Children's Place Inc (PLCE) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to today's program. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during a question-and-answer session. (Operator Instructions). Please note today's call is being recorded. I will be standing by if you should need any assistance.

And it is now my pleasure to turn the conference over to Jane Singer.

Thank you, Beth. Good morning, everyone, and thank you for joining us today for a review of The Children's Place Retail Stores, Inc. second-quarter 2011 financial results. Participating on this morning's call are Jane Elfers, President and Chief Executive Officer; Eric Bauer, Chief Operating Officer; and John Taylor, Vice President of Finance and interim Principal Financial Officer.

Before we begin, I would like to remind participants that any forward-looking remarks made today are subject to the Safe Harbor statements found in this morning's press release as well as in our SEC filings. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially. The Company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date hereof.

After the prepared remarks, we will open the call to questions. We request that each of you limit yourself to one question and one follow-up so that we will be able to take as many questions as possible.

Thank you and now I will turn the call over to Jane Elfers for her opening remarks.

Thank you, Jane, and good morning, everyone. As you may have seen in the press release this morning, we achieved the top end of our guidance range for the second quarter due to strong consumer response to our new product offerings and disciplined inventory management.

We expanded gross margins 70 basis points in spite of softer topline sales. While we had anticipated negative comp sales for the second quarter, the heightened level of promotional activity among mall-based competition was unexpected. However, customers responded favorably to our newly designed products and we had lower unit inventory levels that were tightly controlled so we did not need to promote our way out of excess inventory.

We entered 2011 very cautiously from an inventory perspective, both dollars and units, as we believe strongly that inventory management is the key to profitability. We entered the second quarter with 15% less carryover inventory than last year and we are exiting the quarter with 29% less than last year. This strong focus on inventory resulted in a 200 basis point improvement in merchandise margin for the quarter in spite of higher product costs.

The girls comp was weaker than boys in the quarter, but that was entirely due to the certificate lower inventory levels versus last year. The girls division realized the greatest merchandise margin improvement and also had the highest AUR increase in the quarter, up in the mid teens due to much stronger product offering this year.

Accessories continued to deliver strong positive comps for the quarter. Overall gross profit increased 2% and gross margin expanded to 33.6% compared to 32.9% last year.

Back-to-school floor set timing was similar to last year, uniforms and backpacks at mid-June followed by fall one mid-July and fall two in mid-August. We supported the fall one mailer with a strong marketing campaign and we supported the tax-free events this year in a much stronger way than we had last year. In addition, we reached our millionth fan on facebook during the second quarter.

E-commerce had another great quarter with strong increases across all key metrics. We launched our Canadian e-commerce site at the end of the first quarter and sales for the Canadian e-commerce site were well ahead of our initial projections during the second quarter. We also launched a mobile optimized site during the second quarter.

So to sum up the second quarter, we delivered results at the top end of our guidance range, substantially increased merchandise margin, expanded gross margin, had a great e-commerce quarter, and opened significantly more stores than last year. Our newly designed merchandise is being well received by our customers, which confirms that we are on the right track with our assortments.

Going forward, we are planning to continue to expand margins in the back half of the year; however, we will continue our cautious approach to the balance of 2011 in light of the economy, product costs, conservative consumer spending, and the highly promotional competitive environment.

Now I am going to turn the call over to our Chief Operating Officer, Eric Bauer. As you know, Eric joined us at the end of May and Eric is making a significant contribution to the business. He is excited to share with you some of his initial observations and the opportunities he sees. Eric?

Thank you, Jane, and good morning, everyone. I'm very, very happy to be here today.

Let me start by just saying out loud what I truly believe, namely The Children's Place is a great brand with a talented management team and a solid strategy to deliver profitable and sustainable growth over the long term. As I evaluated The Children's Place, I had the opportunity to meet with all of the senior leadership of the Company. In these initial discussions about their challenges and opportunities, I saw several areas where we had substantial room for further progress and where my background and experience could bring value to the team and help move us forward.

I have spent my first few months evaluating The Children's Place business, getting to know the team, and identifying the biggest opportunities to improve operations over the short and midterm to drive growth. We have a great deal of work to do and it is my intention today to begin the dialogue with you on these important topics while understanding that we will provide you with more detail in the upcoming months.

Not to oversimplify things, but in addition to the merchandise, ultimately this business is all about people, process, and technology. Today I want to go into detail on a few areas where I have done some initial exploration including inventory, store operations, store development, and technology systems.

Let me start with inventory management. In fiscal 2011, the Company made substantial cuts in its inventory levels as compared to prior years. We have bought inventories down to what we consider to be a more sustainable level going forward and this reduction in inventory is one of the primary reasons we will be expanding margins this year in spite of the higher product costs, albeit at the expense of some retail volume.

Unit inventories per square foot in stores and DCs at the end of the second quarter are down substantially, as is carryover inventory. So we are entering the third quarter very clean. We expect a similar pattern for the back-to-school and holiday seasons given higher product costs and the economic uncertainty facing consumers.

That being said, going forward, we need to continue to add greater precision to the inventory planning and allocation process, which is where the team is now focusing most of its energy. The channel planners will be developing a much more surgical view of the specific inventories required to drive sales by season, by category, by channel. They will ensure we get the right inventory to the right channel eventually to the right store at the right time.

In late 2011, we will begin delivering some more weather-appropriate inventory to our hot and tropical stores, which is the beginning of a store tiering strategy, an enormous potential opportunity for us across multiple operational areas of our business including our inventory management, logistics, distribution, and store teams.

Over time, we plan to expand this capability to other customer attributes under the principle that each location has specific qualities and needs that can differ substantially from other locations in our fleet. This is a big project. The team has made significant progress this year but we are nowhere near done. We expect to continue to refine and improve our inventory planning and allocation over the next couple of years.

Going forward, we have an opportunity to plan inventories more strategically up front, to allocate more strategically by volume, by climate, and by market, and to maximize the in-season performance of our product through more effective inventory yield management.

Let me now turn to store development and store operations. As you saw in this morning's press release, we have now opened 70 of the 85 new stores planned for fiscal 2011 and the remaining stores will be opened by the end of the third quarter, prior to the peak holiday shopping season. Our store development team continues to shorten the buildout time and bring the cost down for new stores.

Expanding into value centers and smaller markets has been very successful for The Children's Place and represents a compelling growth vehicle for us. Productivity of The Children's Place Stores however is not at the level I believe it could or should be overall. This needs to change and become a key barometer for our current and future management of the business. We have a number of initiatives underway that impact both the numerator and the denominator in the sales per square foot equation, which we will -- which we expect will begin to improve store productivity.

First, we are evaluating the optimal store size for all locations particularly in lower traffic malls and smaller markets. Our value center stores have a much higher ROI but typically have a lower sales volume because they are often located in lower traffic malls. We believe there is an opportunity to create an even more compelling economic model by making sure the footprint and store attributes -- inventory, staffing, etc. -- are optimally aligned to each trade area and its demand.

Our opportunity here is to adjust our templates not just store size but buildout as well to match each location more precisely both for new and existing stores.

Number two, enhancing store leadership. Starting with our strong zone vice presidents and supplemented by exceptional existing and new talent in our regional, district, and store manager ranks, we have the opportunity to meaningfully impact in-store metrics through better product availability on the sales floor, stronger customer conversion, and higher average transaction value.

We are beginning to realize the benefits from our field teams' ability to impact our business both near and long term but have substantial runway in this arena.

Number three, we are evolving our staffing model and tools to support each different store type so they can more precisely plan the staffing for high peak and high sales periods and productively deployed their payroll. With lower inventory levels and much better product to sell, we have a real opportunity to redeploy payroll into more customer-facing activities like visual merchandising, customer service, and product replenishment.

Number four, by allocating appropriate initial shipments to stores and replenishing into sales, stores are able to more efficiently set up new floor sets, which either reduces associate hours or enables them to spend more time with customers, driving sales. Also, this pull model versus the historical push model enables the highest possible yield on our inventory from our scarcest, best selling items to most effectively moving through more challenging styles.

Next, let me briefly touch on technology systems. I am a strong believer in the power that technology can have to enable the business and its strategies. As The Children's Place has continued to grow, its technology footprint has not sufficiently scaled to support the business model evolution and marketplace challenges we face today. We have an opportunity to take many of our systems to the next level and are working on a number of areas already ranging from tactical tools to support teams in all areas of the business to larger enterprise solutions that set the foundation for our next phase of growth.

To be sure, we must be planful and not distract our operating teams from their focus on running our day-to-day business, but equally, we will be actively leveraging the deep institutional knowledge resident in this Company to build a best in class systems architecture. For a period of time, we will be operating with one foot in the present optimizing the systems we have and one foot in the future, building the systems we need.

While this is only an initial view to the range of opportunities we have, I look forward to continuing the dialogue with you in coming quarters about other elements of the business and our progress.

Now I would like to briefly touch upon the area of product costs which are impacting all apparel retailers in 2011.

Going into the second half of the year, cotton prices were at a record high when we repurchased the back-to-school and holiday assortments. Retail prices are increasing in the second half of 2011; however, we bought unit inventory much more conservatively as we do not yet know what the price elasticity will be in the third and fourth quarter.

Looking forward, we have completed the Spring 2012 buy and are finalizing the Summer buy this month. Cotton futures are down from their record highs but still higher than historical averages. Costs for Spring 2012 are higher than Spring 2011 although favorable compared to holiday 2011. We believe costs for Summer 2012 will be above Summer 2011 but favorable compared to Spring 2012.

In summary, I am very optimistic about the long-term growth prospects of The Children's Place and I look forward to partnering with Jane and the senior leadership team to capitalize on our strong position in the marketplace as we execute the growth strategies.

Thank you for your time and I look forward to meeting you in person in the upcoming months and sharing more detail around our brand and operational initiatives.

Now I will turn the call over to John Taylor, who will review the financial results and outlook. John?

Thank you, Eric. Good morning, everyone. Net sales for the second quarter ended July 30, 2011, were $343.5 million compared to $345.3 million last year, as increased sales from growth in our store base and double-digit e-commerce growth was offset by negative comparable store sales.

Comparable retail sales declined 5.6% as a result of 7% fewer transactions, which was partially offset by a 1% increase in average transaction value. Average unit retail increased high single digits during the quarter while units per transaction declined mid-single digits consistent with our strategy to right size our inventories in 2011.

Comparable store sales declined 6% in the US and 13% in Canada. The larger comp decline in Canada was partially driven by a more significant inventory reduction in that market coupled with macroeconomic headwinds. E-commerce comp sales increased 15% as a result of positive metrics across the board including higher transactions, increased average transaction value, and higher AUR. Regionally, comp sales were stronger in the Southeast, and weaker in the Midwest and the West.

By department, accessories comped the strongest, followed by boys, girls, and newborn. As Jane mentioned, girls had the strongest merchandise margin improvement in the quarter as we significantly improved our product offering but this year's comp was negatively impacted by last year's inventory glut and deep promotions.

By store type, outlets comped slightly below the average but they delivered strong margin improvement as we continued to roll out our new outlet strategy.

Gross profit dollars increased 2% to $115.5 million during the second quarter due to a 200 basis point expansion in merchandise margin driven by a higher IMU, lower markdowns, and tighter inventory management.

Gross margin expanded 70 basis points to 33.6% as the increase in merchandise margin was partially offset by deleverage of occupancy, distribution, and freight expense on a negative comp.

SG&A spending was $111.9 million during the second quarter, a 4% increase compared to last year primarily due to higher spending for preopening expense and new stores as well as somewhat higher administrative expenses and professional fees.

We had asset impairment charges of $1 million during the second quarter of 2011 related to a few underperforming stores. Depreciation and amortization expense as a percentage of sales during the second quarter was 5.4%, similar to last year.

Our effective tax rate for the quarter was 39.2%. Loss from continuing operations net of tax was $9.8 million or $0.38 per share in the second quarter of 2011. This compares to a loss of $8.3 million or $0.30 per share in the second quarter of 2010. The share buyback negatively impacted EPS by $0.03 compared to the second quarter of last year.

Our basic share count was approximately 25.7 million for the second quarter of 2011, compared to 27.8 million shares last year.

Moving on to the balance sheet, our cash balance at the end of the second quarter of 2011 was $151.5 million. This compares to a cash balance of $198.2 million last year. We were able to maintain a sizable cash balance while repurchasing approximately 2.9 million shares at a cost of $136.5 million and investing $83.7 million in CapEx over the past 12 months.

Balance sheet inventory per square foot at the end of the second quarter increased 6% due primarily to higher in-transit inventory. Salable inventory in our stores and DCs was down 5% per square foot at the end of the quarter and carry over inventory was down 29%.

At the end of the second quarter we operated 1,060 stores with a total of approximately 5.19 million square feet, which represents a 7% increase in square footage.

To briefly summarize our share repurchases, during the second quarter of 2011, we repurchased 586,000 shares for approximately $28 million. During the first half of 2011, we repurchased 958,000 shares for approximately $46.5 million. We have $63.5 million remaining of the $100 million share repurchase program which was announced in March 2011.

Moving onto guidance for the third quarter and fiscal year 2011, for the third quarter of 2011, we are projecting earnings per diluted share from continuing operations in the range of $1.23 to $1.28 assuming negative low single-digit comparable retail sales. We expect gross margin expansion will be partially offset by higher SG&A spending for our new stores and somewhat higher administrative expense.

For fiscal 2011, we now expect earnings per diluted share to be in the range of $3.13 to $3.25 assuming negative low single-digit comparable retail sales for the fiscal year. Our guidance assumes currency exchange rates will remain where they are today and does not include the impact of further potential share repurchases in the back half of fiscal 2011.

In terms of inventory, we expect to end the third quarter of fiscal 2011 with balance sheet inventory per square foot up high single digits. We expect salable inventory in our stores and DCs to be up low cycle digits per square foot. Unit inventory will be down and we expect carry over inventory to be down significantly at the end of the third quarter as we continue to execute on our strategy to buy inventory tighter and clear substantially more inventory in season.

Now we will open the call to your questions.

(Operator Instructions). Dorothy Lakner, Caris & Co.

Thanks and good morning, everyone. Jane, I wonder if you could talk about some of the successes that you have had, in particular things you are particularly pleased with in the merchandise assortments as they have improved. And in particular girls, where you saw a really nice increase in AUR and merchandise margin improvement this quarter. Thanks.

Sure, as far as the girls business is concerned, we had a very successful second quarter. The product on both the big and baby girl side was very well received and as we have mentioned in the notes, we were able to substantially increase the merchant margins in the second quarter.

There really wasn't too much that the customer didn't respond to in the second quarter as far as the girls' assortments were concerned. We had a good response to basics. We did an amazing short business, matchables, yoga, graphic tees to the point where with the very warm July that we experienced, we wished that we had had more girls' product particularly in the month of July.

The fashion that we delivered in the summer deliveries was also very well received by the customer and I think that they are really starting to appreciate the differential that we have put in between the styling of big and baby. I think that as we go forward into the third and fourth quarters, we are just going to continue to see that momentum build in girls.

Great, thank you.

Kimberly Greenberger, Morgan Stanley.

Great, thank you. Good morning. Jane, I am wondering -- I am looking at your inventory balance and I am wondering if you can talk to us with the total inventory up 13.9% at the end of second quarter, how does that look in units versus -- obviously we've got the dollars here. Maybe you could just talk about units.

And as you look at your third-quarter plan, are you comfortable with inventories where they are today or how are you feeling just in general about the way you're positioned?

I'm going to turn the first part of that question over to John on the unit and dollar part. But as far as how I'm feeling about inventories, I feel that we are in an excellent inventory position. We have worked very hard in the past 18 months to get our inventories under control and I think we find ourselves in somewhat of a unique position in the competitive landscape with our inventories as under control as they are. It certainly has allowed us to expand merchandise margins and that coupled with the response to the new product has been very healthy for the business.

As I said before to Dorothy, I think as you go into the third and fourth quarters, you are going to continue to see us pay dividends on that strong inventory discipline.

Kimberly, this is John. Our inventory on a per foot basis at the end of the second quarter is up 6% and that is really primarily driven by in-transit inventory. We called that out on our call at the end of the first quarter and our salable inventory, inventory in our DCs and stores on a per foot basis is down 5. So some of the increase in the inventory on a dollar basis at the end of the second quarter is just timing of in-transit inventories.

From a unit perspective, our inventory is down substantially on a per square foot basis on both the salable inventory and including even in-transit, our unit inventory is down. So we feel like we are in really good shape from an inventory position and our carry over inventory is down 29% at the end of second quarter, so we enter third quarter with extremely clean inventory, fresh inventory. And again, we feel like we are in great shape as we head into the back-to-school season.

That's really helpful, John. Just looking back at the second quarter, it looks like the low inventory drove around -- is around a 200 basis point increase in you merchandise margins just backing out the deleverage on occupancy, freight and DC. Is that a fair range?

Yes, Kimberly, that is. That's right. You are right on target. Our merchandise margin improvement was 200 basis points year-on-year and it was driven by that inventory discipline and improved -- lower markdowns, higher IMU, and products that resonated with our customers.

Terrific. Thanks and good luck here in the second half.

Betty Chen, Wedbush Securities.

Thank you and again congratulations on the product improvement. I was wondering, Jane, if you can talk a little bit about the competitive landscape. Certainly we've also heard from some other retailers that the macro environment has increased some of the uncertainty in the consumer shopping patterns. If you can speak to that.

And also, is that part of the thinking around your guidance for negative low single-digit comps for the third quarter or have you already seen some trends slowing down in August as we've also heard from some of the other companies? Thank you.

We're not seeing a slowdown in trend at all. Really when you look at the competitive landscape, it is very promotional and we are taking that to your point into the consideration when we do our guidance. As we said, we're thinking about low negative single digits and we continue to see that promotional environment be heated up. I think until the macro pressures abate, you are looking at a consumer that has proven to be resilient up until this point but there still is uncertainty that is going to continue to test consumer confidence in the second half.

We've got unemployment remaining high and keeping some shoppers on the sidelines. We've got gas high versus last year, which puts pressure on the lower and middle income families. And then on the full impact of cotton inflation across the board hasn't hit. So we have yet to see for holiday the price standoffs between retailers and consumers as the holidays approach.

Betty, it's Eric. If I can just build on that a little bit. Part of what we saw in the second quarter was the fact that inventory was down as consequentially as it was, I think it allowed us the latitude to be much more thoughtful and surgical into how we looked at pricing. And I think that's a pattern we're going to see carry forward into the back half of the year. That rigor about really buying inventory tightly allows us to be much more thoughtful and not necessarily as reactive even as there is a lot of trepidation with the consumer, it allows us to be very thoughtful on how we take pricing actions. And we expect to see that manifest itself in our margins.

Stacy Pak, Barclays Capital.

Thanks. So just a couple clarifications first. I think I just want to -- you said the entire difference in inventory per foot from up 5 to down 6 is the in-transit, right?

Yes, the difference between -- it's up 6 versus down 5, it's -- it's driven by in-transit inventory.

Okay, and then just on the product, Jane, which I think looks great, and I saw that gray ruffle dress sell out at $25 and be replenished. I guess my question is the traffic number. It's not a fabulous traffic number and I want you to talk some about conversion and just kind of what do you think the traffic is a negative response to the higher pricing associated with the better fashion? Is -- are you in line with your negative low single-digit comp guidance now?

Then I have a question just on long-term margins, you guys when you look at -- (multiple speakers)

Let me interrupt. Due to time constraints, we will be needing to move to the next questioner.

Stacy, we will come back. Sorry about that. (multiple speakers)

The big question is on the margins long-term when you look at outlet and direct growing in your mix, what should the differential be in margin from those two pieces as you add outlets and you add direct, you grow those two faster. What should the long-term margin implication be? I know it's up but is there any help you can put around those pieces? Thanks.

Stacy, it's Eric. Let me see if I can actually tackle the traffic conversion question because I think indeed, I think your assessment of traffic down is a fair statement. What I would suggest, there is a different layer to put on that which is around the quality of the traffic. And I think as we walked away from a lot of unproductive inventory, we made a conscious choice to walk away from low-yield traffic. And certainly as you have seen in higher average unit retails and margin expansion for a period of time, our view has been to be much more thoughtful as we repositioned the brand from a fashionability perspective to really focus on that very highly valued traffic.

From a conversion perspective, we are actually quite encouraged because I think even with higher average unit retails, I think there's still -- we are seeing the customer accept the fashionability of that product even at a higher average unit retail.

So I think the traffic patterns once you lap some of the excess inventory of prior years, you're going to see it start stabilizing and normalizing a bit more.

Hi, Stacy, this is John. From a long-term perspective on gross margin, what we have been saying and what we continue to believe is that the path to double-digit operating profit for our Company over the long term is to drive kind of low single-digit comp sales, grow our square footage, and evolve our gross margin back to our historical performance.

And the outlet business specifically, we have -- it's about 13% of our fleet on a count basis. It's more than that on a revenue basis and our outlet margins in the last few years have been as much as 1000 basis points worse than our full price business. And we think there's opportunity to evolve their outlet business back into a range that is more closely reflective of our full priced business.

But we haven't given specific guidance on what outlet margins can do over the long-term, but we do think that the path to double-digit operating profit is to execute the strategies Jane has put forth specifically in the outlet business and see that margin start to be accretive over time.

And, Stacy, we just did reorder that gray dress in black, so there's another reason for you to come visit us this weekend.

Nicole Shevins, Goldman Sachs.

Good morning, guys. Thanks for taking my question. So I was wondering if you could quantify on average what kind of price increases you took across the store for back-to-school? And how are customers responding to price increases on some of the more staple like items like denim? Have they been accepting those price increases or have you seen some resistance? Thanks.

Sure, on the price increases were modest in the first half of the year and we did not see any consumer response against those price increases. When you look at what is come in so far for back-to-school, which is really the July and August receipts, they are the most I would say price-sensitive items that we deliver early in the third quarter. So you have got a lot of business working on denim. You have got a lot of business coming from graphic tees, uniforms, and backpacks.

So those, we have seen a pretty good response from the customer. There is a promotional element in there with denim. I think denim, when you look around being very much promoted this back-to-school season, as it was last year. But I think the competition is heating up a little bit on denim.

As we said before, the way we own our inventories and the way we bought our merchandise, we are able to compete on those key categories and we are able to stay very competitive across a broad spectrum of our competition.

What you are going to see coming in in the September and October deliveries is much more fashion and that's where you're going to really start to see I think the acceptance to the higher AURs. We feel very strongly that our product is much improved and I think that we will be able to give you more feedback on the next call once those September and October deliveries that have a much higher fashion quotient hit.

Janet Kloppenberg, JJK Research

Good morning, everyone. Jane, I was just -- I am just thinking a little bit about positive comps and it seems because your clearance units are down so much that's putting pressure on your UPTs and could be hurting your traffic. So I was just wondering when the crossover point you thought could be where the AUR levels will more than compensate for some of the decline in the clearance units? And when we might be able to be thinking about positive comps.

I think there's also some pressure from Canada and I was wondering if you could talk a little bit about that? And just, John, if you could talk a little bit about SG&A, I think dollars were up about 4% in the second quarter and I was just wondering if we should be using that growth rate in our SG&A estimates going forward? Thank you.

Thanks, Janet. I will take the first part of that question on Canada. When you look at our comps, we were -- the Canadian comp was certainly worse than the consolidated comp and the outlet comp was trailing the consolidated comps.

If you look at both of those categories, that was purely a function of inventory this year versus last year. We were dramatically down in our Canadian channel due to how much inventory we owned up there last year and the need even more so than in the play stores to right size that inventory. But we saw a significant improvement in margin in the second quarter and year-to-date in Canada and really the same for outlet. We did not have the product to transfer to the outlets during the second quarter, so they were down on inventory particularly on the girls' side of the business, where we were transferring and had so much excess product that the customer was not responding to last second quarter.

So where you saw the comp fall a little bit off in that outlet channel, you also saw significant improvement in margin in the second quarter and year-to-date, which is really in line with the strategy set forth last year.

On the margin part, I'm going to turn that over to John.

Sure, from a margin standpoint and from a comp standpoint, we think that our guidance for the third quarter is negative low single-digit comps and that's going to be a sequential improvement from the second quarter. We continue to see a path to flat to positive comps in the out period. But right now with the promotional environment the way it is, we will -- we are going to -- because of our inventory position, we are going to be more thoughtful about driving gross margin dollars and being more productive with our units and less worried about comp in the third quarter and more worried about executing on our strategies longer term.

From an SG&A standpoint, SG&A grew 4% year-on-year in the second quarter. I would suggest that it's going to grow more in the mid-singles in the third quarter as we do have a little bit more -- we have 70 stores open and we are going to continue to complete opening stores in the third quarter. We also have higher administrative expenses forecasted in the third quarter. So mid-single digits would be more reflective for modeling standpoint.

Rick Patel, Bank of America Merrill Lynch.

Thank you, good morning. Can you help us understand your promotional strategy in the back half? If your competitors remain promotional or become even more aggressive, do you expect to respond accordingly or will you maintain your pricing?

Just secondly, how should we think about your promotional strategy in the context of your gross margin guidance?

As far as her promotional strategy versus our competition, we will continue to do what we did in the second quarter. We found ourselves in the fortunate position of not needing to over promote on excess inventory and with a strong consumer response to our product and our ability to expand margins, that's our strategy going forward into the third quarter.

Having said that, on basic items like denim that we spoke about before, we are prepared and we own our inventory in such a way that we are able to be as competitive as we need to be on those key businesses.

And from a gross margin guidance standpoint, our promotional cadence is planned in our guidance.

Brian Tunick, JPMorgan.

Thanks, good morning. I wasn't sure -- did you guys say how much AUCs were up for the back half? I wasn't sure if I heard that. And then my question is on e-commerce, you didn't really talk about it too much yet. Maybe just talk about the growth this quarter versus what your expectations were and any new product categories that you have been testing or were seeing the ability to raise prices on through the website.

As far as the e-commerce part of that question is concerned, you can see when you go on our site, Brian, we have added a new thing that has online exclusives. And we have substantially more online exclusives going into the third and fourth quarters than we did last year. The productivity and the sales that we saw in the second quarter from e-commerce we were very pleased with and it was in line with what we expected. We continue to see that channel outperform. We continue to see a higher ADS on that channel and the consumer continues to respond to the new things that we've put on the site.

The Place Shop up on that left [nap] bar that we've talked about on several calls also continue to be one of the hot spots on our site.

Brian, it's Eric. As regards the AUC question, we haven't actually been specific on it but what I can say is obviously just like everyone else, we're feeling the pressures of cotton fiber up and wage rate pressures and so forth. I think we have the fortunate position of a really strong sourcing foundation in our Company and I think we have been able to be enormously effective even in the face of some of that -- those challenging headwinds.

Marni Shapiro, The Retail Tracker.

Congratulations, and Jane and Stacy, I purchased the dress. So I was curious, I know you guys are rolling out a lot of systems over the next several months but if you can just touch on the back half of the year and what you were able to do either with the existing systems or manually to get, say, fewer snow pants to Puerto Rico than go to New England? And if you think you have at least some impact as to what's coming in the back half of the year?

And if you could also just touch on the accessories, the sleep, that part of the business, backpacks for back-to-school as we roll into holiday, will we -- will that continue to be a big part of the story out there?

Marni, it's Eric. Let me touch on the question about the impact we have been able to have. I would suggest we certainly take some consequential steps forward vis-a-vis localization and vis-a-vis really getting smarter within the construct of the existing system architecture. To be candid, I think it's a combination of our systems are progressively getting stronger and our people are finding interesting and innovative ways to get ever tighter in the way we place inventory. Obviously as we continue to build out a more thoughtful and integrated architecture technologically speaking, I think it's just going to add to the kinds of things that they are able to do and certainly, we have a pretty clear vision of what would ultimately like to do.

So we are certainly early stages but I think we've gotten substantially tighter in how we are getting better about quantities and locations and the ski parka in Miami versus Minneapolis, that sort of thing.

And then on the accessories and sleepwear question, Marni, as far as that's concerned you are going to continue to see us grow those businesses. We have got the space in the stores; we have not had to displace any apparel product to add these new businesses in. When you look at what's going to happen in the third and fourth quarters, the keys there are going to be the cold-weather accessories, the sleepwear shop that we will set up in late third quarter. And then certainly the shoe and boot business that we have been experiencing has been very, very strong out of the box for back-to-school.

So we feel good about the accessory and shoe business going forward and you will continue to see that expand.

Margaret Whitfield, Sterne, Agee.

Good morning and congratulations. I was wondering if you could comment on SG&A trends in Q4 with the number of stores open as of the end of the third quarter, would that moderate?

This is John. From an SG&A standpoint in the third quarter -- or in the fourth quarter, we will continue to see some challenge in terms of leverage in SG&A in the back half of the year as we anniversary higher administrative expenses and some higher variable compensation expenses.

For the full year, our guidance hasn't changed. We still see deleverage sort of in the 30 to 50 basis points on a full-year basis.

Would your gross margin rise? Is it projected to do so in Q3 or would there be difficult comparisons challenging that?

We've been focused on gross margin expansion in the second and third quarter. The fourth quarter we have a tougher compare and we are not expecting gross margin expansion in our models in the fourth quarter.

John Morris, BMO Capital Markets.

Thanks, congratulations on your progress as well. Jane, you have done a good job talking a lot about the product for back-to-school, so I think we are kind of getting that. I want to just fast-forward into holiday to talk a little bit about the opportunity from a merchandising standpoint for holiday. And if you want to also build on anything for back-to-school.

And then kind of the quick follow-up just to kind of pin it down, at what point do you lap the high levels of clearance inventory? Will that be by the fourth quarter?

Sure, on the products selling, we aren't commenting on August certainly comps. We don't talk about monthly comps anymore, but we set the back-to-school delivery in mid-July and we are certainly encouraged by the selling we've seen there.

Going forward into holiday, we are going to deliver holiday starting with a group in mid-September and I feel that the holiday delivery that we have coming is certainly the strongest merchandise delivery that we have delivered since I have been here. I think that the team has a year plus of experience behind them now. Certainly Natalie and her team and Barrie and her team in planning and allocation have that year more of experience I think understanding the consumer, understanding The Children's Place customer, we have really done a very good job conceptualizing the holiday assortment. And I think we really have ownership keyed into the key classifications that are going to drive sales and profitability through the third and the fourth quarters.

From an inventory point of view, when it really laps itself, it really happens in the first quarter of 2012 when Easter gets back to normal and we are going to lap overall in 2012. We're going to continue to have less carryover inventory through the third and fourth quarters this year and really spend this year right-sizing those inventories, focusing on margin expansion, and then really going into 2012 in an offensive way. But still obviously prudent on inventory.

John Zolidis, Buckingham Research.

Good morning. Can we just talk -- I know someone asked about when comps could turn positive and we all appreciate your comments on the product being better and I think it looks better as well. But we know that the customer is the ultimate arbiter of the product flows and really if we don't see comps turning positive, it just suggests to me that the response is not consistent with the improvement that we are kind of talking about.

So longer-term to get the operating margin expansion, we do need to see not just some merchandise margin improvement but also leverage. And so I'm just wondering what is giving us confidence that that is going to happen and when can it happen?

I think really getting the confidence is looking at what we have kind of laid out 18 months ago and what our strategy was and when you look at what we have done since the beginning of the year, we have maintained our guidance for where we were at the beginning of the year despite the macro pressures. We've cleaned up our inventories. We've dramatically improved our product. We own our category correctly. We have an outlet strategy that is really working. We have cleaned up our Canadian business. We've got a hot and tropical assortment hitting in the third quarter and fourth quarter that we didn't have last year.

We got our stores opened in the first half of the year versus last year really trickling them out through the fourth quarter and we have got an e-commerce site and a strategy that's really working. So we've got fundamentals in our business and we are very fortunate in this environment that we have several non-sales oriented drivers that will positively impact our business over the next several quarters. So we feel very good about that.

When you really look at the second quarter and the depressed comps, you can almost take it back to inventory. And as I said, the Canadian channel was way over inventoried last year and the outlet channel as we have discussed many times was way over inventoried.

So you look at those two channels and you really can see the direct correlation between cleaning up and getting a healthy inventory composition in the Company and what it can do for the margin. We certainly understand and appreciate your comments on needing to comp positive and yes we do to get back to double-digit operating margin, and that certainly is our focus. We will continue through the third and fourth quarters to stay focused on that merchandise and on the consumer acceptance to it. But we will make sure that we are in a very healthy place going forward and that we are doing the right thing for the fundamentals of the business.

Richard Jaffe, Stifel Nicolaus.

Thanks very much. I guess just a couple of follow-up questions. One, the additional SG&A in the quarter related to store openings, could you guys put a dollar amount on that so we could back out that component of SG&A?

Yes, it was a couple of million dollars in just preopening expense and then there was an additional $1 [million] or so to manage those new stores in the quarter.

That's helpful. Thank you. Then a question about international, both international sourcing. I know it's been an opportunity or one that you have been exploring, wondering how the progress is going there particularly in light of the product cost inflation. And then international initiatives from a retail standpoint, whether its bricks and mortar or Internet or a partnership or franchise type of arrangement?

Richard, it's Eric. Let me see if I can grab that. So on the sourcing side obviously, I think one of our bigger opportunities remains to be as flexible as we can in this marketplace. Certainly from a strategic perspective, we've always thought about diversifying how and where we source to take maximum advantage of the marketplace even in an inflationary environment that we have seen. And now as cotton fiber is abating a little bit again to find the most advantageous solution for us.

And I think we are fortunately well-positioned given some of our international presence and our relationships with vendors out there. So I think we are in pretty good stead there.

On the international business development side, obviously we have talked about that over the last couple of quarters. I think we sit very much still on track. I think the expectation is still to be seeing some of the results of that in the back half of 2012.

And in terms of the market assessments and the prioritization and the cadencing of market entry, the business model, all of those dimensions, we are very much active right now on defining and dimensionalizing all of those things and I think we're going to have much clearer visibility as we get into the back half of this year.

Dana Telsey, Telsey Advisor Group.

Good morning, everyone. Can you talk a little about -- I know SKU management is important and that you have been talking about reducing the amount of SKUs this year. Where are you in that process? How do you see it going forward? What do you see the margin adjustment as a result of that? Thank you.

Okay, as far as SKU management, we are very focused on that and it goes hand-in-hand with inventory management and what we have been able to do along with getting our hands around the inventories and improving the product is we have spent a lot of time with the visual team in the mock store and we've spent a lot of time really understanding what the stores can hold and how to best maximize SKUs.

With Barrie and her team, they've done a ton of analysis around what was working, what isn't, the number of SKUs that produce the most amount of business and then taking that information in conjunction with what Natalie and her team are doing, I think you're starting to see when you go into our stores a much more focused presentation that really gears into the best-selling styles and that really lets the customer come in and make it so much easier if you will shopping experience. Because she walks into the store and she understands very quickly what we stand for.

That in line with the inventory management really serves us on the margin line and continues to help us propel those merchant margin improvements.

Lee Giordano, Imperial Capital.

Thanks, good morning. Can you talk a little bit more about the performance of the value center locations relative to the mall locations? And then secondly, can you update us on the long-term opportunity for real estate growth? Thanks.

Lee, it's Eric. So, value centers, that remains obviously an enormously interesting opportunity for us because the economics are just so delightful. And I think the opportunity for us is continuing that strategy but getting ever more surgical about really what's the right size, buildout, design for the customer and the demand that we're going to see in those value centers. So I think we continue to see a lot of opportunity there and certainly as we look to the balance of this year and into the next, we are certainly going to continue to try to exploit that.

Overall on real estate, we still believe there's quite a bit of runway there in tandem to continuing as we talked sort of in a tiering localization approach about really going back even to our existing fleet and saying what's the right remodel strategy and the right buildout strategy that really localizes the store that market and the sales demand that exists there?

And so as leases come up, we continue to revisit those locations to make sure that they are refreshed and looking as brand-appropriate as possible but also right sized given the demand we are seeing in those particular locations.

Thank you. This concludes today's Q&A session. And now I would like to turn it back to Jane Singer for any closing remarks.

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

Your conference has concluded. You may disconnect at any time. Thank you for joining us and enjoy the rest of your day.