Children's Place Inc (PLCE) 2009 Q3 法說會逐字稿

Good day and welcome to today's program, the Children's Place third quarter conference call. At this time, all participants are in a listen only mode. Later you will have an opportunity to ask questions during the question and answer session. (Operator Instructions). Please note this call may be recorded. I will be standing by should you need any assistance. And it is now my pleasure to turn your conference over to Ms. Jane Singer. Please go ahead, ma'am.

Thank you, Dawn. Good morning, everyone, and thank you for joining us today for a review of the Children's Place Retail Stores, Inc. Third 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. Dina Sweeney, Senior Vice President of Merchandising, is on hand to answer questions at the end of Management's remarks.

Before we begin, I would like to remind participants that any forward-looking remarks made today are subject to the Safe Harbor Statements found in this morning's Press Release as well as in our SEC filings. 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 the call this morning is contained in this morning's Press Release which can be found on our childrensplace.com website. And now I will turn the call over to Chuck for his opening remarks.

Thank you, Jane. Good morning, everyone. Thank you for joining us today.

We're very pleased to have delivered sales and earnings growth in the third quarter of 2009 despite the ongoing economic uncertainty. The Children's Place delivered top line growth of 3%, and income from continuing operations increased 34% to $38.2 million. Earnings per diluted share were $1.38 compared to $0.96 per share in the third quarter of last year. We were also pleased to see customer transactions increase during the third quarter. While customers remain somewhat price sensitive, we were encouraged to see a 1% increase in transactions during the third quarter following a 7% decline during the second quarter. Comp sales declined 2% due to the impact of promotional pricing on average transaction size which is consistent with what's going on in the industry.

We attribute our success primarily to the resiliency of the children's apparel market which has out-performed the sales of adult apparel. We believe the children's category will continue to out-perform adult apparel because it is more need based. Growing kids simply can't wait for the economy to improve, so moms can make their budgets stretch further for buying more of their children's clothing at value oriented retailers.

The Children's Place has grown market share among specialty retailers over the past year by offering a combination of trend right, high quality merchandise at great value price points. During the third quarter, our wear now apparel and key items drove sales, as we believe customers look to get the most value out of every purchase. Customers also reacted favorably to special items we offered to update children's wardrobes such as our look-maker fashion items, shoes and accessories.

Our primary focus this year has been to maximize profitable sales while containing costs, in order to minimize downside risk as we operate in this difficult economic environment. This prudent approach has enabled us to significantly improve profitability and gain leverage on higher revenues. The 3% increase in net sales, coupled with our strong cost containment efforts, resulted in approximately 380 basis points of leverage in SG&a excluding unusual and one-time items, and a 34% increase in net income for the quarter.

Moving on to the progress we achieved in our growth initiatives, first our eCommerce business had another strong quarter with a 44% growth in sales. Online sales now account for 7% of net sales compared to 5% last year. Next ,we remain on plan to open approximately 35 new stores in 2009 which would increase our fleet by a net of approximately 25 to 30 stores for the year. Much of our expansion this year has been in value-oriented centers primarily strip malls and in smaller markets. The early sales results from these centers are encouraging and we may include more in our mix next year. We also remain pleased with our new Tech II store format which we think looks great, is easier to shop and has significantly lower build-out costs. Our Paramus Park, New Jersey store which was remodeled into the Tech II format, reopened last week to rave reviews from customers.

Last, we are pleased with the progress being made by various departments containing costs this year. We've already exceeded the planned SG&a expense reductions and cost savings we announced in February. The increased savings are coming across departments from store operations to real estate to marketing and administration. And we now expect SG&A spending will be more than $20 million lower in 2009 than in 2008.

Clearly, there is little visibility heading into the holiday season, so so far this year we've observed customer shopping closer to need, shopping less frequently and waiting for great deals before making purchases. And we expect this will continue. And that means that this holiday season we expect a vast majority of the sales will take place between Black Friday and Christmas. We plan to respond by offering compelling promotions to generate excitement in our stores throughout the holiday season. From a merchandise standpoint we're offering newness with the Holiday II line in seven stores this week. And we plan to refresh the merchandise with our Great Gifts floor set and Spring Preview lines which set in early December.

Before I turn the call over to Sue for a review of operations, I'd like to briefly comment on the CEO search. This is a top priority of our Board. The search committee has cast a wide net, and the Board has been interviewing a number of highly qualified individuals. And while we don't have an announcement to make today, it is the Board's intention to name a permanent CEO by year-end. 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 only. As previously disclosed, we've classified Disney Store business as discontinued operations. Net sales for the third quarter ended October 31, 2009, increased 3% to $463.2 million compared to $450.6 million in the third quarter of 2008. Comparable retail sales, which include online sales, declined 2% in the third quarter of 2009 following a 4% increase during the same period last year. The decline in comp sales was the result of a 2% decrease in average transaction size which was partially offset by a 1% increase in the number of transactions.

We ended the third quarter with a total of 950 stores this year compared to 920 stores last year. Gross profit dollars increased 3% to $201.8 million. And gross margin was comparable to last year at 43.6%. During the third quarter of 2009, gross margin was favorably impacted by an increase in IMU versus last year ,which was offset by markdowns. During the fourth quarter of 2009, we again planned IMU to be higher than last year as holiday 2009 merchandise was purchased during a time period when global retail demand was particularly weak.

In addition, we have anniversaried the precipitous decline in the Canadian currency. so we expect to see a modest benefit from the stronger Canadian dollar in the fourth quarter of this year compared to last year. And we expect to have lower shrink expense since we have been accruing to a higher shrink rate all year this year.

Partially offsetting these benefits we may experience some occupancy and distribution deleverage during the quarter depending on comp sales. We continue to expect that gross margin for the fiscal year 2009 will be 50 to 100 basis points lower than last year. Given our stronger than anticipated third quarter results, we may end the year at the more favorable end of the range. But that will depend on our sales performance for the holiday season, and we believe the environment is too volatile to make that call right now.

SG&a as a percentage of sales was 25.6% in the third quarter of 2009, representing 250 basis points of leverage. You may remember that in the third quarter of 2008, SG&A benefited from a net gain from transitional services being provided to Disney. Excluding the unusual or one-time gains from last year, SG&A in the third quarter of 2009 improved by 380 basis points.

The entire organization has done an excellent job in lowering operating expenses this year. During the third quarter, our SG&A leverage primarily came from lower marketing expenses, lower administrative expenses, and better management of store expenses. As Chuck mentioned earlier, we're ahead of schedule in achieving the SG&A expense reductions from the restructuring program that was announced earlier this year. And we now expect SG&A dollar spending for fiscal 2009 will be at least $20 million lower than in fiscal 2008.

Depreciation and amortization expense was $18.2 million during the third quarter 2009, similar to last year. Income from continuing operations before interest and tax was $64.8 million during the third quarter of 2009, compared to $50.9 million last year.

Net interest expense was reduced to $520,000 in the third quarter of this year as we paid off the $38 million balance remaining on our term loan at the beginning of the quarter. In the third quarter of 2008, net interest expense was $1.9 million as the Company had closed on an $85 million term loan at the end of the second quarter of 2008. Going forward, net interest expense is expected to be approximately $600,000 per quarter, which includes seasonal short-term borrowings and fees related to our credit facility.

Our effective tax rate for the quarter was 41%. We expect our effective tax rate for the full year 2009, before one-time items, will also be approximately 41%.

Income from continuing operations was $38.2 million, or $1.38 per diluted share in the third quarter of 2009, compared to net income of $28.4 million or $0.96 per diluted share in the third quarter of last year, which represents a 44% increase in earnings per share. Our diluted weighted average share count for the quarter was 27.6 million which reflects the shares we bought back earlier in the quarter. Net income for the third quarter, which includes the impact of discontinued operations, was $37.8 million or $1.37 per diluted share, compared to $24.1 million or $0.81 per diluted share in the third quarter of 2008.

Moving on to the balance sheet, our quarter ending cash balance was $104.4 million this year compared to $186 million last year, including borrowings of $85 million from a term loan in last year's number. As I mentioned earlier, we repaid the term loan in full at the beginning of the third quarter of 2009.

We also closed on a transaction to repurchase 2.45 million shares owned by Ezra Dabah and his family for approximately $70 million. As part of this agreement the Company was obligated to file a Registration Statement to facilitate the sale of the Dabah family's remaining 2.45 million shares by the end of September. However, at Mr. Dabah's request the Registration Statement was delayed and the Company was notified on October 9 that he would not be selling any shares in this manner. He's filed two 13-D statements in September and October indicating he had sold approximately 1 million shares on the open market.

It is worth noting that despite the difficult economy, the Company has generated cash from operations of approximately $70 million in fiscal year to date 2009. We remain very comfortable with our cash position and overall access to liquidity, and we expect to continue to build cash during the fourth quarter of 2009.

Total inventory including merchandise in transit at the end of the third quarter was up 3% per square foot. Prior season carry-over inventory at the end of the quarter represented a significantly lower percentage of the total balance sheet inventory this year, at 1.7% compared to 4.5% last year. We expect to end the fourth quarter of 2009 with inventory per square foot up in the mid single digits.

During the third quarter of 2009 we opened 13 stores. At the end of the third quarter we operated 950 stores with a total of approximately 4.708 million square feet. During 2009 we plan to increase our net store count by approximately 25 to30 stores.

Thank you, and now I'll turn the call back to Chuck.

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

(Operator Instructions). Our first question will come from Richard Jaffe from Stifel Nicolaus. Your line is open, please go ahead.

Thanks very much. Just two quick questions. One is on IMU and the benefits you've seen and the sustainability of those benefits. I know the market was under -- or the sourcing market was under a lot of pressure, but it still appears to be, I'd say there remains a lot of excess capacity. And wondering what your outlook is for spring merchandise deliveries, for sourcing for 2010. And if some of those advantages will carry forward. And then a second question is just about your promotional cadence in the fourth quarter.

IMU, we expect to continue through the first half of 2010. And so we would expect to see IMU benefit on the spring purchases, which again were made -- our cycle is relatively long so those spring purchases were made at a time when the global economy was still relatively weak and the capacity still plentiful. We expect that to mitigate somewhat by the third and fourth quarters of 2010.

Depending upon the environment or the world view?

Yes.

Okay. And then a discussion about promotions in the fourth quarter. Is there anything you can share with us that you'll be doing that would be different year-over-year, whether it's bounce backs or interactive outreach through the internet or other such things?

Yes. I think for fourth quarter, the one new thing we're doing this year is something called a VIP Passbook, which is a handout that we started handing out to customers in early November. It has several coupons and promotional offers that are able to be redeemed throughout the holiday season. It pushes people to our website to Facebook and Twitter and that will make several other promotional announcements as we go through the holiday season. And I think in general, we're trying to run promotions that are in level somewhat similar to what we ran last year in the fourth quarter, but we'll have to see how sales react.

We do have a lot of contingency promotions that we're able to run if the sales are a little weaker. But we are planning a big Black Friday event and we have almost all of our outlet stores will be opening around midnight, about 90% of our Place stores will open at 5 a.m. And I think we've got a really aggressive plan for that day and for the rest of the weekend with some sales, some great key item promotions and some great price point promotions. So I think for competitive reasons I'm not going to get into any more of the details for that. We just feel like we've got a good program put together for the holiday season, but it really depends on sort of the customers' predilection to shop during the season. Dina, do you want to add anything?

You also may have seen that we recently launched on denim at $10. And we really felt it was a great promotional vehicle for this time of the year. We are in a denim cycle. So we thought as customers are out there it would be a great way to capitalize on what's going on out there from a trend perspective. So that's one other thing you'll probably see.

And could you just review stores by venue, mall stores, outlet stores, open air or street locations, the number of each?

Yes. We have about -- well 60% of our stores are traditional malls. And then we have another 10% of our fleet are in strip malls. And we have another 10% would be kind of lifestyle malls. And about 5% of our stores are on the street. So that's basically how it breaks down. I think as we start to look forward, we're very excited about those value oriented centers that are really popping up now in particularly the smaller markets. And that's an area where we may see more.

Chuck, I may have missed one. Mall was 60, strip is 10--

Lifestyle at 10, street at 5 and outlets at 15.

Thank you. Got it. Thanks very much.

Thank you.

Our next question will come from the line of John Morris with BMO Capital Market. Your line is open. Please go ahead.

Thanks, good morning, congratulations on a good quarter . And so first question is for Sue. I know Richard was just asking about the IMU. Can you give us -- the better IMU from the better sourcing. Can you quantify in Q3 how much that component helped, some kind of color there how much that helped you. And what do we expect the order of magnitude to be similar in the fourth quarter so we can think about the margin forecast there accordingly. And with the bounce back that you saw in the quarter that you did, did it do what you wanted it to do in terms of execution of profitability contribution? I think the game plan there was to really drive higher transactions and get that going. Is that what you wanted it to do? Will you bring that back on a regular basis. And it piqued our curiosity in terms of that new approach, seeing something new out there. Are you going to continue to introduce newness in terms of the marketing promos?

Okay, the IMU -- we don't typically disclose how much benefit came from IMU. What I can tell you is that it was in fact offset, as I said in my prepared remarks, with higher markdowns which we thought was appropriate in the quarter. And I expect the IMU sequentially fourth quarter versus Third quarter to be more. So we got a nice increase in the third quarter, we expect that to increase yet again in the fourth quarter.

So the offset was about equal? In other words it wasn't the larger piece of the benefit?

Just about equal.

Okay.

Just about equal.

And the bounce back?

Yes, the bounce back, it definitely created a lot of excitement in the stores and customers seem to really like it. And we do think it contributed incremental volume ,particularly during the redemption period. And we did see an increase in average transaction size for some of the customers. But we are kind of continuing to analyze it and getting more customer level data out. And then we'll decide kind of how much and what to add into the promotional mix going forward. But I think all year long we've been experimenting with a lot of different kinds of promotions and that's sort of just the way of business.

Okay, great. Good luck for the rest of the season.

Thank you.

Your next question will come from the site of Tom Filandro with SIG. Your line is open. Please go ahead. Tom, your line is open.

Maybe we should go to the next.

Our next question will come from Linda Tsai with MKM Partners. Your line is open. Linda Tsai, your line is open.

I hope it's not a technical problem. Maybe we'll try the next. Hopefully there isn't a technical problem.

And we can come back to Tom and Linda.

Okay, one moment. Our next question will come from Kimberly Greenberger with Citigroup. Your line is open, please go ahead.

Great, thank you. Can you hear me okay?

Yes.

Oh, great. So no technical difficulties. Nice quarter. I just wanted to ask, the negative two comp, could you break down for us the US, Canada and direct? And then in the gross margin line, Sue, I wasn't sure if there was any occupancy and distribution deleverage that may have been offset by some savings on the buying side. And if you could just remind us what is your sort of neutral leverage point for occupancy, buying and distribution once all these cost cuts sort of work their way through the system?

Okay, I'll start with the comp and Sue can talk about leverage. The US comp of stores was about minus four, Canadian comp minus five, and the online comp 44.

And on the leverage factor, we have to generate a comp in the low single digits in order to be neutral on our buying and occupancy leverage. It was pretty neutral in the quarter, with some improvements in distribution relatively minor, being offset by some deleverage on occupancy.

Can I just ask one follow-up for Dina?

Sure.

I know you've been testing a lot of different promotions. And if this isn't the right forum, then obviously we can talk about it off line. But I'm wondering what has been your learning from the various tests on the promos that you've done? What works better for Children's Place and your customers? What hasn't resonated quite as well? Any color you're willing to share would be great. And if you prefer to do it off line, that's fine as well.

So we are seeing customer continue to respond to a lot of our traditional products that we provide them and the promotional cadences that we've traditionally offered on those items. We are trying a lot of new things. We're seeing what works, what doesn't work. We are definitely seeing mom respond to those good price points, and that's where we're going to stay focused. We're going to stay with what we do best in terms of our promotional strategy and make sure that mom understands the value that we're giving her.

Okay, great. Thanks and good luck for holiday.

Thank you. Is Tom or Linda back yet?

Certainly. One moment. Linda Tsai from MKM Partners. Your line is open. Please go ahead.

Yes, sorry about that. How far have you bought out inventories and how are you thinking about it in 2010?

We bought inventories out through -- we've got the summer buy done. We're in the process of calibrating the fall buy now. As we think about our inventory planning, increases and decreases in 2010, we'll be providing more color on that in next quarter's call. But I'd say pretty consistent, relatively conservative buys throughout 2010. Same cadence as what you've seen managing the store inventories and then buying into increases in eComm.

Great, and then just to follow-up for Dina. Relative to 4Q in terms of the inventory mix, are there certain areas where you've invested deeper? And could you also talk about that relative to performance in 3Q?

Yes. We've stayed focused on our initial strategy, reducing our inventory investments in better and best products and shifting that into good. And that is what we saw the customer respond to in Q3. And that was our strategy there, too, so we're remaining consistent there.

Great. Thank you.

Our next question will come from the line of Rick Patel with Banc of America - Merrill Lynch.

Hi, good morning, everyone.

Good morning.

Can you just give us an early read on your November performance? There's been some retailers out there that have talked about weak trend in late October that continued into November. I'm just curious if you saw that as well?

Yes, we typically do not comment on the month before we get to the end. And particularly in a month where we've got this major event coming up next week.

Fair enough. Can you provide some details on the variable that drove SG&A lower in the third quarter, perhaps into buckets of importance? And whether you expect those to continue going forward? And as we think about modeling expenses in 2010, can you help us understand some of the factors that will impact expenses next year and how much of a change we should expect?

Sure. As we look at SG&A, the components that really drove SG&A down were marketing expense. Some of that was timing, so we'll see some of that come back in Q4. Store expenses have come down. And that's just really better management of supplies, overall really tight management of store payroll and supplies. And then overall, just across-the-board administrative expenses. I think Chuck said earlier we really have a culture here now of cost containment and cost reduction. And I think it's premature at this point to comment on 2010. We'll really be getting into that in our fourth quarter call, but I'm -- overall we're very pleased with how we've been able to lower costs. And we seen some acceleration in our cost reduction program, certainly in Q3 and Q4. And that's pretty much it. Those are the buckets.

Great. Thank you and good luck for holiday.

Thank you.

Our next question will come from the line of Janet Kloppenburg with JJK Research. Your line is open. Please go ahead.

Hi, everybody. Congratulations on a good quarter.

Hi, Janet.

I was wondering if you could talk about the marketing expenditure in the third quarter versus the prior year, and what it looks like for the fourth quarter. I know you talked about the promotional level, but I'm wondering about the spend. And Sue, I'm wondering about the costs that have been taken out so brilliantly and so much better than expected. But I'm wondering if in fiscal 2010, if we're fortunate enough to have the economy be stronger, if you'll have to be replacing some of these costs, building back up in certain areas? Thank you.

Yes, I think in terms of the marketing spend quarter three, quarter four, marketing spend was down somewhat in the third quarter. A lot of that was due to timing differences.

That's versus Q3 2008, Chuck?

Yes. But I think that will reverse itself back in Q4, and we'll probably end up spending a little bit more in Q4 relative to a year ago. And I think overall for the year, we'll probably be down about 10% compared to 2008 in terms of the marketing spending. And a lot of that is just being much more targeted in our marketings this year in terms of direct mail, e-mail blasts, a little bit more focus on social media and out of traditional media. And there's just a lot of efficiencies that we've gained this year. On the direct mail side, for example,, we haven't had much of a change in circulation. We've simply been able to get a bigger bang for our buck with productions and targeting efficiencies. Thanks.

And Janet, you had also asked about SG&A and carry forward into next year.

Yes.

It's really premature to talk about 2010, but I think you can expect there's going to be some give back in 2010 in SG&A. At some point there are some inflationary pressures.

Okay, lots of luck for the holiday season. Thank you.

Thank you.

Our next question will come from the line of Brian Tunick with JPMorgan. Your line is open. Please go ahead.

Thanks. Good morning. So I guess one question for Sue, and that's basically for ForEx I think it had a negative impact of 200 basis points on the gross margin last year in Q4. And can we expect to get most of that back this year? And then for Dina or Chuck, just curious on the competitive pricing environment. When we see Old Navy or Gymboree doing what they're doing from a pricing standpoint, what kind of delta in prices do you think Children's Place needs to keep versus your competitors to really be attractive to that shopper? And then finally for Chuck, on the online business, if that should exceed $100 million in revenues next year, is this a nicely double digit margin business and should be accretive to the EBIT margin even if other things get a little tougher out there?

Why don't you start with the FX.

Okay, foreign exchange. So bear in mind last year -- firstly this year in the third quarter, ForEx was relatively neutral. So we really hadn't seen that huge decline in the Canadian Dollar until really October of last year. In the fourth quarter of last year, there were two components of FX. There was a margin component that was about $0.05, and then there was a translation component, translating the Canadian dollar back to US dollars, which was about $0.06. We expect to get some of that, not all of it, back in the fourth quarter this year. And again, it all depends on what rate you're assuming for the fourth quarter. But all things being equal, as you look at the fourth quarter of this year, I'd expect it to be positive but not on the -- not to the extent of $0.11.

Again ,last year you're comparing to the prior year. So the Canadian Dollar is not all the way back to where it was then. But I do expect it to be somewhat positive in the fourth quarter, about 50% or so of that.

Dina, you want to handle pricing?

Sure. In terms of promotional competition, I think we've seen that the children's apparel category has been highly promotional throughout the year. And we believe that that's going to continue with us through the entire holiday season. We are planning, as Chuck had mentioned, some unique promotions to help drive traffic in sales. For example,, the VIP Passbook or the HHH. We do have contingency plans in place. And we feel if we need to get more promotional we will. But at this point, we're not planning on being significantly more promotional than we were last fourth quarter.

In regards to Old Navy, look, Old Navy is a terrific retailer. They had a solid third quarter, as did we. It appears that many of the value retailers that are out there, such as ourselves and Old Navy, are continuing to gain market share in this economy. And we will continue to do what we do best, which is offer customers trend right fashion and high quality merchandise at great value pricing.

Could you remind us what kind of Black Friday results you had last year?

We don't disclose Black Friday specifically as a discrete day.

Okay. And then finally for Chuck, just--

The online business?

Yes.

Yes, I think your observations are right. We feel really good about the online business. It is, as you say, a more profitable business on a contribution basis. And it's a business that's growing pretty dramatically, and we expect it will continue to grow. I think there's a lot of good natural growth as more and more customers are shopping online. And I think we have some opportunity to pick up. I think the best retailers are able to operate in the mid-teens in terms of penetration. And I think that's our goal as well. So I think your observations are correct. I think it's a profitable growing business that's going to be accretive to earnings.

Perfect, good luck this holiday season.

Thanks.

Thank you.

Our next question will come from the line of Margaret Whitfield with Sterne Agee.

A couple of the small questions, most of the major ones have been asked. Could you give us some quantification of that market share increase? And in terms of the December delivery of Great Gifts and Spring Preview in early December, could you elaborate as to what's involved in the Great Gifts and whether there's any change in timing there? I think Spring Preview might be new, Dina, if I'm not mistaking. And finally how many stores do you think it's likely you'll open next year and how many would be in the Tech II format?

So I'll just jump in on the timing of Great Gifts and Spring Preview. We did actually have a Spring Preview line last year. This year it's about the same size. It will occupy the front of the stores, just a new collection just to offer some newness for mom. And then in terms of Great Gifts, we did set a small Great Gift line last year. We are repeating that this year. It's just -- some of the items are just more cross-departmental, so you'll see the same items show up for all of the divisions to have more of an impact.

And then market share question, my comment about gaining market share I was referring really to the share of specialty -- the share of specialty segment of the children's apparel market where we gained over a point of share on a year-to-date basis, which is basically through the second quarter.

And the outlook for real estate next year?

That we're going to talk about a little bit more in the fourth quarter, in our fourth quarter call, our outlook for next year.

But I think you can expect to see more of the Tech II format. That's our primary format as we open new stores.

And probably a little bit greater mix weighted towards these value oriented centers.

Okay, thank you and best of luck.

Thank you.

Our next question will come from the line of Tom Filandro with SIG. Your line is open, please go ahead.

Thanks, congratulations on a great quarter. Chuck, can you give us an update on what you're seeing in shoes? And I'd like to know how much of an impact shoes is having on your online business, and are there any other categories you're currently either testing online that you don't have in stores or thinking about testing in the future? Thank you.

Yes, let me let Dina talk a little bit about the shoes.

So we are seeing shoes continue to perform really strong for us. We saw that in the first half of the year, we're seeing that continue in the third quarter. And in terms of how much it represents to the online business, it represents about 30 stores for us of volume. So it's not a huge portion of the online business, but it clearly is helping us establish ourselves as a shoe retailer.

We've always carried a select number of shoes in our store. And of course, we have this new business that we've been experimenting with over the last couple of years where we have an expanded assortment in about 50 to60 stores. And we're real pleased with the progress on that. The profitability is coming up nicely, but we still have some fine tuning to do on that before we commit to a fast and broad scale roll-out on it. The other kinds of new businesses that we're looking at, I think you see a little bit of that in our stores right now, but some of the accessories.

Yes, so we have a select group of stores that currently have some books with some plush that coordinate back to that. We've tried meal-time pieces which coordinate to all of the newborn print group or necessity items. And we're going to continue to experiment with different opportunities that are out there, both through the online channel as well as stores.

And we do see a real opportunity in some expanded accessories.

Perfect, thank you for the update, and best of luck for the holidays and Happy Thanksgiving.

Yes, thank you.

Our next question will come from the line of Dorothy Lakner with Caris and Company. Your line is open. Please go ahead.

Thanks and good morning, everyone. Congratulations on the quarter. Just going back at the different store types that you have, did you see over the last quarter big differences in traffic or the traffic patterns there? Secondly, where do we stand now with Ezra's shares, the registration us still effective? Just a little bit more color on that. And then how many Tech II stores will you actually end up with at the end of the year? Thanks.

Thank you. In terms of the different stores and the traffic, I think that during the third quarter we saw the outlets probably performing strongest. But the traffic was actually stronger in Place stores. I think what you saw in the third quarter was in a back-to-school environment people were willing to drive out to the outlets. And once there, they converted strongly which is a little different from what we've been seeing most of the year. So I think that was more of a third quarter situation. Our traffic was slightly stronger in our full price Place stores, but the overall sales results were stronger in outlets.

Okay, so no--

Yes, go ahead?

No big differences really. People are still being driven to the stores by events and so fourth, but you saw that more strongly in the outlets?

In the third quarter. Sue, do you want to talk about the Ezra?

So we did in fact withdraw -- Ezra did inform us on October 9 that he did not want to sell shares through the Registration Statement. We did -- we stopped that process and then he filed a 13-D in October announcing basically he had sold a million shares at that point in time on the open market. And given his share ownership now, he's not required, as I understand it, to file as he sells more shares. So the last information on his share ownership that we had was that October filing where he had said he had sold a million shares through that point in time.

Which leaves him with?

Well, he owned about 5 million shares, we bought back 2.45 million, and so he had that amount himself at that point in time, so it will be about 1.5 million or so at that point in time. He may have sold more, we don't know.

Okay.

And then your question about the Tech II. About 25 of the 35 stores we've opened this year have been in the Tech II format, and the remainder are outlet stores. Almost everything we're building today is the Tech II format.

And next year then I would assume the new stores would be in that format ,or are there still things that you're kind of playing around with?

No, the Tech II is something we feel really good about.

Okay, great. Thank you. Good luck for the holiday.

Thank you.

Our next question will come from the line of Lee Giordano with Imperial Capital.

Thanks, good morning, everybody. Can you talk a little bit more about category performance on the merchandise side, boys versus girls. And also what items and categories are working and what might not be working well? Thanks.

So year-to-date we are seeing accessories and shoes perform strongest overall from a comp perspective. Girls is performing relatively well, mostly driven by big girls. The baby divisions are actually a bit tougher than the bigger divisions. And in terms of newborn, we did execute a new strategy starting in fall. And the Q3 performance in newborn was significantly improved over the year-to-date performance or the first half performance. So we were happy to see that some of those things are resonating with the customer.

In terms of categories, in Q3 we definitely saw early on in the season that the customers were responding to wear now categories, so short sleeves, shorts, et cetera. They were also responding to what we're calling fashion look makers, so things that might have been a little bit more pricey, sitting in our better or best categories like pleather jackets, military jackets, items like that that they might not have had in their closets at this point. But the bulk of the volume continues to come from the fashion basics, which are the two key item programs that are on the table.

Great. Thanks.

Thank you, Lee.

Our next question will come from the line of John Zolidis with Buckingham Research.

Good morning, this is Jodi Yen calling on behalf of John Zolidis. Just had a question on your merchandise margins. Were they basically flat during the quarter?

Yes, merchandise margins were flattish for the quarter, yes.

Okay, and how are you planning merchandise margins for the fourth quarter?

We don't disclose that at this point in time. But I think you can back into it, if you take the guidance that we've given on gross margin. What I did say on gross margin is that really at this point in time it's all about the top line. The merchandise is bought, it's in the store, it's here, it's just really all about what happens on the top line. And it's volatile right now. If we sell more on promotion or more on markdowns, our IMU could be flat to down versus prior year. If we have a good, a really good December and good Black Friday, it will be stronger. So really at this point in time I just can't, it all depends on the top line.

And what was the currency impact on sales for the quarter?

Currency impact on sales for the quarter, it was de minimus, basically zero, flat.

Okay, thank you.

Thanks, Jodi.

Our last question will come from the line of Dana Telsey with Telsey Advisory. Your line is open. Please go ahead.

Hi. Can you talk a little bit about sourcing and what further benefits there are to get there ? And also on the outlet business, how is that doing relative to the core business? And do you see any distinction in product categories that are performing? And just Black Friday plans for that, too? Thank

You start.

On sourcing, as we said in my prepared remarks, we got a nice IMU benefit in the third quarter that was offset by markdowns. We expect yet more benefit from IMU in Q4, and we expect that to carry into Q's 1 and 2 next year. At this point, as we've said many many times, we consider sourcing to be a core competency of the Company. So you're not going to see dramatic changes in sourcing that are not driven by economic factors. So at this point, if there's capacity, global capacity will benefit from that. If the capacity really tightens up for whatever reason, we're likely to see an increase or a decrease in our IMU and increase in our product costs.

That's really the story. And we do expect the IMU increases we've seen to carry through the second quarter of next year. And then to -- our expectation is that we haven't finished the fall buy yet, but our expectation is they will be mitigated somewhat for fall and holiday of next year.

In terms of our outlet business, it's an important valuable part of our business. But it's an integrated merchandising strategy between our regular priced stores and our outlet stores. The principal difference on the outlets is that they carry one additional season of clearance merchandise. So when we get to Black Friday, the promotions are in essence the same other than we have another tranche of older season merchandise which will have very attractive promotional prices on them.

Other than that the outlet business is, as I say, sort of integrated to our overall business. And distinctions in margin are not really not that meaningful, because of the way -- it depends largely on where markdowns are taken and the timing of those markdowns.

Thank you.

All right. Well, thank you, everyone, for joining us today. Thank you for your interest in the Company and have a great day.

This concludes today's teleconference. You may disconnect your lines at any time. Thank you, and have a wonderful day.