Children's Place Inc (PLCE) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to The Children's Place second quarter conference call. At this time all participants are in a listen-only mode. Later, you'll have an opportunity to ask questions during our question-and-answer session. (Operator Instructions). Please note this call may be recorded. It is now my pleasure to turn the conference over to Ms. Jane Singer. Please go ahead, ma'am.

Thank you Caitlin. Good morning everyone. And thank you for joining us today for a review of The Children's Place Retail Stores Inc. second 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 statement, set out 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. And now I'll turn the call over to Jane Elfers for her opening remarks.

Thank you, Jane, and good morning, everyone. The Children's Place posted solid second quarter results by driving sales of summer and early back-to-school product. We cleared through our summer merchandise faster than last year, and are entering the third quarter with 33% less carry-over inventory per square foot, which is enabling us to present the back-to-school merchandise in a much more compelling way. For the second quarter, net sales increased 9%, comp sales increased 5%. We generated positive comp sales in US stores, Canadian stores, and eCommerce, which is the first quarter in two years that we've comped positive in all three channels.

We've also narrowed our second quarter loss through a combination of top line growth and strong expense control. The loss from continuing operations after tax was $8.3 million, or $0.30 per share. Excluding one-time items from the second quarter of last year, our loss improved by 33% for the quarter. Based on our solid second quarter performance, we are raising fiscal 2010 EPS guidance to a range of $3.08 to $3.18. For the third quarter of 2010, we anticipate flat to positive low single digit comps, and EPS in the range of $1.38 to $1.43. We also announced today that our Board of Directors has authorized a $100 million share repurchase program. This program reflects our strong balance sheet, confidence in our long-term growth, and our commitment to returning value to shareholders.

Now I'd like to update you on our five key growth initiatives and the progress we're making. First, improving the merchandise. We made a number of merchandise changes, which drove sales during the second quarter. For example, we identified denim and graphic tees as categories that had the potential to outperform. We strategically positioned our marketing efforts behind these two categories, and they drove significant volume in July versus last year.

We also identified an opportunity to drive the uniform and backpack business, and marketed these categories more strategically, resulting in stronger sales during the second quarter. We delivered boots with our July floor set this year, versus September last year, and they're performing well. And we introduced an you assortment of impulse accessories to all stores in the second quarter, and we're seeing strong early reads on this high margin category.

Two, is accelerating new store growth with a focus on value centers. We opened 18 stores in the second quarter, and have opened 34 stores year-to-date, representing a 60% increase in store openings. Square footage increased 5% at the end of the second quarter, compared to last year. Three quarters of the stores opened year-to-date are in value centers, primarily in smaller, underpenetrated markets.

We remain on plan to open 65 new stores this year, nearly twice as many new stores as we opened last year, with the majority being located in value centers. The minimum financial hurdle rates for the value center stores are a year one ROI of 35% or higher, and we're continuing to see returns well above 50% from the value center stores. Build-out for our tech two store format are continuing to come down, so we believe there's additional opportunity to improve these new store ROIs, and we remain confident that there is significant store growth opportunity in our future.

Improving inventory management. We took earlier and more aggressive markdowns on summer product in the second quarter and are entering the third quarter with 33% less carryover inventory per square foot. These markdowns were focused on maximizing summer sales, while at the same time, strategically driving down carryover inventory levels. As I mentioned earlier, having less carryover inventory is enabling us to present back-to-school merchandise in a more compelling way.

We realigned our planning and allocation organization into four channels during the second quarter. US stores, US outlets, eCommerce, and Canadian stores. The information already surfacing from each channel's analysis has led to some immediate improvements in the allocation of the fall 2010 line, and is expected to lead to even more dramatic improvements in planning and allocation in 2011. We've reduced initial inventory allocations at the time of the floor set so there is more inventory available in our distribution centers from which we can efficiently replenish into sales. This minimizes store transfers and enables us to better capitalize on the different channels of our business.

Four, sharpening our marketing message. We believe our more strategic focus on marketing during the second quarter was a key driver of our sales results and we continue to communicate our compelling value and fashion message through windows, in-store signage, e-mail and direct mail. And lastly, driving eCommerce growth. ECommerce had a very strong quarter with increases on all key metrics, including traffic, transactions, average dollar sale and average unit retail. Our eCommerce planning team made tremendous progress during the quarter in more appropriately planning the inventory level to meet demand.

So in summary, for the second quarter, sales grew 9%, our loss narrowed to $0.30 per share this year compared to an adjusted loss of $0.42 last year, expenses were well controlled, and we now believe we will leverage SG&A in fiscal 2010. Inventories are very clean, with 33% less carryover inventory per square foot coming into the third quarter, and we expect the markdown rate to moderate in the fourth quarter as lower inventory levels and a more strategic allocation process helped improve product sell-through.

We increased our EPS guidance for fiscal 2010. We announced $100 million share repurchase program. And the entire team is continuing to make excellent progress against our longer term growth initiatives, which we believe will drive sales and profits in 2011 and beyond. Now I'm going to turn it over to Sue, who will review our financials and update our outlook.

Thank you, Jane, and good morning, everyone. Net sales from The Children's Place business for the second quarter ended July 31st, 2010 increased 9% to $345.3 million. Comparable retail sales increased 4.7%. A 10% increase in the number of transactions, driven by higher traffic and conversion, was offset by a 5% decline in average transaction size, as higher units per transaction were more than offset by a decline in average unit retail during the quarter.

Regionally, comp sales were strongest in Metro New York, the Southeast, Southwest, Midwest, and West. By department, boys and accessories were strongest, followed by girls. Newborn comped in the negative low single digits. All store types comped positive during the quarter, except outlets. Outlets had a negative low single digit comp, which was a sequential improvement from the first quarter as a result of better inventory allocation to outlets from the distribution centers.

The increase in net sales for the quarter was the result of several factors. First, growth in our store base. At the end of the second quarter, our store count was 977 compared to 937 stores at the end of the second quarter in 2009. Two, positive comp sales in the US and Canadian stores. Three, positive eCommerce sales of 30% on top of a 24% increase last year. And four, the appreciation in the value of the Canadian dollar relative to the US dollar, which positively impacted top line sales by approximately $4.2 million, or 1% compared to the second quarter of 2009.

Gross profit dollars increased 8% to $113.6 million during the second quarter of 2010. Gross margin declined 50 basis points to 32.9%, from 33.4%. Our gross margin was negatively impacted by higher markdowns, which was largely offset by distribution and occupancy leverage, a stronger IMU, and a small positive impact from foreign exchange. The decision to take earlier and more extensive markdowns, concentrated on big girls and newborns, during the summer quarter is consistent with our strategy to clear through in-season merchandise faster, so that we enter each new season with minimal carryover inventory. As Jane mentioned in her opening remarks, we're entering the thirds quarter very clean with 33% less carryover inventory per square foot than last year, and we expect the markdown rate to moderate somewhat in the fourth quarter as lower inventory level and more strategic allocation process is expected to help improve product sell-through.

SG&A as a percentage of sales was 31.1% in the second quarter of 2010, representing approximately 250 basis points of leverage. Excluding items which impact comparability from the second quarter of 2009, SG&A leveraged by 270 basis points, due to better management of store payroll, favorability in other store expenses and lower marketing and administrative expenses. We had asset impairment charges of $1.2 million during the second quarter of 2010, related primarily to three underperforming stores. Depreciation and amortization expense as a percentage of sales during the second quarter was 5.3%, compared to 5.6% last year. The loss from continuing operations before interest and tax improved by 30% this year, to a $13.1 million loss in the second quarter, compared to an $18.7 million loss last year.

Net interest expense was $381,000 this quarter, compared to $1.5 million last year as the Company paid off a term loan during 2009. Our effective tax rate for the quarter was 38.8%, compared to 64.1% last year. In the second quarter of 2009, we had a one-time benefit from excess foreign tax credits, resulting from the repatriation of cash from our Canadian subsidiaries. Loss from continuing operations net of tax was $8.3 million or $0.30 per share in the second quarter of 2010 compared to a loss of $7.2 million in the second quarter of 2009, or $0.24 per share, including several one-time items. Excluding the transactions that affect comparability, this quarter's loss from continuing operations net of tax was a 33% improvement from the second quarter of 2009, when the Company reported an adjusted loss of $12.4 million or $0.42 per share.

Foreign exchange positively impacted our second quarter 2010 by approximately $0.05 per share. The share buyback in 2009 negatively impacted our second quarter loss by approximately $0.02 per share. Fiscal year-to-date earnings per diluted share were $0.70, which is more than double the adjusted earnings per share last year, excluding one-time items. Our basic share count was approximately 27.8 million shares for the second quarter of 2010, compared to 29.6 million shares last year.

Moving on to the balance sheet, our cash balance at the end of the second quarter of 2010 was $198.2 million, compared to $152.2 million last year, including borrowings of $38 million from a term loan in last year's number. We were able to improve our cash balance while repaying the term loan and repurchasing approximately 2.5 million shares at a cost of $74 million during the third quarter of 2009 and reinvesting in our business in the form of CapEx. As Jane mentioned, we announced in our press release this morning that we plan to utilize $100 million of cash on our balance sheet to begin repurchasing shares. We believe the share buyback program is consistent with our commitment to increase returns on capital and create shareholder value. Balance sheet inventory at the end of the second quarter was down 19% compared to last year.

On a square foot basis, inventory was down 22%. You may remember that inventory levels increased at the end of the second quarter in 2009, due to high in transit inventory. Excluding in transit inventory, at the end of the quarter, inventory was down approximately 12% per square foot. Carryover inventory was 3.6% of total inventory at the end of the second quarter, which represents a 60 basis point improvement this year or a decline of 33% per square foot. During the second quarter, we opened 18 stores and closed three. Year-to-date, we have opened 34 stores and closed four. At the end of the quarter we operated 977 stores with approximately 4.84 million square feet.

Moving on to guidance for the third quarter and fiscal 2010. For the third quarter of 2010, we're projecting earnings per diluted share from continuing operations in the range of $1.38 to $1.43. For fiscal 2010, we now expect earnings per diluted share to be in the range of $3.08 to $3.18, reflecting our stronger than planned first half results. This guidance assumes flat to positive low single digit comparable retail sales, and assumes currency exchange rates will remain where they are today. The guidance does not include the impact of a potential share repurchase. Given the higher markdowns in the second quarter, we now expect gross margin upside of 20 to 40 basis points for fiscal 2010, compared to our previous guidance of 60 to 80 basis points. We anticipate that gross margin will be approximately similar in the third and fourth quarters of 2010.

Given the strong cost savings realized in the first half, we now anticipate selling, general and administrative expense as a percentage of sales for fiscal 2010 will leverage by 30 to 50 basis points, excluding noncomparable items. Our previous guidance assumed flat SG&A as a percentage of sales. In terms of inventory, we expect to end the third quarter of fiscal again with total inventory per square foot down in the high single digits compared to last year.

In closing, I want to briefly comment on what we're experiencing in terms of cost pressures for the spring 2011 line. Higher cotton prices, higher ocean freight rates, increasing China labor rates, and reduced manufacturing capacity are negatively impacting sourcing costs for the spring line. We were able to mitigate some of these costs through a change in mix, particularly in the girls business which accounts for approximately 45% of our sales. We are also planning some very selective price increases. Our goal is to get IMU as close to parity with spring 2010 buy as possible, and we're making very good progress. Fortunately, the global cotton market and ocean freight prices appear to be stabilizing, so we're expecting that by mid-2011, sourcing costs will start to become more favorable. Thank you, and now we'll open the call to your questions.

Thank you. (Operator Instructions). And it looks like we'll take our first question from the line of Betty Chen from Wedbush Securities. Please go ahead.

Good morning, and congratulations on a great quarter. I was wondering if you can speak a little bit to the environment, sorry if you mentioned this in your prepared remarks. But in terms of the environment, what are you seeing out there? It does appear that the consumer has turned a little bit more cautious. We have heard from many that there is maybe some heat wave issues that's hurting early back-to-school selling in August. Wondering if, typically when that happens in the past, along with a late back-to-school start with Labor Day in week two of September, what typically happens to the business?

And within that environment, how are you thinking about managing Children's Place stores and online, and trying to maintain your competitiveness, and remain top-of-mind? Thank you.

Hi, Betty. It's Jane. Thank you. I think to answer the first part of your question about the consumer, when we first entered this year, and we've spoken about it a couple times, we really approached this year very cautiously from the consumer's point of view. Really keeping in mind that we didn't feel that for the entirety of the year that we would see the consumer really change from where she's been, and where her mindset has been. And we're seeing basically a continuation of three trends that have been going on with our customers for over a year. They obviously continue to be impacted by the difficult economic environment, and they are spending very cautiously. They are buying much closer to need, and they're searching out for the best value.

And as far as The Children's Place is concerned, how we look at that is, we realize they are buying closer to need. The comments you made about the weather, we have not seen a significant weather change really anywhere in the US so far during this back-to-school. So we do think when we do get that weather change, we certainly will see a pick-up.

And then as far as searching for the value, I think as I mentioned in my opening remarks, we have a much stronger and much more compelling marketing calendar as we did for the second quarter, and a much more strategic marketing calendar for the third and fourth quarter for the back half of the year. So I think that we're well-positioned from that point of view when the weather does break.

On that, Jane, how do you feel about evaluating potential price increases next year in this environment? How do you feel the consumer will be able to accept that? And is there any way you can quantify some of the price increases you're evaluating?

Hi, Betty, it's Sue. When I mentioned in my prepared remarks that we're taking price increases, they're very small, and very, very selective. We've kind of combed through the assortment on an item by item basis. We don't think that they're too much for the consumer to absorb. It's not as though we've taken a 5% across-the-board price increase. It's really item by item, and again, the increases are very small.

Thank you. And it looks like we'll take our next question from the line of Linda Tsai from MKM Partners. Please go ahead.

Yes. Good morning. Given the stronger than expected sales, and the larger than expected decline in inventory, do you think you maybe left a little bit of margin and gross dollars on the table, and is there opportunity to adjust this strategy going forward?

Hi, Linda. It's Sue. We really don't think that. Basically the strategy is, if we think we have a problem, we take a markdown and we take it as soon as we can just to clear through that inventory. Jane will augment this. But we really did have some fashion misses in big girls and in newborns. That did impact our margin. But we don't think that was in fact -- we don't think that was avoidable.

And then just exiting the quarter with very clean inventory allows for a very compelling Fall presentation. As we look at the components of our margin and our markdowns, the answer is we don't really -- we don't feel as though we left margin on the table.

And Linda, also just to kind of piggyback on that, I have a bias towards lean inventories, and it's my feeling that we've been operating this Company with more inventory than we need. So I think when you look at the second quarter, it's really a tale of two margins. Where we really had the pain in the margin was in the big girl area and in the newborn area. As I've spoken about before on previous calls, as far as newborn is concerned, I think it's really a mix issue, and we have been way too heavily weighted towards wovens in newborn, and you will start to see that dramatically change with our holiday deliveries, which start to hit at the end of September and the beginning of October.

And on the big girl side, from margin we had some real fashion misses in the quarter, and we also had too much inventory in a lot of categories in big girls. So we made the decision to really attack those, move through those, get those behind us so that we could go forward into the back-to-school period in a much cleaner way, and not have our back-to-school products fight with Summer clearance. So I think that when you look at our July sales, and when you look at what happened with our early Fall selling, I think we put ourselves in a good position to really kind of kick off the season in a much better way than we did last year.

Thank you. And we'll take our next question from the line of Janet Kloppenburg from JJK Research. Please go ahead.

Good morning, everyone, and congratulations on a very good quarter. I had a couple of questions on gross margin. I think you were looking for it to be up in the second quarter. It sounds like maybe you just decided to get more aggressive on some of these fashion issues. Is that a correct interpretation?

Yes.

How is your gross margin in Canada? Was that affected as well by these more aggressive markdowns?

Just about the same, except that Canada had a slightly positive impact from currency, because again we're buying inventory with a stronger Canadian dollar, but yes, just about the same dynamic as the US.

Okay, and Sue, you want us to think about gross margins being down in the third quarter, and then perhaps up in the fourth quarter? Is that the right way to think about it?

That's correct, Janet, with the margins being approximately equal in the third and fourth quarters. And just by way of background on that, we expect the fourth quarter margin to be greater than last year, primarily because last year, recall we had all those rugby sweaters that we were marking down to $5. We didn't buy them this year. So we have a much cleaner buy for the fourth quarter, and as a result, we do expect margin to improve in Q4.

Okay, great. And I just wanted to ask a big picture question. We heard from Gymboree last night that back-to-school started slow (inaudible). Are you guys basically saying that back-to-school has gotten off on a good note?

Yes, when you look at the July, Janet, and it's really all we can comment on because it's a little bit too early in August, we are seeing the weeks of business build in August, as you would expect for back-to-school. But if you just take July, and you look at the back-to-school/Fall business this year versus last year, we had a stronger performance in back-to-school than last year, and that was really driven by some key categories that I mentioned in my opening remarks. Denim was very strong for us. The uniform business was very strong for us. The backpack business was strong for us. It really was driven by the basic business.

And I think a big part of that, as I had mentioned, was the more strategic focus on marketing, and really taking a position early in the year to get behind those kind of key early drivers and really market those. So the answer is yes.

And we'll take our next question from the line of Marni Shapiro from The Retail Tracker. Please go ahead.

Hi, guys. Congratulations.

Thanks, Marni.

Could you talk a little bit, you mentioned the gross margins for girls coming into 2011, and you said you were doing some things to mitigate the sourcing cost. Could you just talk a little bit about that?

And you also touched on allocation, some changes there. It looks like you were able to make for back-to-school, and I'm guessing into Fall, could you talk a little bit about if that trajectory should increase as we go into fourth quarter, some of the allocation changes.

Yes, as far as the first part of your question on the sourcing cost, big girls to me is kind of a redo, and that's where we started with the holiday line, and certainly continued into Spring and Summer. So if you look at how we're buying the classifications in big girls, and if you look at how we're buying fashions versus basics, and just so many of the metrics that go into the buy of big girls, they're very, very different for 2011 than they were in 2010. And that is really helping us on the costing as we go into some more key items, and into some more basics, and out of some of the fashion misses we have. We've been able to mitigate some of those cost increases just by that mix change.

From the allocation part of the question, Barrie has worked very hard, very quickly, to get her team aligned into the four channels of the business, and we've been able to give less initial allocations up front to the stores, and hold more into the DC so we can allocate into the trending stores. So that has helped us from a lot of different ways. Obviously on the top line it will help us, and will continue to help us as we go forward and get better at it. It mitigates transfer activity that we need to do. It helps us in labor costs in the stores. So, a lot of good things are coming out of the new planning and allocation team.

Fabulous. Good luck with the rest of Fall.

Thank you.

Thank you. And we'll take our next question from the line of Margaret Whitfield from Sterne Agee. One moment, please. Your line is open.

Good morning, and congratulations. Yes, I saw the fun-to-go items, Jane, in the stores, and I wondered how that line might evolve for the holiday period and into next year, what types of accessory pieces will you be selling later in the year?

Hi, Margaret, and thank you. The accessory impulse business is really off to a great start, and as we all know, there's a nice margin level attached to that. This is our first foray into it. We have some new players on our accessories team, and we've been working very closely with the market. You'll continue to see items come in for the holiday season. I really don't want to go into specifically what they are, but you'll see more pick-up items priced the same way, start at $2.50. Most items are priced under $5. So you'll continue to see those by-the-register items. We'll be introducing jewelry very shortly in the next four weeks, which you'll see, which I think is a huge opportunity for The Children's Place.

Then if you go a little bit further out into the season, you'll start to see things come in that go with like sleepwear accessories, and kind of like shop concepts that we haven't had before. So you'll just continue to see that accessory business expand and expand over time.

The other thing that we're also seeing with the accessory business, can't talk about accessories without talking about shoes. The shoe business has been really, really great. The boot business is off the charts versus last year because we did deliver our boots in the month of July with our first set-up, versus waiting until September last year. So we've really been able to get a jump on that, and you will continue to see us expand our shoe department in a number of our stores, and then when we get into Spring 2011, you'll see a major expansion in shoes and the number of styles we're carrying. So we're really excited about those non-apparel businesses adding to the total experience.

Could you comment on how much accessories and shoes is today roughly, and where it might go, and what the margin difference is between apparel and accessories, and if this is aiding your UPTs with the fun-to-go.

It's definitely aiding the UPTs. As far as commenting on the margin, we can't really do that, but as a percent to total, it's still less than 20% of the total business, accessories and shoes, and I think it has the potential to grow significantly.

Great. Thank you.

Thank you.

Thank you. And our next question comes from the line of Rick Patel from Banc of America. Please go ahead.

Hi. Good morning, everyone.

Hi, Rick.

Your inventories are pretty lean going into the third quarter, and I'm just wondering, are there any categories that you think you're underinvested in right now. And as we think about your new strategy, how should we think about inventory flows for the back half of the year?

I think as far as being underinvested in anything, that's not a concern at all. As I had said, I think we have managed this business with too much inventory, so I think we have significant opportunity to continue to manage the inventories down. My kind of philosophy is, inventory management is the key to profitability, and we'll continue to operate under that.

As far as the back half of the year, Sue, I think I'll turn it over to you. I know you mentioned we don't give it for the end of fourth quarter, but for third quarter I think it was high single digits?

That's correct. We expect the inventory to be down in the high single digits. And I would also say, if you look at the components of that inventory, we actually bought Fall fashion down and Fall basics up. So we feel like we have the right mix of inventory to make our sales.

And then can you provide some color on your outlook for merchandise margins, should we expect a similar magnitude decline for the back half as you had in the second quarter, since you're taking earlier and more aggressive markdowns now?

No, actually what I said in my prepared remarks is we expect to see our merch margins decline a little in the third quarter, but we expect the fourth quarter to actually improve versus last year. And that's because last year we were overinvested in those rugby sweaters that were a big fashion miss that we had to mark down to $5. We had a lot of fashion misses in the fourth quarter that we actually marked down. A lot of dressy in the fourth quarter that we had to take pretty steep marks on, and we just didn't buy that stuff. We didn't buy those items this year. We bought other things. And as we've said before, Jane got here in time. She couldn't influence the design of the fourth quarter. But Jane had a lot of influence over the actual -- over what we actually bought, and how we assorted the fourth quarter.

Thank you. And we'll take our next question from the line of Dorothy Lakner from Caris & Company. Please go ahead.

Thanks. Good morning, everyone, and congratulations on the quarter.

Thanks, Dorothy.

Just going back to the assortment for a minute. I wondered if you could sort of update us on where you are in terms of making those differences between greater, I mean between for example, big girls and small girls. And then just in terms of where you are in this kind of shift between basics and fashion, how big is the magnitude of that shift, and would we see a further shift going into 2011? Thanks.

Sure. On the holiday line, I don't think you're going to see as much of the differential between big and baby. Where you will see it is in the graphic portion of the line. We're really getting close to being 100% differentiated between big and baby girl graphics, and big and baby boy traffic Ts.

Where you'll see the biggest change-up is as we get into the Spring deliveries, which start to hit in December. That's where you'll start to see a bigger shift between big girl and little girl, and that will continue through the Spring deliveries through March, and then obviously into Summer into the back half of next year. So you will see noticeable differences when we get into next season.

From a shifting of the line from basics to fashion, it's my feeling, when I speak to fashion I'm really speaking to the girls' side of the business. The boys' side of the business has been much stronger than the girls' side of the business. I think the boys' side of the business is in good shape, and I think that we'll just continue to improve it and continue to move it forward.

From a girls' point of view, particularly on the big girls, which is a four to 14, we have had significant misses in fashion, and we have also had significant misses in basics. I don't think that we've been doing the right basics. I think we have more opportunity to do different, more salable basics, and I think we have a big opportunity to really clean up our fashion offering.

So I think from a shifting point of view, I can't really speak to what percent of the business we're going to put -- I mean I could, I just would choose not to right now, speak to the percent of business we're going to put in fashion versus basic. But I think what I want you to walk away with is knowing that the basic business is very, very important, and a large part to the total, hasn't been working as well as it could be in big girls, and you'll see shifts on that for holiday and into Spring. And on the fashion side, you won't see as much of a shift in holiday, and you'll see a big shift with the Spring deliveries on much more salable fashion, much more trend-right fashion for bigger girls.

Thank you. And we'll take our next question from the line of Lee Giordano from Imperial Capital. Please go ahead.

Thanks, good morning. Could you talk a little bit more about the store growth opportunity down the road, just remind us what you see as the ultimate potential there. And then secondly, can you talk about your remodel program, how many stores this year, and what kind of investment are you looking at. Thanks.

Sure, as far as store growth, we're opening 65 stores this year, and we're on track to do that. As far as next year store openings, we're going to announce that on the third quarter call. From a fleet potential, I hesitate to put a number on it. I think that we have the opportunity to open several hundred more stores in our future, and I can't tell you that it's 1,400 or 1,500 or 1,600 or 1,300.

I think as long as we continue to see the results we're seeing from this value center strategy, and as long as we're able to find as many markets as we can find that are not cannibalizing our business, that are small, underpenetrated markets, we will continue to move forward with the strategy. We also have the benefit of being in a particularly tenant-friendly environment, and our build-out costs are coming way down, so the profitability of these new stores continues to go up.

From a remodel point of view, we have 60 remodels scheduled this year, low scope through mid-scope to total redos, and that remodel activity will continue for the next few years. We have significant amount of remodels planned.

Thank you. And we'll take our next question from the line of Stacy Pak from SP Research. Please go ahead.

Hi. Couple of questions. Just first of all, on the basics that you're talking about for back-to-school selling, are you seeing the strength in basics because that's what the customer is demanding, or is that because of an improvement in your basics over last year where there was an issue?

Second of all, can you talk about what you're doing for marketing this quarter, Q3? And then on the AUR, what was it in this quarter, and what's the plan for the AUR in the second half? And finally, can you just address what's going on in the Canadian mall? Thanks.

Okay. First part of that question, back-to-school selling, the strength of the back-to-school selling has been in denim, has been in graphic Ts, has been in uniforms, and has been in backpacks. From a uniform point of view, I think we have a much more robust offering this year than we had last year. We started to offer it online, year-round. We offered it online earlier this year than we did last year. We positioned it in a better spot in the stores this year than we did last year. And we marketed it in not only in e-mail but in direct mail much more strategically than we had last year, which drove that business.

The backpack business, I don't think you could say that our backpacks were better than last year. I think that you can say that we much more strategically marketed our backpacks versus last year, and we're basically out of stock now in backpacks, very few left. So we were able to really move through that business early in the season. We have another three weeks of selling, we'll be covered there, and then we'll be out of the backpacks.

From a graphic T point of view, we have caught those a little bit earlier than we were able to catch some of the other fashion. Our graphic Ts are much improved from a fashion point of view, a more current point of view. The customer is loving those. We did really well with those.

And denim, our denim is not different from last year. I think where we positioned it in the store, the way we got behind it from an e-mail campaign, the way we got behind it online, the way we got behind it from window messaging was certainly superior to last year. And we are such a great value player that for us to continue to announce in our windows and in our marketing that we have that compelling value message, I think is really what drives the customer into the store. So I think it was a combination of having the right product and marketing it correctly, and getting ahead of maybe some of the competition, and stealing a little market share there.

As far as the third quarter and marketing, I can't really go into the specifics. I will tell you that the value and fashion message that we've been preaching since I came in the first quarter will only continue to get stronger and more focused. I feel very, very good about the marketing campaigns that we have planned for the third quarter. And very good about the strong marketing we have planned for the fourth quarter.

As far as the Canadian mall traffic, we're seeing Canadian mall traffic up. We're seeing the same kind of metrics we're seeing in the United States. We feel good about what's going on in Canada. We are also, with the same vigor that we are attacking our marketing in the US, we are putting the same behind our Canadian marketing strategy, and paying more attention up there to how we are promoting ourselves, and we're seeing payback there.

And then from an AUR point of view -- .

Hi, this is Sue. On our AUR, we have seen some declines in AUR as you would expect with the markdowns that we had. We expect that to mitigate somewhat in the third quarter, but still expect it to be down in the third quarter. And then we are expecting an AUR pick-up in the fourth quarter, again because we had such extensive markdowns on some big items that we bought very heavily in the fourth quarter of last year, like those rugby sweaters which we don't have this year.

Thank you. And we'll take our next question from the line of John Zolidis from Buckingham Research. Please go ahead.

Hi. Good morning.

Hi, John.

Just wondered if I could ask about some of the new executives that you brought in over the last several months. How are they settling in? What opportunities have they seen in the business that maybe you didn't identify before they brought in? Or conversely, what challenges have they pointed out that might be issues to overcome?

Well, I think the new executives are doing a great job. We'll go through them if you want. Starting with Natalie, who's the head of merchandising. I think she's come in, she's really built a strong team under her. We have a new person under her who is in charge of girls and accessories. We have a person who is now in charge of big girl, and we have a person who is in charge of accessories. So she's got a lot of new players in her world that are making a big difference, and as I said, we started this with really the Spring buy, and as we move into Summer I think we'll see a lot of changes. The one thing I will tell you is that, to the person, the new people that have come into the Company are all so energized by the amount of opportunity there is at The Children's Place to move the merchandise forward, and to move the processes forward. So I believe they're energized, and certainly hard at work, mining those opportunities.

Barrie has also done the same thing. Barrie and Natalie pretty much came at the same time. Barrie has worked very quickly to recruit some talent into her organization that we think has the background to move The Children's Place forward. She has moved her organization into four channels. She's got ahead of Canada, who has Canadian planning experience. She's got a head of outlet planning who comes from an outlet background. She's got a head of e-com, who comes from an e-commerce background, and then obviously, she herself has all those backgrounds.

So I think the way that she's been able to take that team, put it into the four segments and have that team start really looking at each segment because they are different in what drives each segment, has been rewarding for them. And the same thing with Natalie's team, the new players in planning and allocation are kind of overwhelmed by how much opportunity and how much upside there really is to get more strategic about the planning and allocation processes at The Children's Place.

Larry McClure, who is the head of HR, I think he's probably one of the earlier people we brought in, making a big difference, really getting into the culture of The Children's Place. And I think he is happy with what he sees as far as the changes.

And Sunil Verma, who's our new CIO, has been making some really great progress in a very, very short time. He's the newest member of our senior team, and he is really also seeing much, much opportunity, and working hard to build his team to address the issues we have as a Company on the IT side. So I think they're working well together, collaboration and communication would be the two key words that I would use, and I think they're just really excited about the opportunity.

Okay. So basically six months in or so with this new team, there's certainly nothing that diminishes your confidence about earlier projections to get up to potentially like a double-digit operating margin at some point.

Nothing at all. Only strengthens my conviction about how much opportunity there is here.

Thank you, and we'll take our next question from the line of Dana Telsey from Telsey Advisory. Please go ahead.

Good morning, and congratulations.

Thanks, Dana.

So it seems like the less carryover inventory, definitely a key part of the strategy, that could benefit -- and do you see that benefiting through the balance of the year, and is that something that you see enhances margins long-term? And speaking about long-term, that potential operating margin, is it 12%, 13%? Anything that you see that would prevent you from getting there, or what would get you there? Thank you.

Sure, from the inventory point of view, we certainly are going to continue to manage down the inventories. We have operated this Company with excess inventory, and when you take the excess inventory out and you couple it with the ability to really go after the categories and the classifications that more drive the business, I think you have a recipe for success. So you will continue to see us move the inventories down. As Sue said, Fall was bought much more appropriately, and then holiday was bought even more conservatively. And on top of being bought conservatively, the big fashion misses from last year, which was really the glut of sweaters and the overdoing of dressy, you're not going to see that. And that's been replaced with much more salable key items with a good marketing strategy behind them.

From an operating margin longer term, I'll give Sue that one.

We've said that we believe we can get our margin back to the low double digits over the next few years. We continue to believe that. We haven't pointed to a precise operating margin that we can get to, but again, we're very optimistic that we can in fact get back to low double digits over the next few years.

Thank you. And our last question comes from Richard Jaffe from Stifel Nicolaus. Please go ahead.

Thanks very much. We say Stifel. A couple of quick questions following on the inventory thought. You had the big catch-up, bringing the inventories down to what seems to be the appropriate level. And then we should look for a little bit of that reduction on a per square foot basis in 3Q. And then in 4Q, nearly flat, and then going forward the level should be about right. Is that a good way to think about it?

We actually have not given guidance for fourth quarter. So we announced our second quarter inventory. We're down 22% per square foot, all-in. Last year we had a very big spike in in-transit. So if you just look at the inventories without in-transit, the end of the second quarter we're down 12%. We said we expect to be down about a high single digit in the third quarter. So kind of about comparable. And then we'll give guidance on fourth quarter when we do the third quarter call.

Okay. But the general strategy is to operate the business with a faster turning and leaner inventory?

Yes, yes.

Okay. Without getting specific about numbers, that's the way we should think about it, and you're well on your way to achieving that with this change today.

Yes.

The other question is the integration of footwear that I've seen in a couple of stores, wondering how that's going, and how you think about footwear now as, rather than a separate department or category but rather an integral part of your presentation. And your selling more as an accessory category than a free-standing business, and how that's working, and if that could provide more visibility for growth for that category.

Yes, that's a great question. Definitely are much more focused on hanging shoes within the assortments than the box shoes. You won't see us open any more stores with box shoes. Stores we do have that have the extra space for box shoes will continue to stay that way. If you look at all our new stores and our stores going forward, we will be hanging all the shoes. We will be integrating footwear into the apparel. It's more of merchandising by lifestyle, so you'll see the dressy shoes with the dressy product. The casual shoes with the casual product.

And we're also making much more of an impact in store with shoes. If you look when I first started, most of the shoes were hung very low. They were hard to see. Now, when you walk into the stores, you can see the end caps top to bottom in shoes, you can see the end caps top to bottom in boots, and that's definitely paying off in the numbers. And I think that from the point of view of a growth business, it is certainly one of the biggest growth businesses we have. It had excellent performance in 2009, continues to have excellent performance in 2010, and as I mentioned earlier will be a big roll-out for 2011.

And is there further categories or additional categories that could grow either through the Internet or through innovative presentations in the stores that you haven't mentioned. That could be a yes or no answer.

I think two different answers. I think for the stores, we can continue to really maximize this accessory trend. We have room in our stores, we don't need to displace anything to add the accessories in, so it's really totally additive business and it is as a high margin. So I think that's been something that's been very underpenetrated and overlooked for a long time here, so as we get into those businesses, we expect to see good things from the accessory business.

If you think about online, I think the online opportunities are more unlimited. I think that there's opportunity to get into businesses that we do well in already year-round, like uniform, like swimwear, like things like that, and then I think there's new businesses that we can do on the Internet that we can't do in store, and you'll start to see some of those come alive in the fourth quarter this year. Can't really talk about what they are. But you'll start to see them, and then we'll continue to maximize that channel through additional categories.

Thank you. And that concludes our Q&A session portion.

This is Jane Singer. Thank you for joining us today. If you have any further questions, please give me a call at 201-453-6955. This concludes our call.

Thank you for calling. This concludes today's conference. Have a wonderful day.