Children's Place Inc (PLCE) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to today's teleconference. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask a question during the question and answer session. (Operator Instructions) Please note this call may be recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Jane Singer. Please go ahead.

Thank you, Missy. Good morning, everyone, and thank you for joining us today for a review of the The Children's Place Retail Stores, Inc. first quarter 2010 financial results. Participating on this morning's call are Jane Elfers, President and Chief Executive Officer, and Sue Riley, Executive Vice President Finance and Administration.

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. All statements in today's call refer to continuing operations unless otherwise indicated. 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 childrensplace.com website. Now I will turn the call over to Jane Elfers for her opening remarks.

Thank you, Jane, and good morning, everyone. I would like to start with a brief overview of the quarter and then move into a summary of the progress we're making on our longer term growth initiatives. We're off to a good start this year. The Children's Place posted its strongest first quarter ever in 2010, achieving a record level of earnings. Net income increased 18% on a GAAP basis to $28 million. On an adjusted basis excluding one time items net income rose 29%. Earnings per diluted share were $1 for the first quarter of 2010 ahead of our guidance of $0.85 to $0.90 and 35% higher than adjusted earnings per share for the first quarter of 2009. Net sales increased 5% to $422.1 million and comparable retail sales declined 0.5% for the quarter which is about what we expected. Recall that we were up against a 1% comp increase in the first quarter of last year on top of a 6% comp increase the prior year.

Now I would like to update you on the senior team. We have made significant progress in strengthening the Company's senior management team. I want to highlight several key appointments made since we last spoke. Natalie Levy, Senior Vice President Merchandising joined us on May 3rd. Natalie was most recently with Ann Taylor, and she brings deep merchandising experience across a broad array of categories and retail formats from specialty to discount to department stores. Barrie Scardina, Senior Vice President Planning and Allocations joined us on May 10th from Liz Claiborne where she was head of retail operations. Previously Barrie headed up planning, distribution, and business development for Polio Ralph Lauren. Dina Sweeney, a 26 year veteran The Children's Place has taken on the newly created position of Senior Vice President Outlets. She will lead the strategy to drive sales and profits for this important channel. And Sunil Verma, Senior Vice President and Chief Information Officer joined the Company on May 13th from Macy's where he headed up information and communication technology for Macy's Home Store, a $5 billion 800-store division. We're really excited to have these talented and experienced individuals on board.

Now I would like to update you on our five key growth initiatives. One, strengthening the merchandise. We had an opportunity to make some adjustments to our holiday buy this year which is scheduled to set in stores in September. We also planned to supplement the holiday line with expanded accessories, updated sleepwear, and additional footwear inventory, which we expect to drive incremental sales. With Natalie on board we expect to make significant progress on our longer term merchandise goals which include modernizing the offerings and differentiating the product between big and little kids. Dina Sweeney is starting work on an outlet only strategy for the Company. We have 130 outlets which is about 13% of the fleet, and this is an important area of focus and a big opportunity for The Children's Place. We are just in the initial planning stages, so I don't have any details to discuss today but will share more information about our plans as the strategy develops.

Two, accelerating new store growth with a focus on value centers. We opened 16 new stores during the first quarter of 2010, which is more than double the number we opened in the first quarter of last year. 11 of the 16 new stores are located in value centers, primarily in smaller, under penetrated markets. As I mentioned on our last call, we plan to open 65 new stores in 2010, nearly twice as many new stores as we opened last year. The majority of the new stores going forward will be located in value centers. This new store growth initiative is based on a disciplined retail strategy and sound financial requirements. Minimum hurdle rates for these value center stores are a year one ROI of 35% or higher and we are seeing returns well above 50% for the stores opened in the last year. There are 32 value centers stores in our comp store base. These value center stores led the fleet with the highest comparable store sales in the chain during the first quarter and they represent a significant growth opportunity for the Company going forward.

Three, improving our inventory management. We ended the first quarter with balance sheet inventory down 4% per square foot, and we expect inventory levels to be down high single digits by the end of the second quarter. Having the right merchandise in the right store at the right time is a huge opportunity for The Children's Place, and we're thrilled to have Barrie on board to lead the planning and allocation initiative for the Company. Barrie is working closely with Natalie to better strategize our inventories up front and to improve inventory allocation by channel and by market.

Four, sharpening the marketing message. We have the opportunity to provide our customers with a much clearer streamlined marketing message that aligns direct mail, email, windows and in-store signing. Our initial efforts started in April when our summer deliveries hit the floor. Our direct mail, our emails, our windows and our in-store signing were aligned on message for the first time with the focus on fashion and value. In addition, we're maximizing the returns on marketing by optimizing our direct mail and in-store couponing efforts and stepping up our marketing online. And five, driving e-commerce growth. E-commerce continued to outpace the rest of our business with a 22% sales growth during the first quarter. Longer term we have the opportunity to drive additional online sales by expanding into new categories and expanding our web presence outside the United States.

So to recap, we made significant progress in a very short time. We posted solid business results during the quarter with the highest Q1 net income the Company has ever recorded. We opened more than twice as many new stores during Q1 compared to last year and the value center stores outperformed the rest of the chain. Our e-commerce business continues to deliver double-digit sales increases. Our inventory position is well controlled. Our new marketing strategies are taking hold and the team is working together to drive our key growth initiatives forward. Our goal is to continue to steadily grow market share and I believe The Children's Place is uniquely well-positioned to do so.

We continue to operate our business under two assumptions. One, that consumer spending power will continue to be constrained by a lingering weakness in the economy. And, two, there is no near term catalyst to drive an acceleration in children's apparel purchasing. Right now our expectation is that comp sales will be in the positive low single digits for the second quarter. Now I will turn it over to Sue who will review the financials and update our outlook. Sue?

Thank you, Jane, and good morning, everyone. Net sales in The Children's Place business for the first quarter ended May 1, 2010, increased 5% to $422.1 million. Comparable retail sales declined 0.5% for the quarter. A 2% increase in the number of transaction during the quarter was offset by a 2% decline in average transaction size. We were pleased with the improvement in comp traffic, higher level of conversion, and increased transactions in US stores throughout the quarter which we believe was due in part to our decision to keep clearance product in the full price stores longer. This clearance strategy resulted in noticeable improvements in metrics for the full price stores during the quarter, which was partially offset by a decline in traffic and conversion in outlet stores. Overall this is a more effective and more profitable clearance strategy for the Company and we plan to continue implementing this approach going forward.

Regionally comp sales were strongest in the southeast and midwest. By department accessories were strongest followed by boys, girls, and newborn. The increase in net sales for the quarter was the result of three things. One, growth in our store base. At the end of the first quarter our store count was 962 compared to 922 stores at the end of the first quarter in 2009. Two, growth in e-commerce sales which increased 22% during the quarter on top of a 42% increase in the first quarter of last year and, three, the appreciation and the value of the Canadian dollar relative to the US dollar which positively impacted top line sales by approximately $8.4 million or 2% compared to the first quarter of 2009. Gross profit dollars increased 8% to $179.7 million during the first quarter of 2010 and gross margin increased 120 basis points to 42.6% from 41.4% last year. The increase is the result of a stronger IMU, a positive impact from foreign exchange, and slight leverage of distribution and occupancy which was partially offset by higher markdowns during the quarter. SG&A as a percentage of sales was 26.9% in the first quarter of 2010 representing approximately 90 basis points of leverage. Excluding items which impact comparability from the first quarter of 2009, SG&A leveraged by 30 basis points, due to slightly lower marketing expenses and holding the line on administrative costs which leveraged on higher sales volume.

Depreciation and amortization expense as a percentage of sales during the first quarter was 4.2% compared to 4.4% last year. Income from continuing operations before interest and tax increased 32% to $47.7 million in the first quarter of this year compared to $36 million last year. Net interest expense was $456,000 this quarter compared to $3.3 million last year as the Company paid off its term loan in 2009. Our effective tax rate for the quarter was 40.7% compared to 27.5% in the first quarter of 2009, as last year we had a tax benefit from the favorable settlement of an IRS income tax audit. Income from continuing operations net of tax increased 18% to $28 million or $1 per diluted share in the first quarter of 2010 compared to $23.7 million or $0.80 per diluted share in the first quarter of last year. Our diluted share count was approximately 27.9 million shares for the first quarter of 2010 compared to 29.6 million shares for the first quarter of last year. Excluding the transactions that affect comparability from the first quarter of last year, income from continuing operations net of tax increased 29% in the first quarter of 2010 and earnings per diluted share increased 35%. Foreign exchange positively impacted our first quarter 2010 earnings per diluted share by approximately $0.09 and the share buyback in 2009 positively impacted our first quarter 2010 earnings per diluted share by approximately $0.08. Net income for the quarter including the impact of discontinued operations was $27.9 million or $1 per diluted share compared to $23.5 million or $0.79 per diluted share last year.

Moving on to the balance sheet, our cash balance at the end of the first quarter of 2010 was $225.7 million compared to $224.3 million last year which included borrowings of $38 million from a term loan in last year's number. We were able to hold our cash balance steady while repaying the term loan and repurchasing approximately 2.5 million shares at a cost of $74 million during fiscal 2009. Net cash provided by operating activities increased approximately 30% in the first quarter of 2010 compared to the first quarter of last year. Balance sheet inventory at the end of the first quarter was up slightly compared to last year while inventory per square foot was down 4%. Carryover inventory was 5.6% of total inventory at the end of the first quarter which was a 100 basis points improvement compared to last year. During the first quarter we opened 16 stores and closed one. At the end of the quarter we operated 962 stores with a total of approximately 4.8 million square feet.

Moving on to guidance for the second quarter and fiscal 2010. For the second quarter of 2010 we're projecting a loss per share from continuing operations in the range of $0.38 to $0.33 per share. For fiscal 2010 we now expect earnings per diluted share to be in the range of $3.05 to $3.15 reflecting our stronger than planned first quarter results. Guidance for the second quarter and fiscal 2010 assumes comparable retail sales will increase in the low single-digit range and currency exchange rates will remain approximately where they are today. Given the stronger gross margin in the first quarter, we now expect gross margin upside of 60 to 80 basis points for fiscal 2010 compared to our previous guidance of positive 40 to 60 basis points. We expect second quarter gross margin to be higher than last year as a result of a stronger IMU and favorable foreign exchange.

There is no change to our SG&A guidance. We continue to anticipate SG&A spending as a percent of sales for fiscal 2010 will be approximately flat excluding noncomparable items. In terms of inventory we expect to end the second quarter of 2010 with total inventory per square foot down in the high single digits compared to last year. You may remember that inventory levels increased at the end of the second quarter in 2009 due to higher in transit inventory. We expect to reverse that this year with in transit inventory levels down significantly at the end of the second quarter.

In summary, we're pleased with the strong financial results the Company delivered during the first quarter and we expect to show continued improvement during the second quarter. We believe we remain well-positioned for fiscal 2010 with a strong balance sheet and cash position. And now, we'll open the call to your questions.

(Operator Instructions) We'll take our first question from Anna Andreeva with JPMorgan. Please go ahead.

Great. Thanks so much. Good morning.

Hi.

I was wondering if you could talk about the progression of your comp trend during the quarter. Just wondering if you saw a deceleration in the business in the last couple of weeks in April like most retailers did, and, Jane, as you look into the summer your comps obviously slowed significantly last year in the second quarter. Maybe talk about what you see as opportunities this year -- either with the products or promotional cadence.

Thanks, Anna. We're not going to comment on our bi-monthly comps for the first quarter, but I will tell you our business in the last couple of weeks of April did take a hit as most people did with the change in weather. If you recall, we were up against some very favorable weather the last two weeks of April last year, and we did not enjoy the same trend this year. We did have a tougher end of April.

As far as the second quarter question, we are looking for comps to improve in second quarter versus first quarter. You may recall on a two year run rate we're up against a 1% positive comp for the second quarter and we're looking to be low single-digits on top of that. So we feel that we will continue to improve off the first quarter.

And can you talk about maybe specifically opportunities this year from the product side or promotional cadence?

Yes. I really do think that the marketing strategies that we're putting in place are going to really help propel The Children's Place business. We saw it happen in the first quarter. I believe we will continue to see it gain traction in the second quarter, and we will continue to see throughout this year and into next year. We're really spending a lot of time understanding our business and putting together a much more focused, much more thoughtful promotional and marketing calendar than we have had here in the past, and I think you started to see that and you will continue to see that really, really help us.

Okay. That's helpful. And I am not sure if you mentioned this. What were your comps in your full price stores? Sounded like the outlet business was maybe a little bit of a drag from the top line perspective in the quarter?

We actually didn't break out full price stores versus outlets, but you are correct, outlets were somewhat of a drag on the quarter.

The full price stores were positive?

No. The full price stores were still negative. We did say that the value oriented centers outperformed the full price stores. Full price stores were negative, but not as negative as the outlets.

Okay. That's great. And could you just talk about maybe --

Thank you. We'll take the next question from Janet Kloppenburg with JJK Research. Please go ahead.

Good morning, everyone and congratulations on a nice quarter. Sue and Jane, I was wondering if you could talk a little bit about your full year expansion plans and if we should be -- how many stores you open, what the size of the stores will be and growth rates we should expect. And what percentage will be in the value centers.

And maybe if you could talk a little bit about the outlet business. Sounds like it might be suffering because it doesn't have the level of clearance that it had before, and how quickly you think you can get some made for factory product into these channels. Thanks.

Okay. Janet in terms of our expansion, we had announced that we expect to open 65 stores this year, and we're on track to open those 65 stores. About -- most of them will be value oriented centers. And of the 16 stores we opened in the first quarter, 11 were in fact value oriented.

Are they the same size as the mall stores?

They're about 4,500 square feet.

Okay. And can you give us by quarter how you'll be opening stores or you don't have that?

Sure. We have about -- sorry -- 16 in the first quarter as I said, 19 in the second and 30 in the third, and we expect to have all the stores open by the third quarter coming into the holiday season.

Okay. Great. And on the outlet strategy?

The outlet strategy --

Or did the outlets suffered from not having the clearance and how you see that unfolding?

Yes. The outlets definitely were weaker than the full line stores from a comp sales point of view in the first quarter. I think that one of the big things that Barrie brings to the table -- Barrie, our new Head of Planning and Allocation -- is really she has come in and is really able to help us start to look at inventory by channel. And I think that we will reverse that trend relatively quickly in the outlet. And I don't think that you necessarily need to think about that or model that for the balance of the year as a continuation. I think we can get that strategy well in hand pretty quickly.

Will you be developing made for factory product?

Yes. You won't see it this year. Right now our made for outlet product is only 3% of our outlet buys right now.

Right.

And we expect 3%. And we expect to increase that very significantly as we move into the latter half of 2011 and Dina really works on the strategy. We will have more to say about that in the months ahead, as we continue to develop that strategy, but we think there is a big sales and a bigger margin opportunity in the outlets.

Thank you. We'll take our next question from Thomas Filandro with SIG. Please go ahead.

My congrats as well on a great quarter. Jane, I think you noted that you plan on I think you said modernizing the offerings and I believe we will see some of that in that holiday delivery in September. Can you give us a little more color on exactly what we can expect to see and what if any impact will that have on the pricing or AUR structure of the business. And I have one follow-on question, please.

Thanks, Tom. I don't see it having any impact on the pricing structure. Really what we mean by modernizing the offering is instead of really looking at the boys and girls business as a one-size-fits all, we're really looking at the younger boy versus the older boy and the younger girl versus the older girl. We're really starting to when we really started to do that in holiday, and we'll make a lot more progress on that into 2011 with Natalie on board and Barrie on board now. We're starting to look at it as really two separate kids. And understand what those differences are and really dig into what sells by size and work hard to satisfy that customer a little bit better than we have.

You will start to see, for instance in graphics and our graphic tee program, we'll have almost 100% differentiation between little boys and big boys and 100% differentiation between little girls and big girls. There is a lot of things to look at in the denim business. There is things to look at in the fashion business. There is a lot of opportunity to really think about those sizes differently and maximize them.

That's good. Just a quick follow-up. E-commerce up again very strong 22% versus 42%. Can you tell us what are the drivers there? Are you seeing an uptick in new-to-file shoppers, increased basket, and what should we anticipate in terms of growth going forward for the balance of the year? Thank you.

We really see e-commerce as certainly leading the way as far as comp store growth. The thing that's driving e-commerce is traffic, and we have done traffic to the site. The stores line at The Children's Place has done an excellent of capturing additional email customers. We continue to see week after week and month after month, significant increases in who we're able, and the number of emails we're able to capture, and that is certainly reflected in those numbers you spoke of.

Thank you. Our next question is from Rick Patel with Merrill Lynch. Please go ahead.

Good morning, everyone. Can you talk about your sourcing costs? By now I am sure you made your purchases for -- at least some of them for the holiday season and I am wondering if you're beginning to see inflationary headwinds pick up and if you are what you might be trying to do to offset that?

We have. We're seeing the same -- we're feeling the same inflationary pressure everyone else is certainly with the prices of cotton and then some issues with ocean freight. You're correct. We have bought holiday at this point and we're in the process of negotiating the spring buy, and so what we can say at this point is stay tuned. We're doing what we can to mitigate the cost increases, and we'll report back to you once we have the spring buy finalized.

And your SG&A appear to be really well controlled in the first quarter. As we think about the back half of this year do you anticipate any upward cost pressure as it relates to investing in your Canadian e-commerce ops or improving your inventory systems and is that also embedded into SG&A guidance?

We're not anticipating significant increases in SG&A as a result of either of those two projects at this point. We do have them factored in. Again, our guidance on SG&A has not changed.

Thank you. Our next question comes from Marni Shapiro with The Retail Tracker. Please go ahead.

Hi, guys, congratulations.

Thanks, Marni.

If you can talk a little about the marketing. I received in the mail yesterday your new stock-up campaign which I thought was very clear, very price focused -- the flip flops, two for $5 and polos, two for $40. I think I thought it looked great. You're still including in it the season pass at 15% off. As you roll out the marketing for the rest of the year can you talk about how you balance things like the season pass? Does it still have the same impact it used to? Is it relevant? With the very clear pricing messages that you are focusing on now, you've always had the pricing but it seems like you're really amping that up. How does that all play together?

When you look at what we're doing as far as the seasonal pass and you really delve into that and understand how much volume that really did produce, it still is is an important key to direct mail, and we will continue to see those in our direct mail pieces. Having said that, we are reducing the amount of direct mail that we do send out. We have studied that very carefully over the last four months, and really have been able to trim down on the amount of direct mail we do and focus it better on the customers that respond to it.

As far as the value pricing messages, you will -- have started to see that. You're seeing it in the stock-up mailer that you mentioned, and you will continue to see a focus on those prices. We have always had very sharp pricing at the The Children's Place between the value and the fashion offering, but we have not done a good job of letting the customer know how great our values are, so you will continue to see promotions throughout the second quarter, through the holidays -- and holidays meaning Memorial, Fourth of July and into the fall and holiday season -- that are much more focused on what those great values are at The Children's Place. So I would say look for more of the same and I think it is only going to get better.

Awesome. Looks great. Congratulations. Good luck with summer.

Thank you.

Thank you. Our next question comes from Betty Chen with Wedbush Securities. Please go ahead.

Thank you. Good morning and congratulations.

Hi, Betty.

Good morning. I was wondering if you can talk a little bit about some of your learnings from aligning the marketing across [severest] channels. I know that we're early on after the initial effort in April, but anything interesting from that that we can learn and further refine the future campaigns?

Yes. I think one of the only things I probably can say about that without getting into too much monthly specifics on the first quarter was when we launched the summer line at the end of the March and the beginning of April it was the first time we had direct mail aligned with windows, aligned with email, aligned with in-store signage, and we went after big classifications and we saw double-digit increases in the sales this year versus last year in those classifications when that marketing hit.

I wasn't surprised. Again, without spending too much time in the past we really did not do a good job at all on focusing our marketing, and I think that there is so much upside for The Children's Place to continue to get really focused and aligned on message.

And I was wondering also separately in terms of DDC I think you mentioned in your remarks earlier looking into new categories as well as potentially going abroad to further drive sales growth. Can you talk a little bit about what categories are we thinking about, which countries, and potentially timing of those two efforts?

Yes. As far as international opportunity, our first opportunity is to launch a Canadian website which we will be doing in the first half of 2011, and I think after that, international shipping will be the next thing that we'll be talking about, so we're on track to launch that Canadian website in the first half of 2011. Canada is an important business for us, and we have about 10% of our fleet by the end of the year will be up in Canada. If you -- I am not sure we have spoken a lot about this, but if you look at Canada, for the first time ever at The Children's Place we did a direct mail piece in the first quarter. And for the first time ever we sent them an email.

So when you think about how much opportunity you really have considering we have never emailed them or never sent them a piece of direct mail, that's certainly one of the big marketing opportunities we have. We are working feverishly to collect emails in Canada as we do down here and we're doing a really good job. The stores are doing a great job with that. We should be in a very solid position when we launch our Canadian website to have a lot of customers waiting for us to ship to Canada. We're really excited about that market.

Thank you. We'll take our next question from Margaret Whitfield with Sterne, Agee. Please go ahead.

I wondered if you could elaborate on the difference between the performance of Canada and the US comps in Q1 and if you could discuss what your guidance includes for Q2 in terms of the ForEx impact. And also any change in timing of back-to-school shipments and any change this year in tax free events in key states?

Well, back-to-school shipments are the same. Tax free, the only thing we know about is Georgia seems to have canceled their tax free event. I think it is something like July 30th to August 2nd, but other than that we don't have a lot of changes.

The Canadian business was down somewhat compared to the rest of the business, and I think a lot of that has to do with the way we promote up there and as I mentioned some of the marketing we have. We did get hurt by the Olympics in February, so I think that was certainly a piece of it in the first month of the season. And as far as the ForEx, I will give that to Sue.

We're expecting a continuation of the Canadian ForEx rates into the second quarter. Same rate as what we're seeing today into Q2.

Thank you. Our next question comes from Kimberly Greenberger with Citigroup. Please go ahead.

Nice start to the year.

Thanks, Kimberly.

Jane, you and I have talked about the tremendous opportunity to improve the planning and allocation process and now that you have got the senior management team that you were looking for in order to be able to execute on that, could you look out over the next one, two, three, four quarters and tell us how you see the -- how you see your progress in taking advantage of some of the low hanging fruit in terms of planning the assortment better, getting the right inventory to the right stores, and more effectively tiering your tropical versus warm versus cold climate stores? Thanks.

Sure. As we discussed on the previous call, I think in the second half of 2011, I would say that we will be firmly in place with all the initiatives that you spoke of and really, really have a good handle on planning and allocation. Having said that, Barrie has been here -- now this is week two and for Natalie it is week three -- and they are already digging into a lot of things. I think that we can make significant progress before the second half of 2011. I just don't think the entire system will be in place until then.

Barrie has already come in and she is working with Natalie on placing the spring line right now, and she has been able to come in and give us a lot of information that in the past we might not have had access to. I think the good news in talking to Barrie is that after looking at the systems we have and looking at the information that a lot of the information that we need is there. It is just a matter of mining it better. From a merchandise planning system and an allocation system, she is deep in study in that now to really understand what she thinks that we'll need and together with Sunil Verma, our Chief Information Officer, we'll be making those decisions over the next 30 to 60 days.

I feel good. I don't want to you get the impression that nothing is going to happen until the back half of 2011, because a tremendous amount is going to happen before then and is already happening. We're really energized to have her on board and the new team is working really well together, and there is a ton of opportunity even as we go into the fall season, not even the holiday season of this year, to better allocate by channel. And by channel I mean to Canada, to US, to outlet and to E-com, and she is already making progress and making suggestions there. I feel even stronger than I did before she came, about how big this opportunity is and very, very happy she is in place now.

Terrific. Thank you.

Thank you.

We'll take our next question from Dorothy Lakner with Caris & Company. Please go ahead.

Good morning, everyone. Wanted to ask about lead times. I know you talked on previous calls about shortening them, getting faster flows of product, and I just wondered if you could update us on that. And then secondarily just a little bit more color on the shoes and accessories business. I know you have talked about the opportunity there as well.

Shoes and accessories have really led the way and had very, very strong comps for a long time. There is a lot more opportunity to make more of the accessories business. There is a lot more accessory business to be done, and there is a lot more categories of accessory that is we don't currently trade in that we have opportunity. Without really tipping our hands will you see a lot more of that in the third quarter set up, and then you will see much more of it in the holiday set up.

As far as the lead times are concerned, with Natalie on board that's something that she has also immediately noticed is that -- where is the opportunity for us to shorten up on lead times, and things like we spoken about on previous calls -- how do you get closer to time on denim, how do you get closer to need on knitwear -- those -- and obviously the accessory conversation which is undermaximized here right now -- so she is really focused on that and I think with her on board and Barrie also helping her on the planning part we're going to be able to make some quick progress on that.

Thank you. We'll take our next question from John Zolidis with Buckingham Research Group. Please go ahead.

Hi. Good morning.

Hi, John.

If I could just follow up on that question a little bit and maybe try to extract a little bit more specifics. You talked about allocating by channel and market. Is there a potential benefit from classifying your stores in tiers and looking at shopping patterns by local demographics or psychographics or is there any opportunity to adjust what inventory levels go to the stores on those bases and has that not been used in the past. And can you just maybe talk a little bit more specific about -- maybe just throw out a few details what potentially could be done? Thank you.

It clearly has not been done in the past. The ultimate vision is the right merchandise in the right store at the right time. And the ultimate vision is really more of a localization strategy and to really put the merchandise in by psychographic, by demographic, by market, by climate. The way that Barrie and I are approaching this is really to start off by thinking by channel.

Each channel is separate and each channel needs to be looked at separately by planning and by merchandising -- so you take the Canadian channel, you take the outlet channel, you take the US store channel, and you take the E-com channel. Each one has unique characteristics. Each one of them has unique customers. Each one of them has unique merchandise flow patterns. So to separate those out between those four channels and then to really dive in by store within those channels is I think the big unlock on the sales and the margin at The Children's Place. And I felt that since the day that I came. Barrie obviously is in agreement as is Natalie, and I think the team is really focused on how do we get there and how do we get that done. I think as I said before, knowing that a lot of the information we need to do that is here, but really not having minded appropriately in the past and not really have had the reporting structure around it that we needed to make the appropriate decisions -- that's where the opportunity is. And I think that we can get there on the data side and the reporting side very quickly.

As far as your question about when you can started to make those changes, Barrie has already started even in the less than two weeks she has been here to talk about how we can make better allocation decisions on the fall deliveries which will be the July, mid-July/August set up and then certainly how we make better allocation decisions by channel into holiday and onward. I think from a localization strategy when you really get into the climate and the markets and the demographics I think that's the latter half of 2011, and I think that's where you really start to see it all come together.

Thank you. Our next question is from Richard Jaffe with Stifel Nicolaus. Please go ahead.

Good morning. We say Stifel. Thanks very much. Great season, guys. What was surprising was the decline in ad spend and yet the better than expected result from your ad investment or marketing investment. Can you talk about how that shifted, how you can spend less and generate more sales and should we anticipate this kind of result for the balance of the year?

Recall we said on the last call that we were looking at all the marketing programs to see what the rate of return was so what we were able to do in the first quarter is just cut out some of the programs that in fact had a very low rate of return. And again given the rate of return they weren't in fact getting the sales, they weren't getting the return on investments so we were able to cut some of those programs. The answer is, yes, we expect to see a continuation of that through the rest of the year, but we may be reinvesting back in other programs that we do think will get us the top line and profit yield that they should.

Given the results should we expect a decline in the borrowing for the balance of the year or more importantly a decline in the interest expense for the year?

We're actually not in a net borrowing position right now, and to the extent that we do borrow somewhat in the -- usually we get into our cash crunch period really in July when we've got coming out of summer and we're buying fall inventory. I don't think we'll be into that facility, though, for very much, if at all, this year at this point -- so basically what you're seeing on interest is really just interest income and the costs of maintaining our facility and I don't expect to see material changes to that as the year progresses.

We'll take our next question from Linda Tsai with MKM Partners. Please go ahead.

What do you think are the differences if any between your outlet mall-based and value center customers and what did traffic look like in the quarter between these different locations?

I don't think that between the value center customer and the mall customer there is necessarily a big difference. I think that with our unique position in the marketplace as that pertains to fashion and value I think that we do appeal from the malls to the value centers. When you look at the outlet customer, that is a different customer, and when you start to really study outlets and you look at when the traffic happens in outlets and you look at it by outlet, you start to see there is a different receipt pattern that would benefit that shopper.

As they shop, there is a different need and there is a different timing of the outlet shopper, and without getting into a lot of detail on that, particularly since Dina has just gotten to the job and is just formulating a strategy, there is a different merchandise flow I would say -- would be one of the biggest things that we can do to help impact the outlets. You are going to be hearing about more of that on the future calls.

I know there is a difference between the prices between your full price obviously and your outlet, but do you also price your merchandise differently between mall based and value center stores?

No, not at all.

And then one final question. When you say you will continue to clear end of the season product through the stores, do you consider this a permanent strategy and not something you will revert as you solidify your outlet strategy?

Exactly. I don't think we'll revert because I think over time, you will start to see the outlets dramatically shift into made for outlet only product and you will see us put less more productive inventory into our stores so we don't have the amount that we have had to clear. And will you start to see us put much more exclusive or made for outlet only products into the outlets. So you will see a big rebalancing of that. That's going to take time. Those are the things that will take us to the back half of 2011 and in some cases longer as it pertains to outlets.

Thank you. We'll take our next question from Lee Giordano with Imperial Capital. Please go ahead.

Thanks. It is Lee Giordano. Couple of questions here. First, can you talk a little bit more about the category trends in the quarter and how girls versus boys performed. And then secondly what kind of opportunities on the merchandise side do you see for back-to-school or even holiday this year versus last year? Thanks.

Thanks, Lee. The trends were shoes and accessories led the way, followed by boys, followed by girls followed by newborn. Those were the trends for the first quarter. As far as back-to-school is concerned, the fall buy is -- was bought when I got here and I think what you will see in that is a much stronger marketing message that will help to propel that like it has started to with the summer deliveries. And I think in the holiday line is where you will see the biggest change from last year where we were able to not anniversary classifications that were not successful for us, and we were able to put a lot more business behind a lot more volume and a lot more receipts behind the key classifications that work for us.

In the first quarter one other thing I wanted to add about the business there was in the dressy product -- that was definitely the tougher part of the business in the first quarter. We have owned a lot of dressy inventory, and which -- the customer is certainly not buying dressy to the level they bought it two or even three years ago. It is not versatile. There is really not a lot of end uses other than a one wearing and we have a big opportunity next year in first quarter to really restrategize the way The Children's Place thinks about dressy. To that point we were able to catch that in holiday of this year and really place a lot less true dressy products and add a lot more casual elements to that so that there are multiple end uses for it and the consumer feels better about buying it.

Thank you. Our next question will be from Jim Chartier with Monness, Crespi, and Hardt.

Good morning. Can you tell us what the inventory levels will be at the end of second quarter excluding the in transit and also did you say that you should have better inventory investment in the outlets beginning in fall of this year?

I think that we will have put, yes -- I think that we won't have the made for outlet only product, but we will have inventory aligned better by channel by the fall. And as far as the inventory question is, I am going to give that to Sue.

Yes. We expect our inventory levels not including in transit in the second quarter, to be flat to up slightly -- very slightly.

And so then that would still be down on a per square foot basis ?

Oh no, I'm sorry, I meant per square foot. I beg your pardon. Per square foot, yes.

In terms of markdowns, given the benefits from some of the planning allocation strategies you highlighted that will impact fall, when should we start to see the markdown rate start to decline on a year-over-year basis?

Bear in mind fall was bought before any of the with -- under the old inventory purchasing strategy, so I wouldn't expect to see a decline in fall. We were able to -- Jane and the team were able to curtail some of the holiday buys -- so I would expect to see some improvement in markdowns in the fourth quarter.

Great. Thank you.

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Good morning, everyone, and congratulations. Given the cash usage that you have, how are you thinking about -- or the cash build that you have -- how are you thinking about the usage of cash? And as you think about the gross margin in terms of the complexion, further opportunities for IMU, is there or how do you see the balance between promotional levels, cost increases and IMU going forward? Thank you.

Okay in terms of the cash, Jane and I are in active discussions with each other and with our board on how we maximize shareholder value with that cash. Just -- there are active discussions, and I would just suggest you stay tuned. Having said that, I would like to say we do like -- I'd like to wait until we have more visibility to back-to-school before actually making a decision on how we maximize value with that cash. Just because that's really when we generate -- when we really start to generate cash for the year.

On the IMU, we are looking for IMU. We expect to see IMU expansion in the second quarter. It was already bought, and just recall that last year we had seen IMU expansion starting in the third quarter, so we expect that to pretty much level out in Q3. And then versus prior year we are planning on an IMU deterioration in Q4 but we are expecting that to be mitigated -- more than mitigated -- by markdown optimization.

Thank you.

Thank you. I would now like to turn the conference back over to our speakers for today.

Thank you very much for joining us today. We appreciate your interest in The Children's Place. Have a good day.

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