Children's Place Inc (PLCE) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to The Children's Place third quarter conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. And I'll be standing by if you should need any assistance. It is now my pleasure to hand the call over to Jane Singer, please go ahead.

Thank you, Megan. Good morning, everyone, and thank you for joining us today for a review of The Children's Place Retail Stores, Inc. third 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 found in this morning's press release, as well as in our SEC filings. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially. The Company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date hereof.

Please also note that a reconciliation of certain non-GAAP financial measures discussed on this call is contained in this morning's press release, which can be found on our ChildrensPlace.com website. And now I will turn the call over to Jane for her opening remarks.

Thank you, Jane and good morning everyone. While the third quarter was challenging for The Children's Place, we continued to make significant progress on our longer-term growth initiatives. During the third quarter, we got off to a solid start with back-to-school basics, but poorly performing fashion, coupled with unseasonably warm temperatures, impacted our sales and earnings. Net sales declined 2%, and comp sales declined 5.7%.

Higher markdowns to clear fall merchandise resulted in a lower gross margin for the quarter, but we are entering the holiday season with carryover inventory down 22% per square foot. We tightly managed administrative expenses during the quarter, which helped leverage SG&A by 40 basis points. Net income for the quarter was $31.2 million, or $1.14 per share.

Looking towards the fourth quarter, we believe our holiday strategy is stronger this year, and we've seen an improvement in our November sales trend compared to October. While encouraging, we nevertheless remain cautious in our outlook for the quarter and fiscal 2010, as consumer spending continues to be impacted by the difficult economy. We now expect full year EPS to be in the range of $2.78 to $2.83, compared to $2.64 last year, excluding one-time items.

Before I update you on our five key initiatives, I'd like to make a brief organizational announcement. [Mia Minor], our Head Designer, left The Children's Place in October, and I'm very pleased to announce that Natalie Levy, our Senior Vice President of Merchandising, has been promoted to Executive Vice President of Merchandising and Design. We have a search underway for a new head designer who will report directly to Natalie.

Now I'd like to update you on the significant progress we've made on our five key growth initiatives since our last call. Number one, improving the merchandise. We added a new sleepwear shop in all stores for holiday which includes an expanded selection of separates for older girls and boys as well as novelty items. The girls' sleepwear collection is merchandised in a girl's swing shop, and the initial selling has been strong. Going forward, we will utilize the swing shop concept space to maximize seasonal opportunities throughout the year.

We introduced jewelry to all stores for holiday. This high margin category has been selling exceptionally well, and will be expanded going forward. We added a line of fun beauty products including nail polish kits and lip gloss to all stores. Initial sales have been strong, and we expect the beauty line to be a popular gift-giving item in December. We have an assortment of spring merchandise setting in all stores in early December, and our full spring line will set in early January. We look forward to seeing how customers respond to the new line.

Our footwear business continues to outperform. We are expanding the assortment and allocating additional space for footwear in all stores, starting in the first quarter of 2011. And in October, we introduced a special occasion shop which is available exclusively online and the assortment has been performing well. This special occasion shop will remain online year-round with seasonally appropriate special occasion product.

Number two, accelerating new store growth with a focus on value centers. We opened 62 new stores through the end of third quarter, and square footage is up 5%. Two-thirds of the new stores are in value centers. We are continuing to see year one ROI for the value centers exceeding 50%, which is well above our 35% hurdle rate. In 2011, we expect to open approximately 85 new stores with the majority of the new stores in value centers.

Number three, improving inventory management. During the third quarter, we took aggressive markdowns on poorly-performing fashion to clear through inventory and we are exiting the quarter with 22% less carryover inventory per square foot. For the fourth quarter, we reduced initial inventory allocations to stores, and are holding more inventory in our distribution centers from which we can efficiently replenish into sales based on individual store needs. This is expected to minimize store transfers, and enable us to better capitalize on the different channels of the business. Overall, we have been making significant upgrades to our allocation process, our assortment planning process, our systems and most importantly, our teams. We expect to realize the benefits of these initiatives in the back half of 2011.

Number four, sharpening our marketing message. We have some great window promotions planned for the fourth quarter. We have introduced Christmas windows for the first time in more than 20 years at The Children's Place, and strong gift-giving messaging will change frequently throughout the quarter.

We have resegmented our customer database to ensure high cost marketing tactics are devoted to high ROI segments, while the broader base is reached through low cost e-marketing. We have greatly expanded our e-mail marketing reach, with our e-mail list growing 300% over last year. E-mail is a more timely and flexible vehicle for us and we are utilizing it to directly market offers to our customers. Going forward, we will continue to increase our use of e-mail and social media to engage our customers. With 65% of our current moms choosing e-mail as their preferred communication channel, and 50% of our moms active in social media for shopping, research and recommendations, we believe these communication channels will continue to gain importance.

And five, driving e-commerce growth. E-com had another very strong quarter, with increases on key metrics including traffic, transactions, average dollar sales and average unit retail. We simplified the look of the site and continue to make site enhancements and improve the user experience. We added a section called place shops, which includes our new gift shop, our special occasion shop, a sleepwear shop, a uniform shop and more shops to come. We began honoring PayPal as a payment method, and we now offer virtual or e-gift cards on the site, and we will begin offering international shipping in the fourth quarter of this year.

Now, moving on to sourcing. There has been a lot in the news lately about the significant cost increases in Asia, which are expected to impact apparel retailers in 2011. We were able to significantly mitigate the cost increases for the first half of the year, through product cost engineering, significant mix changes, and selective price increases. However, costs have continued to escalate, particularly cotton prices, and we now expect more pressure in the back half of 2011. As you know, we have a diversified sourcing base, which gives us some flexibility in shifting fabric orders, as well as production, to countries that have less inflationary pressure.

We're working diligently to mitigate the impact for our customers, but if cotton prices remain where they are, which appears likely in the short term, there will be an impact on the product pricing throughout the industry in the back half of the year. We'll know much more after we complete our 2011 back-to-school buy over the next months, and we'll provide further updates in March, when we announce our fourth quarter earnings. We're hosting a vendor summit in Shanghai in January with our vendors from all over the world, and this is an opportune time for me to meet with our vendor partners to jointly discuss our longer term objectives and strategies for success.

Now, looking forward into 2011, we will be providing guidance for 2011 when we announce fourth quarter and fiscal 2010 earnings in March. Our merchandising, planning, and design teams have been significantly strengthened this year, and you will continue to see their impact as we enter 2011. Made for outlet product will begin delivering during the second and third quarters of 2011. We will continue to increase our North American footprint with an emphasis on value centers in smaller, underserved markets. Channel specific allocation, assortment and distribution strategies will be in place by the third quarter of 2011. And we will continue growing our e-commerce business through site enhancements, new product offerings, and expanded shipping to 38 international countries, including Canada.

In closing, I remain very optimistic about the long-term growth prospects for The Children's Place. We continue to focus on assembling a top notch team, and they are making terrific progress on our key initiatives. I believe we are well positioned to continue to steadily grow market share, given our strong brand and value proposition. Now I'll turn it over to Sue, who will review our financials and update our outlook. Sue?

Thank you, Jane. And good morning everyone. Net sales from The Children's Place business for the third quarter ended October 30th, 2010, declined 2% to $453.4 million. Comparable retail sales declined 5.7%, a 3% increase in the number of transactions was more than offset by a 9% decline in average transaction size. The transaction size was negatively impacted by a significant decline in average unit retail during the quarter, as we marked down the poorly-performing fashion.

Regionally, we performed slightly better in the west and southeast. By department, accessories had a positive comp for the quarter. The other departments comped negative with boys performing stronger than girls and newborns. By store type, value centers performed slightly better than average, and outlets were below average. The decline in net sales for the quarter was entirely due to negative comp sales in the US and Canadian stores. This decline was partially offset by growth in our store base and e-commerce sales. At the end of the third quarter, our store count was 1,005 compared to 950 stores at the end of the third quarter in 2009.

E-commerce comp sales increased 33% on top of a 44% increase last year. E-commerce represented approximately 9% of sales for the quarter. Gross profit dollars declined 10% to $182.3 million during the third quarter of 2010. Gross margin declined 340 basis points to 40.2% from 43.6% last year. Gross margin was negatively impacted by the higher markdowns needed to clear poorly-performing fashion during the quarter. In addition, distribution and occupancy deleveraged as a result of the negative comp sales.

SG&A as a percentage of sales was 25.2% in the third quarter of 2010, representing approximately 40 basis points of leverage, due to lower marketing and administrative expense, and a reduction in the bonus and equity compensation accruals during the quarter. Depreciation and amortization as a percentage of sales during the third quarter was 3.9%, similar to last year. Operating income was $50 million, compared to $64.8 million last year. Our effective tax rate for the quarter was 37.2%. The tax rate was slightly favorable compared to last year's rate of 40.6%, and we now expect our tax rate for fiscal 2010 to be approximately 39.1%.

Income from continuing operations net of tax was $31.2 million, or $1.14 per diluted share in the third quarter of 2010, compared to $38.2 million or $1.38 per diluted share last year. Our third quarter 2010 earnings per share includes a $0.04 per share benefit, resulting from the Company's repurchase of 1.7 million shares during the quarter. Our diluted weighted average share count for the quarter was 27.2 million shares.

Moving on to the balance sheet, our cash balance at the end of the third quarter of 2010 was $172.7 million, compared to $104.4 million last year. We were able to significantly improve our cash balance in the third quarter, while repurchasing 1.7 million shares for approximately $80 million, and reinvesting in our business through capital expenditures. Balance sheet inventory at the end of the third quarter was down 7% compared to last year. On a per square foot basis, inventory was down 12%. Carryover inventory at cost was 22% lower per square foot at the end of the third quarter of 2010 than last year.

During the third quarter, we opened 28 stores. Year-to-date, we have opened 62 stores and closed four. At the end of the quarter we opened 1,005 stores, with a total of approximately 4.96 million square feet, which represents a 5% increase over last year. As Jane mentioned in her opening remarks, our holiday strategy is stronger this year, and we have seen an improvement in our sales trend in early November. Nevertheless, we are cautiously approaching the fourth quarter given the difficult economic environment.

Our initial guidance for the fourth quarter and updated guidance for fiscal 2010 is as follows. For the fourth quarter of 2010, we are projecting net earnings per diluted share from continuing operations in the range of $0.98 to $1.03. For fiscal 2010, we now expect earnings per diluted share to be in the range of $2.78 to $2.83. This guidance assumes negative low single digit comparable retail sales for the fourth quarter, and assumes currency exchange rates will remain approximately where they are today. The guidance includes the impact of shares repurchased through November 17th, 2010.

Given the higher markdowns in the third quarter, coupled with reducing our net sales projection for the fourth quarter, we now expect gross margin will decline approximately 80 to 100 basis points for fiscal 2010, compared to our previous guidance of 20 to 40 basis points of expansion. We continue to anticipate that the gross margin rate will be approximately similar in the third and fourth quarters of 2010. Given the strong cost savings realized through the first nine months of fiscal 2010, we now expect SG&A spending as a percentage of sales for fiscal 2010 will leverage by about 40 to 60 basis points, compared to our previous guidance of 30 to 50 basis points. In terms of inventories, we expect to end fiscal 2010 with total inventory per square foot down mid single digits compared to fiscal 2009.

As Jane mentioned in her remarks, we now plan to open 85 new stores in fiscal 2011, for a net of approximately 70 additional stores including closures. Square footage is expected to increase by approximately 7% in 2011, and now we'll open the call to your questions.

(Operator Instructions). We'll go first to the site of Betty Chen with Wedbush Securities. Your line is open.

Thank you. Good morning and congratulations on really executing in a tough environment. I was wondering, Jane, if you can remind us now, I think you mentioned in your prepared remarks and you went through that, we're now entering holiday with 22% less in carryover inventory. Where is that going to put us by the end of Q4? And so that by spring when we see some of the new designs, will that be fully reflective of the new design or will we still have a percentage of the legacy merchandise, so just want to get a sense of that.

I'd say that as we exit -- this is Sue, Betty. We exited the quarter as you pointed out with 22% less carryover inventory and that's fall inventory that we're carrying into holiday. As we exit the fourth quarter I would expect there to be some carryover holiday inventory that we carry into February and kind of sell it at clearance but I expect the trend to continue as it did from the second quarter into the third quarter and into the fourth quarter because we are clearing more of that inventory in the actual quarter. So I would expect to see a carryover percentage approximately equal to what we had seen in the past couple of quarters, if not a little better.

Just as a follow-up, I think you had also talked about several of the categories that might be additional in opportunities for holiday. Are there perhaps some maybe categories last year that did not perform as well that could also be an opportunity this year?

Well, Betty, it's Jane. Hi.

Hi, Jane.

How are you? I think when you look at the categories that we're bringing in for holiday and you look at some of the things like the sleep shop and you look at the accessory business that we're doing, and you look at the jewelry business we're doing, those things are certainly going to continue into the spring and into 2011 and beyond. We anticipate carrying jewelry year-round. We anticipate making more out of the sleepwear business. Certainly it's a bigger part of the business in fourth quarter than it is in the spring. We continue to plan to have that, as well as really focusing on building the accessory and shoe business which are performing very well for us right now.

And Betty I think you had also asked about categories that did not perform last year. As we said before, Jane could not influence the design for fourth quarter, for holiday, but she could influence the buy, and we didn't buy a lot of those things that did not perform last year. So it's a better buy this year for holiday.

We'll move to our next question, comes from the site of Janet Kloppenburg with JJK Research. Your line is open.

Hi, everybody.

Hi, Janet.

I had a couple questions for Jane Elfers. I'm sure you, Jane, you've been in retail in a long time. I know it's been a while since we've had apparel inflation. I'm wondering when you think back to periods when you've had to deal with this, if there's an opportunity in terms of mix. So perhaps some of the graphic tees and some of the other knit categories might experience a price increase, but I was wondering with the build going on in accessories and sleepwear and shoes, if you thought there would be an opportunity, and stronger e-commerce business, just wondering if there might be an opportunity where you could avoid any sort of gross margin or meaningful gross margin erosion because of the sourcing pressures going on.

Yes, Janet. I think when you look at what we did for the first half of 2011, because we are buying so differently by classification and because the mix is so different, particularly in the girls and accessory areas for the first half of 2011 than it was last year, we were able to mitigate a significant amount of the cost increases because of that. When we look forward into the back half of 2011, the prices have escalated significantly since we placed the first half of the year buy.

We do have some opportunity in the second half to continue to work on the mix, again, particularly in girls, and we do have to your point the opportunity to continue to grow the higher margin accessory businesses. But on the apparel side, there will be pricing pressure and there will be pricing increases but we will continue to work to mitigate those and as I said, we're in the midst of doing the fall buy itself and we won't be done for about another month so we will give more color on that in March when we report earnings.

I wondered about the e-commerce business. For some of the companies I follow, it does generate a higher operating margin. I'm wondering if that's the case for Children's Place and what you're doing to invest in that business so that perhaps it can help on the profit line or the profit margin line.

Yes, Janet, the e-commerce business is by far our most profitable channel and we are making investments in e-com to further drive it because, again, it is so profitable.

And we'll move next to the site of John Morris with Bank of Montreal. Your line is open.

Thanks. Good morning, everyone and good job managing in a tough environment.

Thank you.

Yes. So let's see, couple questions here. First of all, you mentioned a lot of great additions to the assortment, particularly for holiday, Jane. I'm wondering where are you scaling back in the assortment? Where will there not be as much square footage dedicated to some of the classifications? What do you take out or scale back? And then secondly, with the SG&A savings that you saw, good cost control, looks like a big piece of that was coming from scaling back in marketing expenses. Is that the case? And what's your plan for marketing expenses and control go-forward.

Okay. Well, on the first part, as far as scaling back, we're in a fortunate situation at The Children's Place that when you look at our dollars per square foot, we certainly have a lot of runway. So when you look at the categories that we've added in, particularly like on the jewelry side and some of the other cold weather accessory businesses, we have space in our stores, and we've been able to just layer those businesses in.

From a bigger picture point of view, where we're scaling back is, I'm a firm believer in lean inventories and we're scaling back on inventory as a total, particularly in apparel. So if you look at like coming into holiday, we significantly reduced the holiday buy versus last year and where we were able to do that was in the poorly performing categories from last year. For instance, the over-investment we had last year in the striped sweater category and the significant over investment we had last year in woven bottoms, particularly corduroy and colored twill. So those are the places where we've been able to significantly pull back that we feel are going to really benefit us on the margin line as we go through the quarter.

As far as marketing expenses, we have really scaled back direct mail. I mentioned this a couple times on a couple calls. When I first came, and we did the ROI analysis on what we were mailing, we were mailing way too often, way too deep into the file. So we were able to significantly cut that poor performing marketing back, and really move our customer into much lower cost e-com and e-commerce marketing. That's really where we're going as a Company.

It's really where our customer is. Certainly as I mentioned the preferred method of communication to our younger moms is e-mail and social media so we have been able to move into that. We plan to continue that as we move into 2011.

We'll move next to the site of Dorothy Lakner with Caris & Company. Your line is now open.

Thank you, and good morning everyone and congratulations on the progress that you guys have made.

Thanks, Dorothy.

Just, again, looking at the second half of next year, since your outlet business is in the process of transition, and will I think essentially, if I understood you correctly, be making that transition in the second half of 2011, shouldn't that be an additional positive for margin, given that the way you had been running it or the Company had been running it was a lot less profitable than the new way you will be running it going forward?

Yes, the answer to that question, Dorothy, is yes. All the things that we've been talking about from the outlet strategy to significant improvement in planning and allocation should drive margin in the back half of 2011. However, the unknown is the product sourcing --

Sure.

The sourcing issue and we haven't yet done the back-to-school buy.

Sure.

That could mitigate the margin upside somewhat.

Right. Okay. And then just another question on accessories. Where has accessories been as a percent of the mix and where did it end up in the third quarter? Where do you think for example could be next year or if not, where do you think an appropriate level of penetration is for that business?

Well, definitely varies by zone, obviously much bigger penetration to the girls business than it is to the boys. Accessories as a total is only 17% of our business. When we talk about accessories we talk about shoes and accessory together. I think there's significant opportunity in 2011 and beyond to grow that percent to total.

We'll now move to the site of Anna Andreeva with JPMorgan. Your line is open.

Great. Thanks so much, good morning, guys.

Good morning.

Two questions for you. First, did you quantify the improvement you're seeing so far in November? I'm assuming better weather is helping you and I know your lapping negative 13 from last year, but then looking out December and January were actually much better last year.

I guess what gives you the confidence that negative low single digits is the appropriate number for the fourth quarter. Sounds like you think the mix is much better and much more productive, but I'm just trying to understand that. And then secondly, if you could just talk a little bit more about the store growth opportunity down the road, just maybe remind us where you see the ultimate potential there?

I'll take the first part of your question on the comp for the quarter. What is gratifying about the comp, about the trend that we're seeing so far in November is there was a market change when we set holiday, -- did the second set of holiday and that started very early November. So we're optimistic at this point in time but nonetheless there is some uncertainty around the comp. We do feel that the comp that we've called down in the mid single digits is appropriate at this point in time. Low single digits, excuse me, is appropriate at this time, and should that change, we'll update you. But at this point, we are gratified by the traction that we're seeing thus far in November.

And on the store growth opportunity, we're opening 65 stores this year, 66 stores this year, and we're saying that we're looking to open approximately 85 next year. We are really experiencing some great results from the class of 2009 stores that we opened and certainly the results that we're seeing season to date through 2010, we have a lot of confidence in our new store opening strategy, particularly in these value centers, in these underserved markets, we're really seeing outsized returns. So we believe that we have the potential to continue to open stores at this pace for the foreseeable future. I'm not willing to put a number on the ultimate fleet size because I think we even surprise ourselves sometimes to see how great these underserved markets are really doing so we'll continue to keep you updated.

We'll take our next question from the site of Rick Patel with Banc of America. Your line is open.

Hi. Good morning, everyone.

Hey, Rick.

Can you give us a little bit more detail about the improved performance you're seeing in November? Is it fashion or basic merchandise that's driving that? And can you also comment on how outerwear is doing so far in the month?

Sure. Yes, the performance in November so far is across the board. Some real highlights are in girls, the knit bottom business is very strong. The cold weather accessory business is terrific. The outerwear business has been very strong. The fleece business is good. The dressy, which we bought significantly down to last year, is performing well, with the appropriate amount of inventory. Boots and shoes have been terrific outperformers. Long sleeve graphics that hit, the new graphics we brought in are great. The jewelry business has been outstanding and some of the things like thermal in boys and some of the basic denim have been performing well.

Okay. Great. And can you also give us the breakout of gross margins or at least give us some commentary on how they did in Canada versus the US and any major changes in the trend that you're seeing there.

No, the trend was the same in the US and Canada.

And we'll move next to the site of Nicole Shevins with Goldman Sachs. Your line is open.

Great. Good morning, guys. Thanks for taking my questions. In light of some of the product issues that you saw on the girls side in the second quarter and the third quarter, can you talk about how the spring deliveries, which the new management team was able to impact are different and how you think they should be more brand right? Thanks.

Hi, Nicole. I think when you look into spring you're going to see a market difference, particularly in the newborn and in the girls businesses. When you take the girls business, I think what you're going to see when you look at the product is a much better ownership by classification. What I found when I came here was there was a lot of historical buying being done. If we bought it last year, we're going to buy it this year.

That's not where the business has been trending overall. Over the last few years, things like the amount of dressy we have been buying, you'll see a much reduced amount of dressy. Two reasons, number one, because we bought too much, number two, you've got a later Easter. You're going to see much more trend-right classification ownership. You're going to see us buying into the classifications that are much more wear now. I think you're going to see a much better color palette, particularly on the girls side, much more style-right or trend-right colors. You're going to see styling that is less tricked up and more fashion-right again.

You're going to see as I said more wear now product and you're going to see as you go into the different channels of the business, you're going to start to see when you're in the e-com channel, when you're in the place channel, when you're in the Canada channel and the outlet channel, you'll start to see us gearing into the classifications that's are important to each one of those channels and trying to maximize the business by channel, by classification.

Thanks for the color.

And we'll move next to the site of Marni Shapiro with The Retail Tracker. Your line is open.

Hey, guys. Congratulations. The stores are looking better and better.

Thanks, Marni.

I just have a couple of quick housekeeping things. You ran through those last couple of comments really very quickly. If you could just touch back on -- you talked about 70 stores square footage growth, if you could touch back on a few of those comments and if you could give us the square footage number at the end of the quarter.

But if you guys could also talk about your transactions and traffic have been up consistently the entire year. Not consistently in the percentage that they're up, but up the entire year. So when I think about that traffic is clearly not an issue for you guys. Can you talk about how you're thinking about that to better take advantage of it? It's doesn't feel as if you need to get the customer in the store. You actually do have people coming in the store. So could you talk a little bit about how you're feeling about that.

We do have people coming into the store, Marni, and you're right. The traffic and the transactions and the conversion haven't been the issue. The issue has been more in the AUR which feeds the ADS. And I think a lot of that has to do with particularly the markdowns we've had to take to clear poor performing fashion and I think also the overbuying of inventory. So as we look forward into 2011, getting the inventories more in line and getting the fashion right, I think merchandise works wonders on the AUR line and the ADF line. So I think that's really how we're thinking about it. And then from a new store opening point of view, we're planning on opening approximately 85 new stores. I think in Sue's remarks, she said it was net 70 and that would include closures of approximately 15.

That gets you a 7% increase in square footage in 2011 versus 2010 and I think you also asked about square footage that we had as of the end of the quarter and it's 4.96 million. Sorry if I ran through that too quickly.

We'll move next to the site of Linda Tsai with MKM. Your line is open.

Yes, good morning. Jane, could you describe the overall evolution of the aesthetic that you're targeting on the product side? How different will the product be, say, a year from now versus the Company that you started with?

Well, I think number one, what I want to get across is that it's still going to look like The Children's Place. When you start to come in and you see the new product in spring and then you see summer with Natalie's influence and then into fall and holiday, we're still going to keep the core DNA of The Children's Place, which is outfit dressing and colored, match back, head to toe kind of look.

I think what you're going to see different, though, is you're going to see much more trend-appropriate merchandise, and you're going to see much better colors. I think we've had issues in the last couple years with how we've done the colors and how we've -- we haven't been on-trend with the styling. So I think the color is going to make all the difference as the starting place and I keep going back to classification ownership. Not owning colored twill bottoms, not owning bright colored corduroy bottoms, not owning sweaters when sweaters don't trend. But owning the right classifications. Owning the knit bottoms that they want, owning the right graphic tees. Owning the right silhouettes in denim when denim is trending, making sure we're into those trends.

Giving the customer the opportunity to buy the accessories. We're not going to comment on the dollars that we've done in the jewelry business but just since we've introduced that jewelry business for the few weeks, the results are really, truly astounding, and just to be able to put those things into the store that she wasn't able to get before, to be able to pick up more trend-right sandals and shoes in the spring, to be able to pick up the right cold weather accessories, so I think you're just going to continue to see an evolution of The Children's Place but I think that you'll feel when you walk in that the product's better and more right.

We've had a lot of focus groups come in. We've had a lot of mothers come in with their kids to walk the spring one line and to walk the spring two line and we've gotten pretty much overall positive reinforcement from not only the moms but from the kids and some of the things that we've heard from the moms, and several of the moms have kind of gathered around saying that oh, great I can finally shop here again for my older kids. So we're feeling good that this product is going to be well-received by the customer in spring.

And we'll move next to the site of John Zolidis with Buckingham Research. Your line is open.

Hi, good morning.

Hey, John.

Question on the third quarter gross margin. Can you tell us how much was occupancy deleverage versus merchandise margin decline in the overall gross margin decline.

We actually don't disclose that but I can tell you in descending order of importance. Markdowns was the single biggest negative driver on gross margin, followed by the deleverage of store and DC costs and those were the two drivers, with, again, markdowns being the single -- the lion's share of the decline.

Okay. And then coming into the fourth quarter with lower levels of carryover inventory, the improving November trend and having been able to edit the assortment and eliminate some of the categories, which didn't perform last year, and my recall is that last year there were a lot of markdowns, particularly on those rugby sweaters and some of the other items that you talked about, are we now thinking that merchandise margins can be up significantly in the fourth quarter? What's embedded in the guidance relative to those factors I just mentioned?

John, we are in fact expecting merch margins year on year to be up in the fourth quarter, again, because we didn't buy those classifications or those items that did not sell last year.

Okay. Can you give a kind of round number, like how much were they down last year and what do you think they can be up this year?

Gross margin last year was -- our external gross margin last year was actually slightly favorable to the previous year. But merch margins were down fairly significantly. We expect to recover this year the amount of merch margin that we in fact lost last year. That's okay. Go ahead.

Our next question comes from the site of Kim Greenberger with Morgan Stanley. Your line is open.

It's Kimberly. Excuse the cold here.

Hi, Kimberly.

Hi, Jane. I wanted to ask about your just overall approach to managing inventory. You talked about in 2011 -- well, just for historical purposes, you said Children's Place probably historically has bought too much inventory. As you look at 2011, do you have any sort of goals in mind for how much less inventory you would like to see the business manage with? And you've also said that about a third of the total inventory buy ends up getting sold at third markdown and liquidation markdown and I'm wondering if there are any strategies as you're reducing your inventory buy to try to make sure that there's less left over for that third and liquidation markdown. Are there some tools that you've got in place to help you with that?

Well, Kimberly, we've not disclosed a number of how much less inventory that we're looking at overall. I can tell you that I will continue to keep an eye on inventory and continue to cut the inventory as aggressively as I think is prudent for the business.

We have a significant way to go with The Children's Place and a lot of room to cut inventories back, in keeping with the second part of your question, if you just look at how much inventory we end up transferring from our Place stores to our outlets and how much of that is embedded in our past, when we're working on our new outlet strategy, we're looking to buy the appropriate amount of inventory for the Place stores so that we can almost all but eliminate the end of season transfer to the outlets and looking to buy the outlets over time into the back half of 2011 and into 2012, the appropriate amount of made for outlet exclusive products. So I think that that, when we can get that into play, that will also dramatically reduce the inventory for the Place stores and for total Children's Place.

Canada is also part of that equation. We have the same issues up in Canada. We have in my opinion been dramatically over-placing in Canada and you'll start to see that really tighten up with the spring 2011 buy and going forward. And the one channel we've been underplaying from an inventory point of view is e-commerce and you'll also see in 2011 us get back on line in a positive inventory position in that channel.

Great, thank you.

Thank you.

We'll move next to the site of Richard Jaffe with Stifel Nicolaus. Your line is open.

Good morning, guys. Just a quick follow-on to gross margin and then a question on repurchasing shares. Starting the season or the fourth quarter with so much less clearance has got to advantage you year-over-year, just a lot less to clear at that second or possibly third markdown. And if things are looking a little better in terms of product assortments and inventories leaner for fourth quarter, you guys have a nice opportunity to the upside on gross margin. Am I missing something here?

Richard, this is Sue. Our accounting policy is when we exit a quarter, we take a reserve down to where we think we'll have to liquidate that carryover inventory. So that's already factored into the third quarter earnings. The end of each quarter, we're looking at how much carryover we have. We're estimating how much it's going to cost, what we're going to have to take in markdowns to liquidate it through end of life and we take that as a reserve in the current quarter. So the lower carryover in and of itself does not represent a margin, a gross margin opportunity.

Nonetheless, we are expecting gross margins in the fourth quarter to be favorable versus last year somewhat, but sequentially we're expecting them to be about flat versus third quarter. That could change, of course, depending on how things unfold this quarter but I think we've got an appropriate range kind of established at this point in time.

Thanks for the explanation. Just a thought on repurchase. Obviously an important part of the last couple of quarters, and as your repurchase plan begins to wind down, what are your thoughts going forward?

Well, notwithstanding the repurchase, we exited the quarter with a very healthy cash balance and Jane and I would like to recommend to our Board that we do another stock buyback at some point next year, and I can't speak for the Board but I would expect that we would do another buyback at some point again next year, because we do continue to generate very strong cash.

And our next question comes from the site of Lee Giordano with Imperial Capital. Your line is open.

Thanks, good morning.

Hey, Lee.

Hi. Could you talk a little bit about your expectations for the overall promotional environment and level of discounting in the mall this holiday versus last year. And then can you discuss your promotional cadence in Q4 versus last year, any changes we should be aware of? Thanks.

I think the promotional cadence has been very high all year long and I think it will remain that way for the fourth quarter. The customer is certainly looking for great value but she's pretty much been doing that all year so I think it's going to be intense but it was intense last year. As far as The Children's Place, I think we have a much, much stronger promotional game plan for the fourth quarter than we did last year.

As I mentioned, we're introducing Christmas windows for the first time in over 20 years, which went up yesterday. So we have our Christmas windows up and what we're doing is we're rotating out strong gift-giving messaging throughout the entire quarter and we're up against what I consider a much weaker window cadence last year. We had sleepwear in the window for three or four weeks last year. We had some what I would call confusing promotions in the window last year which really didn't speak to the value and brand proposition that we want to get across as The Children's Place. So I think that we will definitely hope to benefit from that throughout the fourth quarter with those strong key item messages.

And our last question will come from the site of Dana Telsey with Telsey Advisory. Your line is open.

Good morning everyone. Can you give any more color on the planning and allocation systems that are going in, where you are in terms of the opportunity for that? And then also, just as you think of the product mix in the stores, Jane, whether it's boys, girls, what should the ultimate allocation be and how does it impact any margin opportunity go-forward? Thank you.

Sure. And good morning. We're making terrific progress on the planning and allocation side of the business. [Berry] is working very, very hard on developing a top notch, Best-in-Class team in planning and allocation and she's made a lot of ground on two fronts, the allocation systems and the assortment planning and you'll start to see that go into effect for really the second half of 2011 with the back-to-school buy. On the assortment planning side, we have a whole new system and a whole new method of doing that and that is, like I said, will be in place for the fall buy.

On the allocation, we're already making improvements in the allocation system now and how we allocate goods. I mentioned in my prepared remarks that we had really held back significantly on the initial allocations for holiday in the DCs so we can feed back into the business as it happens. You'll see us get a lot better at that in the first quarter of 2011 from an allocation by channel as we have dedicated goods by channel. I think that the ultimate allocation between boys and girls, I think that remains to be seen. I think you have to put that accessory and shoe component in there and I think that's what I would focus you on, is how big can we get that accessory and shoe business and how quickly can we get the girls business back on track. The boys business has been strong, so I think the combination of getting the fashion right in girls, coupled with moving full speed ahead on shoes and accessories is really where the win is in the merchandising for The Children's Place going forward.

This does conclude our question-and-answer session. I would like to hand the call back over to Jane Singer for any closing remarks.

Thank you, Megan. Thank you all for joining us today. If you have further questions please call me at 201-453-6955. Thank you for your interest in The Children's Place.

This does conclude today's teleconference. Thank you for your participation. You may disconnect at any time and have a wonderful day.