external gross margin in the fourth quarter and I was just hoping that you might be able to comment on that, as well. Thanks.

Okay. Kimberly, it's Richard.

I'll comment on The Children's Place inventory and then pass on the Disney margin to Sue. Start into the fourth quarter, the 3% inventory increase that we reported versus the low double digits that we had given guidance before was 100% related to the timing of in transit. And the timing of in transit literally came down to today's. Instead of hitting the very back end of January getting -- taking ownership of those goods and hitting the balance sheet, we took ownership of a chunk of inventory before Chinese New Year, which hit our balance sheet right at the beginning of February. So it was really the timing of a few days.

In terms of the goods available comment that Neal made, what we look at is at a retail value, what we have in the pipeline, not just on that one day and time. And we have projected outright through the first quarter that future goods available for sale this year versus last year are up in that high -- high single, low double digit. One of the things last year that we didn't consider in this available for sale right now in the -- in this quarter is the incremental denim that we received. Because that denim only got put on the floors at the end of June last year.

So some of the -- the differential besides the timing is coming from denim we were carrying last year in our inventory that we didn't consider available to sell in the quarter.

And Kimberly, to answer your question on gross margin. As you know we don't disclose gross margin by brand. But what I can tell you is that the Disney Store's gross margin was up nicely. As we said in our prepared remarks, that was driven by lower markdowns, coupled with stronger IMU and we're seeing gains on the Disney Brand. So overall we're very pleased with the Disney margin. We're also pleased with our objective of narrowing the margin gap between Disney and Children's Place and made nice progress toward that end in the fourth quarter.

Sue, any comment on what that fourth quarter differential was?

The differential narrowed by 10 points.

Narrowed by --

10 points versus it is fourth quarter of last year. Okay. When you look at Disney margin versus Children's Place margin last year, and then look at it this year that narrowed by about 10 -- 10 points.

Richard, so it sounds to me like you feel like you've got enough inventory to do the business you're expecting to do here in the first quarter, is that a fair statement?

Yes, we feel a lot better about the inventory. The position gets better and better as we go through the year. We feel even better in back to school. But we really believe that the -- the negative issue that we saw in the fourth quarter is not -- we're not in that same position going into this quarter.

Terrific. And good luck for spring here.

Thanks, Kim.

We'll take our next question from John Zolidis with Buckingham Research.

Hi, good morning.

Morning.

Hi, John.

Morning. I guess just let me add my opinion that I think share repurchase activity would be enormously beneficial to shareholders and the stock price. Especially with the stock trading where it is.

That said, I've got a couple questions. First, can you quantify what the leverage on occupancy was during the quarter? And then, I don't believe that you quantified the impact of the 53rd week. Can you tell us how much that contributed to sales and earnings?

Sure, we hadn't historically quantified the leverage that we got from occupancy, but I can tell you that it was positive -- it was positive as you'd expect. In terms of the benefit that we got from the 53rd week, we believe it to be a couple of cents. About $0.03 to $0.04 per share.

Can you quantify the top line impact?

Top line -- that 53rd week was in fact a strong week for us. So I'll ask Richard.

Yes, John, one of the reasons why it's very difficult to just quantify that week on its own is because of the timing of those weeks, we shifted some promotional activity around.

So if we just quoted that one week versus not -- versus to take that one week out, it's not a comparable thing to -- then I would have to say we would have done the activity in the 52nd week if it didn't exist.

Okay. It's really -- it's for modeling purposes for next year because we have to exclude that next year.

And I think the best thing to do would be exclude -- just take a pro rata of February and exclude one week. January --

January -- just take one week of the January sales.

I think that's a better way to model it out than to take that last week in January.

Okay, thanks, that's helpful. And lastly, can you comment on SG&A? I think I heard you said that SG&A delevered 150 basis points after excluding all the one-time items. And I was unclear whether that included or excluded the impact of options. And then given that you had a 20% increase in sales, why should SG&A be delevering?

Well, recall that we had some -- first let me just get to the right schedule here. So just give me a second to get to SG&A. We had -- if you look at the year in total, we did deleverage, after you take out some of those -- after you take out those unique items. And the reason for that --

The year -- the year in total -- leveraged.

The year in total -- I'm sorry -- leveraged. So [inaudible] take out the -- after you take out the one-time items, we deleveraged in the fourth quarter without them. Fourth quarter was unique for reasons that I -- that I mentioned earlier. The reason why we didn't leverage more is primarily because of increased expenses, increased investments that we'd made in the year in marketing.

Okay. Thank you.

Okay.

We'll take our next question from Marni Shapiro with Retail Tracker.

Hi, guys. How are you?

Hi, Marni.

I have a couple questions, mostly for Neal. Sorry, Neal. But can you give a little bit of color around some of the markdowns in the fourth quarter. You talked about the weather being issued. So were the markdowns more heavily weighted in outer wear and fleece, and more boys or girls? Any kind of color around that?

Marni, it's Richard. I'll take the markdown question. No. The answer is no. In fact, we had -- we -- going into the fourth quarter we're a little bit concerned that we'd underbought some of those cold weather categories. We had much better sales than we had expected in October and early November. In hindsight it was -- it was a favorable mistake in those categories because obviously December ended up being warm.

The heavy markdowns were because we were -- we were not deep enough in the key items and we had broader assortment that cost us more to liquidate that broader assortment. We also, and I think I mentioned it previously, had ratcheted up some of the AURs for the fourth quarter -- owned AURs. That didn't materialize, so we had to take some deeper markdowns to liquidate the goods. And we ended the quarter actually cleaner than we did last year. So we just didn't want to carry the inventory in the fourth quarter that didn't perform, but it wasn't cold weather.

So it was more of an issue that the product was really broken that was left to be marked down and so you need to mark it down deeper?

Yes, it's a lot more expensive to -- to liquidate a broader broken assortment than depth of key items.

Okay. That makes sense --

It was that -- it was that, but also money. We didn't exactly meet that expectation on sales. We attempted to drive it towards markdowns.

Right. Okay. And as you look at The Place store going forward. Two quick questions. What size store are you planning for the fleet for '07 -- the stores that you're opening?

And then beyond shoes, is there anything else you're considering putting in the store. I know you've dabbled at times in toys, for example. Anything else we should expect from you in '07?

The size of the stores, as we said, with shoes, we're looking more 5,500 - 6,000 square foot stores with shoes, which we're very excited about.

Okay. Will all the '07 stores have shoes?

Will, all -- the majority of them will. And future categories, as Ezra said, we want to be in kids, we want to be value. We've got a lot on our plate this year. So shoes is our major focus of -- of any additional category you'll see for '07.

The rollout for shoes, is it back to school?

Back to school. Yes.

Thanks, guys. Good luck with Easter.

Thank you.

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

Hi, everybody.

Hi, Janet.

Hi. A couple questions. On Children's Place when you think about the underinvestment in key items and the overassortment. I wondered if you were able to correct that fully, Richard, for the first half? And also, Neal, you had talked about the fourth quarter of '07 having fewer flows. I think you had mentioned something about bringing flows down and I -- I wondered about the newness aspect there, because you had cited that as a problem to top line growth, as well. And then I have a couple more questions for the Disney people, thank you.

Well, to answer your first question, we're really happy with the summer flows that we have. They look much more focused, much more depth behind the key items. We're really thrilled about how they look and you'll be seeing those in the stores in the future.

When do we see those, Neal, the summer flows? April?

The week after Easter.

The week after Easter. Okay.

And as it goes to fourth quarter, we believe we had way too many floor sets. We were moving our floors around way too much in the fourth quarter. One of the things we benefit greatly from, and this is the whole year and we really have not taken as strong advantage, especially at the end of last year, is we have many different ways that our customers can outfit with the items we have in the store.

And through mannequin changes and through the look we present to the customer, you'd be surprised how many customers come in and really look at the mother -- the mother looks at the mannequin for guidance. So -- so we think we'll demonstrate to our customers' newness, but we don't have to be changing the entire floor every week or every other week. So it's going to be cleaner, it's going to be easier for our customers to come in and shop. It shows we care about the mother as well as, quite frankly, the stores from a simplicity, we'll be able to take more of the customer facing needs and making sure we have sizes, colors on the floor as opposed -- as opposed to the multiple -- multiple amount of floor sets we did fourth quarter.

If I can just add to that. I think the comment we made about needing newness was specifically around December. And we in fact have added a floor set to December -- to early December post Thanksgiving. So we will have more newness setting on the floor for December. Most of the cutbacks in the floor sets, that Neal and I think Ezra might have referred to, were earlier in the -- in the holiday floor sets.

Okay. Great. And then, first of all, congratulations to Amy and Tara on such a great fourth quarter for Disney. And a couple of questions there. It -- it sounds like the prototype is ready to go.

But I -- I might be touching on something sensitive here, but wasn't that an issue with Disney? Is on the specific design of the prototype and has this been approved by Disney? And secondly, with respect to the investment in the toy assortments, I'm wondering what effect that might have on gross margins going forward for the brand? And, Sue, for your -- for the distinction of gross profit levels between Disney and Children's Place, of which I think you said was 10 points, is that for the year or for the fourth quarter?

Thank you.

Wow.

Sorry, sorry, sorry.

Okay. So this is Tara and I'll comment on --

Hi, Tara.

Hi, how are you?

Good, thanks.

-- on the prototype. We're thrilled with the approval of the design to have the prototype. And we're in the process of submitting all of the drawings and -- and construction documentation to Disney. And to that process, we're hoping to get wrapped up by the end of April. Our hope is by August to have our first store, couple of stores open. We are definitely going to walk before we run. We're going to get it right, make sure that both us and The Walt Disney Company is happy with the quality of the prototype, as well as the design.

I think everyone agrees that we have captured -- we've created a clean, modern, exciting store, but it still captures the magic of Disney. And through this whole process that was one thing we kept asking ourselves again and again. Are we maintaining the amazing magic of The Walt Disney Company and vision? And I think we've all agreed that we've done a good job there. I think from a quality standpoint we have aggressive traffic in our stores. And many components of our new store is going to be factory produced from the wall systems to the cash wraps.

We feel we're going to be able to really keep a close eye on the quality of those materials coming out and believe that this new store is going to be able to withstand the test of time. I do not want to comment right now on some of the discussions that we're having with Disney, but as you heard from Sue, predominantly it's around the remodel. So this is -- we're stepping in the right direction getting this store close to approval. And moving -- starting to move into our remodel. So I hope that answers your question.

And then, about the investment in toys. I think there was a little bit of a misperception in the last call when I talked about toys that perhaps we were going to start skewing the percent of the assortment more aggressively towards toys. That, in fact, is not what's happening. Soft lines remain incredibly important for us. It continues to trend. We're excited about that product.

The point I was making in toys was that we want to be leaders in toys, not followers. And I believe in the past we've been more of a follower in innovation and the technology in toys. And we feel that we have a huge opportunity to be a dominant player in the mall in toys and we should take advantage of that. And that was a huge reason for bringing in Ivy Ross from Mattel, because she's rich with that experience in toys. So I'll turn it over to Sue. Sue --

Janet --

I also have a question about if you could tell us some of the details around lowering the anticipated -- the tax expense to address the recently remodeled stores and your guidance from $6 million to I think $4 million.

Okay. This is big, it's a big question. Let me start with the first question I'm remembering. I think that was you asked for clarification on my gross margin comments whether they were limited for the fourth quarter or for the year. And those comments were in fact limited to the fourth quarter.

And I just want to clarify one point going back to Kimberly's question. I was not saying that the margin between Disney and Children's Place narrowed by 10 points. Simply if you look at the Disney margin as a function of The Children's Place last year and this year, one ratio to another, that gap narrowed by 10 points.

But isn't it also true that The Children's Place margins were down?

The Children's Place margins were down very slightly in the fourth quarter.

The gross margin.

The gross margin was very slightly in the fourth quarter. And that's because we had positive IMU and positive occupancy leverage that was offset by more markdowns.

Okay. Great. That's important that we brought that out. Okay. Go ahead.

And separately a question had to do with the guidance and why we took down the amount of -- the charges or the expenses that we expected to realize in 2007 in connection with the stores that had been remodeled. That's a function of our having decided to take an impairment charge or needed to take an impairment charge in 2006 as we evaluated those stores.

So we took a look at those stores and we concluded that we did in fact have an impaired asset as such. We made a decision to take a charge in 2006 to recognize that asset impairment and that has a relationship to the amount of charge that we'd have to take in 2007. So we reduced that amount in 2007 and took our guidance up mathematically by that precise amount.

Great. Thank you so much. Good luck.

Okay. Thanks.

Janet, I just wanted to add something to Janet's question about toys. This is Amy. And thank you for your kind words.

Hi, Amy.

I just wanted to -- as we stated in the past, growth in toys does not necessarily negatively impact our margins based on our sourcing capabilities. So I wanted to throw that in there, as well.

Great. That's great.

Okay. Take care.

You too.

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

Thanks, and good morning, everyone.

Hi, Dorothy.

Just a couple of clarifications. One, with Neal or Richard, I guess I just wanted to -- wanted you to confirm, you do feel better, I think you said about the key item positioning for spring. Is that -- is that the case given your comments about the lack of depth in the fourth quarter? And I wondered if you could also elaborate a little bit on what you're going to be doing in terms of micromerchandising this year based on your learnings in '06?

And then how many remodels are we going to see at both Children's Place and/or Disney, but I guess primarily Children's Place this year?

And lastly, marketing expense, I wondered if you could talk about that as a percent to sales and how that's changed. And one last question. Just anything you can say about a timetable we should think about in terms of the negotiations with Disney. Thanks.

The -- on the key items. We feel really good about what's happening at summer on how strong our key items look. And I will tell you each season they're going to even get better as we continue to focus on them. But we are really pleased. We've seen our summer set ups in our mock store and headquarters and we are very pleased with the focus on the entire assortment, as well as the focus on the key items. And again, our key item -- key items and the secret to our success is the ability to take these key items and outfit them many different ways, which our moms really appreciate, because they can take an item and dress it many different way.

So we see really impacting starting summer and the rest of our course. And this is back to the way we've done it all the time other than the hiccup we had in fourth quarter. I'll let Richard talk a little bit about the micromerchandise.

In terms of the micromerchandise, we are not changing the initiatives that we started last year and even the year before. We continue to focus on climate differentiation and then differentiating what we call tier one stores, or big stores versus smaller stores. And when I say big, that is defined by the ability to do more sales and also have the space to accommodate expanded assortment. So really it's just a refinement of those strategies.

It's easy to tackle those strategies. There's lots of learning, understanding that a store a hot climate, for example, is one thing. But understanding what that means for the assortment continues to be a learning. So really the focus is to continue to just get better and better as the initiatives that we already have in place and not add any.

From a remodel perspective, for TCP we're looking at approximately 25 remodels for this year for TCP.

Okay. And those -- will the remodels include shoes? Is that part of the plan?

Most -- most cases, some of the cases, not all, but some.

Okay.

I think you'd also asked about marketing expense.

Right.

We don't disclose marketing as a discrete line item, but we did mention earlier in our remarks that marketing had deleveraged slightly on the year and also for the fourth quarter. And again the marketing deleverage in the fourth quarter is a function of the sales having come in somewhat softer than what we had thought.

And would we expect that to continue to build in '07? Or should we see that maybe flatten out?

We would expect it to flatten out in '07.

Okay. Great.

And, Dorothy, in regards to your last questions about potential timing on the negotiation with The Walt Disney Company, as you can imagine that is something we cannot put a timing on. As we mentioned in this morning's press release, we have exchanged proposals and we believe we are making progress. And at this moment we'll leave it as such.

Thanks, Ezra.

Thank you.

We'll take our next question from John Morris with Wachovia.

Thanks. So a couple questions. Ezra, to extent you can talk about it, and I know you've got to be careful on this, but it would probably help us just to kind of clarify a little bit. Is the nature of the discussions with Disney pretty much solely about the remodels and maintenance, as mentioned in the release, or are there other factors? Can you just speak to that?

Yes. We would rather not get into details. Please refer -- refer to the announcement that we made this morning in that -- in that regard.

And on the prototype -- the Disney prototype, you talked a little bit about how this one -- this phase is going to be a little bit more modern. I'm just wondering if you can give us a little bit more color on how it will be different from some of the previous prototypes that you've done, and what it is you're specifically excited about with this one, compared to the other versions that we've had.

Yes, maybe I'll let Tara take that, but it's not -- it would be hard to talk about the difference, but rather Tara will tell you -- give you a little more color on what you are to expect with this new concept.

So with the new concept, it -- what we're excited about is, again, I talked about the Disney magic. And if you go and visit some of the earlier stores on the Disney -- when The Walt Disney Company had the Disney stores, there was this great wealth of reference to the Disney heritage with the sculpts in the store. You really walked into the store and felt like you were transforming into the world of Disney. I think what the -- with the stores that we worked on in 2004 -- 2005, we lost a lot of that magic. I think that we -- that you walk in the store, you definitely felt they were much cleaner, neater, brighter, but we lost that magical piece.

And looking at these stores, we've -- I would say they have a more modern feel in the sense that it has a more updated, more modern aesthetic to it. You walk into the store there's this beautiful red, sparkly marble floor. You transitioned towards the back of the store. You add these added warmth eco-friendly wood floors. The wall systems, all are in a very nice kind of champagne warm color. But again, able to be very flexible to add in a lot of these elements of Disney from marketing to propping. In the center of the store, there's the energy of the video screen -- the video screens kind of are in a circular part around the [inaudible] mountain that again add that theatrical element.

There's just -- there's touches of that magical piece throughout the store as you walk through it. But there's a great warmth even though it's a more updated feel and a more modern approach. So a little hard to describe. So much of it in this business is just being in the environment, seeing it, understanding it, but I'll tell you, we walked our DMs -- we had a district managers' conference last week and walked all our district managers through the store and they were so enthusiastic. And many of these folks have been with The Walt Disney Company prior to the acquisition by the TCP. So they've been with this company for a long time.

And to see their excitement and to feel that they thought we'd really hit on that kind of nuance of the Disney brand, if you will, was very exciting for all of us, the senior team to hear.

That's -- that's very helpful, Tara. And just one last one. I think you all said that you had tried for a higher AUR at holiday. Would you reconsider and think about trying for a higher AUR back to school this year?

TC --

Yes, I think it was TCP.

TCP, okay. Yes.

John, we actually taken a little bit of a different going forward. We want to make sure that the value is absolutely, totally evident in our merchandise. And we also believe that the customer needs it, deserve it from us. So we're not looking for going forward AUR increases. As a matter of fact, you may even see slight decrease going forward, as we want to make the customers more mad about what we have to offer to them.

And if I can just add to that, an initial AUR decrease or even level AUR on the inventory doesn't mean that you get a lower AUR out the door.

Yes. Perfect. Okay. Thanks. Good luck for spring.

We'll take our next question from Margaret Whitfield with Sterne, Agee. Please go ahead.

Good morning, everyone.

Hi, Margaret.

Hi. I guess this is for Neal, the same question that was posed to Tara. I wonder if you could comment on the consumer response to your Easter dressy lines. And also wondered what the Easter shift being earlier this year does to your -- to your April comps?

Well, I can tell you what is exciting is the true Easter dressy, our dressy business has -- with the response we were pleased with the dresses, which we are known for iconic. Some of the learnings that we've had and sometimes casual Easter dressy probably isn't the right direction. Our customer loves us for our Easter dresses and we've done very well with that so we're -- we're very pleased with that. I'll let Richard take the shift in the Easter calendar.

Obviously Easter falling on the first weekend of April, and having less preEaster volume in April has a negative impact on the April comps. I don't think we've actually quantified that. But it's obviously -- it's positive to March and negative to April.

So, Neal, back to casual Easter, did you have more of it in the stores this year than last? Or will you be making a shift to reduce it to the mix?

Oh, I think we're going to be -- I think the key thing we have become known whether it's holiday dressy, whether it's Easter dressy, really to be a destination. We think we have a way to capitalize and take advantage of that more. The casual side of that. We have to make sure it fits in there and we're not forcing something that's casual and saying it's more dressy.

I think there are some items we missed on this time. So we'll be a little more careful with it. I would feel confident you're going to see holiday dressy and dress -- Easter dressy more focused in the future than it was for this Easter.

Okay. And for Tara, you mentioned your opportunities are to improve margins in toy and home. I wondered what -- what you're working on to be able to do that.

Well, as you know, our core competency is in -- is in the soft line. So as a company, after the acquisition, that was definitely our focus and the place we went first was -- was focusing on the soft line. So this year always opportunity in soft lines, we're going to continue to push in that area. But definitely amping up our focus in toys. And -- and pretty much how we're doing that in the hard lines is just continuing to expand our factory base and trying to get more compliant vendors on the docket with us and being able to really utilize them.

I think we're also getting smarter on costing on toys. We've learned a lot in the last couple years. We are getting better on the right things to push back in the factories, getting better on what we can expect on every level -- level from the components, to the molding costs. And we're just getting very detailed. I mean, Children's Place, these guys, we are -- as I say we are pros at -- at sourcing and it's been fun to watch this team focus in that area and -- and getting even deeper and digging deeper on those margins. Hope that answers your question.

And Tara, 'Cars' were so important last year, is it still hanging in? Or what do you see for the outlook of that business this year?

We are very pleased with 'Cars', and, yes, it's still hanging in. And look for that as being still important part of our assortment as we move into 2007 and have gone back and bought more inventory in the third and fourth quarter in 'Cars', with that trend that we're seeing.

We're also, I mean, very excited about we have four theatrical releases this year and we're very confident between those four theatrical releases that we're participating in, in the Disney Stores, 'Meet the Robinsons', 'Pirates', 'Ratatouille', 'Enchanted'. Very confident that that's going to be able to meet the comp, the business that we did off the two movies 'Cars', and 'Pirates' last year. So it's a good lineup, and 'Cars' continues to do well. So it's great, we're excited.

Okay. And finally for Sue, what would be a good tax rate to use for this year?

'07 will be 38%.

Okay. Thank you.

Okay.

We'll take our next question from Jeff Black with Lehman Brothers.

Hi. Hello, everyone, thanks. I just have a couple of follow ups on the remodels. Sue, what did we spend on remodels in '06? And what are we spending on remodels in '07? And as we get the remodel together, how are we testing it? What's really the acid test for you guys to go forward? Does this thing have to improve comps? And what do we have as an assurance that it in fact can improve sales? And finally, given all that, what would be a budget, assuming that we move forward with this remodel for the year out period in '08 and '09? If you can give us that, thanks.

We haven't provided the specifics of '06 or '07 Capex. I'd have to get back to you with that and we can certainly -- certainly do that as we break it down a little further.

And then on testing this thing out, and how do we know this thing's really going to improve sales at Disney and the risk of online investment going forward?

Yes. We're certainly looking at the sales line, certainly studying the customers' reaction. And certainly studying how the product is holding up to the traffic to make sure it's absolutely bullet proof. So we'll be looking at quite a few things to make sure that it's right and tweak it as necessary before we do projected full rollout, which will begin in early 2008.

I think for '07, we really not counting on up side sales volumes from these stores, we're really just testing the concept.

Well, it's premature. You lose, you have to close the store to the remodel. And the only the only thing you pick up it's really too late in the year to counteract from loss from the closure.

And I mean I also think it's important just to color out, remodels are also about the brand. And elevating the brand and making sure that we have a very aged fleet at the Disney Store and many of these stores haven't been touched in 10 to 12 years. There's a big portion of this, this is just about getting these worn out age stores up to brand standard. And it's important for us to be able to as we're elevating and innovating the product and continuing to improve that we have a beautiful environment that really showcases our brand in the appropriate manner. So I just wanted to add that in, as well.

And we look forward to do that as a high priority once we have total sign off on the go ahead, the remodeling of the Disney Stores as Tara mentioned will be an absolutely first and high priority for The Children's Place organization.

Okay. Great. That's helps. Looking forward to it. Good luck, guys.

Thank you.

We'll take our last question from Rob Wilson with Tiburon Research Group.

Yes, thank you. I guess -- can we start with magalogs at The Children's Place in '07 versus '06? I believe you had eight magalogs in '06? Has that changed? Have the magalogs reached the point when they -- at which they can't materially drive traffic any longer?

First of all we did have more than eight, we actually had about 11 mailers -- 11 or 12 mailers last year in '06. We believe extremely strongly in our magalogs and look forward to the more -- more segment focused marketing for 0 -- '07. We will have some increase in, not the big growth you saw '06 to '05, but actually we feel very confident that by segmenting more and directing who we send the to will actually help our return, as opposed to just prospecting, which was a lot of what we did in '06 to make sure we grew our base.

And we will continue to grow our base in '07, but we are very pleased, it's a very dedicated customer we have. And the more we segment it and put the right book in the right hand, we expect to see that return.

So we should expect more mailers and more circulation in '07?

Yes, not anywhere near the increase we saw '05 to '06, but yes.

Okay. And, maybe Sue, can we go back to this $9.4 million investigation charge in the press release that suggests that some of this is related to SG&A, I'm guessing, and some relates to tax. Can you give us --

It all got booked to SG&A, and it relates to certain tax consequences from stock option issues.

Perfect. That's helpful.

So it's not on the tax line of the P&L at all. It's just -- it's all in SG&A. And again, relates to certain tax consequences, okay?

Thanks for clearing that up. And finally -- finally, the new distribution center in Fort Payne, Alabama, when will that go live? And should we expect potentially SG&A to deleverage related to that facility going live?

The facility goes live later in the year. So in the second half of the year. And because of that --

Back end of the second half.

Back end of the second half. And because of that timing, we're not expecting deleverage in 2007 from the facility.

Okay. And one final quick question, do you have the ending gross square footage for both brands at the end of 2006?

Yes, didn't we put that in the prepared remarks? I think we said 1.5 million for Disney --

Do you have a more exact number?

Okay. Do you have an exact number?

Maybe -- maybe I can call you later and get --

Yes, you can either call --

Hold on, just coming in.

4.024 on Children's Place. Looking for -- and I thought -- Disney should be about 1.5 million -- 1.546 precisely on Disney. So I think I had said 4 million and 1.5 million, and so now you have the precise numbers.

Okay. No, that's helpful. And when you guys give e-commerce growth, do you count, when you give -- I'm sorry, when you give sales per square foot by the brands, do you take out e-commerce sales?

It's not in the comp.

Is not in the comp.

E-commerce is not in the comp.

When we do sales per square foot he's asking for. I don't -- I have to check it. Let me check it and get back to you.

Alright. I'll call you later.

Alright. Okay. With that last question out of the way, thanks, everyone, for your participation. Thanks, everyone, for your interest and support. And we will look forward to continue -- continued performing together. Thanks, and have a great beginning of summer, almost, right? All the best. Thanks.

Bye.

This concludes today's teleconference, you may disconnect at any time. Thank you, and have a great day.