Children's Place Inc (PLCE) 2008 Q2 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. Later you will have an opportunity to ask questions during our Q&A session. Please note this call is being recorded.

I will now turn the call over to Ms. Jane Singer. Please go ahead, ma'am.

Thank you, Tasha. Good morning everyone, and thank you for joining us today, for a review of The Children's Place Retail Stores, Inc. 2008 second quarter and year-to-date financial results. Participating on this morning's call are Chuck Crovitz, Interim Chief Executive Officer, and Sue Riley, Executive Vice President, Finance & Administration. Also on hand to answer questions at the end of management's remarks are Richard Flaks, Senior Vice President, Planning, Allocation and Information Technology, 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. And now I will turn the call over to Chuck for his opening remarks.

Thank you Jane, and good morning everyone. Thank you for joining us today.

Earlier this morning, we reported our second quarter 2008 financial results. We are very pleased with the solid top and bottom line growth The Children's Place business generated for the quarter. Our improved results is a culmination of ongoing hard work and dedication of our entire team, to improve our merchandise assortment and implement several strategic imperatives, that have improved our business performance.

Some highlights of our financial performance during the quarter include a net sales increase of 16%, a comparable store sales increase of 9%, and excluding unusual one-time items, we had a loss from continuing operations of $900,000 during the second quarter of 2008, compared to a loss of $17.8 million last year. On a per-share basis, this translates to a $0.03 loss this quarter, compared to a $0.61 loss in the second quarter of last year.

In retail, as you know, everything starts with the merchandise. Over the past few quarters, our merchant and design teams have worked diligently to optimize our assortment that we offer our customers. We are remaining true to our brand roots by providing head to toe outfitting, trend-right fashion, and colorful merchandise. And we are delivering all of this at a great value. Customers responded very positively to our improved merchandise assortments during the quarter, as evidenced by our strong comp store sales growth, and a 50-basis point increase in The Children's Place market share to 3.9% of the US children's apparel market, as measured by NPD.

Additionally, we sharpened our eCommerce marketing and merchandising efforts, which helped to drive web traffic and sales during the quarter. While we are encouraged by the positive trends we have experienced, the traction we gained in our business in the first half of 2008, we are mindful of the ongoing challenges in the macro economy.

As a result, we will continue to conservatively manage our business, and carefully navigate through this difficult retail environment. Importantly, this year we are approaching the business with a mindset that is focused on quality sales and healthier margins, as opposed to aggressively driving top line sales. We are being more patient and keeping full price merchandise on the floor longer until customers are ready to shop.

We believe customer behavior has shifted to shopping even closer to time of need, and we are adjusting our merchandising, marketing, and promotional strategies, to more fully support this evolving shopping behavior. The Children's Place offers tremendous value to customers through our everyday pricing, and we do not plan to anniversary some of the aggressive promotional strategies from last year, now that our inventory levels are better aligned with demand.

Maintaining a tight control of cost of goods is a critical component of our strategy as a leading value retailer. As everyone knows, there have been a variety of challenges this year, due to the inflationary pressures in China, currency challenges, and higher energy and commodity costs. Sourcing is the core competency of The Children's Place, and we are pleased that our team has been able to successfully mitigate these cost pressures, as a result of our strong long-term relations with our Asian manufacturers who are experiencing weaker retail demand this year, as well as our nimbleness in moving manufacturing and assembly operations to lower cost countries as opportunities arise.

I would like to provide you with a brief update on the progress of the strategic initiatives I have briefly mentioned at the outset of my remarks. These include, number one, a Board level strategic review of operations, which resulted in the Company's decision to exit The Disney Store North America business. Number two, a decision to manage inventory more conservatively, and three, a reduction in expenses and capital spending.

First, the divestiture of the Disney business is mostly behind us, although we have a few matters that will take us until the end of the year to unwind. We believe that we have emerged stronger, and we will be better able to maximize the long term return to our shareholders, by focusing entirely on our core namesake brand.

Second, having inventory levels more aligned with demand this year is giving us the flexibility to keep our merchandise at full price for a longer period of time, as I mentioned earlier. We ended the second quarter with inventory levels approximately 14% lower than last year, and we expect to have lower inventory levels on a year-over-year basis for the third quarter as well.

And lastly, we are pleased with our efforts to lower our expense structure and limit capital expenditures, and have begun to generate results in a number of ways, although we still have further room to trim costs without compromising the Company's long-term growth potential. We are on target to realize the $12 million in savings from our shared services work force reduction in fiscal 2008, and we expect to deliver similar or greater savings next year. In addition, we are reducing the costs of our new store buildouts through value engineering, and we will be selective in our new store openings, until demonstrated progress indicates the return to more aggressive store growth.

Our entire team has fully embraced expense reduction and process efficiency as an integral part of the culture going forward, and every department head is accountable for maintaining or lowering his or her costs, while contributing to top line growth. And finally, in order for us to maintain our position as a leading value-oriented children's apparel retailer, we are continually striving to realize opportunities to leverage our sales volume, systems and vendor relationships, to increase our efficiencies going forward.

In summary, we are pleased with the advances our business in the first half of the year, but we certainly have work ahead of us. We will continue to manage the business with an awareness of the impact of the continued weak consumer confidence. We remain confidant that our sharp focus on The Children's Place brand tenants of outfitting, color, and fashion offered at a great value, coupled with our prudent inventory, CapEx, and expense management, will allow us to continue to deliver profitable growth to our shareholders over the long run.

With that, let me turn the call over to Sue, who will review the financials.

Thank you, Chuck. Good morning, everyone. Most of my discussion today will focus on continuing operations, which is The Children's Place business only. As previously disclosed, the Disney Store business has been classified as discontinued operations in accordance with Generally Accepted Accounting Principles, given our decision to exit that business.

Net sales from The Children's Place business for the second quarter ended August 2, 2008 increased 16% to $338 million, from $290.5 million last year, contributing factors to the sales growth were comparable store sales, which increased 9% compared to a 1% decrease last year, eCommerce sales, which grew more than 85% for the quarter, and modest growth in our store base.

At the end of the second quarter 2008, our store count was 902, compared to 883 stores at the end of the second quarter last year. Our 9% comp for the quarter resulted from a 6% increase in store transactions, and a 2% increase in average transaction size. Units per transaction increased in the low-single digits.

Average unit retail was flat, as the lower markdown rate was partially offset by a higher proportion of good compared to better and best merchandise in our product mix, and an intentionally higher mix of summer, compared to fall merchandise during July of this year. We had a modest increase in traffic and conversion during the quarter, and all regions comped positively.

Gross profit dollars increased 38% to $128.5 million. Gross margin increased 580 basis points to 38%, from 32.2% in the second quarter of fiscal 2007. The increase reflects fewer markdowns and lower occupancy expense as a percentage of sales and higher initial markup, which were partially offset by higher distribution costs for our Southeast Distribution Center, which anniversaried this July. SG&A as a percentage of sales was 31.3% in the quarter, representing 630 basis points of leverage.

I want to point out several one-time items that impacted our results during the second quarters of 2008 and 2007. This year, we are realizing transition services income, partially offset by variable costs for services that we are providing to Disney, as we finalize our exit from that business. We also realized income from the sale of our Mall of Manhattan store lease during the second quarter of this year.

In addition, we incurred professional fees during the second quarter of this year, primarily related to the long-term loan for the Proxy and the 8-K filings were restated TCP financial statements. In both years, we incurred legal fees related to the Company's stock option investigation, and in 2007 we incurred stock option tolling expenses. Excluding these items, which we deem to be unusual or one-time in nature from both periods, SG&A leveraged approximately 330 basis points for the second quarter, as the Company's work force reduction in shared services, and other expense management initiatives have taken hold, coupled with the increase in sales.

Contributing to the SG&A leverage for the quarter were lower payroll, marketing, store and store opening expenses, all as a percentage of sales, partially offset by higher bonus accruals and equity expense. Some of this benefit is from timing, as we delayed store openings for the second half of 2008, and for business reasons, shifted a portion of the marketing spend from the second quarter into the third quarter, to more closely align the Magalog mailing with our peak full price selling period.

Moving down the P&L, depreciation and amortization expense as a percentage of sales was 5.2% comparable to last year. Income from continuing operations before interest and tax was $4.9 million, compared to a loss of $31.6 million in the second quarter of last year.

Interest expense was $400,000 this quarter, compared to interest income of $400,000 in 2007, since we carried debt this year. Our effective tax rate for the quarter was 39%, slightly lower than planned, which is an anomaly due to minimal earnings during the second quarter. We expect the full year tax rate to be approximately 43%. Income from continuing operations net of tax was $2.7 million, or $0.09 per diluted share, compared to a loss of $19.8 million, or $0.68 per share in the second quarter of last year. Our diluted share count for the quarter was 29.6 million.

Excluding the one-time items from both periods, second quarter adjusted loss from continuing operations net of tax was $900,000, or $0.03 loss per share, compared to a loss of $17.8 million, or $0.61 per share in the prior year quarter. GAAP net income for the second quarter included the impact of discontinued operations was $11,000, or breakeven diluted earnings per share, compared to a loss of $28.1 million, or $0.97 per share last year.

Moving on to the balance sheet, our quarter ending cash balance was $146.7 million, and we had no outstanding borrowings on our credit facility. During the quarter, the Company closed on an $85 million term loan, to ensure that we would have adequate liquidity to weather the difficult macroeconomic conditions, and provide maximum flexibility for our business. We also signed a new credit agreement for a $200 million asset-based revolving credit facility. This replaced the revolving credit facility previously in effect.

Our net cash position for the quarter reflects the funds received from the term loan, as well as our stronger than expected business performance, and the deferral of capital spending into the second half of 2008. The Company continues to have some cash associated with The Disney Store exit. We continue to expect the costs to come in at the low end of the estimated range.

Total inventory at cost at the end of the quarter was down 11%, or 14% per square foot. Carryover inventory was 3.8% of total inventory, versus 1.2% last year. While carryover inventory is higher than last year, overall we are pleased with the performance of our summer line, and are comfortable continuing to sell summer merchandise in our outlet stores through Labor Day.

We expect to end the third quarter with inventory per square foot down low to mid-teens. During the second quarter, we closed four stores. Year-to-date, we have opened three stores and closed five. As of August 2, 2008, we operated a total of 902 stores, with a total of approximately 4.3 million square feet.

We plan to open approximately 30 new stores in 2008, with the majority expected to occur in the third quarter. I want to echo Chuck's comments. Overall, we are very pleased with our business results for the quarter, and the progress that is being made to deliver long-term profitable growth.

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

Thanks, Sue. To wrap up, we are very encouraged by our performance for fiscal year-to-date, and we are pleased that we have begun to benefit from the actions we have taken to improve our business. Our second quarter financial results reflect substantial progress towards the goal of returning the business to it's historical levels of profitability.

Thanks. Operator, now I would like to open up the call for questions.

Thank you. (OPERATOR INSTRUCTIONS). We will take our first question from Tom Filandro with SIG. Please go ahead.

Hey, thanks. Amazing quarter. Congratulations to all of you.

Thank you, Tom.

Thanks, Tom.

My first question is, Chuck, with your comments, you made some comments on the sourcing side, but you also made some comments on your rising costs or upward pressure on costs. Can you help us understand how we should sort of view IMU for the balance of this year and into 2009?

Yes, I think the forces I described, that we have got some things going up and some things coming down, I think our expectation at this point is that it will be slightly down going through the back half of this year.

And that will be mitigated, we expect, by lower markdowns year-on-year, as Chuck mentioned, because we're not going to repeat the same promotions that we had last year.

And I do have a question Chuck related to that, another specialty retailer, a competitor of yours, talked about moms spending less, UPTs were a little bit of a drag, and they actually commented that in terms of marketing, there they would market more aggressively earlier this year, and we do have five fewer days between Thanksgiving and Christmas. Just given your lower promotional cadence, is there any change in, how do I say this, getting the overall value message more perceived out there in-store, so you don't lose market share in a less promotional environment? Does that make sense?

Yes, I don't see us, I think what it is, we are just probably not going to have to go as deep. Last year, as you know, we had a lot of inventory that forced a higher level of markdowns. I think it is that that we are not going to repeat. In terms of the normal level of promotions or marketing, that we would have driven the business with long-term, I don't see big changes in that.

I think our marketers actually did something really smart, which is they curtailed the mailings of the fall one Magalog, because you have Fall 1 set when summer is still on sale in the stores, and then they are increasing the marketing focus on Fall 2, so again, you have more Magalogs out there when you have full price selling.

The other thing that is going on in the marketing side is we are trying to find ways to deliver our marketing more efficiently. One of them is what Sue just mentioned, we are adjusting the timing. Another way is just to shift how we deliver the marketing in terms of, say direct mail versus e-mail, and making small shifts in those areas, in a way that we don't think will effect sales and response, but will lower the costs.

If I could add in one thing, Tom, it is Richard. Although we are planning a lower level of marketing, we are still positioning some level of contingency marketing for us to be able to, you say our competitors have said they are going to pull the trigger earlier and that type of thing. We have built some level of flexibility into our marketing to be able to react as well if we need to.

Congratulations, again, and best of luck for the fall and holiday.

Thanks, Tom.

Thank you, Tom.

We will take our next question from Dana Telsey from Telsey Advisory. Please go ahead.

Good morning, everyone. Can you talk a little bit about operating margin potential, as you evaluate the business, do you have the potential to get back to your historical operating margins? What are the levers to drive you there? And then also as you look at the search for a CEO, any progress being made there? And just lastly, any update on the expected use of the credit line? Thank you.

Okay. I will take the second question on the CEO search. That is an ongoing search, and we are probably not going to comment on that much further than to just say it is an ongoing activity. Sue, do you want to talk about the long term operating margins?

Long-term, we have said we believe we can get back to historical operating margins, maybe not quite the highs, but certainly low double-digit margins over time, and that is going to take just increasing our top line systematically through new store openings and programs with the Company. We will be initiating over the next few years, and as importantly, really curtailing expense as we do so, but it is going to take some time to get there.

It's more about controlling the level of expense growth than it is necessarily making huge cuts.

And then your last question was the use of the credit facility. The credit facility is in place, and as you know, we did the $85 million term loan. I expect we will be pretty much this year relying on the term loan for balancing our financing, as we are buying inventory for holiday, et cetera, more so than the credit facility.

Got it, and what comp level do you need to leverage expenses?

Really it is low single digit to leverage expenses.

Terrific. Thank you.

We will take our next question from Kimberly Greenberger from Citigroup. Please go ahead.

Thank you. I will add my congratulations for the great quarter as well.

Thanks, Kimberly.

Sue, I am wondering if you could provide any color in terms of the proportion of gross margin increase in the various items that you listed? I know you don't want to give the exact basis points, but any sort of proportional allocations would be helpful. Secondly, it looks like you are on a run rate to achieve just about a 30% SG&A rate to sales this year. Does that look achievable to you, or is that somewhat optimistic?

Okay. First, with regard to the gross margins, the single biggest driver of the gross margin improvement was lower markdowns year-on-year, by a long shot. And then second, when we list out the items that impact any given line item, we do so in descending order, but it was really driven by markdowns.

And SG&A?

And then the SG&A question, we are not giving guidance, but I would say that what the number that you quoted, the SG&A as a percentage of sale is reasonable.

Great, thank you.

Thanks, Kimberly.

And then just lastly, because of the oddity of Florida not repeating the sales tax holiday this year, a number of other retailers have commented on August month to date. I know it is not customary for you to do that under normal circumstances, but I was wondering if you would consider commenting on August, just considering the uncertainty out there with what happened in Florida?

No, I think just we feel it is too soon and with our timing of how we deliver fall, it is way too soon for us.

Okay. Thanks, Chuck, and good luck here with Back-to-School.

Thank you.

Thanks, Kimberly.

We will take our next question from Linda Tsai from MKM Partners. Please go ahead.

Hi, good morning. In terms of the $12 million that you are taking out of the cost structure this year, what areas are you targeting to take out of your cost structure for next year, and where might the biggest opportunity be?

We have not--

We haven't detailed that at this point. It is really a continuation, I think, of what we have started, which is really just a lot of blocking and tackling. As there is attrition in the organization, challenging the organization, not to replace those positions.

I mean the new thing for this year is to start on the zero base budgeting discipline, and so I would expect given that, that we are going to start to see reductions across the board, and there are certain areas we have identified as investment areas that support our growth, but I think our zero base budgeting approach is going to give us across the board reductions.

Okay, and then your comment about 2Q being down 14% on a per square foot basis, just a point of clarification, will that be even lower in third quarter?

Yes, I said in my prepared remarks that we expected third quarter to be down, inventory per square foot to be down in the low double digits.

Okay, and then just a question for Dina, in light of the heightened demand for the good pieces of business, how are you planning for next year? Are you investing more heavily in the good area now?

We are focusing on a balance between that. I think we have brought our levels down appropriately to where we wanted to be positioned with good, so yes, we will continue down that same path.

Great. Thank you, and good luck.

Thank you.

Thanks.

We will take our next question from Betty Chen with Wedbush Morgan. Please go ahead.

Thank you. Good morning, and again, congratulations on a good quarter. Following on that earlier commentary, I guess, Sue, could you talk a little bit about, I mean inventory is down on a per square foot basis, but then you mentioned the carryover inventory is a little bit higher. Sounds like it is all in the outlets. Could you maybe talk about that a little bit more?

Yes, it's primarily, again I did say this in the prepared remarks, but we intentionally sold less Fall in July, and we liked our summer line. Last year, we weren't as pleased with summer, and as such, we marked it down to get it out. This year, we liked our summer line. It is continuing to sell. We have moved it to the outlets and we would like to see it continue, believe it can live in the outlets certainly through Labor Day, and slightly beyond that.

Okay.

That is really a function of liking the line, and being comfortable with it where it is being sold now.

That makes sense. And could you talk a little bit about, I mean obviously significant expense leverage in the second quarter from the comps, and then could you, it sounds like also it's benefited from the marketing and the store openings plans being shifted into the back half, especially to the third quarter. How should we think about those two buckets, as we kind of look at these estimates in the business into the balance of the year?

Yes, marketing did shift, as we said, from the second quarter into the third quarter, but it is all, so you will see more marketing expense in the third quarter sequentially, and also as a percentage of sales more than what we, than what we had spent last year. So you should see an increase in marketing in Q3. And then the store openings expenses, again we said the bulk of our stores, most of the 30 stores that we are opening will in fact be opening in the third quarter, so you will see more preopening expense in Q3.

And then lastly, it definitely seems like the web business continues to gain momentum. Are you seeing any, is it the similar kind of learnings that you are seeing in the retail business? Could you talk a little bit about that and then also, how should we think about the growth of that business going forward, and what is the opportunity there?

I think I will take the second part of that first. I mean we do see the opportunity that is there, and we are going to continue to manage towards that. I think a lot of what we have seen in the growth of eCommerce this year, has been how we repositioned some of what we are calling the marketing, the paid search and affiliate programs, and how we have been dealing with our e-mail campaign programs this year versus last year.

In addition to that, we have made adjustments to how we are merchandising on the site, which is driven more towards how we are aligning the brand towards the outfitting and more focused assortments there, so I think that definitely has helped the eCom business over the past year.

I will say strategically we see eCom business as one of our major growth engines, certainly not the only, one a major one, so an area of keen focus for us.

Great. Then lastly, I am not sure if I missed this earlier, could you tell us what was the CapEx spend for the second quarter, and how we should think about that for the year?

We had provided a range of 65 to 75 million for the year. I think the quarter was, what was the cumulative year to date? It is 10 million in the quarter, 20 million year-to-date cumulative.

Great. Thank you very much, and good luck.

Thank you.

Thank you.

We will take our next question from Janet Kloppenburg from JJK Research. Please go ahead.

Good morning everyone. Congratulations.

Hi, Janet.

Couple questions, Sue, if I look at the SG&A dollars on the statement, the P&L, it is actually down on a dollar basis. I think I am supposed to add back about $3.5 million between the lease sale and the professional fees that you are singling out as one-time, is that correct?

That is correct, Janet. So if you look at SG&A, add back was $5.4 million net of fees that we in fact received, and what that is is Disney had paid us for transitional services, and so those represent the fees that we received net of variable expenses.

And then $2.3 million for that lease that we sold, we were being moved to another location in the mall, and didn't want the new location, so we opted out, and did realize $2.3 million from the sale of that lease, and that is partially offset by some professional fees in connection with the 8-K filings that we did to restage The Children's Place. That is about 1.7 million.

Well, then were SG&A dollars actually up in the quarter slightly?

They were in fact up slightly in the quarter relative to last year.

Okay. And just looking forward into the back half of the year, I know you can't tell us what it might be, but could there be some of these one-time benefits as well in the second half of the year, as you unwind Disney and the other store properties?

Well, we are not doing a wholesale unwind of store properties. That just happened to be one property where there were in fact unique circumstances. And Disney will continue until such time as they decide they no longer need these services, so the answer is yes, you are likely to see some one-time bursts certainly through the third quarter. Fourth quarter, I am not sure about.

Okay, but then we have to assume that the marketing expense will rise for the back half of the year, as you have shifted some of your event planning?

That is right. A way to think about marketing is that it is about flat as a percentage of sales with a skew towards the second half.

Okay, and maybe if you and Chuck could talk a little bit more about this new strategy of holding product in the stores longer, I understand you are being more patient, but it makes analysts like me worry about it, if markdowns are being taken on a timely basis. If you could just talk a little bit about that, I would appreciate it. Thanks.

Do you want to talk about that, Richard?

Richard?

Yes, so the strategy is not just a function of selling product where we used to, and then just waiting. We have made some shifts to the floor set strategy. So for example, in Back-to-School, we actually reduced the investment in Fall 1. I think Sue mentioned it earlier, which sets in in July and pushed more investment into August, to improve the investment during the peak time period where the customer is shopping.

What is on the floor right now, Richard, is Fall 1 or Fall 2?

Fall 2.

Fall 2, so there is a higher investment in this assortment versus what we saw in late July?

That is correct, and the other thing is last year we started heavily promoting the line pre-Labor Day. This year, our intent is we will still have a Labor Day event, but we don't need, in the history, we used to do our sales in the end of the first or second week of September.

Last year because of how much inventory we had, and the fact the line wasn't being well received, we basically started the event for Labor Day, which is too early. The shoppers, they are still shopping, people even going back to school, they are still figuring out what they want, and still coming back. So it is a shift in floor set strategy in conjunction with a markdown strategy. It is not hold off on markdowns that need to be taken.

Okay, great. Thanks. And then, Chuck, if you could talk a little bit about the shift in the marketing program. I sense from Chuck's comments that that may affect the comp sales results on a monthly basis. Maybe you could give us some level, or how you want us to think about that?

No, I didn't mean to give that impression. I think we talk about--

Also the promotional cadence being different as well, Chuck. Do you want us to be thinking about comps being perhaps not as strong as they were in the first quarter, A) because you have less inventory, and B) because you are being more promotional?

I see. Well, two -- I guess two different sets of questions. One is about the marketing. The other is about the whole top line growth--

Right.

Markdowns.

I think so much of last year was inventory driving us to make markdown decisions, just more stuff coming in that we had to make room for, whereas this year I think we put ourselves in a position where we can see how the merchandise is selling, and make a decision week to week. So it's just that we are focusing now on how the merchandise is selling, in terms of reaching markdown decisions, as opposed to having a pressure of inventory behind us.

That being said, I think that last year because we had so much inventory, we had to liquidate it, that that really drove the top line very strongly. We did it at fairly unattractive margins, which is I think some of why you are seeing the tremendous growth in the gross margin in the second quarter. And I think it is that we are going to try to see more of that. We are going to try and just focus more on running a quality business from a markdown standpoint, and not being forced by a lot of inventory to generate a lot of top line growth, that doesn't yield a lot of money on the bottom line.

Okay. Thanks very much, and lots of luck.

Thank you.

Thanks, Janet.

Thank you. We will take our next question from Brian Tunick from JPMorgan. Please go ahead.

Hi, yes, thanks. Congratulations as well here. I guess three questions. First one, maybe just thoughts on the balance sheet management. We are just trying to understand the rationale. You guys have net cash, taking on some of these additional revolvers. Just trying to understand, is a share repurchase program is something you would consider? Just trying to understand that first on the balance sheet.

Yes, let me take that, Brian. We did decide, as we have mentioned before, to proceed with the term financing, and the simple fact is we are in a very, very tough economy. I am not seeing anything that says it is going to get a lot better as we embark on 2009, and we felt as a company that we needed to have the liquidity on our balance sheet. At this time, we are not looking at a stock repurchase program.

Okay. Second question, just eCommerce, maybe as a percentage of sales, what kind of base are we coming off of with these pretty amazing growth numbers?

5% of the total.

5% of the total, okay. Maybe finally somebody could talk about the footage plans initially you guys are thinking about for '09, maybe what is happening with the average new store size, and I guess that sort of adds in the footwear question. Sort of are you guys happy with footwear, and how many stores is it in right now?

You talk about the square footage, I'll talk about the footwear.

I would say the same square footage increase for '09 as what you saw in '08, approximately 30 stores.

And we are sticking with our basic store average size of [4,500] to 600 square feet.

In terms of the footwear, I think the footwear is a work in progress. We have decided not to build more footwear stores until we really perfect the business, so this year is really one that is focused on a lot of experimentation, and I think we are pleased with where we are right now. We are learning at a rapid rate.

We feel like we've got good customer acceptance of the shoes themselves, and now that the inventory is coming better into balance, the profitability is going up. We are doing a lot of experiments at the store level, both operationally and how we display things, and we just want to make sure we've got a really solid business before we roll it out. But we are still in the learning mode.

From a scale perspective, how are the gross margins right now on the footwear business?

They are lower. They are lower than the apparel business and for a variety of reasons.

Okay. Thanks and good luck.

Thank you.

Thank you.

We will take our next question from John Morris from Wachovia. Please go ahead.

Thanks. My congratulations too on a terrific quarter. Thinking out, Chuck, looking out over several years ahead, I don't want to jump the gun here too much, but clearly you guys have gotten the business back on track really nicely, so as you think ahead, your kind of longer-term strategic plan, thoughts about new growth down the road. You are up at about 902 stores.

You clearly have some additional capacity to go, but what are you thinking about in terms of longer-term growth at this point, and my other question for Sue is are you thinking at some juncture about going back to giving guidance, or sort of what is your thought process now that the numbers are more manageable? Thanks.

All right, John. Yes, I think as we think about the long-term growth picture, I think you are right. There is more store capacity, and we have looked at that and recently completed a real estate strategy. So I think we feel strong about that.

We feel very strongly about the eCom and how big that can be, and we also see a lot of earnings growth potential with just the continued strategy we have talked about, in terms of maintaining, sort of controlling our costs as we let our top line grow. We have looked, starting to discuss with our Board several other kind of growth opportunities that we have for the Company, but there is still work in progress. But I think in general, we feel there are a lot of places where this brand can go.

And as to guidance, I don't have, probably not the answer you're looking for, but we don't have a target date as to when we will reinstate giving guidance. As you know, we missed a number of quarters last year, and just felt that we wanted our business to be, we wanted to have a better handle on the stability of our business before returning to guidance and so we are just going to see how, I expect you won't get guidance before the next couple of quarters.

Thanks. Good luck.

Thanks, John.

We will take our next question from Steve Kernkraut from Berman Capital. Please go ahead.

Hi Chuck, and congratulations on a great quarter. Most of the questions have been asked, but maybe you could try to calibrate the business, a lot of retail, as you talked about about how the rebate checks have helped them during the quarter. You guys had a 9% comp.

Just so we could get a sense of what a more normalized run rate would be going forward, do you have a sense of how much the rebates helped you guys, since you really cater in the value sector and Penney's and Wal-Mart and Kohl's all mentioned how it helped them so much.

We were sort of scratching our heads about how we would divine that amount, but no, we did not have any amount of what that contributed to us.

What we do know is we saw a significant improvement in our business actually before the rebate checks were mailed. But beyond that, we don't know how they impacted us.

Okay, okay. And one other question dealing with your real estate strategy, where you are saying you are fine tuning it, and have a much better sense of what will be opening stores future. Is there some way you could kind of give us a sense of what that should do, in terms of the operating margins on a longer-term basis, in terms of the business? Should that add a meaningful amount to your operating margin potential?

Well, I think the guidance that we have talked about on the, on the operating margin is simply the notion that over the next five years or so, we see ourselves returning to double-digit operating margin, and that that is going to be a combination of the three strategies that we talked about, I talked about with John in the previous question.

Okay. Thanks very much, then.

Thanks, Steve.

We will take our next question from Marni Shapiro from The Retail Tracker. Please go ahead.

Hi, guys. Congratulations.

Thanks.

Thanks.

One, I just have a quick clean-up type of question. Could you remind me, last year you were liquidating your denim. Was that all in Q2, or did that carry into Q3? Because you had a very nice increase in your transactions of 6% against that. I was just curious if that carries into the next quarter?

You are talking about the current quarter, into Q3?

No, last year. Last year's denim. Last year's denim.

Marni, there are two pieces. Last year we had a $9.99 event on our denim, which was all in Q2. It was in July. The liquidation denim is something that we do every year. We exit out of some fashion product and replace it. The lion's share of it was dealt with in the early part of the year, but there was some that was still being liquidated into Q3, as is there is some this year as well, comparable.

The bulk of it was over by the end of the first half?

Yes.

Okay, and if you guys can give a little bit more, again on the direct business, have you been e-mailing out to your clients more and are you seeing better click-through rates? And if you can also talk a little bit about the metrics online, if you are seeing the sell-through more with newborn versus boy or girl, that is different than what you are seeing in the stores?

Sure. In terms of click-through rate, our e-mail campaigns basically are similar to where we have been, two e-mail campaigns a week. We are seeing more traffic, and we are seeing more click-through rates. In terms of how we see it online, we are selling a lot more girls than we are newborn, newborn is probably still one of our slower businesses on the online arena. But we are happy with the results that we are seeing in the girls division.

Great, and have you been playing around any differently with the shipping, and events like that, that you have seen any kind of reaction to?

No, we have been maintaining our $5 flat rate shipping.

Great. Great, guys. Good luck with the rest of Back-to-School.

Thank you.

Thank you.

Thanks, Marni.

We will take our next question from Jim Chartier with Monness, Crespi & Hardt. Please go ahead.

I just want to make sure I understood the comment on the shared services, are you still on track for $12 million of savings next year? Or are you going to get that 12 million of savings in 2008?

We expect to get it in 2008, and for it to continue for 2009.

So you will have 12 million, the work force reductions really didn't start impacting until this quarter, correct?

No, it was really the first quarter we saw some impact from the work force reductions.

Okay, and can you just quantify the benefit you have gotten from that in both first and second quarter of this year, then?

That we can't, but you see that in the leverage. So we have broken out all the one-time items for you, and I think you can get to that by just looking at the leverage that we achieved in the quarter.

Okay.

Okay.

And then on the internet business, is the seasonality of the eCommerce business similar to the retail stores, or are there any differences?

For third quarter?

Just for the whole year.

Yes, they are fairly similar. The only thing that we have to account for is sometimes it ends a little sooner, so like defined seasons, where Halloween would be a particular date, you see the peak of that a little bit earlier based on when the customer's need to have that product, the same with holiday.

Okay, thank you.

It appears we have time for one last question. We will take our last question from Kimberly Greenberger with CitiGroup. Please go ahead.

Sorry about that. I just had a quick follow-up question on the Back-to-School merchandise. I think you set Fall 1in the second week of July, we have had I guess four-plus weeks of selling so far on the new Fall stuff. Any thoughts on the customer response to the Fall products so far?

So Fall 1, we were reasonably satisfied with what we saw, we had targeted the assortments to be more wear-now and they definitely responded to that. They responded to the shorts, the short-sleeve tees, the dresses, that type of product, so we were relatively happy with what we saw there.

The categories that were a little bit slower for us were obviously the heavier weight, the heavier weight products. And in regards to Fall 2, we really just set that, and we are heading into the peak now, so I think it is a little too early to comment on that.

Great, thanks.

Now I would like to turn the program back to Chuck Crovitz for any further comments.

Just wanted to thank everybody for joining us today, and for your interest in the Company, and we will look forward to continuing to update you on our business on the initiatives, and the progress throughout the year. Thanks, again. Have a good day.

This does conclude today's teleconference. You may now disconnect your lines, and have a great day.