Children's Place Inc (PLCE) 2007 Q4 法說會逐字稿

Good day, and welcome to the The Children's Place fourth-quarter 2007 earnings conference call. I will now turn the call over to Ms. Heather Anthony. Please go ahead, ma'am.

Thank you, Kevin. Good morning, everyone. Thank you for joining us today for a review of our fourth-quarter fiscal 2007 financial results, as well as an overview of actions taken resulting from our ongoing strategic review process. Joining us is Chuck Crovitz, Interim Chief Executive Officer, and Sue Riley, Executive Vice President of Finance and Administration. Also on hand to answer your questions at the end of our prepared remarks are: Rich Paradise, Senior Vice President and Chief Financial Officer, Richard Flaks, Senior Vice President of Planning, Allocation and IT, and Jill Kronenberg, Senior Vice President General Merchandise Manager for The Children's Place brand. Today Chuck will review our announcements made today and Sue will cover our preliminary financials. We ask that you limit yourself to one question so we can get to as many callers as possible. Before we begin I'd like to remind participants that any forward-looking remarks made today are subject to the Safe Harbor statements found in this morning's press release as well as in our SEC filings. After our prepared remarks, we will be able to take your question. With that out the way, I will turn the call over to Chuck. Chuck.

Thank you, Heather. Good morning, everyone. Thank you for joining us today. Earlier this morning we reported the fourth-quarter and fiscal 2007 financial results and also provided an update on our ongoing review of strategic alternatives.

Let me first turn to the specific actions we announced this morning which is consistent to the priorities we discussed in our third-quarter conference call. On that call we outlined our key go-forward priorities the most important being the need to assess our operations and identify near term actions to improve the business. The plans we announced today are a result of that effort. Over the last several months, we have conducted deep dive into the business. As part of that review, we have been able to confirm what we believe and have known to be true for many years, the core Children's Place business is strong, viable, and while we certainly stumbled on many fronts in 2007, the business is improving. When we look at our performance in 2007, five factors had the greatest impact on our business.

Number one, our merchandise did not resonate with customers. Number two, our inventory levels were too high. Number three, our expense structure and capital spending levels were not reflected of a value-oriented business. Four, we had to operate through a challenging macroeconomic environment. And five, the structure of the Disney business with high variability and high capital requirements. What we also know that business as usual is no longer acceptable. In an effort to right our ship and return the Company and the brand to its historical levels of productivity we are compelled to make tough decisions that will enhance our organizational effectiveness.

As outlined in our press release we are embarking on the four -- following four decisive actions. Number one, we are exiting the Disney Store's North America business. Number two, we are enhancing the profitability to workforce reductions. Number three, we are reducing our planned 2008 capital expenditure budget. And fourth, we are managing inventory at lower levels appropriate to this environment.

Turning to action number one, exiting the Disney Store North America business. As part of the broader review of strategic alternatives, we and our advisors looked at various strategies to enhance the operating performance and to realize the full potential of the Disney Store North America business. Although a full review of the Disney Store operations, it's potential to deliver earnings and the necessary capital required to meet obligations and the license agreement, we have decided to exit the Disney North American business. Obviously we have nothing but the upmost respect for the Disney brand and we are proud of what we have accomplished with this business during the time that we have run it. We have built a fantastic team to oversee and run the business, we have upgraded the aesthetic of the product throughout the store, through our expertise in global sourcing we were able to improve the quality of the merchandising while significantly reducing cost.

We entered into the outlet channel which has been very productive. We launched a highly successful e-commerce site and we developed an unique and compelling new Disney Store prototype that has been very well received by the guests. We opened this first stores in November of 2007 and they have performed very well throughout the holiday season. Unfortunately while the earnings potential for this division could materialize over time, when it's compared to the capital investment required the equation does not balance ourselves in this environment. Reflecting our decision to exit the business, we took a pretax asset impairment charge of $80.3 million in the fourth quarter.

As discussed in this morning's release, the Company and Hoop are in advanced stage of discussion with the Walt Disney Company regarding the terms under terms that Disney might regain ownership and control of approximately two-thirds of the existing stores. Hoop and the Company intend to disclose arrangements for exiting the Disney North America business in the very near term. In addition to the costs that will be incurred by the Hoop subsidiaries in connection with exiting the Disney North America business, at this time the Company expects that it may incur pretax exit cost in the range of $50 million to $100 million payable over a period of time.

Now turning to action number two, enhancing profitability through workforce reduction. In connection with a review of our expense structure along with the planned exit of the Disney Store North American operations, we are eliminating approximately 80 current positions from our shared service workforce which is on top of 50 open positions we have determined not to fill. This results in a reduction in the size of the shared services of approximately 30%. As a result, we expect to realize annualized savings of approximately $12 million pretax, which if you look at 2007 was about 11% of shared service expense.

Let me just take a moment and explain that shared services are services such as distribution and information technology and real estate that will service both brands. We are talking about just that portion of our overhead. This decision was not entered into lightly. We sincerely regret the impact this will have on some of our associates and we have taken the obvious steps to help mitigate the impact this will have on them. We need to take these actions though in order to streamline operations, certainly in light of our becoming a single brand organization once again. Beyond the workforce reduction, we are committed to generating efficiencies that will benefit the Company over time.

For example, we will leverage our size which will benefit our procurement of nonmerchandise supplies. We will challenge large areas of spending to ensure that we are getting the biggest return for our investment. And we will value engineer our stores which I will speak about in just a moment. Again these are just a few of the examples of areas we are going after greater efficiencies and costs.

Turning now to a review of action three, reducing the planned 2008 capital expenditure budget. As outlined in today's press release, we are planning on reducing our '08 capital spend by more than 60% compared to 2007. The majority of these saves are coming from the exiting of the Disney Store business and our decision to no longer pursue the building we planned to use as our headquarters. As it relates to stores, however, we must ensure that the dollars that we are spending generate the type of returns we have historically enjoyed. We have a great new prototype for The Children's Place which we love, however, the buildout has to be more cost effective which is why the majority of the 30 new stores this year are planned to open in third quarter giving us more time to value engineer them. In addition, we will remodel and refurbish several stores this year and will continue to invest in technology, particularly the e-commerce site which is enjoying tremendous growth and was up 37% last year.

Turning finally to action number four, we began a serious focus on inventory management last fall and we continue to make progress in this area as evidenced by our inventory outlook for the first and second quarter of this year. In short, we are evolving our overall philosophy to simply buy less when compared to last year which we believe is particularly prudent in this environment. Further, in working with the team, our inventory buys in 2008 are narrower particularly in the second half as compared to '07 and we have also simplified the assortment variations across fleet, which has added benefits of creating more efficiency throughout the supply chain and increasing the focus within our the stores.

Before I turn the call over to Sue, let me reiterate that despite the many distractions and challenges that we endured in 2007, I believe there is tremendous long-term opportunity for the Company. We are well-positioned in the growing markets. The Children's apparel grew at 6% last year, approximately three times the rate of the adult apparel. And despite our challenges, our market share in 2007 increased by 10 basis points. We know that the consumer behavior is shifting towards value which plays to our favor. And while mom and dad may cut back on their own spending, they need and want to spend on their children. Our awareness levels are very high are on par with Gap Kids and Old Navy. 78% of all shoppers also likely to recommend us to a friend. Most importantly, we are returning to our roots in terms of our merchandising strategy. Great color, great outfitting and great fashion at a tremendous value. With that, let me turn this over to Sue for a detailed review of the fourth-quarter financial results.

Thank you, Chuck, and good morning, everyone. Before I begin a discussion of our fourth-quarter results, I want to remind everyone that the financials as shown in last year's press release were on a preliminary basis and have subsequently been updated as part of our financial restatements. Now moving on to our results. Consolidated net sales for the 13 weeks ended February 2, 2008, increased 4% to $670.9 million compared to $645.2 million for the 14 weeks ended February 3, 2007. Fourth-quarter sales were comprised of $443.4 million from The Children's Place brand, a 6% increase over last year and $227.5 million from Disney Store flat to last year. As a reminder, last year's fourth quarter had an extra week of sales that totaled $29.5 million. Consolidated comparable store sales increased 3% for the fourth quarter driven by 2% increase in transactions and a 1% increase in average transaction size.

By brand, The Children's Place increased 7% on top of last year's 2% increase, and Disney Stores comparable store sales decreased 4% compared to last year's 14% increase. Consolidated gross profit dollars decreased 11% or 640 basis points to $250.5 million. Consolidated gross margin was 37.3% compared to 43.7% last year. The primary driver of the margin decline was higher markdowns at both brands and distribution costs. Further, as we have previously discussed, our holiday inventory levels were high, and as such, we increased our markdown reserve. Partially offsetting the margin decline was moderate occupancy leverage in both brands.

SG&A as a percentage of sales was 30.9%, representing 110 basis points of deleverage. Taking out unusual items from both periods. SG&A as a percentage to sales was 29.4% compared to 28.1% last year. Contributors to the deleverage included royalty and commissions paid to Disney for the e-commerce business that we did not have last year, and payroll expense since our volume was higher than last year, partially offset by bonus expense and slightly lower marketing expense as percentage of sales. Our inability to leverage for both the quarter and the year underscores the importance of the actions we announced today. We recorded a pretax asset impairment charge of $95.3 million, $80.3 million of which is associated with the exit of the Disney Stores business and $14.8 million of which is due to the writedown of the building that we had previously planned to use as our corporate headquarters in Secaucus. This compares to last year's pretax impairment charge of $16.7 million. We recorded other costs of $12 million this year reflecting our decision not to move forward with the construction of the previously mentioned new headquarters and the exiting of Disney Stores business.

Depreciation and amortization expense increased 40 basis points or 3.4%, reflecting our larger store base, new DC, and the accelerated depreciation of the Mickey stores. We incurred interest expense of $1.2 million versus interest income of $1.6 million last year, reflecting our having to borrow against our revolver as most of our cash reserves during the quarter were overseas. Our effective tax rate was 34% in the fourth quarter versus 19% last year. This year's tax rate reflects the impact of our impairment charge and other costs which were incurred in a relatively high tax jurisdiction, partially offset by the tax impact of our decision to repatriate foreign cash in order to meet the obligations pertaining to our Hoop operating facilities. Last year's tax rate benefited from the use of certain foreign tax credits.

Our net loss for the quarter was $58.5 million or $2.01 per share compared to net income of $44.7 million or $1.48 per share last year. Excluding unusual items incurred both this year and last year, fourth-quarter net income was $20.5 million or $0.70 a share compared to net income of $52 million or $1.73 per share last year. As a reminder, last year's extra week contributed $0.04 to the quarter.

On a segment basis for the fourth quarter, The Children's Place reported an operating profit of $35 million or 7.9% of net sales, well below last year, reflecting higher markdowns and the previously mentioned impairment and exit costs. Excluding unusual items, this year and last year, The Children's Place operating margin in the fourth quarter was 13% versus 18% last year, again primarily reflecting higher markdowns year on year. Disney Store reported an operating loss of $92.1 million, primarily reflecting the impairment charge, as well as accelerated depreciation and exit costs. Excluding unusual items this year and last year, Disney Store's operating margin in the fourth quarter was approximately flat compared to 12% last year. Shared services reported an operating los of $29.8 million, up 8% or 11% versus last year when excluding one-time items from both periods. Drivers of the increase included amortization of capitalized software, audit fees and store construction.

Moving on to the balance sheet, we ended the fourth quarter with cash of $82.1 million compared to cash and investments of $189.7 million last year. Cash changed primarily as a result of our lower operating cash flows driven primarily by lower net income, higher inventroy builds and no proceeds from stock exercises that we had last year. We had $89 million of borrowing on our credit facility at quarter end compared to zero borrowings last year. Throughout the quarter, most of our cash reserves were outside the U.S. We have since repatriated $45 million of cash to meet our obligations under the Hoop license agreement. Further on our balance sheet we have $36 million of cash characterized as an offset to accounts payable since the cash was in an operating account at year end. Had this cash been invested at year end cash and investments would have been $36 million higher and accounts payable would have been $36 million higher reflecting our higher investment in inventory year end.

Total consolidated inventory was up 19% or 13% on a square foot basis. At The Children's Place, inventory of cost was up 9% on a square foot basis, which is below previous guidance, while Disney Store's inventory of cost per square foot up 24% or 10% excluding e-commerce which is above the previous guidance. Consistent with our strategy to lower our inventory levels at the end of the first quarter, we anticipate inventory per square foot at The Children's Place brand to be flat to up in the low single digits. End of the second quarter, we anticipate inventory per square foot of The Children's Place brand to be down compared to the prior year. At the end of fiscal 2007, we operated a total 1,239 stores comprised of 904 The Children's Place stores and approximately 4.3 million square feet and 335 Disney Stores and approximately 1.6 million square feet. Reflecting store openings, we continue to anticipate opening approximately 30 new stores in 2008 and remodeling 17 The Children's Places. The majority of our new store openings will fall in the third quarter.

Turning to CapEx, 2007 capital expenditures totaled $200 million in line with previous expectations. As announced this morning, and as Chuck highlighted, we now expect 2008 capital expenditures in the range of $65 million to $75 million, below our previously announced level of $150 million. Of the $65 million to $75 million, approximately $55 million reflects new store openings, remodels and maintenance, and approximately $15 million reflects information technology and other initiatives.

The primary drivers of the Company's CapEx reduction are the decisions to exit the Disney Store business and to discontinue the construction of the building we had planned to use as our corporate headquarters. As we look ahead, while the environment is currently challenging, at this time we anticipate growing sales in the mid-single digits in 2008, which will be driven in part by 30 new store openings in the latter par of the year. Selling, general and administrative expense as a percent of sale are anticipated to be flat year-over-year reflecting the Company's workforce reductions and other expense reduction initiatives partially offset by the absorption of shared services that The Children's Place will have to absorb as we exit the Disney business. Thanks, and I will turn the call back over to Chuck.

Thank you, Sue. Operator, I think we would like to now open it up for questions.

Certainly. (OPERATOR INSTRUCTIONS) First, we will go to Tom Filandro of SIG. Please go ahead.

Thanks. You noticed that exiting of the Disney business that the Walt Disney Company might regain ownership of two-thirds of the existing stores. Does that imply that one-third of the stores are expected to be closed due to maybe cash flow negative performance? And if so, are the costs related to the closings imbedded in your $50 million to $100 million charge? How will you fund the $50 million to $100 million charge? And can Jill provide an update on spring, highlighting successes and merchandise opportunities that balance the year? That kind of was one question. Thanks.

Well, from Disney to spring. Good question, Tom. Compliments for that. Yes, in terms of the Disney business, I think that we've -- we are in discussions as we said with Disney, advanced discussions regarding how we transition the stores over to them. And in terms of the remaining third, we are going to be exiting those one way or the other. As we said, we are exiting this business, but the exact way in which that is going to happen is something we really can't comment on at this point, because we are still in active and in advanced negotiations. However, we will be able to explain all of this in the near term, so I just have to defer that question. But let me turn this over to Jill and let her talk a little bit about the more exciting news in spring.

Hi, Tom.

Hi, Jill.

This spring, we definitely felt a nice turning of the corner happening, and even in the last two months we have been feeling that. All the businesses have been feeling good, have been having some nice successes in each and every one of them, which is nice. We are still cautiously optimistic about the rest of spring with the big shift in Easter. So we have got to wait and see what that brings to us. But overall we feel we are very well-positioned in the very difficult environment that we are in. Something that we have been talking to and that Chuck mentioned in his overview was just our overall -- our overarching merchandising strategy of the year, which is really getting back to our roots, that talk about all the things that define and differentiate ourselves from the competition which is our great color, our head-to-toe outfitting, our trend right fashion we are known for and all at a great value. And that is really the one overarching theme that we are heading for this year.

Thank you. Any response to the funding of the cost related to exiting Disney?

Again, Tom, it is just premature to comment. We will be get back to you with more details.

Thank you very much. Best of luck to you all.

We will now go on to Kimberly Greenberger of Citigroup. Please go ahead.

Great. Thank you. Can you hear me okay? Sorry, there was some background noise there. I just want to say, first and foremost, congratulations to Jill, Nina and their teams for really restoring a gem of a business. I think the merchandising direction looks just fantastic. In terms of the go-forward look of the business, Sue, we are just trying to get a better understanding of how to model the stand-alone business going forward. If you could help us with that shared services bucket for last year, the $107 million. How many of the one-time items that you listed in the press release are included in that number, just to help us in terms of backing them out? And when you say that the SG&A dollars for 2008 are expected to be flat, what is the base dollar amount we should be using off of which to model that?

Okay. First with regard to the one-time items included in shared service. We have -- shared services. We haven't listed them out but shared services as reported are $29.8 million. If you take out the specific items that we view as being one time, the shared services -- actually we did list them in the addendum to the press release, you have got $2 million on strategic alternatives, $2.3 million of residual stock option investigation cost, incremental audit fees of $1.2 million, again primarily in connection with the stock option investigation and the the restatements and some executive search of almost $1 million, about $700,000. That leaves with us $23.5 million of shared services expense. [That's the thing] we are going to be -- that we were expecting to reduce as we start to realize the savings from this headcount reduction year on year. So that is the amount that the The Children's Place is now going to have to absorb as we think of The Children's Place as a single brand less the amount we can offset by taking out -- by reducing headcount. As to the base for SG&A, you should use this year's base, take out the one-timers this year, and then assume that -- as a percentage of sales in modeling out The Children's Place as a stand-alone for 2008.

And I would also like to say with regard to 2008 and The Children's Place as a stand alone, once we conclude this Disney issue and exit the stores, we will be providing more clarity as to what we think Children's Place will look like as a stand alone going forward.

Sue, could you give us some sort of outlook for how you are thinking about the cash management here in 2008? And do you think you have a sufficient working capital line of credit to sort of get you through to 3Q and 4Q, which tend to be the quarters when you start building cash back again?

Yes. I would say that with regard to cash management, we are managing our cash much more tightly than we have before. I said in my prepared remarks that we did repatriate cash from overseas, and we are deferring the opening of new stores into the latter part of this year. So recognizing that in the second quarter we generally have -- experience our lowest cash position as of course, we are not generating the top line in the second quarter that we do, say, back to school and having to buy back-to-school inventory at that time. I am not going to comment whether or not the line is appropriate at this point, but I will say we are manage managing our cash, much, much more conservatively than we have in the past, and that of course is coupled with a significantly more conservative inventory management strategy as well, which will impact that -- the summer months because that's when we do -- that's when we start to pay for our back-to-school buy.

Right, okay, terrific. Well, good luck here in 2008.

Thanks, Kimberly.

We will now go on to John Morris of Wachovia. Please go ahead.

The cost savings that you mentioned of $12 million potentially, can you give us a sense of how much of that -- is that all applied to The Children's Place core, or is some of it also applying to Disney? And also if you can give us an update on some of the management searches that are under way and an update there.

Okay. John, thank you. The -- in terms of the -- well, I guess -- Sue, can you pick up on this piece on the --

Certainly. The workforce reductions that we announced today are in the area that we call shared services. And shared services is an organization that was pretty much created at the time of the Disney acquisition, where certain -- like the accounting organization was put into what's called a shared services organization, to provide service to both Disney and TCP. So the specific groups are -- it is accounting and finance, human resources, information technology and the stores organization that was created to manage maintenance and repairs and design, etc., for the entire -- for both fleets of stores, The Children's Place and Disney. That is the group that we were talking -- when we refer to shared services that is what we were referring to. And the announcements today represent about a 30% cut in the shared services headcount. The cost reduction of which we expect to realize in the latter part of 2008, and then the $12 million is the annualized number that we expect to realize in 2009.

And then, Tom, the second part of your question about the executive searches. Those are -- they -- the search for the CEO is ongoing. It is part of the whole strategic review process. And that's more of a Board issue. At this level we are staying very focused on recovering the business and maximizing the value for shareholders over the medium and long term. In terms of the -- really those are the only -- that is the only active search we have ongoing at this time. In terms of the President of The Children's Place, now that we are a single brand business, we just really need to evaluate what the structure needs to be there, and we haven't landed that -- needs to be there and we haven't landed that completely yet and for the time being I am enjoying the opportunity to get close to The Children's Place brand as we become a more smaller and focused business.

Thanks.

We will now go to Margaret Whitfield of Sterne Agee. Please go ahead.

Yes. Good morning. You have given us some idea of what SG&A is looking like for the core business. I wondered if you can comment what the gross margin was for the core business only in '07 and any directional comments on what we might expect in '08.

Sue.

Yes. Yes. Our gross margin in the fourth quarter was down in both businesses. We don't disclose the splits. However, I can say that it was down more in Disney, but it was down in The Children's Place as well. In part as a result of the more conservative inventory management coming into '08. We're just doing -- we are not buying as much, so we are not having to mark down as much. It is our expectation that we can increase our cross margin year on year as a result of having fewer markdowns. Of course time will tell you about we are in fact buying fewer units and so we expect to have lower markdowns in 2008, which should fuel The Children's Place margin.

But any comment on what the base margin was in '07 for the core business only?

Again, Margaret, we have not historically split out the gross margin for Disney and The Children's Place. So I can't comment on what the base was except to say we do expect it to improve in 2008, and the margin was down in both brands in the fourth quarter, but down by more in Disney.

I just want to put a little qualifier on that and say this is certainly our target and hope, but this is a difficult economic environment and a little dicey to predict where our gross margin is going to go.

Time will certainly tell.

And you referred to the strategic review as ongoing. What additional aspects are you considering? And nobody mentioned shoes. Is that a go-forward test?

Yes. The shoe business -- let me have Jill address that. And I will come back to the other piece.

The shoe business right now we currently have about in 50 stores. It has been a business that we are learning a lot from. We are taking our learnings, applying it to this year, and are feeling good about it and feeling actually good about the effects it is even having on our core shoe business that are in the entire chain. So just basically it's been a year of learning for us and we are applying those learnings going forward.

And the second half of your question with the strategic review. It is an ongoing review that is going on at the Board level and with our advisors, and you have a big down payment on it today, but it is a continual review, and we probably -- we are not prepared really to talk about the other avenues and the other aspects that we are looking at right now. But that we are just completely committed to maximizing the value for our shareholders, and that is the focus, and as I said, it is an ongoing and active part of the work of the board and the senior management team here.

One -- just one little question. How many stores do you think The Children's Place could ultimately have? Earlier it was stated 1,200 stores. Is that still the idea?

I think that what we are focusing on right now is really recovering the business and restoring it to its previous levels of profitability and productive, and that -- and that's got to be the focus right now. And then as we get through those first couple of stages, we will need to turn towards the future and some of the growth opportunities, and we have had several on the table. And we are just going to dust that off and take a look at it. But right now I'd have to say our focus is recovering the base business, and I don't really want to comment on 1,200, 1,600 number of stores until we have a chance to thoroughly get into that.

Thank you and good luck.

Thanks, Margaret

We will go on to Michael [Sargast] of Longacre. Please go ahead, sir.

I was just wondering can you talk a little bit -- in looking at shared services, it seemed that maybe that was supposed to be divided a little more evenly based on the store count -- or divided more pro rata based on the store count between Disney and The Children's Place. And so I was just wondering, is there an opportunity where into '09 you think you are being conservative and you can bring that number below $95 million where you're -- I guess -- where you are guiding to right now?

I think notion of going after our cost structure is an ongoing initiative and reductions we are seeing in shared services are both the results of our decision to exit the Disney business, as well as our continuing focus on getting the cost structure of the Company appropriate for a value-oriented retailer. I think it is on going and I think we're going to continue to work for those areas, particularly through process improvements that will yield lower costs. We also expect for transition period at least that we will continue to offer services to the Disney Store chain. And so we will have to work all of that out.

Okay. And I guess just to follow up to Kimberly's question was, do you feel that your current revolver is, or -- your current borrowing capacity is sufficient, or will you have to get something new?

I will let Sue answer that.

What I said to Kimberly is that we are managing cash much more conservatively than we have in the past. We repatriated $45 million of cash, incurring store openings until the latter part of the year and have a significant lower inventory buy year on year for back to school, which we believe is appropriate given the comps that we experienced last year, the markdowns we saw last year, and the economic environment that we believe we are heading into. Beyond that I haven't commented and I'm not going to comment at this point on the adequacy of our revolver, except to say we are managing cash much more conservatively than we have in the past.

Okay. Thank you.

We will now go on to Janet Kloppenburg of JKK Research. Please go ahead.

Hi, everybody.

Hi, Janet.

Hi. Hey, Sue, just a couple of questions. Can you give us what the depreciation expense was for the The Children's Place business last year? And can you guys talk a little bit about the third of the Disney Stores not taken back by Disney or not being considered to be taken back by Disney? Are they your expense? Will there be charges involved perhaps with store closings? And then I have a couple other questions about the P&L. Thank you.

Let me just quickly answer that first question, if we can call it an answer. We are just not really at liberty to talk about what is going to happen to those stores right now. Once again, we will -- we are in advanced stages of negotiation, and we will make all of this clear over the next short period of time --

Okay.

-- once we get it resolved.

Okay, thank you. And over the short period of time mean -- short to us is a month or so. Is that a fair assumption?

We -- I would say we are talking about days and weeks and not months.

Thank you very much. Go ahead, Sue.

And it is Rich, on the depreciation and amortization for The Children's Place only for the year it was $5 million.

Janet, you said a few more questions.

Yes on the gross margin line, if you can talk a little bit -- obviously there is an opportunity in '08 for leverage on occupancy and also improved full price selling. Jill, maybe if you -- we are hearing about higher costs coming out of Asia, if you can talk a little bit about what you are seeing there. And lastly, Sue, when you say flat SG&A dollars for this year, does that include an assumption of a higher bonus accrual than in '07? Thanks.

Okay. Why don't we start Jill and answer the questions about the Asia sourcing?

Janet's question in Asia, our teams are over there right now actually. So far year-to-date we have been able to mitigate most of the challenges that we have seen over there. We don't know what the future is going to bring, and that's really where we are currently.

So wait, say that again, Jill, you aren't sure yet about the higher costs. Is that what you are saying?

We have been able to mitigate most of the pressure overseas through what has been faced so far. We have placed everything through the fall of '08. Our teams are over there right now placing holiday. And we have yet to see what they have come back with currently, but through fall of '08 we have been able to mitigate most of the rising costs overseas and we're going to see what happens for this holiday.

Are you anticipating having to make any revisions to your vendor base or factory choices?

No.

You aren't? Okay.

Nothing dramatic, no.

Move on to the question of occupancy leverage.

Jan, the two other questions that you you had. When we talk about occupancy SG&A, we do anticipate when we think about plans for upcoming years to pay bonuses at that planned rate, so would include a higher bonus payment so to speak. And then in terms of occupancy leverage, we haven't been commenting on forward-looking guidance, if you will. As Sue mentioned, we are looking at reducing our store expenses in terms of value engineering, etc. So, we would -- our goal -- or our target, of course, would to begin to leverage those costs, but we are not providing specific information in terms of guidance on that.

Okay. And can you give us some guidance on tax rate on a quarterly basis for '08, please?

Yes, Janet. I didn't give guidance in the prepared remarks on the tax rate. As I said we will give clarity to '08 once we get -- once we conclude what we are going to do with regard to the Disney stores. I do expect to see an increase in the rate that is fairly substantial year on year. And the reason for that because they can no longer assert that the cash is invested permanently abroad. So we will be taxed at the full U.S. rate and then tax strategies in place years ago that are in fact driving the book rate up a little. But, again, more clarity on 2008 once we know what we are going to do with the Disney Stores.

Thanks very much and lots of luck.

Thanks, Janet

We will now go on to Linda Tsai of MKM Partners. Please go ahead, ma'am.

Yes, hi. The $50 million to $100 million exit cost encompasses a wide range. What accounts for the degree of variance? And then maybe what just like a conservative estimate, maybe just a range of where you think the long-term operating goal might get to?

We are not -- on the $50 million to $100 million, we have not concluded our negotiations and there are still several moving parts and alternative scenarios here, so that is what accounts for the range. And beyond that we just can't comment at this point.

As for the ongoing margin, again, that really would be -- for stand-alone The Children's Place, and what we said is that will provide more clarity once we conclude what we are going to do with the Disney Stores. I'd also refer you on the range if you look at the 10K, it is pretty well -- the source of those exit costs, if you will, or cash expenses, are pretty well-documented in the 10K, and as Chuck said we just can't provide more detail on that at this point in time.

Do you think you will provide more detail before the quarter ends?

We said shortly.

We said shortly so as soon as we possibly can, yes, we will.

Okay, thank you.

We will now go to Brian Tunick of JPMorgan. Please, go ahead.

Andrea. Can you guys perhaps comment what kind of ramifications to The Children's Place should we be aware of as a result of exiting the Disney agreement? As I recall the original agreement appeared fairly onerous to exit. So I was wondering if you can comment on that.

Sue, you want to take it?

I would say at this point again we can't comment on that -- on anything having to do with the exit at this point in time until such time as we announce that the -- something -- discussions with the Walt Disney Corporation have been concluded. So there is just -- at this point I can't provide more clarity except what is in the press release and what's in the 10K.

Okay.

you have the impairment charge which is in the press release. You have a range of cash cost recognizing it is a wide range but again it is documented in the 10K, and beyond that we can not provide more clarity to those discussions. We will as soon as the discussions conclude.

Okay. And could you provide any comment regarding Ezra's potential bid for the Company at $24?

Yes, we don't comment on those kind of matters. I think Ezra's our largest shareholder and he's been instrumental in building the Company and I think we are -- we hope to and continue to work very constructively with him, as we do with all of our shareholders, but our number one priority continuing to improve this business and to enhance shareholder value.

Okay, that is helpful. And Chuck, too, you mentioned that you guys are looking for process improvement across the board. Could you maybe talk a little more specifically what kind of buckets of SG&A opportunity do you see longer term?

Well, I just think -- we talked about a couple of them in my prepared remarks, and I think that the -- a lot of this has to do with efficiency in organizations, number of levels, and appropriate structures, lack of duplication, that's is one level. Also a series of process improvement. The big areas as mentioned was our nonmerchandise procurement area that probably have purchased these expense items on a more uncoordinated basis and that we are learning that as we coordinate these purchases, that we can really take advantage of large economies of scale and negotiation and get our cost down there.

The third thing is, as we said, we are taking the time to really reengineer our stores, and make sure that -- that the design which we are very happy with now is built in the most cost effective way, both in the immediate cost but also the -- that the materials are chosen to have the lowest life cycle cost. There are several other areas we have been going through, in terms of audits and review of different contracts to make sure that what we are -- that we are fully utilizing all of the services that we are paying for, and that we are fully availing ourselves of all the credits that we are entitled to. It is a very broad-based look. The management team is highly committed and incented to go after these costs in an aggressive way, and I am really pleased with the progress we are making.

Okay. That's helpful. And good luck, guys.

Thank you.

We will now go to John Zolidis of Buckingham Research. Please go ahead, sir.

Hi, good morning.

Hi, John.

A couple of -- you had a lot of good questions already. Just wanted to follow up on, I guess, something that Tom started with earlier. And make sure I understand that the $50 million to $100 million that you are talking about in cost to exit the Disney business, that is in addition to the $80.3 million asset charge was taken in the fourth quarter, and both of those items are all cash charges, right? They are not noncash.

Not exactly. Let me clarify this issue. First, the Company took an impairment charge in the fourth quarter, one pertaining to exiting the Disney Stores and the other pertaining to our decision not to move toward with [Emerson]. Those are noncash charges at this point in time. So that's basically taking assets on the balance sheet and recognizing they will not be generating cash flows into future or that they're not going to be utilized as intended and writing them down. Okay. So that is a noncash charge. Looking to 2008, what we did say is that there could be a cash charge of -- a cash expenditure from The Children's Place into Hoop or elsewhere pertaining to the exit of Disney, and again that is all documented in the 10K. I just want to clarify the distinction between those two and two amounts. One is noncash, it's writing down asset values on the balance sheet and the other in fact would be a cash outflow from The Children's Place.

And John, while you observed, there have been many very good questions around the $50 million to $100 million. There haven't been too many detailed answers yet, but they will be forthcoming.

Okay. And just -- I don't know if you were going to answer this question or not, but I will ask it anyway. The one-third of the stores that I understand you are still in advanced stages of negotiation to determine what to do with them is -- are expenses related to the potential outcome of the one-third of the store base. Is that included in the $50 million to $100 million, or is there potentially going be an additional cost for that one-third of the store base?

We think the $50 million to $100 million represents the entire cash -- the range of cash cost for exiting the business.

But beyond that, we can not comment, John.

Okay. Well, that is helpful. And then you very nicely went through a reconciliation of the shared services piece for the fourth quarter, telling us kind of what was one time in nature and what was an ongoing expense. But I think what most analysts will be looking for for the greatest degree of health will be same reconciliation for the full year, $107 million expense. Sue, could you possibly run through that $107 million and let us know what in there was one-time in nature?

Certainly. Okay. The strategic alternative -- basically you start with $107 million. You have strategic alternatives of $2.2 million. Stock option investigation and related expenses are $10.3 million, pretax. Incremental audit fees are the same, $1.2 million. And then we have a much larger severance number on the full year amount, and that is because, of course, we have CEO severance that was built in there in the third quarter. So that is almost $5 million, which gets us to about $88.5 million for the normalized shared services for the year.

And then looking forward on -- using that $88.5 million as a base, is that the piece that you believe you can reduce by an additional 12%?

Yes.

Thank you. Thanks a lot, guys.

Okay. Thank you, John.

We will now go to Marni Shapiro of The Retail Tracker. Please go ahead, ma'am.

Hi. How are you?

Hi, Marni.

I am very much looking forward to less complicated press releases in 2008. I have a Children's Place question, since that is the business that is ongoing. Can you just walk us through your thought process today as to what is the right number of stores Children's Place should have across the country, outlets versus front-line stores? And how many of the stores today have been touched and put into the new prototype? And are you considering as you look to reduce the costs of these new prototypes as you open stores and renovate, are you considering a new prototype as well?

Yes. Yes. I think -- as I said before, I don't think we've got great visibility to the total store count yet. We just want to go back and relook at that. And we do have a division between our technicolor store and our apple maple which is 40/60 overall. And I think that today we are building -- we are looking forward to building more technicolor, obviously. That is really the format of the future. But -- and so mostly what we are doing is that -- is value engineering on that format, and also doing some refurbishment on some of the other stores, but again value engineering some of those materials as well.

I mean -- I guess as you look at the product assortment going forward and, Jill, congratulations and Nina, because I think the stores look really so, so much better. Have you guys looked at the way the store lays out and the fixturing and even things like that as far as the costs in the store as ways to possibly reengineer the stores? Given how you are moving forward, it looks like a much cleaner assortment, a little more edited. I'm just curious if you could tinker with -- even internally in the store.

I think that is something that we talk about a lot and we are always looking to find better ways to present the merchandise, but I think really much of our focus right now is on value engineering the new prototype. And I think once we get that to a place where we are comfortable and then we can start looking at and if we think we might need to do to better present things. But we are pretty comfortable right now with where technicolor is. We are pretty happy right now with the set-up of the stores are and the configuration of the tables and the fixtures.

I think that Jill, Nina and Richard have done a great job in terms of really focusing and bringing more disciplined to the assortment strategy, moving out of third quarter, which is giving this store a much cleaner and a much more focused look. I think it is part of the way we are going after the reduction in inventory is also reduction in style counts and SKUs and so forth. This is what is helping our store to get very cleaned up.

The majority of reduction in inventory is driven by narrowing the assortment, not investing in less debt where appropriate.

Great. Alright, guys, good luck with everything.

Bye, Marni.

And lastly, we have a follow-up from Kimberly Greenberger of Citigroup. Please go ahead, ma'am.

-- questions. First, after you exit the Disney business, will you report that as a discontinued operation and restate last year, or how will that work, Sue?

That will exactly be reported as a disc op, and we will in fact restate last year for the discontinued operations, correct.

And will that be done shortly after you conclude your negotiation with the Walt Disney Company? When would you get the timing on those restatements?

It would be coincident with the filing of our 10K in the first quarter.

Okay, great, in May we would get a real clean LY restated number.

That's correct.

Fantastic. And, Sue, did I hear you right, there will expected to be a higher tax rate on the repatriation of some of the funds?

That's correct. Even though we repatriated at the end of the third quarter of 2007, we can no longer say that our cash is permanently invested abroad, and so we will be having a higher tax rate in 2008 and beyond as a result.

Okay. And then just one last question. Any comment that you can give publicly on the sort of active dialogue that the Board has with Ezra? Is there an open communication line there? Is there a regular dialogue? How are you sort of looking at maintaining that relationship?

I think I mentioned before that Ezra is an active member of our Board, and obviously he was -- he is our larger shareholder and was instrumental in building the business, and has a lot of great insight into this business, and we really value the input. He continues to work actively on the board, and has been involved in these major decisions. No, I just don't think that much has changed in that regard.

Okay, great, thanks, Chuck. And good luck here in '08.

Thanks, Kimberly. I want to thank everybody else for joining us on the call and for your interest in the Company. And we will continue to keep you updated as we have said repeatedly, and hopefully in the very near future the results of this Disney situation. Again, thanks very much. Appreciate your participating, and we look forward to talking some more.

We actually have two additional questions. Are we going to take those questions?

Yes, why not. Sure. We are here.

Certainly go to [Vic Kumar] of [Samplis] Partners. Please go ahead.

Yes. I just wanted to ask you does your Cap Ex guidance for the year include those savings from value engineering, or is that is something in the future?

It includes a portion of them but not all of them that we hope to be able to achieve.

And I just wanted to check, I think you had said this before, but I I think I may have misread the press release, are the -- is the $50 million to $100 million that you're anticipating for the cash exit cost, is that the entire cost? Maybe I am misreading the press release, in '08 it sounds like there might be additional cash at the Hoop subsidiary, but not sure.

We really can't comment beyond what is on the press release and the 10K at this point in time.

Okay. I think that was it then.

Okay, thanks.

Thanks.

And our final question is from Michael Sargast, please go ahead.

We can't hear you.

Michael, we can't hear you.

Hello?

His line has disconnected.

I think we need to run at any rate. So --

He had asked a question earlier.

-- once again, thank you very much for joining us, and we will be back in touch soon.

Thank you.

Thank you. Bye.

This does end today's call. You may disconnect at any time. Thank you and have a great day.