Children's Place Inc (PLCE) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to today's program. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q & A section. (Operator Instructions) Please note this call may be recorded.

It is now my pleasure to turn the conference over to Ms. Jane Singer. Please go ahead, ma'am.

Thank you, Wendy. Good morning everyone, and thank you for joining us today for a review of the The Children's Place Retail Stores, Inc. fourth-quarter and fiscal year 2008 financial results. Participating on this morning's call are Chuck Crovitz, interim Chief Executive Officer and Sue Riley, Executive Vice President, Finance and 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. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially. The Company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstance after the date hereof. Please also note that a reconciliation of certain non-GAAP financial measures discussed on this call is contained in this morning's press release, which can be found on our www.childrensplace.com web site. And now, I would like to turn the call over to Chuck for his opening remarks.

Thank you, Jane. Good morning, everyone. Thank you for joining us today. As you saw in this morning's press release, The Children's Place reported solid fourth-quarter and full-year 2008 financial results. We also undertook four significant actions during the year to strengthen our business and help ensure the long-term success of the Company. These include reducing inventory levels, identifying opportunities to reduce our cost structure, strengthening our balance sheet and cash flow, and exiting the Disney Store North America business.

To briefly review the highlights of our financial performance, our net sales were flat for the fourth quarter, and comparable store sales declined 5% due in large part to the negative impact of foreign exchange. Net sales increased 7% for the year with comparable store sales up 2% for the year. E-commerce sales increased an impressive 70% in the fourth quarter, an increase of 64% for the year. Excluding unusual and one-time items, income from continuing operations for the fourth quarter increased 10% to $21.3 million or $0.72 per share, an increase almost 60% to $66 million or $2.23 per share for the year. We also strengthened our balance sheet and cash position throughout the year. Sue will elaborate on this in a few minutes but it is note worthy that The Children's Place improved its year-end cash position by nearly $150 million net of debt during the fiscal 2008. We are proud of our performance, particularly in light of recent industry trends. According to MPD, spending on children's apparel in the US declined 3.2% in the fourth quarter of 2008 and declined 1.7% for the fiscal year.

Three shifts and shopping patterns appear to be happening in the market. Consumers are going to malls less frequently, they are making a greater proportion of purchases on sale merchandise rather than full price, and they are delaying purchases and buying much closer to need. We expect that all three factor will continue to impact the overall growth of the children's apparel market during 2009. The Children's Place expanded market share in 2008 from 3.6% to 3.9%. Nevertheless, it is clear that the global macroeconomic issues are impacting the Children's apparel market in significant ways. Our business is not immune to the external pressures and we are managing accordingly. We are carefully reviewing our promotional and marketing programs to ensure they are effective as possible in this environment and we have undertaken a number of initiatives to address shifts in consumer purchasing trends in order to drive top-line growth in 2009; however, we expect comparable store sales will remain challenged until the economy begins to improve.

Here are some examples of initiatives we have under way. In line with consumers shopping patterns, we have moved to a more wear-now strategy. For example, we kept winter merchandise in our stores during January and February 2009, because we expected that moms shopping closer to need will be looking for warm, replacement clothes if the cold weather persisted. It did, and the strategy worked to our advantage, as the sales of winter products helped drive volume during the months of January and February. From a marketing perspective, we are focused on increasing the efficiency of our marketing programs and driving traffic. We are continuing our targeted direct mail efforts which have been effective efforts in driving sales and we have reduced spending in some of our print publications this year as we increase our online marketing and email campaigns, as well as integrated marketing programs. In stores, we are continuing to offer two-for and three-for promotions that provide great value while encouraging multiple unit purchases.

Overall, we feel good about our spring merchandise and upcoming summer line, both spring and summer lines feature streamlined SKU counts so outfits can be more clearly displayed. We fine-tuned the architecture of the line to offer more good and better product that can live in the stores for 12 to 16 weeks. In this economy, our goal is to offer a focused assortment of value-priced merchandise day in and day out while continuing to offer a selection of unique fashion pieces at somewhat higher prices to enhance a special outfit. In-store inventory levels will be slightly lower in 2009. Operationally, we have improved our inventory flow strategy to stores. Smaller initial shipments and more frequent replenishment help us to get the right product to the right stores at the right time.

In terms of our free sales and ending sales growth drivers for 2009, we believe that our online business has significant additional growth opportunity. The relocation of our e-commerce fulfillment operation to our southern distribution center in Atlanta in June 2009 will provide additional capacity and lower the overall costs of fulfillment. And we are continuing to invest in systems to ensure that our infrastructure and platform have adequate capacity to support current and future growth strategies and to add new features and functionality to assist customers shopping our e-commerce site.

In terms of new stores, we have planned to increase our fleet by a net of 30 stores in 2009. Longer term, we believe the chain can grow from 917 stores to at least 1100 stores in the US and Canada. Through value engineering we have lowered the buildout cost for our new stores. In addition to saving money, this lower cost format gives us more options in terms of the types of locations and markets where we can open and possibly operate new stores. And finally a disciplined focus on expenses and cost management is becoming an integral part of our culture. During the first quarter of 2009, we implemented several cost control initiatives which are expected to result in approximately $20 million of annualized savings. This $20 million in annualized savings is on top of the $12 million in costs that we took out of our shared services department in 2008. We continually look for additional opportunities to reduce spending and increase efficiencies across the organization. For example, we announced today that we are relocating to a new headquarters building in the fall of 2009. With this transaction, we are consolidating five local offices into one. This will result in positive cash generation beginning in late 2009.

We continue to believe the Company is well positioned in this economic environment with our high-quality, trend-right fashion and value pricing, and longer term, we are fully committed to restoring the Company to its historical levels of profitability once the economy returns to a more stable footing. With that, let me turn the call over to Sue, who will review the financials.

Thank you, Chuck, and good morning, everyone. Most of my discussion today will focus on continuing operations of The Children's Place business only. As previously disclosed, we have classified the Disney Store business as a discontinued operation, in accordance with generally accepted accounting principles, given our decision to exit that business last year. Net sales from The Children's Place business for the fourth quarter ended January 31, 2009 were $441.5 million, slightly below last year's fourth quarter net sales of $443.3 million. We had a 5% decline in comparable store sales during the fourth quarter of 2008 on top of a 7% increase last year. The decline was the result of a 4% decline in transactions, consistent with the 4% decline in mall traffic, a 1% decline in average transaction size. This decline was largely offset by strong e-commerce sales which increased 70% for the quarter and growth in our store base.

At the end of fiscal 2008, our store count was 917 compared to 904 stores at the end of 2007. During the quarter, sales were negatively impacted with the decline of the value of the Canadian dollar relative to the US dollar. The currency swing negatively impacted top-line sales by approximately $12 million compared to the fourth quarter of 2007. Foreign exchange negatively impacted our comparable store sale by approximately three percentage points. In constant currency, the fourth quarter comparable store sales declined 2%. Gross profit dollars declined 1% to $175.8 million. Gross margin decreased 40 basis points to 39.8% from 40.2% in the fourth quarter of fiscal 2007. The decrease is a result of lower IMU, higher shrink, a negative impact from foreign exchange, and slight deleverage of our distribution and occupancy, which were largely offset by fewer markdowns during the quarter. We expect continued pressure on our gross margin during the first half of 2009 for several reasons. A lower IMU due to cost pressures in Asia at the time that we purchased our spring and summer inventory.

The negative impact of foreign exchange which we expect will continue to affect our business through the first half of the year or possibly longer depending on the Canadian dollar, and given the difficult economy, we believe it is unlikely that we will be able to further reduce markdowns. So we do not expect to have the favorable markdown offset that we had in 2008. For fiscal year 2009, we expect gross margin to decline approximately 100 to 150 basis points, with most of that decline occurring in the first half of the year. With the cost pressures we are currently experiencing, we now expect gross margin for the first quarter of 2009 to erode somewhat further from the fourth quarter of 2008. SG&A as a percentage of sales was 27.1% in the fourth quarter 2008, representing 250 basis points of leverage.

I want to point out several one-time items that impacted our results during the fourth quarters of 2008 and 2007. This year, we had one-time benefits to SG&A from the recovery of accrued legal fees and residual income from transition services which we provided to Disney as we exited that business, amounting to approximately $900,000. Last year, we had one-time expenses in SG&A for professional and legal fees related to the Company's stock option investigation, related restatements, and the review of strategic alternatives. Stock option totaling expense and executive severance expense. The net impact on SG&A was $6.1 million. Excluding these items, which we consider to be unusual or one-time in nature from both periods, SG&A as a percentage of sales for the fourth quarter of 2008 was 27.3%, representing approximately 90 basis points of leverage due to better management of store expenses resulting in approximately 190 basis points of leverage. This was partially offset by higher accruals for management bonuses and an increased charge for equity awards in the fourth quarter of 2008, resulting from the Company's significantly improved performance this year versus last year, which accounted for approximately 80 basis points of deleverage and slightly higher IT cost which resulted in approximately 20 basis points of deleverage.

In fiscal 2009, we expect to hold SG&A dollar spending flat, excluding one-time items as a result of Company-wide cost savings initiatives in 2008 and 2009. As Chuck mentioned earlier, during the first quarter of 2009, we implemented cost control initiatives which are expected to result in approximately $20 million pretax in annualized savings. Approximately half of the savings will be in store-related expenses. The other half are cost savings initiatives at Corporate headquarters. We will get some benefit to the SG&A line in the first half of the year, and expect to be up to the full $5 million quarterly run rate by the third quarter of 2009.

Moving down the P&L, we had asset impairment charges of $5.4 million during the fourth quarter of this year, compared to $15 million last year. Most of the impairment charges in both years are related to items which we consider to be one-time in nature. In the fourth quarter of 2008, we had a one-time asset impairment charge for underperforming stores in our 2007 fleet. In 2007, we incurred a large impairment charge related to our decision not to move forward with the building the Company planned to use as a new Corporate headquarters. Excluding these one-time items, the impairment charge for the fourth quarter of 2008 is approximately $500,000, compared to $200,000 last year. Depreciation and amortization expense as a percentage of sales during the fourth quarter was 4.1% similar to last year. Income from continuing operation before interest and tax more than quadrupled to $32.5 million compared to $7.9 million in the fourth quarter of last year. Net interest expense was $2.1 million this quarter, compared to $1 million in 2007 as a result of the term loan we closed in the third quarter 2008.

Our effective tax rate for the quarter was 23%, as we benefited from a one-time favorable resolution of a state tax issue. In the fourth quarter of 2007, our effective tax rate was significantly higher, as the Company incurred tax provisions related to our decision to repatriate funds from overseas and evaluation allowance against the deferred tax assets of a foreign subsidiary. We expect our expected tax rate before 2009 before any one-time items to be approximately 42%. Income from continuing operations net of tax was $23 .3 million or $0.79 per diluted share, compared to a loss of $4.2 million or $0.15 per share in the fourth quarter of last year. Our diluted share count for the quarter was $29.6 million. Excluding the one-time items from both periods, fourth quarter, adjusted income from continuing operations net of tax increased 10% to $21.3 million or $0.72 per share, compared to $19.4 million or $0.67 per share in the fourth -- in the prior year quarter. Foreign exchange negatively impacted our fourth-quarter 2008 earnings per share by approximately $0.11 per diluted share. GAAP net income for the quarter, including the impact of discontinued operation, was $38.8 million or $1.31 per share compared to a loss of $58.5 million or $2.01 per share last year.

To briefly touch on the year, as Chuck mentioned, fiscal 2008 was a good year. Income from continuing operations net of tax were $73.9 million or $2.50 per diluted share, compared to $10 million or $0.34 per diluted share of the previous year. Excluding one-time items from both years, income from continuing operations after tax increased 59% to $66 million or $2.23 per deluded share, compared to $41.4 million or $1.40 per share in 2007. Foreign exchange negatively impacted our fiscal 2008 earnings per share by approximately $0.05 per diluted share. As I mentioned earlier, we anticipate the Company's financial results will continue to be negatively impacted by foreign exchange through the first half of 2009 and possibly longer, depending on the Canadian dollar.

Moving on to the balance sheet, our quarter-ending cash balance was $226.2 million, compared to $81.6 million last year. We have $85 million of borrowings from our term loan this year compared to borrowings of $89 million on our credit facility last year. Our cash position for the quarter reflects our strong business performance, as well as the funds received from the term loan. The Company continues to have some cash costs associated with the Disney Store exit, which we continue to expect to come in at the low end of the estimated range. At the end of the fourth quarter, we improved our cash position by nearly $150 million net of debt versus 2007. During the first quarter of 2009, we are required to prepay approximately $30 million of the term loan. The provisions of the loan include a mandatory principal repayment based on excess cash flow regulation whereby the Company is required to prepay a portion of this loan without penalty.

Excluding merchandise in transit in both years, inventory at cost at the end of the quarter was down 1% in total or 4% per square foot. Total inventory, including merchandise in transit at the end of the fourth quarter, was up 7% in total or 4% per square foot. Year end inventory levels were impacted by higher in transit inventory, primarily as a result of the earlier Chinese New Year in 2009. Carry-over inventory was 7.5% of total inventory at the end of the fourth quarter compared to 6.5% last year. Consistent with our strategy to keep more wear-now merchandise in the stores longer. We expect to end the first quarter of 2009 with total inventory per square foot flat to up slightly due to an additional inventory investment to support our e-commerce growth. In-store inventory is expected to be down slightly in 2009. During the fourth quarter we opened four stores and closed seven. During the fiscal year 2008, we opened 26 stores and closed 13. At the end of fiscal 2008, we operated 917 stores with a total of approximately 4.4 million square feet. During 2009, we plan to increase our net store count by approximately 30 stores. Turning to Cap Ex, 2008 capital expenditure totaled $52 million, somewhere below our previous estimate.

Given the increasingly difficult economic climate during the second half of 2008, we were proactive in conservatively managing our capital spending. We expect 2009 capital expenditures will be higher, in the range of $75 million to $80 million, including approximately $17 million of Cap Ex associated with the buildout of our new Corporate headquarters. Approximately half of the 2009 Cap Ex will be used for new store openings, remodels and maintenance and the remainder for IT projects and the distribution centers. In summary, the The Children's Place had solid operating results during the fourth quarter and fiscal 2008. We are pleased to be entering 2009 with a strong balance sheet and cash position, particularly given the uncertainty of the economic environment. Thanks, and now I will turn the call back over to Chuck.

Thanks, Sue. Operator, we would like to open the call for questions this morning.

(Operator Instructions) And we will take our first question from Kimberly Greenberger from Citigroup. Your line is open.

Great, thank you. Chuck, I was hoping you could expand on your comments about improving inventory flow to the stores. If you could just explain a little bit more what that's about. And when do you expect that initiative to be fully implemented? That would be helpful. And then I just wanted to double check, did I hear you right, an $0.11 impact from FX in the fourth quarter? If you could clarify that, that would be helpful.

Okay, thanks, Kimberly. In terms of the flow to the stores, what we are doing this year is trying to reduce the -- we set a new season. We reduced the initial close of store -- traditionally we did about 90% of flow to the stores of the new product initially and replenished about 10%. At this point we are probably closer to 60%, 70% and replenishing the rest. What that helps us do is eases the workload on the store, first of all. You don't have so much merchandise to deal with, but most importantly, it allows us to flow the reserve merchandise to the stores that really need it, so we are not out of stock at one store and marking down at another store on the same merchandise. So that has been a big help to us operationally as well as a markdown standpoint. We started that Fall of last year, and every quarter we have been slightly improving it. I would say -- I am not sure we can ever say we will be fully implemented, because we keep finding other ways to fine tune this, but we have made some significant strides on it in Spring and we have additional plans for Fall of this year. I will let Sue answer that.

Yes, Kimberly, you heard that correctly. There's an $0.11 cent negative foreign exchange impact from the Canadian dollar in the fourth quarter and it's $0.05 for the year.

Okay, Sue, any idea what the FX impact in Q1 and Q2 might possibly be or any sort of ranges?

It should be closer to the $0.11 than the $0.05, and that's because we saw decline of the Canadian dollar in the third quarter of 2008.

Okay. Each quarter $0.11. In each quarter, Q1--

Approximately, yes.

Roughly. Okay. Lastly, Chuck, the move of the direct business fulfillment center down to Alabama. Is -- are you going to be up and running down in Alabama in June? Or how does the transition work if you could just help us understand that, that would be great.

Yes, we will be up and running in June, and what we are doing is on the seasonal shift, we will be shipping the old season out of our current facility and the new season, the new facilities and we will transfer some of the remaining stuff out from our current facility down to -- as a cleanup once the shift has happened. But, yes, we will be up and running in June.

Great, thanks. Nice quarter and good luck for Spring.

Thank you.

We will take our next question from John Zolidis from Buckingham Research. Please go ahead.

Hi, good morning.

Hi, John.

Hi, John.

A question on the top-line performance. I was wondering if you could give us a little more of your personal impressions on how the business did during the fourth quarter given the kind of economic distress that was going on out there. You are only down 2% in constant currency, which stacks up pretty well relative to other areas of retail, but can you just talk -- do you think the product is doing well? Do you think that you are really benefiting from trade down from more higher, expensive brands? What are you hearing from your customers? How do you feel about your sustainability of that fourth-quarter top-line performance? Thank you.

Yes, I think that we -- as you mentioned, we were pleased with the fourth quarter in relative terms. I think we held up very well relative to competitors that were sort of at a higher price positioning than we did. I think the product was well accepted overall, but it was certainly not the level we would have hoped it to be, and you have a financial impact from that. We did throughout the year see some impact of trade down from higher income consumers coming in through them. The latest data we looked at there is a little less clear on those trends than it had been for most of the year. I do think that from a positioning standpoint, I feel really good about where we are. I think from a product standpoint, we feel the strategy we are putting in place and getting consumer acceptance, just in an overall weaker environment. Good overall performance, but the absolute performance level is not where we would like it to be. Anything you want to add?

I am seeing the same thing. Overall I would have to say the customers responded fairly well for what we gave them for the holiday time period. And we're continuing to watch and see how the spending habits continue into the first part of this year. We have seen some shifts. There is clearly more of a slowdown on the basic side of the business, but we will continue to watch it. It really looks like they are more likely to spend their money on fashion colors and items and maybe things that they don't have within their wardrobe and really just taking -- stretching their current wardrobes by just creating updated looks and outfits from what they are purchasing.

Thanks a lot for that color.

Next Margaret Whitfield from Sterne, Agee. Please go ahead.

Yes, good morning. A couple of questions. You mentioned you lowered your buildout cost. I wonder if you can quantify that. Does that allow to you open in smaller markets. I think you said that. Can you comment on the nature of the smaller markets. Also, e-commerce has been on fire. What percent of your sales is it at year end and what is the goal on that business as a percent of sales. Finally if you can comment on the Easter shift impact on your business.

A lot of good questions. Thank you. In terms of the buildup cost, we significantly reduced our build out cost and started playing around with some new format. It is difficult for us to give guidance on that, because its so depends upon whether you are building a "A" mall, a "B" mall, a strip center, et cetera. And one big store can really throw that off when you are building 30, 40 stores a year, but I am really pleased with the level we brought down. We brought it down significantly, and you're right, it does allow us it to operate more profitably in many more locations than we previously had. We are doing some experiments in some smaller markets-- I think we define a smaller market 100,000 to 200,000 population, and it is way too soon to say how -- what we are doing there, we have only opened a couple of those stores with several weeks of sales we have seen. We are very pleased. But we don't base a strategy on two weeks' worth of results.

In terms of e-com, e-com this year was about 5% of sales. I don't think we sort of publicly stated our goal, but I think you can look at the penetration percents across the industry, and what we have observed is that teen retailers and people with direct mail backgrounds tend to be up in the mid- to high-teens, and we are certainly shooting to get to where we are closer to that neighborhood over the next period of time -- next several years. And we feel really good about that e-com business and are investing heavily in it. Lastly, in terms of the Easter shift. Around here, we talk about Marpl, which is March and April, because it is so tough to see what happens and we have lots of theories and we can convince ourselves it helps March or hurts March, but very difficult to predict. We tend to manage this thing by the quarter, and whether Easter hits in the end of March or the beginning of April, it doesn't really affect the way we are going to manage because we do tend to look at things on a quarterly basis. Rich, I don't know If you want to add anything.

I agree with what you are saying.

If they are buying closer to need, that might shift more into April, right?

That certainly could.

Okay. Thank you, best of luck.

Thank you.

Our next question comes from Brian Tunick from JPMorgan. Please go ahead.

Great, it is [Anna Andrea] for Brian. On SG&A, I was hoping to clarify. Sue, did you say we should expect SG&A to be flat for the full year with most of the improvement coming in the back half?

That's correct. And that is flat in absolute dollars year on year, not withstanding the fact that we are opening new stores.

Okay. Got you.. I know you mentioned half of that $20 million should be coming from stores and half from the home office, but I was hoping you could talk about more specifically the buckets of opportunity and maybe talk about the store payroll, marketing and processes.

You want me to take that?

Yes.

We are not going to comment specifically on store payroll, but what we did at the store level, is we are tightening up on certain store expenses. For example, we are looking at out -- whether or not we really need to be providing boxes to customers who are shopping in outlets, so there is a store expense savings there. We looked at levels within our stores and we actually eliminated a level within our -- a level of management within our stores, which is resulting in savings. On the marketing side, we are cutting back the longer-term brand building marketing. We absolutely want to do that. But In this environment we are scaling that back somewhat and we are continuing to invest in our highly focused marketing, the mag lots that really do generate incremental top-line sales. At Corporate headquarters, we did have to eliminate some positions which we have already announced. The employees who are impact ready aware of that at this point in time and we expect to see the savings that we expect to see in the early part of the year. Chuck or anybody else? Anything would you add to that?

No.

That I left out?

Various different programs. Just ways to reduce costs on medical insurance, cars, things of that nature. Just as an across-the-board focus on cost containment.

Okay. That is helpful. I guess as we look look out to 2009, sounds like there are further opportunities for SG&A cuts. Is there a SG&A rate as percent of sales that you guys think as an appropriate goal down the road?

What we have said is as we look at our longer range plan and we project out a rate of sales growth, we would expect SG&A to grow at half that rate. That's how we are looking at SG&A on a longer-term basis.

Got you. Thanks so much.

Thank you.

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

Thank you, good morning, everyone and congratulations on a great quarter.

Thanks, Betty.

I was wondering Sue, if you could comment just to clarify if I heard you correctly that we are going to have to expect margin pressure in 2009 with primarily a lot of that pressure coming in the first half because of product cost.

That's correct. And you did hear me correctly. If you look at our product cycle, we are out buying a good nine months prior to any given selling season. If you consider what was going on about nine months ago, there was an awful lot of factory consolidation in Asia. That is actually impacting--it had somewhat of an impact on our fourth quarter, and we expect that to continue into the first and second quarters of next year. And then to moderate -- we have bought back to school and we are seeing a moderation in those costs that are largely driven from the US retail environment where demand is in fact down. We do expect gross margin pressure in the first and second quarters and thats compounded by the weakness of the Canadian dollar. As I said earlier the Canadian dollar took a precipitous decline in the third quarter. We have two full quarters of the full impact of the Canadian dollar weakness, and we are just--in this environment, where the consumers seem to be buying on promotion. We are just not counting on the level of markdown savings that we have seen throughout 2008. Richard and Dina are the team are managing markdowns, but at this point in time we are being cautious on the gross margins for first and second quarters

That sounds fair enough, Sue Is it possible then, given the product costs for the Fall and perhaps even the upcoming holiday season, that we could see gross margin improve in the back half?

I would say could you see gross margin in the back half. Because, again, we are not sure how long this economy is going to stay where -- how long we are going to be this recession. So I think that you can see gross margin improve as it pertains to IMU. I think we will see IMU improvement. The impact of the Canadian dollar, again, depending on where Canada trades, the Canadian dollar trades relative to the US--I don't expect to see a huge negative impact; however, the markdown issue. The longer we stay in a recession the more consumers we think will wait to buy products on markdowns and the higher we will see a markdown rate that could mitigate the positive impact from those two events.

Okay. Thank you for that color. And then I was also wondering, will we be able to see additional SG&A savings after the consolidation of the, I think, five different office locations that will happen later half of this year?

You won't see P&L savings on that. It is really--where you see -- and the reason for that is we had to take a charge last year for lease expense associated with that facility that we were going to use as the Corporate headquarters, but there is a cash savings from this consolidation, so you won't see it in SG&A, but you will see it in the cash and that is about $3 million a year of cash savings.

Okay. Thank you so much, Sue, and best of luck for Spring.

Thank you.

Thank you.

Our next question comes from Janet Kloppenburg from JJK Research. Your line is open.

Good morning, everyone. Congratulations.

Thanks, Janet.

A couple of questions, Sue. On the product costs. We are hearing that for the back half, some companies are benefiting from some price advantage now going on. I wonder if could you comment about that or even the outlook for the first half of fiscal '10. We are also hearing about -- in some cases a few price points at the -- let's say the good level, fewer at the better and best levels. If could you talk a little bit about that. That will help as well. And then just to clarify on the SG&A. I know that there is $20 million in savings a bit in the first half and a $5 million level reduction in each of the third and the fourth, but I am not sure that we should expect $20 million induction in entirety this year. If you could comment on those items, I would appreciate it. Thank you so much.

Let me take the first and third question and I am going to have to ask that you repeat the question with regard to the price points. We couldn't catch the whole question. So product costs? Yes, we did see an increase in product costs which is impacting the first and second quarters and we do expect that to moderate for Q3 where we have already gone out and done the Fall buy.

The question there is are you getting advantages in the second half. In other words, could product costs in the second half be down versus last year in the second half?

The answer is yes.

Okay. Thank you.

And then with regard to SG&A, you are correct, you won't see the full $20 million this year. What you will see is the quarterly rate will be $5 million. And we expect to get to that quarterly rate generating the savings by the third quarter so you should see about $10 million in each of third and fourth quarters and a couple million dollars in each the first and second quarters.

Okay. I didn't mean to confuse you on the price point. The strategy is good, better, best. My question is in this type of environment, are you skewing your price points more to the good or the value end and less at the best end, and if you could give us an idea of what tax rate you want to be using for this year. I think you might have said 32%, but anyway, thanks.

In the back half we have shifted -- we shifted product out of the best category and have shifted it both into good and better.

Okay. So that could put pressure the average retail on the back half of the year?

A little bit, but not -- I wouldn't really say that. I think we really have adjusted the mix appropriately to support the AUR that we need to have.

Okay. Great, thanks.

And then, Janet, yes, 42% is a good tax rate to use.

The suggested $0.72 on the quarter that you just reported. Would we use that tax rate as well?

Yes, as an ongoing tax rate, yes. A little lower than that should get you very close.

Good luck to you all. Thank you.

Next we will go to [Marney Shapiro] from The Retail Tracker.

Hey, guys. Congratulations.

thank you, Marney.

First of all, absolutely no boxes to the outlet shoppers. Let them buy it for a couple of bucks and make money.

Polite.

Well, everybody else is charging for boxes these days. Why shouldn't you at the outlets. I was curious a little bit about the outlets. The stores at the mall look very clean and I know for a while you were transferring goods to the outlets to clean up some excess inventory if I recall. I was curious if you are still doing that or have you really been able to clean through that channel. What I am seeing in the outlets is made for the outlets. You talk a little bit about how the outlet business was in the fourth quarter, and the store openings net for next year, can you just -- a little more detail, how many openings, how many closings and how many of those are outlets.

Let's let Richard answer the first question about outlet strategy and Sue can answer the store counts.

In terms of outlets, it has always been our strategy for outlets to get their product from really three sources. First, they sell full-price products, which is exactly the same as what we have in our full-price stores and this is represented about half of the volume we have from our -- we don't make separate product, because being value, if we have $5 or $6 T-shirt, it is hard to come out with a outlet version that is cheaper than that and it works. Second thing is obviously, outlets generate their own markdowns through the product -- the full-price product we send them, but we have always used outlets as a clearance vehicle for our full-price store than it was transferred. During '07 when we had too much inventory, the level of transfers into those stores was way above what is optimal for us. The strategy has changed and we continue to move goods into the outlets, just the extent of it has been coming down. Right now as you go into our stores-- we talked about crossing the season with a little bit more carryover inventory and part of the strategy is obtaining wear-now. Most of the inventory is now sitting in the office (inaudible) or left in the full-price stores. If you go into the outlets, you will see a higher proportion of Winter product in the office than would you have last year.

And then, Marney, to answer the second part of your question, I would use about 35 to 37 new stores with about five to seven closures for the net of 30. We just don't disclose the type of stores that we are opening before we actually do. So I can't tell you the number of outlets versus full price.

Okay.

Sorry.

Fair enough. Good luck to you for the rest of the season.

Thank you.

Thank you.

Our next question comes from Linda Tsai from MKM Partners. Please go ahead.

Yes, hi. In terms of buying closer to need from what you are seeing from your customers, you kept more Winter inventory in January and February. Does this change how you flow inventory in the Fall, like conversely, will you keep more lightweight clothing in your stores longer heading into Fall?

Do you want to take that?

I will let Dina take that.

We did make some product adjustments to have more short sleeves and shorts available in July which would then live on the floor until August. With the flow strategy, in terms of keep -- not doing as many transfers, there would definitely be more of that Summer product in the stores through August and probably into September of this year.

Would that impact your AUR at all?

We don't believe so because what we do is look at the total mix and we have been protecting their AURs, and, again, even though we are letting some products (inaudible)-- we don't swing the pendulum all the way across. It is a balance. So there still is going to be obviously a long sleeve product in the store, but just a slightly higher percentage of short sleeve.

Just another follow-up for Dina. In terms of Chuck's comments saying that basic sales were a little lackluster. Are you shifting the percentage of fashion to basics as you move through 2009?

Yes, we are actually monitoring our basic business slightly different than we have in the past and we are making adjustments to categories like the denim graphic tees and some of the basic chino program to make sure we are not over-investing in that.

So historically what would you say your percentage was of basics to fashion. What might it look like this year?

I think if -- if I can combined all of those on an annual basis probably 20% to 25% and now I would say we are looking -- based on what we can shift maybe closer to 15% to 20%.

So that would be 20% to 25%?

Originally.

For fashion or basics.

For basics.

For basics, all right. Great, thank you and good luck.

Thank you.

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

Good morning, everyone.

Hi, Dana.

Hi. Can you talk a little bit about the gross margin and how the sourcing impact benefits come to fruition in light of the promotional environment. And how you see gross margin trending throughout the year. Is there differences in terms of what you expect the pricing environment to be? And then as you think about Canada. Any update on Canada and how that business is doing compared to the US and the foreign currency impact. Thank you.

Okay. First part of your question really is more about the retail aspects of the gross margin in this environment.

Right.

Well, -- why don't you take that. Well -- maybe before Dina gets a start on that. I think that we are not really trying to change our retail strategy in general. We have strong value. We are going to keep having that value message. Obviously we remain flexible. If sales slow down and we see an opportunity to go after a more business, we are going to react in terms of retail prices. So I don't see a big change other than our continuing to be flexible and opportunistic about that. In terms of Canada --

This terms of Canada we are seeing some -- the comps of February were stronger than what they were the prior year. We are seeing some shift there. I think when we look at this, Canada sort of had -- entered based on the currency almost equalling the dollar at some point last year. Business was tougher for them then, and it looks like now that the dollar-- the currency rate has changed we are seeing Canada come back.

Importantly, Dana, our Canadian business has a stronger margin structure, not withstanding the decline in the dollar. The Canadian business has a stronger margin structure than our US business. Our business is price higher in Canada and so the gross margin, notwithstanding the fact you are buying product with a weakened Canadian dollar and our operating margin are in fact stronger than the US.

Got it. Thank you.

We have time for one more question today. We will take our final question from Tom Filandro from SIG. Your line is open.

Thank you. I would also like to add my congratulations, nice job.

Thank you.

I would like to highlight for a second here, in light of the recent concerns about product safety issues. Can you tell just update us on where TCP stands on that front and what--when it relates to testing, is that increasing part of your cost structure with the safety issues. And I have a follow-up

The consumer product safety has been a big issue of late. I think one of the benefits we got out of being -- owning the Disney Stores that we really have to deal with lead in toys, and this really put us well ahead of the game in terms of developing protocols around these regulatory issues. So back in 2007 we had some -- we put in fairly rigorous testing policies and garments to make sure we met all of these Federal standards. The Consumer Product Safety Improvement Act that was -- that has been discussed here, passed, but when it was first proposed in Congress, our people started really monitoring those discussions and began getting prepared for these new regulations.

And what happened there is in February, actually February 8th of this year, the acceptable level of lead dropped down to about 600 parts per million. In August, it is going to go down to 300 parts per million. So we had a couple of areas of concern. One of them was the rhinestones. We use a lot of rhinestones on our garments, but as a result of trying to stay ahead of this game, we are sure that the level of lead in our rhinestones we have in our product even holiday of 2008 was already at the August 2009 standards. So I think we are in good shape there. The other issue is [phalates]. which is a plastic softener that really impacts our rain gear and some of the grippers we put on the bottom of our pajamas and our socks. And, again, we just -- we saw those things coming, and we made adjustments early, and got that -- got our holiday product to be compliant with that. In general, sourcing is one of our core competencies. We tend to just stay up on these things, and I think our team has done a very good job of staying ahead of it.

Chuck, from a cost standpoint this is not a huge issue because you have been doing it for a long time.

We have been doing it for a long time. No question this does increase cost. We ask our vendors to do a lot of this for us. We do actually some testing for our vendors at a charge for them, but ultimately that raises everybody's cost.

Sorry. My second question really relates to the store count moving. I think you said, Chuck from 917 to 1100. I was wondering if you could give us the split between US and Canada long term. And given the environment, I would suspect that maybe you have opportunity to accelerate and get better deals. Is that a possibility to you guys, and are you thinking about beyond e-commerce new concept, new category growth for the future?

Yes. Let me take these. In terms of the 1100 store count I mentioned. I want to be clear. I think we can get to at least 1100 stores over the next several years. I am not trying to put that as an upper limit on the chain size, but I do think that we easily have the opportunity over the next several years. In terms of Canada, we really don't talk about the split there, but we do see Canada, as Sue mentioned, as one of our most profitable businesses and it is difficult to find property in Canada than it is in the United States, so it is a little slower than we would like it to be. Help me with the last part of your question about the new opportunities. A little bit more about what --

I was wondering -- I guess on two fronts. The acceleration of store openings, given the environment, an opportunity to get more aggressive early, and the second piece of this, looking even further out into the future. E-commerce is a current growth task. Are you thinking about new concept growth, new classification growth, anything beyond what your core competency currently is?

In terms of accelerating store growth, given this environment, I think we are open to that and we are looking at that, but we are not -- we haven't made any commitment on that at this point. But, you are right, this is a good environment in which to grow and we are doing a lot of experiments as I mentioned earlier in terms of these new formats and new locations. So we are being flexible on that. In terms of--yes, you are right. We can use e-commerce to experiment with new kinds of category and new products, and we are looking at those opportunities right now. We are not in a position to kind of announce that.

Thank you very much. And best of luck to all of you. Thank you.

Thanks, Tom.

Thank you. I guess that concludes our call today. Thank you all for your interest in the Company.

Bye, everyone.

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