Children's Place Inc (PLCE) 2008 Q1 法說會逐字稿

Good day and welcome to The Children's Place conference call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Q&A session.

And I would now like to turn the program over to Ms. Heather Anthony. Please go ahead.

Thank you Operator. Good morning, everyone. Thanks for joining us today for our a review of our fiscal 2008 first quarter financial results. Joining us on this morning's call are Chuck Crovitz, Interim Chief Executive Officer, and Sue Riley, Vice President Finance and Administration. Also on hand to answer your questions at the end of management's remarks are Rich Paradise, our CFO, Richard Flaks, Senior Vice President, Planning, Allocation, and IT, and Dina Sweeney, Group Vice President of Merchandising.

Before we begin, I would like to remind participants that any forward-looking remarks made today are subject to the Safe Harbor statement found in this morning's press release, as well as in our SEC filings. After our prepared remarks, we will be able to take your questions.

With that out of the way, I will now turn the call over to Chuck. Chuck?

Thank you, Heather, good morning, everyone and thanks for joining us. Earlier this morning we announced our first quarter 2008 financial results. In a difficult economy we delivered income from continuing operations of $0.66 per share, compared with $0.64 per share last year.

Operating income was up 15%, and operating margin increased 20 basis points to 8.5%. We believe these results reflect good progress towards our goal of returning the Company to it's historical levels of profitability. Last fall we outlined several key areas of focus including improving our merchandising assortments, lowering our inventory levels, expense management, and commencing a strategic review to maximize shareholder value. I am pleased to say that in the first quarter, we made progress in each of these areas.

First and foremost we are returning to our roots in terms of merchandising strategy, and by that I mean, great color, great outfitting, and great fashion at a tremendous value. We began experiencing increased consumer acceptance of our product in holiday which continued in the first quarter, particularly with Easter dressy, and summer.

Our improved merchandise and value proposition are enabling us to take market share, particularly as consumer behavior we believe is shifting toward value, according to MPD our market share increased 30 basis points to 4.2% during the first calendar quarter of 2008 versus last year. And while recent business trends are encouraging, our outlook has to remain caution since most of our business is done in the second half of the year.

As noted earlier, Dina Sweeney is here with us this morning, and will happily go in to further details about our merchandising performance during the quarter. As many of you know, we recently promoted Dina, who is transitioning seamlessly into her new role. Dina is a 20-year Children's Place veteran, who over the years has worked across all merchandising divisions. She possesses a thorough understanding of our customers, knows the team very well, has a clear passion for the brand, and a great track record managing important growth areas of the business, like Canada and E-commerce. We are pleased to have an executive of Dina's talent and experience leading our merchandising area.

Related to our ability to improve merchandising performance is of course our committment to lowering inventory levels. Our rate of inventory growth has been steadily declining, and we continue to expect that inventory on a total and per square foot basis will turn negative versus a year ago at the end of the second quarter.

Third, lowering our expense structure is also a critical strategy for us, which encompasses administrative expense, as well as capital expenditures. Capital spending is on track to come in 60% below last year. We made an initial down payment on expenses in the first quarter with a work force reduction, related to our shared services division. As previously announced, we expect to realize annualized savings of approximately $12 million pre-tax beginning in 2009.

Lowering expenses is an ongoing initiative, and our goal is to deeply root expense reduction and process efficiency into this culture. We are looking across the organization from marketing to transportation to telecommunications, to store construction. Our strategy is to ensure that we leverage our volumes, our systems, our vendor relationships to operate the business with processed discipline and cost structure, that is consistent with that of a value-oriented retailer. We believe all of these strategic initiatives are particularly prudent and timely, given the current economic environment.

Finally, management and the Board continue to examine strategic alternatives to drive growth and shareholder value. The most tangible example of this effort announced in the first quarter is our exit of the Disney Store North America business. We are pleased that the cash costs to exit the business are expected to be at the low end of our 50 to $100 million range.

We are now able to completely focus on our core Children's Place brand where we see a very bright future. Importantly, our strategic review is ongoing, and we continue to look at all opportunities to maximize shareholder value. In summary, we have much more work ahead of us, but we are pleased with the progress we made in the first quarter. Above all we are committed to the tenants of our brand, great color, great outfitting, and great fashion at a tremendous value, and through all of these efforts, we expect to deliver long-term profitable growth to our shareholders.

With that introduction, let me turn the call over to Sue, who will review our financial results.

Thank you, Chuck. And good morning everyone. For the purpose of today's call, we will be discussing the business on a continuing operations basis. The Disney Store business has been classified as discontinued operations in accordance with Generally Accepted Accounting Principals, given our decision to exit that business. Consequently, continuing operations reflect The Children's Place business only.

Now moving on to our results. Net sales from The Children's Place business for the first quarter ended May 3rd, 2008, increased 12% to $400.2 million, from $356 million last year. Contributing to our sales growth in the quarter, was a 70% increase in e-commerce sales. Comparable store sales for The Children's Place business increased 5% for the quarter on top of last year's 2% increase.

Our 5% comp was comprised of an approximate 3% increase in comparable store sales transactions, reflecting modest increases in conversion and traffic, and an approximate 2% increase in average transaction size. A mid-single-digit increase in units per transaction offset a low single digit decrease in AUR. All regions comped positively in the quarter, with the exception of the Southeast and Canada, which comped in the negative low-single digits.

Gross profit dollars increased 13% to $171.1 million. Gross margin increased 10 basis points to 42.8%. Lower markdowns, production and design costs, and occupancy as a percentage of sales were partially offset by higher distribution costs, as we have not yet anniversaried our Southeast distribution center, and lower initial markup.

SG&A as a percentage of sales was 29.8% in the quarter, representing 40 basis points of leverage. Contributing to the leverage were, lower payroll and benefits expense, lower store opening expense reflecting fewer openings versus last year, and lower marketing expense, all as a percentage of sales. Partially offsetting the leverage were store-related expenses and supplies, higher legal and professional fees, and unfavorable foreign exchange, given the strength of the Canadian dollar, all as a percentage of sales. Excluding the professional fees deemed to be unusual or one-time in nature from both periods, SG&A leveraged approximately 50 basis points.

Moving down the P&L, Depreciation & Amortization expense as a percentage of sales was 4.4%, up 30 basis points from last year, reflecting increased depreciation from our store base, as well as from our new Southeast distribution center. Income from continuing operations before interest and taxes was $34 million, a 15% increase over last year, or 8.5% of sales, up 20 basis points from last year. Interest expense was $0.5 million, compared to interest income of $1 million last year, since we carried debt all quarter this year.

Our effective tax rate was 42%, compared to 38% last year, as we are no longer permanently invested in our Asian subsidiary. We expect the full-year tax rate to be approximately 45%. Income from continuing operations for the first quarter was $19.4 million, or $0.66 per diluted share, compared to $19.1 million, or $0.64 per diluted share last year. Shares outstanding were 29.3 million, compared to 30 million last year.

Moving on to the balance sheet, our quarter ending cash balance was $118.3 million, and outstanding borrowings on our credit facility totaled $27.9 million, for a net cash position of $90.4 million. Our net cash position reflects stronger than expected business performance, and the payout of approximately two-thirds of the cash costs associated with the Disney Store exit, which came in at the low end of our range, coupled with the timing of certain items, including the payout of May rent checks, and income tax refund, and the deferral of capital spending.

Total inventory at cost was up 12%, or 6% on a per square foot basis, somewhat higher than our estimate, reflecting higher merchandise in transit. Carryover inventory was 9% of total inventory, versus 5% last year. As Chuck mentioned, we expect to end the second quarter with inventory per square foot down in the high single to low double digits. During the first quarter we opened three Children's Place stores and closed one. As of May 3rd, 2008, we operated a total of 906 Children's Place stores, and approximately 4.288 million square feet. We continue to anticipate opening approximately 30 new stores in 2008, the majority of which will be in the third quarter.

Thanks, and now I will turn the call back over to Chuck.

Thanks, Sue. To wrap up, we believe that we are taking the necessary actions to put the business on a solid footing. Our first quarter financial results reflect initial progress towards our goal of returning the business to it's historical levels of productivity and profitability.

Thanks. Now Operator, we would like to open the call up now to questions.

Thank you. (OPERATOR INSTRUCTIONS).

We will take our first question from the site of Kimberley Greenberger, please go ahead.

Great. Thank you, good morning, and congratulations on a nice quarter.

Thank you.

Thank you.

I wanted to ask about the inventory numbers, if you could give us the in-store inventory here at the end of Q1, I guess excluding that in-transit piece would be helpful? I think, Sue, you mentioned the initial mark-up in the quarter was down slightly. Is that a rise in sourcing costs that you are seeing, or is there something else in there that would be helpful? And thirdly, if you could just remind us when you anniversary the open of the new distribution center? Thanks.

Thanks, Kimberly. Richard why don't you take the first couple of questions on inventory.

The inventory in-store without in-transit was up in the low single digits. So we were roughly in line with the guidance we gave last time. The difference between where we ended and the guidance was purely goods that got onto ships sooner than we thought they would.

And then, Sue, you want to talk about the anniversarying.

I think the next question mentioned was the IMU, I mentioned that the IMU was slightly down, and Kimberly, that is largely a function of mix year-on-year, as opposed to cost increases. And our AUR, you may have noted as well in the prepared remarks was down slightly as well. And then the anniversarying of the DC is Back-to-School of '08.

Great. Thank you, and good luck for summer.

Thank you.

We will take our next question from the site of John Morris. Please go ahead.

Thanks, good morning, congratulations on a good quarter.

Thanks, Joe.

I guess following up on that, Sue, are you seeing any cost increases as you get in to the back half, particularly as it relates to goods coming out of the Far East, but also prices of cotton, et cetera, raw materials?

And then separately, if you all can talk a little bit more about merchandising, particularly from a product strategy perspective, as you head in to the fall Back-to-School season, where the opportunity is on a year-over-year basis, and how you are thinking about it from that perspective?

And then finally, for Sue, just kind of a quick question, did last year, the numbers that you released today, the $0.64, did that include a $0.03 charge due to options expense? Thanks.

Thanks, John.

That is quite a question. The first question that you asked of me, John, was about cost of goods. And what we continue to see on cost of goods, is yes there is pricing pressure, and it is coming from a variety, the dollar is weak right now, commodity prices including cotton are increasing. However, that has been mitigated somewhat by demand.

Where the retail environment in the US is somewhat down, so we are pretty much able to hold our costs in line, in part again, sourcing is a core competency of this company, so pretty good at being able to shift production to lower our cost, and also we are seeing the lower demand is helping us to mitigate higher cost pressure, and then the next question that you asked of me specifically, before I will turn it over to Dina, had to do with last year's earnings per share, and whether or not that included option expense, that did in fact include option expense, so last year, EPS including those costs, was the $0.64, and then if you take that out, it would have been $0.68. This year we also had some items in the first quarter that one would characterize as one-time, and if you pull those out of this year's first quarter, it would have been $0.70.

Can you give us a brief rundown on what those were?

In the first quarter of this year?

Yes.

Primary professional fees associated with some of the activity that we had around certain lawsuits.

Okay. Good. And then the merchandising question?

As Chuck had mentioned from a strategy perspective, we are returning to our roots, offering the great color, the great fashion, great outfits, all at a tremendous value. We have reduced our overall investment in best product this year substantially below last year, and we have shifted that into good product.

We continue to see an opportunity in girls and newborns. We are more focused and narrow assortment. Our inventory investment in denim we have substantially lowered from last year as well, which has really brought us in-line to our 2006 position, which was our best denim year ever. From a category perspective, we still feel that denim will still continue to be the single largest volume driver for the Company during the Back-to-School time period, because it does remain the primary staple for The Children's wardrobe.

And we have made some adjustments to our overall denim program, we have introduced new washes and fits on both the boys and girls side in the good price point. And in addition, we will continue to offer premium denim silhouettes, however, we really reduced that investment as well. Just overall we have also differentiated from last year, our fall 1 assortment, versus our fall 2 really focusing on more shorts and short-sleeve products, which we believe is the correct strategy as we move forward.

Great. Thanks. Goods luck.

Thank you.

We will take our next question from the site of Margaret Whitfield. Please go ahead.

Good morning, everyone. Congratulations.

Thank you, Margaret.

Looking at the balance sheet, I wonder what you could say regarding your future financing needs? If you are working on the term loan, what is the status on that? The interest rate and timing?

Sue?

Yes, Margaret, we are continuing to work on that term loan. We feel that notwithstanding the fact that our borrowing was less coming out of this quarter, than what we had anticipated some months ago. We still feel that on a long, given the volatility of the business, it is just wise to have a backup source of financing. So we are continuing to work on the term loan. As to timing, I would say the next couple of months, we should have it closed.

So the revolver presently can sustain your needs of financing the stores and store openings?

Yes.

Okay. That is good news. I know, Chuck, you were assessing the real estate. Any thoughts or updates for us under the strategic review?

No, we have made good progress on that assessment, but it is not quite complete yet, and so I would like to hold off on that, and we will update you on that in the future.

How about shared services? I assume there were some severance costs in Q1, or were there not, Sue?

There actually were some severance costs in Q1, but they were offset by some severance adjustments from last year. So in fact, there was not a one-time expense in the first quarter associated with severance in total, also bear in mind the severance costs associated with the exit of the Disney business, and people who had been participating in shared services who had been working on the Disney business, were in fact included in discontinued operations. So it is actually not, severance is not a material component of the continuing operation P&L.

You mentioned good response to summer. Any comment on May sales trends thus far?

No.

No, it is a little hard right yet. So we will be happy to talk about that in another month or so.

All right. Congratulations.

Thank you.

We will take our next question from the site of Brian Tunick. Please go ahead.

Thanks, good morning. Couple of questions. I guess the SG&A came in better than we were expecting, and we were just wondering, are you still endorsing sort of flattish for the rest of the year, and was there any timing in the marketing shifting out of Q1 and into Q2? The second question, any comment on shoes? Is that still a big focus? Dina, do you think that is the right direction for where this business should be going? And any comments you can make or not on Ezra, given the 90-stand still agreement? Are you still working with Lehman Brothers. Is this going to be something we are going to hear from soon? Thank you.

Okay. Sue will take the first. Dina the second, I will take the third.

Okay. So SG&A I actually think we will see a little bit of leverage this year versus last year on a continuing operation basis, and that is pretty consistent with what we had said, we expect to see most of the savings from our restructuring really kick-in, starting this quarter, and then in to the second half, but I think you can expect to see some leverage year-on-year.

With regard to marketing spend, the first quarter shift, we are going to see more of that in the second half than we expect to see in the second quarter. So we are putting more emphasis on Back-to-School and holiday. Now, Dina?

Yes, from a shoes perspective, we are still focusing on shoes. We have identified some key learnings. We have seen some opportunity in narrowing the overall SKU assortment that we have given the stores. We are look at reevaluating the square footage, as we continue to open in new locations, and we also are playing with the longevity of specific product categories, as we continue to move forward. We are also finding new ways to improve and leverage our clothing to our shoe location, so something we are definitely focused on.

Great. And in terms of Ezra, there is not a lot new to say on this. He remains an active engaged member of our Board, and we continue to work, actually with Lehman Brothers. And the Board is committed to addressing any qualified offers that we might receive. So there has not been much change on that.

Okay. Terrific, good luck. Bye, Heather.

We will take our next question from the site of Janet Kloppenburg. Please go ahead.

Good morning, everyone. And congrats on a good quarter. I have a number of questions. First on the shared services expense, Sue, 107 million, can you give us an update on where you think that will come out as a stand-alone business for The Children's Place?

Yes, Janet, I think what you are referring to is shared services expense from last year?

Correct, I am.

As we look at The Children's Place what you would expect to see is we couldn't restructure all of that out.

Okay.

In fact the number that you see here in SG&A is pretty much comparable to that share, the concept of shared service no longer exists.

Of course. I appreciate that. But what should we be using as that level? What will it come down this year? I know it is not commensurate with proportion of sales.

Yes, what I was saying to, a way to answer that is what I was saying to Brian Tunick is that if you look at SG&A last year on a Children's Place only basis, and look at SG&A this year, I expect to see some moderate levels of leverage.

Have you delineated that for us, Sue?

We haven't yet, because we have to restate, it seems like we are continuously restating. But we have to restate 2007 to pull out the Disney business.

When will we get that?

You will see it in the first quarter, and then Rich Paradise and his team are working on the remainder of the year, we should have that within the next month or so, Rich?

Yes. I would say that is fair.

So we will get it before you repiece the second quarter?

I think that is fair.

Okay. That is number 1. Number 2, should we expect the IMU to be down for the rest of the year, Sue?

IMU, we are looking at IMU being down moderately for the year, this year compared to last year, yes.

Second --

Driven primarily by product mix.

Yes.

We are SKUing in to more good as opposed to best.

Right.

And it actually is primarily mix driven.

And I expect that as markdowns go lower, as you anniversary some pretty promotional high-inventory periods, that you could offset some of that lower IMU with lower markdowns?

That is the plan, although, we are cautious about Back-to-School.

Okay. I understand. The interest expense was much lower than I expected in the quarter, Sue. Can you give us some guidance go forward?

Actually, we are not giving guidance at this point. Interest expense was lower in the quarter, primarily because we had cash overseas that was still invested during the quarter, so we were able to mitigate some of the expense. Beyond that I think it is best until we wait until we have, the financing that we want obtained secured, and then we will give you some guidance on what you can expect on interest.

Could that benefit that you saw in the first quarter trickle in to the second and third quarters as well? The higher cash?

Well, second quarter we come into a trough.

Right I understand.

--inventory. So I would say not.

Okay. And then the depreciation level? It was about 17 million in the quarter, I think. Should we be using that for the go-forward per quarter?

I would say you should take it up, because there is going to be some capital spending, but I would say very moderately. If you use 17.7 I think in the quarter, so if you maybe round up, you would be okay for the year.

Okay. And did you guys say that your carryover inventory was 9% versus 5% last year? Does that mean the clearance inventory is higher than it was going in to Q2 '07?

That is predominately spring goods are higher as a percentage of our total. Part of that is because the go-forward inventory Back-to-School is down, but yes, we are higher. And the reason for that is last year, the customer really did not like our line, so we aggressively marked it down very early, the Spring line. We were at a 4.99 event by the beginning of April. This year, we have not been as aggressive, because we haven't needed to be, but we are clearing the inventory comparably at a sell-through rate comparable to last year.

And just two more questions. When you look into the back half of the year, do you look for your inventories to be as lean as you expect them to be coming out of Q2, which is down around 10% per square foot. And also for Dina, can you talk to us a little bit about how much you were able to affect the Back-to-School and holiday product lines.

On to the inventory first, we don't be give guidance out more than one quarter, but directionally we do expect the inventory to be down. And I just want to make one other point about the end of the second quarter. We gave guidance based on last year, but if you look at it on a two-year basis, that is actually flat to slightly up to two years ago. I just don't want everyone believing that the big negative inventory position that we are quoting at the end of the second quarter, is a function of not having enough. It is a function of just rectifying where we were last year, and we feel very comfortable relative to two years ago.

Okay. Great. Sue, also if you could talk about if there is anything you could do to affect the tax rate? And Dina, my question on holiday and Back-to-School. Thanks, very much.

Okay. The tax rate --

I know it is 45, but it is high.

It is high, we know. It is a high tax rate. The thing I will point out there Janet is that is our book rate. Cash. The total taxes we will be paying out in cash will be lower than that. And that rate is a function of our having repatriated cash from Asia, so we are no longer permanently invested in that sub.

To be honest, there is very little we can do with that rate this year. I think that we as a finance team, I know Rich and his team will be leading a charge to get that rate down in future years, but I would say for this year, order of magnitude there is relatively little that can be done.

Dina.

Although my primary focus is Canada and E-comm, I really have always have been an integral part of the merchandising team, so--

So the answer is yes.

Great. Lots of luck, Dina, I look forward to meeting you. Bye Heather.

Hi, Janet.

We will take our next from the site of John Zolidis, please go ahead.

Hi, good morning. Question on the balance sheet, you indicated that two-thirds of the approximate $50 million of exit costs related to Disney have already gone out, but you have these restricted assets in Chapter 11 that are on the balance sheet about $99 million. Is that the working capital associated with the Disney Store business?

Yes, the balance sheet is complex. The assets that were held for sale as of the end of the quarter, primarily it is held in the bankruptcy. So inventory, do you have that list. Let me just pull out the list. Just bear with us here for a second. Okay. It is working capital. It is cash that we received that the bankrupt entity received for the inventory that was sold to Disney.

My question is, is that when we finalized the exit of Disney, or I guess, when we see the balance sheet, I guess, for next quarter, is there any other working capital, or cash drag that is going to kind of outflow to Disney?

There is very little. Well, nothing to Disney. From TCP, so there is no cash movement from TCP to Disney or to Hoop.

What you will expect to see is there were certain obligations that were obligations of The Children's Place Corporation. And that is the one-third remaining that we expect to pay out between now, we should be mostly, it seems like severance for employees of The Children's Place who had been associated with Disney, but they were not obligations of Hoop the entity, and other items somewhat like that. I would expect to be largely done by the end of the year, with some flow into next year, but not material amounts.

Okay. And can I understand from your statements about the current revolver being sufficient to handle your seasonal working capital needs, but deciding to try to get the term loan just as an insurance policy, if you will, that when we get to year end, we will be in a net cash position exclude, I guess that is the question. Net cash position?

I would say that is a highly, that is a reasonable conclusion.

Okay. Great. And then a little bit of a broader question, I mean, right now you may be aware your stock is trading about $4 higher, about 15%, and Ezra had previously talked about making a bid for the Company at $24, the stock is currently approaching $33.

Given that we are very early in seeing the progress and improvement from a number of the initiatives you have in place, how would the Board consider a take-out proposal from either Ezra or another party, in light of the potential for the stock to go higher, based on your own performance as the year progresses?

The Board is going to do what the Board will typically do. I think you have just outlined, the calculus that any Board would go through in evaluating offers. And we basically have here sort of a high-class problem. I mean, it is great that the strategies are starting to take hold, and the stock is going up, and, I think it just puts the shareholders in a very good position overall, and that is what our objective has been.

Okay. Thanks for that answer, and good luck, guys.

Thank you.

Thank you.

We will take our next question from the site of Dana Telsey. Please go ahead.

Good morning, everyone.

Good morning, Dana.

Hi. Can you talk a little bit about in the current environment, how are you looking at the promotional cadence going forward, particularly as you prepare for Back-to-School, and also on the merchandising side, as you think about Back-to-School, holiday season, price points and what you see being different with the assortment this year compared with last year? And any update on the CEO search? Thing you.

You want to start Richard?

Yes. In terms of the promotional strategy, we will being a little bit caution based on what we saw last year with Back-to-School, so what we have really done is position a strategy that doesn't necessarily anniversary last year's promotional activities, but we have the contingency to go there if we need to, because we can go in to Back-to-School and see something different to what our expectations are. So it is a little early for us to definitively lay out a promotional strategy, because we are sort of keeping our options open, based on the experience we had last year.

From a merchandising perspective, again, we really differentiated some of the products in Fall 1 to Fall 2 this year. And really, driving it more towards a wear-now perspective.

Any comments about holiday?

And holiday, has been more of an evaluation, in terms of reducing that SKU assortment and really allowing the product the time to live on the floor.

Okay.

And then with the CEO search?

The CEO search, yes, that is ongoing, no particular update on that, but it is ongoing.

Okay. Thank you very much.

Thank you.

We will take our next question from the site of Linda Tsai. Please go ahead.

Yes, hi. With regards to ending 2Q inventory levels being lower than last year's, it sounds like an improvement from what you were previously expecting at the end of Q1, was this simply a function of discounting more to sell through the inventory, or was there something else going on?

No. I think we had given a directional, we just said we were going to be negative. We had not given any definitive numbers around that. Now we are just being more definitive, it is pretty much in-line with where we expected to be.

Yes. This is part of a longer-term strategy that we talked about last fall, we felt we needed to bring inventor levels down, and the first quarter we could really fully effect was this Back-to-School period. So that is the first time you are fully feeling the effect of that strategy.

Okay. At what point do you think you will provide more detailed guidance? You mentioned when you secured financing? When should we expect that to happen?

No, I said when we secure financing I think we can give you more visibility as to what our interest expense line would be. At this point we haven't identified a time when we expect to go back to giving guidance. Our business was very volatile last year, and as such we stopped giving guidance, so we are not giving a definitive point of time at this time.

Okay. Thank you.

Sorry.

We will take our next question from the site of Jim Chartier. Please go ahead.

Good morning. Most of my questions were answered, but just curious on where you are in lowering the cost for the new-store build-outs, and if the reduced costs were going to be in place for you to open stores in the second half of the year?

Yes. Yes, and yes. We have made good progress on doing that, and starting to see some nice results from the sourcing efforts, I think holding some of the store-building off in the first half of the year has allowed us to really consolidate. We are still not where we think we can ultimately be, but it will represent good progress, and you will see that in the second half of the year.

And what kind of percentage decline in price are you targeting, or cost are you targeting for the new stores?

I think I would prefer to talk to you about what we have accomplished. Let me update you on that second half of the year, when we actually have those things in place.

Okay. Thank you.

Thank you.

We will take our next question from the site of Marni Shapiro, please go ahead.

Hey, guys. Congratulations. So Richard, I do have an inventory question, and not that anyone is worried that you would not have enough inventory in this environment-- (laughter) --but the end of the second quarter you guys are hoping to end down high singles to low double? Should we expect that through the entire back half of the year? And then just to merge this with the merchandising side, you guys have had some issues in newborn and big girl. So is the inventory down across the board, or are you focused on certain areas, managing it a little bit more tightly?

From an inventory perspective, again, we are not going to give definitive guidance out for beyond one quarter, but directionally we expect the inventory to be down throughout the whole year. What I am not going to do is sit here today, some of it we haven't even purchased yet. Some of what comes in the fourth quarter is Spring product. We are just seeing our Spring presentation. So until we have actually purchased the goods, it is hard to give definitive guidance that far out. But our targets are directionally to be down throughout the whole year.

In terms of the investment what I would say is that the inventory investment is down in all areas, because all areas were inflated. It is just not a straight line. It is not down equally in every single business. We went back and did an analysis of the businesses, and we have made the strategic investments in different places based on where we thought the opportunity was. Even within businesses it is not equal by category, we did a lot of analysis on the inventory.

Great. And then if you guys could also just follow up on the merchandising side a little bit. You talked about moving out of best and in to better. I guess a little bit more color around that. Some of the T-stands of fashion, do they start sort of start to disappear, or are they more of the one-off items that you have layered into your stores?

We actually said that we were reinvested the mix from best in to more good products.

I am sorry, good.

But you will still continue to see fashion elements within the store reflected on the T-stands. We have not given that up. They are unique pieces to us.

So the store won't look too basic?

It will not.

I will just add to that, although we have not given up those fashion pieces, that is part of the narrowing, we have narrowed it, and one of the reasons we did that, is we were experiencing not leaving enough fixtures open to put sale product on. We have narrowed the assortment go forward, to make the assortment look more focused and tight.

Great. That is a good thing. Makes it easier to shop. Thanks, guys, and good luck with Summer.

Thank you.

We will take our next question from the site of Jeff Steinberg, please go ahead.

Jeff? Hello?

Okay.

Jeff?

Sorry about that. I had the mute button on. First of all congratulations, and just understand as you are looking at the business structurally, you are obviously making a lot of progress here. Is there any reason to think that you can't return to the historic operating margins of the business, and success of the business?

No.

That is our goal.

That is our goal. It will take some time to get there, there are some structural changes that have to be made. It will take some time, but we can get there.

I think you had talked in the past about having targets for operating margins that had been substantially better than the call it 6% that you had achieved.

That is correct, but understand with the divestiture of Disney, we have experience that we will have to absorb, it will just take some time to get there, it is certainly our goal to restore The Children's Place to its historical level of profitability.

Okay. I would appreciate any perspective as you think back about the historical margin structure of the business, and you think about the improved operational actions you are taking, talking about from a big-picture standpoint, what might allow you to perhaps do better than what you had done in the past, in terms of operating margins?

I am sorry your question --

Levers?

What are the levers we are going to be looking at?

Yes, where do you see large opportunities to improve the business, which might allow margins to be 6 or more percent over a recovery period?

Yes, I think it is a combination of generating higher sales per store, and certainly that is, with our inventory markdown performance, is going to help us there. There is some category expansion that we have talked about in terms of shoes.

We have a very booming E-comm business that we feel really good about, and think that that has positive operating margin leverage for us, and then we do have some engineering to do on the cost side, which will both reduce costs, and increase efficiencies, some of those will actually have impacts on margins as well. So we are going through and laying out a series of initiatives, but in terms of the long-range planning that we have done, we really think that we can get back to historical levels of profitability that are well above 6%.

Terrific. Well you are doing a great job. Thank you.

Thanks.

We will take our last question from the site of Kimberley Greenberger. Please go ahead.

Great, thank you. I just had a quick follow-up on the IMU. The pressure you are expecting on IMU through the rest of the year as you increase your investment in good, and decrease the best investment. Can you give us any sense, is that like 50 basis points, 100 basis points, any help there would be great?

And then secondarily, if I remember properly, last year in Q3 and Q4, it may have even started in though second quarter, I am not sure, the markdowns for the core Children's Place division I think were up multiple hundreds of basis points. Can you just remind us the general range that you saw in increased markdown activity last year? Thanks.

Yes, okay. Let me start with IMU, and short of giving very specific guidance, how about if I say that your range is not far off the mark. I would say between 50 and 100 basis points on IMU for the year.

On markdowns, we had actually seen a significant increase in our markdown rate in the second quarter of 2007. That is when we really started to see the consumer acceptance of our product was not what we had anticipated.

So it was really second quarter, third quarter, and fourth quarter of last year when markdowns were significantly ahead of the '06 levels. We are expecting to that to be moderate, but as Richard said earlier, we are being somewhat caution at this point, because we just haven't seen the consumer's reaction to our Back-to-School assortment yet. And last we are pretty encouraged by the early consumer response to Summer.

Great. Thanks, Sue. And a fond farewell to Heather.

Thank you Kimberly.

That concludes our Q&A session, I would like to turn it back over to management for any closing remarks.

Great. I just want to thank everybody for joining us today and for your interest in the Company, and we look forward to continuing to update you on our business initiatives, and our progress throughout 2008. Thanks again.

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