Children's Place Inc (PLCE) 2009 Q1 法說會逐字稿

Good day, and welcome to today's program. (Operator Instructions).

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

Thank you, Erin. Good morning, everyone, and thank you for joining us today for a review of The Children's Place Retail Stores, Inc., first quarter 2009 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 circumstances 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 childrens.com website. And now I will turn the call over to Chuck for his opening remarks.

Thank you, Jane. Good morning, everyone, and thank you for joining us today. As you read in this morning's press release, The Children's Place continued to deliver sales and earnings growth during the first quarter of 2009. This solid performance in spite of the recessionary economy is largely due to the actions we undertook during the past year to strengthen our business and put the Company on path for future growth. These actions included reducing inventory levels, reducing 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 first quarter performance, net sales increased slightly to $401.9 million. Comparable retail sales increased 1%, and income from continuing operations -- excluding unusual and one-time items -- increased 5% to 21.8 million, or $0.74 per share, for the first quarter of 2009, compared to $0.71 per share last year. We are pleased that the Company was able to continue growing sales during this quarter, particularly given the negative industry trends in market volatility. April sales came in stronger than planned, accounting for 34% of the first quarter sales, which is one of the highest proportions ever for the month of April. We believe the shift in the Easter timing accounted for much of the strength, as did some warmer weather towards the end of the month. Overall, we were pleased with the sales of both our spring and summer lines throughout the month.

As a result of the strong April sales, inventory levels at the end of the quarter are slightly lower than originally planned, as Sue will review in a few minutes. We are comfortable with the current level of inventory, particularly given our improved inventory flow strategy, as we are now better able to react to volatile market conditions and quickly replenish merchandise to stores based on sales volume. To briefly touch on our three sales and earnings growth drivers for 2009, first, we are continuing to invest in our eCommerce business to drive growth. Online sales increased 42% during the first quarter of 2009, on top of the 70% increase last year.

eCommerce sales accounted for 6% of total sales for the quarter, and we anticipate continued growth in this channel, as moms who are pressed for time really appreciate the convenience afforded by shopping online. As you know, we are relocating the eCommerce fulfillment operation to our southeastern distribution center in Fort Payne, Alabama, this month, which will provide additional capacity and lower the overall cost of fulfillment. We have been carefully planning this move since our announcement in January, and we expect that the transition will be executed with no disruption to the business.

Second, in terms of new stores, we are on plan to open approximately 35 new stores in 2009, which will increase our fleet by a net of 30 stores for the year. Furthermore, we are very pleased with the early results of our [Tech 2] prototype, our new value-engineered format that incorporates the best elements of our Apple-Maple and Technocolor stores. The new Tech 2 stores look great and are engineered to withstand higher traffic. Importantly, the buildout cost per square foot of the Tech 2 prototype are coming in well below the stores we've built over the last two years, which gives greater flexibility in the types of locations and markets where we can operate profitably. We plan to open several more Tech 2 stores over the next few months, and will keep you apprised of our progress. And finally, we are ahead of schedule in realizing the planned SG&A expense reductions and cost savings that we announced in February. Sue will provide additional details about the significant progress being made across the organization to increase efficiencies and lower spending.

Looking ahead, we are up against some difficult comparisons during the second quarter. Last year, comp sales increased 10% during the second quarter amidst a much stronger economy. In addition, we expect that a negative impact of foreign exchange this year will continue to affect our financial results during the second and third quarters. Also in terms of timing, several states have moved their back-to-school tax-free events one week later, from the first to the second weekend in August this year; so those sales will be reflected in our August and third quarter results instead of the second quarter. For these reasons, we don't expect 2009 results to meet the stellar performance achieved last summer, which represented the best second quarter in the Company's history. That said, we believe our summer merchandise offering is highly compelling, particularly given the current environment.

Our colorful and trend-right fashion, combined with great value pricing -- including many two-for and three-for offers -- is resonating well with customers. From a marketing perspective, we are focused on promoting the tremendous value we offer customers, highlighting key price points in order to drive sales and conversion. So while we continue to experience significant volatility in our business, we are pleased with our first quarter results, and we continue to believe the Company is well-positioned to achieve our longer-term growth goals. Before I turn to Sue for a review of operations, I would like to briefly comment on the Company's upcoming 2009 Annual Meeting of Stockholders. As you are probably aware, The Children's Place is a nine-member board of directors, which includes former Chief Executive Officer and Chairman, Ezra Dabah, who resigned as CEO of the Company in 2007, and Stanley Silverstein, Mr. Dabah's father-in-law.

The Company has nominated its slate of three directors and has been notified of Mr. Dabah's intent to nominate three individuals to serve as directors of the nine-member board. Mr. Dabah's nominees are not endorsed by the board of The Childrens Place. The Company has filed its preliminary proxy materials with the Securities and Exchange Commission in connection with the 2009 annual meeting. While we will not be answering any questions this morning regarding the proxy contest, as we are in an SEC review period, the Company's highly-qualified and independent nominees -- all of whom currently sit on the Company's board -- have extensive industry experience and outstanding corporate governance credentials.

I can assure you that our management team is as focused and determined as ever to deliver continuing value and growth for stockholders; and we believe the Company's nominees -- Sally Frame Kasaks, Malcolm Elvey, Norman Matthews -- have been and will continue to be instrumental in continuing this positive momentum. With that, let me turn the call over to Sue, who will review the financials.

Thank you, Chuck, and good morning, everyone. My discussion today will focus on continuing operations of The Children's Place business. As previously disclosed, we have classified Disney Store business as discontinued operations in accordance with Generally Accepted Accounting Principles, given our decision to exit that business last year. Net sales for The Children's Place for the first quarter ended May 2, 2009 were $401.9 million, slightly above last year's first quarter net sales of $400.2 million.

During the first quarter, we had a 1% increase in comparable store -- in comparable retail sales, which include online sales, on top of a 6% increase last year. The increase in comp sales was the result of a 1% increase in average transaction size. The number of transactions remained flat. We ended the first quarter with a total of 922 stores this year compared to 906 stores last year. Net sales for the quarter continued to be negatively impacted by the decline in the value of the Canadian dollar relative to the US dollar. The currency swing negatively impacted topline sales by approximately $9 million compared to the first quarter of 2008. Gross profit dollars declined 3% to $166.5 million, and gross margin decreased 140 basis points to 41.4% compared to 42.8% in the first quarter of fiscal 2008.

On our last conference call, we mentioned that we expected gross margin for the first half of 2009 to be significantly lower than the first half of 2008 for several reasons, including a lower IMU, higher shrink accrual, the negative impact of foreign exchange and slight deleverage of distribution and occupancy. We were pleased that the first quarter margin actually came in somewhat higher than anticipated due to strong topline sales and some favorability in freight expense. Going forward, we expect gross margin during the second quarter of 2009 will continue to be somewhat lower than last year, due to a continuation of the factors I just mentioned. However, during the second half of 2009, we expect IMU to rebound as the back-to-school and holiday 2009 buys were made during a time period when global retail demand was particularly weak, which resulted in more favorable pricing.

It is also worth noting that the precipitous decline in the Canadian currency began in late September 2008, so we will anniversary that decline towards the end of the third quarter, assuming there is no major change in the Canadian dollar/US dollar exchange rate. As a result, we now expect gross margin for fiscal 2009 will be comparable to last year. Declines during the first half of 2009 are expected to be largely offset by gains in the second half, primarily during the fourth quarter. Selling, general and administrative expense as a percentage of sales was 27.8% in the first quarter of 2009, representing 200 basis points of leverage, including one-time items associated with restructuring costs this year and professional and legal fees related to the Company's review of strategic alternatives last year.

Excluding those items which we deemed to be unusual or one-time in nature from both periods, SG&A as a percentage of sales for the first quarter 2009 was 27.2%, representing 210 basis points of leverage, as the entire Company rallied behind cost savings identified in February to ensure that we realized them as quickly as possible. Contributing to the leverage were: Better management of store expenses primarily related to supplies, repairs and maintenance; lower marketing expense, as we reduced the number of print advertising insertions and pursued more integrated and online marketing programs; lower payroll expense and bonus accrual; and some other miscellaneous items that were partially offset by equity compensation and higher pre-opening expenses as more new stores were opened in the first quarter this year compared to last year. With the higher than expected level of SG&A savings realized in the first quarter, we now expect SG&A dollar spending for fiscal 2009 will be somewhat below last year.

Moving down the P&L, we had an asset impairment charge of $1.1 million during the first quarter of 2009 for underperforming stores, including one store that had been open for less than two years. Depreciation and amortization expense as percentage of sales during the first quarter was 4.4%, similar to last year. Income from continuing operations before interest and tax increased 6% during the first quarter of 2009 to $36 million. Net interest expense was $3.3 million this quarter compared to $0.5 million in 2008 as a result of the $85 million term loan which we closed during the second quarter of 2008. We prepaid more than half of the loan -- $47 million -- without penalties during April as a result of our strong cash generation. Our effective tax rate for the quarter was 27%, due to a one-time tax benefit from the settlement of an IRS income tax audit. We expect our effective tax rate for 2009 before one-time items to be approximately 42%.

Income from continuing operations net of tax was $23.7 million or $0.80 per diluted share in the first quarter of 2009, compared to income of $19.4 million or $0.66 per share in the first quarter of last year. Our diluted share count for the quarter was $29.6 million. Excluding the one-time items from both periods, first quarter adjusted income from continuing operations net of tax increased 5% to $21.8 million or $0.74 per diluted share, compared to $20.7 million or $0.71 per diluted share last year. Foreign exchange negatively impacted our first quarter 2009 EPS by approximately $0.08 per share. GAAP net income for the first quarter, including the impact of discontinued operations, was $23.5 million or $0.79 per share, compared to net income of $19.5 million or $0.67 per share last year.

Moving on to the balance sheet, our quarter ending cash balance was $224.3 million compared to $118.3 million last year. We have $38 million of borrowings from our term loan this year compared to borrowings of $27.9 million on our credit facility last year. At the end of the first quarter, we improved our cash position by approximately $96 million net of debt compared to the first quarter of 2008. Total inventory, including merchandise in transit, at the end of the quarter was down 4% per square foot. This is slightly lower than our previous guidance, primarily due to stronger April sales. Carry over inventory accounted for 5% of the total balance sheet inventory at the end of the first quarter compared to 7% last year. We expect to end the second quarter of 2009 with inventory flat to down slightly. During the first quarter of 2009, we opened six stores and closed one. At the end of the first quarter, we operated 922 stores, with a total of approximately 4.565 million square feet.

During 2009, we plan to increase our net store count by approximately 30 stores, with most of the new store openings occurring during the second and third quarters. Thank you, and now I'll turn the call back over to Chuck.

Thanks, Sue. Operator, we'd now like to open the call up for questions.

Certainly. (Operator Instructions). And we will take our first question from the site of Brian Tunick with JPMorgan. Please go ahead, your line is open.

Yes, good morning. Congrats on a nice quarter. I guess, Sue, two questions for you, maybe. First on the SG&A commentary, I think before you had said a $20 million opportunity for this year, or an annualized goal; and given how the first quarter came in better than you thought ,we were sort of confused by your comments about somewhat below now last year's levels. And then on the gross margin line, maybe just give us an idea of the delta between the occupancy and the merchandise margins, sort of what happened in that line.

Okay.

Thanks.

Let me start with SG&A and just clarify my comments.

Okay.

First, the $20 million is the amount -- the annualized amount of the restructuring. So what we had said is that we expected to realize $20 million on an annualized basis. We said we expected to get some of that in Qs 1 and 2, and then get to the annualized run rate of about $5 million in Qs 3 and 4. We are just realizing that $20 million sooner, okay? So it's just a question of getting more of it into Qs 1 and 2. And we did say -- and I did say on SG&A that we expect the dollar spend of SG&A to be somewhat below last year. So I expect it to be a little bit down from last year, and that's notwithstanding the fact that we have new stores that are opening, okay? So I hope that clarifies SG&A.

And now on gross margin, the primary drivers of the margin decline relative to last year was this -- IMU is the single biggest driver, and that's the combination of higher product costs this year than last year -- which we had talked about before -- and then also the impact of the Canadian dollar, because in our Canadian business they are buying product with a weakened dollar, which is in fact impacting the Canadian gross margin and our overall gross margin. Leverage, we had expected -- the deleverage we had expected to be more. It's in fact slightly less and not as big a driver to the gross margin decline year on year. And then also we have the shrink reserve, which we did take a higher shrink reserve this year than last year because we saw higher shrink in the fourth quarter when we did a full inventory.

And then for Chuck, just maybe -- I know online, obviously, is the biggest growth opportunity you've called out before. Maybe what are some of the things you are doing to drive traffic to the site? Maybe talk about that.

Yes. Dana, do you want to take that one?

Sure. We are looking at integrating some campaigns with marketing through outside resources. Along with that, we have recently started a targeted campaign; so we've partnered with e-Dialogue, who is now handling that with us, which gives us the opportunity to really target and segment the customer base so we can send them really what they are looking for at the time that they are looking for it. Those are our two big marketing pushes. And in addition, we will continue to launch our regular campaigns twice a week in general, and we are acquiring additional names throughout the Company through data bases by the Verifone and other opportunities that have come up.

On a longer-term basis, we are continuing to invest in the infrastructure of this business. I mentioned we are moving the distribution center down to our larger southeast distribution center to give us better productivity and lower cost. And we have been continuing to invest in features and functions on our site. We relaunched our site about the middle of last year and we are continuing to make investments so that two or three times a year we'll be releasing new features and functions.

Great. Thanks, and good luck.

Thank you.

Thanks, Brian.

And we will take our next question from the site of Kimberly Greenberger with Citigroup. Please go ahead, your line is open. Kimberly, your line is open.

I'm sorry. Thank you. I was on mute. Good morning.

Good morning, Kimberly.

Hi, Kimberly.

Sue, could you give us the US and the Canada comps here for the first quarter, if you have them? And then also, in terms of the one-time items that were backing out from the first quarter, do those all fall in SG&A or are they spread through SG&A and gross margins?

Okay. Let me start with SG&A, and they are pretty much in all SG&A. The one-time item -- well, except for the tax impact, Kimberly, which would affect the tax line. So the one-time items this quarter -- let me just flip to that page -- are -- we had -- slight and sweet, we did characterize the store that had been open for less than two years to be one-time, because normally we give our stores longer before we in fact take an SG&A -- before we take an impairment charge, which is on the separate line item on the P&L. Restructuring severance, we did take in the quarter, and that does hit SG&A -- it's $1.8 million. So basically, it's just the impairment charge, the 1.8 for restructuring severance; and then deferred financing fees that were associated with the prepayment of the loan is in interest.

Okay. Great.

That's for the components, and then of course you have the tax impact, which was a credit which impacts the tax line.

Perfect.

Okay? And then on comp, our Canadian comp for the quarter was minus 2.7% this year; and our U.S. comp was minus 1% this year for the quarter.

Okay. And then just a quick question on sourcing. Looking into the second half of the year, it sounds like you have secured some sourcing cost reductions, both for third quarter and fourth quarter. I don't know if Mark or Richard can comment on this. But any sort of magnitude around those savings on like items?

So I will answer that. It's Richard. First of all, if I can just clarify something. We've only made commitments through the holiday buys, which come in in third quarter. So we haven't committed the spring buys yet, which is fourth quarter receipts.

She is referring to selling.

Yes, but from a selling --

Right, selling perspective.

In terms of the magnitude of the improvement, we are actually seeing IMUs fairly significantly about last year levels; whereas in the first part of the year, we were actually down to the prior year.

Yes, and Kimberly, most of that is in the fourth quarter; and that's again -- Rich was referring what we are actually buying and when we take receipt of those items -- but we expect most of the IMU is expected to be favorable somewhat in the third quarter, and then quite a bit in the fourth quarter as we realize the IMU on the holiday buy, which was in fact quite strong relative to last year.

Yes.

That's why we said most of the gross margin improvement will come in Q4 -- we expect to come in Q4, excuse me.

Great, thanks, and nice way to manage here through a tough environment.

Thank you.

And we will take our next question from the site of Margaret Whitfield with Sterne, Agee. Please go ahead, your line is open.

Good morning. I was interested in your comments about the change in certain states from Q2 to 3. What states are involved? And I wondered if Dina could give us a little preview of what she has in the offering for back-to-school in terms of any changes to the assortment, pricing trends -- anything she could offer would be helpful. Thank you.

Yes, in terms of the states that we are looking at that have gone back, I guess, it looks like Alabama has gone back. Looks like Iowa has gone back. Looks like Louisiana, Missouri, New Mexico has gone back. North Carolina has gone back. Oklahoma, South Carolina, Tennessee and Virginia have all gone back.

Okay.

And then in terms of price points, our price points have really not changed as we move forward into the back half of the year. We are reducing our investment in vests, and we're carrying slightly more inventory in the mix between good and better products as we move forward. We are really emphasizing a strong value message, and we're doing that through the in-store signage and the marketing campaigns.

Okay.

Margaret, I just wanted to clarify one thing, on my answer on the back-to-school tax free event. I indicated the states that are moving back from, in essence, quarter 2 to quarter 3. There are other states that are pushing back a week, but won't change the month or the quarter.

Okay. How about the big ones like Texas and Florida?

Yes, Texas is going back a week from the second week to the third week in August. And Florida -- I don't know. They canceled their back-to-school last year. I don't know what they're going to do this year.

And Chuck, for the -- could you give us an update on the search for a CEO, a permanent one?

Yes, we were actively involved in that search. We are seeing candidates at this point, and it's an active search. We are using Herbert Mines & Associates to help us with that. So that's an ongoing -- it's an ongoing search.

Thank you.

We will take our next question from the site of John Zolidis with Buckingham Research. Please go ahead, your line is open.

Hi, good morning.

Hi, John.

John.

I was wondering -- I know that you guys don't want to give formal guidance, but you are providing a number of comments on various line items within the income statement that we can use to come up with estimates. Looking back to three months ago, utilizing the comments that you made on the first quarter, analysts came up with numbers that were very different from how the earnings turned out. So I was wondering -- because it would be very helpful -- if you could go through internally the variance and quantify some of the items -- specifically within the gross margin -- that were better than expected.

And some of the items that you talked about heading into the quarter were the FX, the IMU, the deleverage and markdowns, all of which were expected to be unfavorable. So if you could just go through how those things positively impacted the first quarter relative to your expectations three months ago, would be very helpful. Thank you.

Okay, John. Let me talk through that. And first just to clarify, what happened in the quarter -- and Chuck had mentioned this in his prepared remarks -- is we really -- April came in much more favorably than what we had anticipated, and that was largely in the latter part of the month. Two things happened. We ran our sale, and \the weather did -- the weather got very nice. As a retailer you hate to talk about weather, but it does matter. And so we saw very strong sales in the last two weeks of the month.

Having said that, the -- I will just go through the components that you raised. Foreign exchange was about where we thought it would be. So foreign exchange had just about the same impact on the gross margin as what we thought it would. IMU was slightly favorable, and that was simply because we got more favorable freight than what we had anticipated when we were on our year-end call. But it wasn't a huge driver. It was slightly favorable. The deleverage was not as unfavorable as what we thought, and that was a function of realizing those sales in the latter part of April. So we did still see some deleverage, but it was not to the extent that we had anticipated three months ago. And mark downs were in fact slightly favorable relative to what we thought three months ago. We just saw -- we didn't see quite as many sales skewing into the mark down period; although mark downs did drive traffic, again in those last two weeks. But we did see a little more full price selling than what we had anticipated three months ago. But it was really -- John, it was really the impact of stronger sales which came in in the very end of April that drove the margin.

Okay. I mean, that must have been a pretty strong end to the quarter. Question on the SG&A comment. Brian already asked about this. He said SG&A dollars somewhat below last year. The first quarter was down $10 million year-over-year, with some square footage growth. I would say that's more than somewhat below. Is there anyway you can zero in on that number a little bit more for us? Thank you.

Certainly. I would say that at the time of our last call -- as I look at our plan compared to 2008 -- SG&A was flattish, and now saying somewhat down, not withstanding the fact that we do have new stores that are opening. So we are expecting the dollars to be down, and we are expecting SG&A to leverage about -- I would say over 100 basis points relative to last year for the year.

Thank you.

Thank you.

And we will take our next question from the site of Janet Kloppenburg with JJK Research. Please go ahead, your line is open.

Hi, everybody.

Hi, Janet.

Hi.

Hi, congratulations on a nice quarter.

Thank you.

First of all, I was wondering if you could talk a little bit about your inventory levels. It sounds like they are in really good shape, and I was wondering if you could talk a little bit about how you are approaching -- or how you approach -- the fall inventory buy. Considering your comparisons from last year, et cetera, are you buying up to last year? Or are you being more conservative?

Richard?

Okay, I will take that. In terms of the current inventory, as Sue said, we ended up down about 4% on the balance sheet. Just a little bit more color to that. The stores were actually down slightly more than that -- mid-single digits -- being offset by eCom, which has continued to be planned up to last year because of the growth driver over there. The way we are approaching the inventory levels go forward, first of all, we are giving guidance for the end of the second quarter which is flat to slightly down. Again, we expect the stores to be down in the low single digits, with eCom being up, which is getting to reflect a slightly down. We don't give guidance for the back half of the year. But what I would say is we continue to be conservative about the inventory levels -- so in the flattish range. However, we continue to be conservative. We have not planned inventory up.

Okay, great. And Chuck, I was wondering if you could talk a little bit about the rash of competitors about to enter the kid's business -- Eagle opening some stores, Arrow Aero about to launch PS, Crazy 8 sounding like it's going to be accelerating its square footage -- new square footage growth program. A lot of new competitors coming in, many of them pointed at the moderate to lower priced kids segment -- a business you really own in the malls right now. And I was just wondering if, given some IMU advantages, if you are thinking at all about different pricing strategies?

Yes, I don't think at this point we are thinking about changing what we have done. We're obviously keeping an eye on these competitors, I think much more so on Crazy 8. Arrow is a little -- really much more of an older concept.

Older, yes. And Eagle too, probably?

Yes, I think so. And I think Eagle is going to be slightly at different price points from some of the rest.

Right, but you have got the Justice influx as well?

Yes, that's correct. So -- and again, the Justice is probably more -- slightly older than we are. But I think over the years we have watched several competitors come in at this segment, as you say, we are quite strong in. And we watch them and we try to make sure that we are doing the best job that we can in terms of the strategies that we have; and so far -- kind of knock on wood -- that has serve us well. But we are going to continue to monitor these guys very closely. They are fine competitors, and -- but we're going to mostly stick to our own knitting on it.

Okay, great. And then, Sue, on the SG&A dollar decline, my guess is given everything you've talked about in the reduction program you have in place, is that the SG&A dollar decline in the second quarter should be at least as great in the second as it was in the first?

Well, we expect to leverage SG&A in the second quarter of '09 relative to '08, and so we will get back to you on that.

Okay. I will talk to you guys later. And again, congrats.

Thank you.

And we will take our next question from the site of Linda Tsai with MKM Partners. Please go ahead, your line is open.

Yes, hi. This is a question for Chuck or Sue. In your April sales release, there was mention of a $1 million charge for process changes relating to new product safety laws. I realize $1 million isn't very significant given the overall scope of the business, but could you provide us with some color on what the changes are and if there is any type of associated timeline?

Yes. This is -- these costs costs were really incremental costs involved in sort of complying with the evolving regulations in the consumer product safety area. And they have to do mostly with increased testing and with training of our staffs to make sure that we remain compliant. We just thought it was important to -- when we were reporting a strong quarter -- to talk about these extra costs because we don't know how far those are going to go. The regulations and rules are still being clarified and continuing to evolve. But I think in general, what we are discovering is that we have to do a lot more testing than we have in the past, and we need to kind of move our procedures up the supply chain a little further than we had in the past. But we are not -- we don't have complete visibility yet to exactly where these are going to go; but we are working closely with the CPSA to try and understand and perfect our procedure so that we continue to offer products that are compliant with the rules.

Are the charges going to be similar going forward, or it's hard to say?

Just hard to say at this point.

But they are factored into our numbers.

Okay.

And so as we have given some guidance on gross margin, that does contemplate what Chuck just referred to.

Does it impact any of your current lines?

I'm sorry?

Does it impact -- like have you had to take any product out of the stores? Or has it kind of changed the way you're following lines into the stores?

No, we think that the product that we have in our stores are compliant into the rules, and we're going to continue to evaluate our procedures and standards to ensure that they remain in compliance.

Great, thanks.

Thank you.

And we will take our next question from the site of Betty Chen with Wedbush Morgan. Please go ahead, your line is open.

Thank you. Good morning, everyone, and congratulations on a great quarter. Chuck, you alluded to earlier some encouraging signs from the new Tech 2 -- Techno 2 prototype. Could you talk a little bit more about that store format, what you are seeing? And also any more information around the buildout cost, and what does that imply for the longer-term fleet opportunity? Because I know in the past we had been talking about roughly 1100 stores.

All right. Yes, I think it's -- well, first of all, let me talk a little bit about the Tech 2 format. It is sort of the best of both worlds of the Apple-Maple and the Tech 2. It picks up the openness of the Apple-Maple but it incorporates a lot of the color that we are known for in the Technocolor design; but it gets rid of some of the very expensive architectural elements that were in that store before. So the most significant aspect of it is it's a great looking store. I think we all feel good about it. I think we've gotten good consumer response to it so far. But I hasten to add that we've only built one of them, and we are about to open three or four more in the next 30 days. So it's pretty early on; but again, we are very encouraged.

In terms of the cost, I think I would just like a few more of these under my belt before we start quoting what the costs are. But so far what we are seeing -- and in terms of pro formas -- they are quite significantly less expensive to build and much quicker to build. And I think the result of that is, as you suggest, it does open up the opportunities in terms of where we might be able to operate. Perhaps we can operate in smaller markets than we were able to before with less volume, and still make a nice return. So yes, I think you are right. There is a lot of -- there is perhaps some opportunity to grow over and above the store counts, because there's different opportunities that present themselves with this format. But it's a bit early, but we will keep you informed of our progress over the next couple of months.

And I was wondering, Sue, if you can talk a little bit about the high class problem of a growing cash balance on your balance sheet here? Obviously, I would imagine maybe paying down the debt balance would be your priority. But how are you and the board thinking about the cash usage and the priorities for that?

At this point in time, we are just going to sit tight with the cash. As you know, we had some liquidity issues last year as we were exiting the Disney business, and right now it just feels -- we think it's the right thing to maintain the liquidity. And as you point out, if anything, we would pay down debt when we can without incurring a penalty.

Great, thank you.

Thank you.

And we will take our next question from the site of Dorothy Lakner in with Caris and Company. Please go ahead, your line is open.

Thank,s and good morning, everyone.

Good morning.

Good morning.

A couple of house keeping items. Could you give us a little bit more detail on the way the second quarter and third quarter store openings are going to lay out? Secondly, I wondered if you could give us any kind of timeframe on when you would expect to wind up the CEO search? And then online -- the online business -- it's 6% now. Do you have a target percentage that you would like to get to, and how soon you could get there? And then lastly, looking at the back-to-school season, are you approaching this one differently than last year? And if so, could you give us a little color on that? Thanks.

Okay. All right, let me answer a couple of them, and turn them over to some other people. In terms of the timeframe for the CEO search, we don't have a specific timeframe on that. We are really searching to make sure that we find the right match. And in the meantime, the board and management is continuing to focus on running the business. So I think we really have the opportunity to make sure we get absolutely the right person.

Okay.

In terms of the -- Sue, do you want to take the second?

At store openings, there could be some slip in this; but right now we have about 15 store openings scheduled for the second quarter, and about 12 or so for the third quarter.

Okay.

In terms of the online business that -- in terms of where our target is at -- we really haven't established a target for that yet. What we've observed is that many of our best competitors in this area operate in the sort of low to low double digits. And so that seems achievable, but we really haven't been public about a target yet. We haven't been public about a target yet.

Okay.

And Dina, do you want to talk about back-to-school?

Yes, in terms of back-to-school, we actually made a few calendar shifts there. So we set fall preview, basically, week four of June, which is one week later than we had positioned it last year, and it basically consists of uniforms and backpacks similar to what that -- the components of that was last year.

Yes.

A few more shorts and short-sleeve tops. Then Fall One, we actually pushed out one week as well, so it's set the second week of July. And we are supporting that with a direct mail piece that will arrive in stores in that particular week with a comparable cirque. Fall Two sets the second week of August. Again, one week later than last year. Again, supported with a direct mailer and a comparable cirque. And then, Halloween sets week three, which is one week later than last year as well, but positioned comparably to where it was the prior years.

Okay, and that's the week three of August?

Yes.

Great. Thank you.

Thank you.

And we will take our next question from the site of John Morris with BMO Capital Markets. Please go ahead, your line is open.

Thanks. My congratulations as well. I guess a follow-up to that last one on the outlook for back-to-school, and you're talking about the timing of the deliveries. Can you talk about it in terms of where you see the opportunity from a merchandising and product standpoint compared to last year?

Yes, so we are continuing -- as I mentioned before, we are focusing on the good and the better products. So we've repositioned our mix a little bit to drive that. We still will have unique fashion items, some of which fall into that best category; but really feel that those are the unique identifiers for us as a Company and are finding that the customers are responding really well to them. We will continue to support the two-for and three-for programs through the basic (inaudible) items; and in terms of basics, we're really trying to function with denim really being a major driver of the back-to-school component, and we are looking -- we are approaching that this year from a faster fashion perspective. So we have an opportunity to really identify what's working within the washes and the fits and using available fabric to sort of fill the needs. So if we see something that's performing a little bit slower than we had originally anticipated, we can sort of reposition those goods to items that are selling. So we are really excited about that as well.

So to clarify in the denim, when you say faster fashion, you don't necessarily mean higher fashion content on the denim? You mean --

No, we mean quicker turnaround time to fulfill the needs.

Yes, okay, good. And then Chuck or Sue, I mean, just kind of a small question on this one; in terms of the timing of the shift that you called out in August, does that have much of an impact in -- or can you quantify what it would be, all things being equal for, an impact on EPS or comp? In terms of the start.

I don't know --

Should we be thinking about that from a modeling perspective, versus just something you want to call out (inaudible) background?

I would say it's one more factor that you just want to put into the second quarter miss, but we're not -- or second quarter view versus last year, which Chuck has already said in his prepared remarks, we are not -- second quarter of last year was just so incredibly strong. I'd just say it's just one more factor to think about when you are thinking about the second quarter.

Yes.

Very helpful. Thanks. Good luck.

Thank you.

And we will take our next question from the site of Marnie Shapiro with The Retail Tracker. Please go ahead, your line is open.

Hey, guys. Congratulations.

Thanks, Marnie.

You just stressed me out. Halloween in August -- that sounds terrible. And congratulations on this new group you just hit. I think it's beautiful with the dipped dye and the ombre. But I actually had a question on newborn. And I have been paying attention, and it is much softer to the touch, and some of the items are much sweeter -- the ruffle skort -- and yet it has a much hipper edge, for lack of a better word, with the graphics. So could you talk a little bit about that business, and has it been gaining some traction, and how do you feel about it going into back-to-school?

So from a fashion side, we have definitely repositioned that -- and I'm glad you are feeling that, because that was the inspiration and it's really where we wanted to go. We are seeing fashion actually performing rather well for us. We are excited about that. You are going to continue to see that approach to it as we head into fall. Our business overall, though, in newborn is still a bit challenging -- more challenging than what we would like to see it right now. But we are anticipating, as we continue to move forward with this type of look and feel and continue to market it in a way that it gets out to the customers more -- we are anticipating that we could hopefully see some additional growth there. The basics right now are a bit slower than we had anticipated\, and that's really what is pulling the business back right now.

That makes sense. Is there a difference between the trends for newborn online versus in store?

In terms of selling trends?

Yes.

No, not really.

Okay, great. Well, good luck, guys.

Thank you, again.

Thanks.

And we will take our final question from the site of Dana Telsey with Telsey Advisory. Please go ahead, your line is open.

Good morning, everyone. Can you talk a little bit about occupancy costs, and if you are seeing any adjustments for leases that are expiring, and what changes you may be seeing there? And then just as you are thinking about assortments going forward, what you are seeing there in terms of mix of the store, how -- what percentage of the store do you want to be allocated to each? Is it changing at all, and what that means for IMU and margin? Thank you.

Okay, thank you. Yes, in terms of the rent -- I will take that one, and Dina can take the assortments. But as you may know, we have about 40% of our fleet coming up for renewal over the next three years; and we have been more successful in our recent negotiations in terms of our -- particularly for the shorter-term renewals from one to five years. We do think with this sort of value (inaudible) prototype, we have greater flexibility in terms of the types of locations where we can operate profitably. So that's where we are on leases, and Dina, do you want to talk about -- ?

Yes, we're not really seeing a shift in the mix from a divisional perspective. I mean, I think the last call we sort of talked about the fact that baby was a little softer than big was. But really nothing dramatically to affect anything. So as far as mix goes, we're maintaining where we are.

Thank you.

Okay, well, thank you, everyone, for joining us today, and thank you for your interest in the Company. Have a great day.

And this concludes your teleconference for today. Thank you for your participation, and have a wonderful day.