Children's Place Inc (PLCE) 2011 Q3 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 our Q&A session. (Operator Instructions). Please note today's call is being recorded. It is now my pleasure to turn the program over to Jane Singer. Please go ahead.

Thank you, Lindy. Good morning, everyone and thank you for joining us today for a review of The Children's Place Retail Stores, Inc. third-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, 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 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.

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

Thank you, Jane and good morning, everyone. The Children's Place delivered a solid third quarter. Net sales increased 7%; comp sales increased 1%; gross margin increased 110 basis points; operating income increased 9%; net income increased 8%; earnings per share from continuing operations increased 17%; and we entered the third quarter with 29% less carryover inventory and exited the quarter with 54% less carryover inventory as a result of our disciplined approach to inventory management. Total balance sheet inventory per square foot was up 3.9% at the end of the quarter.

Average unit retails in the quarter increased in the midteens with the highest AUR increase in girls. Accessories and footwear delivered double-digit comps for the quarter. E-commerce had a positive 27% comp with increases across all key metrics. US Place doors had a positive mid-single-digit comp led by the big girl division, which comped in the positive high single digits. This positive turnaround in the performance of big girl was the result of strong consumer acceptance to our compelling new product, significant AUR increases and a substantial reduction in carryover inventory. Canadian stores and US outlet stores delivered significant margin improvement versus last year due to disciplined inventory control.

In marketing, our third-quarter strategies were successful. We competed very effectively during August in the key back-to-school categories of denim, graphics, uniforms and backpacks. The increased promotional focus on these key items helped us overcome a difficult end of the month due to hurricane Irene.

In addition, our tax-free strategies and our tax-free results were stronger than last year. Our holiday picture-taking window set in mid-September. They drew rave reviews and drove strong traffic, which gave us a competitive advantage in this important category. Our Place cash event in September was also very successful and our October marketing was key in helping us overcome the warm weather in the beginning of the month and the snowstorm at the end of the month.

In real estate, we completed all our fiscal 2011 new store openings during the third quarter and our value center strategy is on track as these stores continued to outperform the fleet during the quarter.

We continued to strengthen our leadership team during the third quarter and we are thrilled to announce five key hires. Kevin Low joined us as Senior Vice President, Store Operations; Peter Warner joined us as Senior Vice President of Global Sourcing; Lori Tauber Marcus, Senior Vice President and Chief Marketing Officer; Liam Devoy, Vice President of Distribution and Logistics; and Dan Angus, Vice President of CRM.

Looking to the fourth quarter, our holiday 2 line set in stores the first week of November. In our hot and tropical stores, a spring capsule replaced last year's heavy winter merchandise. Spring merchandise sets in all stores in early December. This is Michael Gianelli's first line and the first line all year that was developed under the direction of a head designer.

We have a stronger promotional strategy in place for fourth quarter versus last year. We are well-positioned in the e-commerce channel from an inventory perspective and we expect sequential improvement in Canadian comp store performance in the fourth quarter.

In closing, I am very proud of the results we delivered for the third quarter. When I join The Children's Place, we said that, during the back half of 2011, we would start to see our five key growth initiatives produce results and we have. We comped positive and expanded gross margin for the first time since 2008 in spite of double-digit cost increases, a very promotional competitive environment, a hurricane and a damaging Halloween snowstorm. These results speak to the strength of The Children's Place brand and the leadership team we have assembled.

As you all know, I am very passionate about the long-term growth prospects for The Children's Place brand. We will continue our cautious approach into 2012 in light of the economic uncertainty, significant product cost increases in the first half, conservative consumer spending and our expectation that the highly promotional competitive environment that we have witnessed this year will continue into 2012.

However, barring a material weakening of the economy, we firmly believe that the significant progress we have made on our five key growth initiatives will result in positive comp sales growth, continued gross margin expansion and operating margin expansion in fiscal 2012. Now, I'll turn the call over to Eric.

Thank you, Jane and good morning. It was a busy and productive quarter from an operational standpoint. Let me update you on some of the progress we're making in real estate, stores, outlet, IT, sourcing, logistics and planning and allocation.

Starting with real estate. In order to have a clear roadmap for our future development, as well as the specific strategy for each individual store, we are undertaking a comprehensive fleet review. We expect to complete this review early next year. This is an ideal time to undertake such a review because we have a substantial portion of our fleet up for renewal over the next three years. We will capitalize on this opportunity by carefully reviewing each renewal to ensure it is in the right trade area, right center, right location within the center and with the right buildout for The Children's Place. Where possible, we will be partnering with our landlords to ensure we have the right space and footprint in each mall.

We will also fully leverage the flexibility in store templates and location types that our brand affords us -- A malls, B malls, street locations, value centers, etc. -- to ensure that we are most effectively positioned to serve our customer and generate the best returns for the shareholder.

As I mentioned on the last call, I am focused on improving overall store productivity and we have several initiatives underway to do so. Building on the success we've had with value centers, we will be piloting smaller footprint stores in these centers, which typically have lower traffic. We want to test the smaller footprint to validate our ability to drive higher sales per square foot, thereby generating productivity closer to mall-based stores, while still leveraging the advantageous rent economics these centers afford us. Doing this with an appropriate assortment allows us to not only optimize the financial return of the store, commensurate with its top-line potential, but also to better leverage payroll and inventory to maximize its return on investment.

We are currently refining some back-of-house stockroom strategies, which we expect to result in more efficient replenishment and improved front-of-house performance, which we will begin rolling out in early 2012. We will be remodeling approximately 80 stores into the Tech2 format over the next 12 months, half in the US and half in Canada. Tech2 stores offer greater merchandising flexibility, higher capacity fixtures and stronger branding.

Our Canadian fleet is primarily Technicolor as that was the format designed for the original Canadian rollout. We are accelerating summary models as part of our plan to improve business performance in that market. We expect to remodel 12 stores in January 2012 and another 25 Canadian stores during the first half of fiscal 2012. The costs associated with the January 2012 remodels have been incorporated into our guidance for the fourth quarter.

Moving on to stores. I talked with you last quarter about some of our initiatives to improve the customer experience in store, including optimizing store staffing, tighter management of key business processes like replenishment, training at all levels and a greater focus on customer engagement.

I am very pleased that Kevin Low has joined the Company as SVP, Store Operations to head up this effort. He has great experience and the drive to make it happen and under his leadership, these initiatives are well underway. We will update you on his progress in the ensuing quarters.

Outlet. Our outlet strategy is progressing. As anticipated, outlets have been a drag on top-line sales this year as we transitioned from the old clearance center model and dramatically reduced the amount of deeply discounted merchandise. We are, however, seeing impressive margin enhancement as we expected. And we believe outlet margins will continue to strengthen throughout fiscal '12. We will anniversary the high level of clearance inventory in the first half of 2012 and anticipate outlet comp sales will stabilize and begin growing again in the second half of the year. We have about 35% made-for-outlet product in stores now and we're on track to have the majority of product be outlet-specific in 2012.

IT. As you know, our IT organization has been focused on upgrading legacy systems, which is critical to achieving our long-term growth objectives. Our migration from each legacy system involves a rigorous approach, leveraging seasoned resources with extensive oversight and testing at each stage. I am happy to report that the team has successfully implemented several modules so far this year. We'll keep you updated on our progress towards our new footprint over the coming quarters.

Sourcing and logistics. We made two important hires in operations during the third quarter. Peter Warner, Head of Global Sourcing, and Liam Devoy, Head of Logistics and Distribution. Peter and I spent the first week in October in Asia meeting with our teams and key suppliers. We came away impressed with the operations and capability that The Children's Place has on the ground in Asia, as well as those of some of our key vendor partners.

Building on these strengths, we also believe there are several opportunities to enhance our global sourcing capabilities. We will share highlights with you in the coming quarters as we begin to operationalize these initiatives.

In logistics and distribution, I've had the opportunity to spend some time in our distribution centers and the same premise applies. Building on a solid model, Liam is concentrating initially on optimizing inbound transportation, as well as store delivery and replenishment programs, which will enable us to deliver greater precision and ensure that we have the right products in the right store at the right time. In both sourcing and logistics, we believe we can build on the past successes the Company has had and unlock a range of additional capabilities and enable incremental financial benefits.

Inventory management. As we continue to rationalize inventory levels, we need to add greater precision to the inventory planning and allocation process, which is where the team is focusing most of its efforts. In addition, we began delivering more weather-appropriate inventory to our hot and tropical stores this month. This effort represents the beginning of a localization strategy and having Peter, Liam and Kevin onboard to partner with our inventory management team will help us accelerate this process.

In conclusion, I believe there is a tremendous opportunity to improve the efficiency and agility of the operational side of the business. We are significantly strengthening the operational team and are developing an action plan to ensure we begin realizing these opportunities as quickly as possible in order to support and accelerate the Company's growth. And 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 third quarter ended October 29, 2011 were $484.1 million, a 7% increase, compared to $453.4 million last year. Comparable retail sales increased 0.9% during the quarter. A 9% increase in average transaction value more than offset a 7% decline in transactions during the quarter. The primary difference between our second and third-quarter results was that our average transaction value increased 9% in the third quarter compared to 1% in the second quarter. The new merchandise and strong fashion offerings drove a significant increase in AUR, which was up midteens in the third quarter compared to a high single-digit increase in the second quarter. Comparable store sales increased 0.3% in the US and declined 12.8% in Canada, which was partially driven by a more significant inventory reduction in the Canadian market, coupled with macroeconomic headwinds.

E-commerce comp sales increased 27.4% resulting from increased transactions, an increase in average transaction value and a higher AUR. Regionally, US comp store sales were stronger in New England and the Southeast and slightly weaker in the West. By department, accessories and shoes comped highest, followed by girls, boys and newborn.

US stores delivered positive comps across all store types during the quarter with the exception of street stores, which comped flat and outlets, which comped negative low double digits. Outlets had substantially less clearance inventory this year as we continued to evolve to our new made-for-outlet strategy.

Gross profit dollars increased 10% to $200.1 million during the third quarter. Gross margin expanded 110 basis points to 41.3% due to an increase in merchandise margin driven by a higher IMU, lower markdowns and tighter inventory management. SG&A as a percentage of sales was 26.2% in the third quarter of 2011, representing approximately 100 basis points of deleverage primarily due to higher accrued variable and equity compensation expense in the quarter. You may recall last year in the third quarter, we benefited in SG&A by a lower variable and equity compensation accrual as a result of underperformance in the quarter.

Depreciation and amortization expense as a percentage of sales during the third quarter was 3.8%, a 10 basis point improvement versus last year. Our effective tax rate for the quarter was 38%.

Income from continuing operations net of tax was $33.7 million or $1.33 per share, compared to $31.2 million or $1.14 per share in the third quarter of 2010. Our diluted share count was approximately 25.3 million for the third quarter of 2011 compared to 27.2 million shares last year.

Moving on to the balance sheet, our cash balance at the end of the third quarter of 2011 was $152.6 million. This compares to a cash balance of $172.7 million last year. We were able to maintain a sizable cash balance while repurchasing approximately 1.8 million shares at a cost of $84 million and investing $85 million in CapEx over the past 12 months.

Balance sheet inventory per square foot at the end of the third quarter increased 3.9%. Carryover inventory was down 54%. At the end of the third quarter, we operated 1076 stores with a total of approximately 5.26 million square feet, which represents a 6% increase in square footage.

To briefly summarize our share repurchases fiscal year-to-date 2011, we have repurchased 1.6 million shares for approximately $74.5 million. At the end of the third quarter, we had $35.6 million remaining of the $100 million share repurchase program, which was announced in March 2011.

Moving on to guidance for the fourth quarter and fiscal 2011, for the fourth quarter of 2011, we are projecting earnings per diluted share from continuing operations in the range of $1.19 to $1.24, assuming flat to slightly positive comparable retail sales. We expect gross margin to be down modestly in the fourth quarter as we anniversary a significant inventory reduction in the fourth quarter of 2010, which resulted in a 120 basis point margin improvement last year. We expect to benefit from a slightly higher IMU during the quarter, but we don't expect as much of a margin lift from inventory management and we are anticipating a highly promotional competitive environment. We expect SG&A spending in the fourth quarter will increase approximately 10%, similar to the third quarter as a result of higher planned equity and variable compensation payout this year, along with other investments we're making to drive our growth initiatives.

For fiscal 2011, we now expect earnings per diluted share to be in the range of $3.24 to $3.29. We expect gross margin will expand 30 to 50 basis points in fiscal 2011 due to a higher IMU, lower markdowns and disciplined inventory management. SG&A is expected to deleverage 60 to 80 basis points due to higher variable and equity compensation payout in fiscal 2011.

As Eric mentioned in his remarks, we plan to remodel 12 stores in January 2012, which will negatively impact earnings by approximately $0.04 per diluted share for the fourth quarter and 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 fourth quarter of 2011.

In terms of inventory, we expect to end fiscal 2011 with balance sheet inventory per square foot up mid-single digits. Unit inventory will be down substantially and we expect carryover inventory to be down significantly at the end of the year 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). Thomas Filandro, SIG.

Thank you very much and congratulations on a fantastic quarter. Two quick questions, Jane and [both] Eric, you both -- you mentioned this hot store strategy. Can you expand a little bit on the number of stores, ask what percentage of the goods will differ in those stores and just your thought process on how that will impact performance in holiday?

And then, Jane, this is probably a difficult question, but with the high teens pop in AUR more than offsetting the drop in transactions, do you believe you are changing the profile of your core shopper or are you just basically more deeply penetrating that core shopper's wallet? Thank you very much.

Well, thanks, Tom. On the holiday store strategy, it's a little bit over 200 of our stores that were able to get the delivery. Last year, on 11/1, we delivered basically the same merchandise to all stores and as you know, our 11/1 delivery is some of our most heavyweight goods. So this year, what we did -- the easiest way to think about it is we basically pulled forward the 12/1 spring delivery that sets in all stores to 11/1 for these 200 plus stores and we have only had a couple weeks of selling so far, but certainly much better than delivering heavyweight fleece and pieces of outerwear like that. So I think we can pretty much say that we know that that is going to be a successful strategy. And I think we have opportunity, as Eric said, to get more precise in what we do in inventory management, so I think next year, we can get even better at that.

On the high teens AUR, I don't think that we are fundamentally changing the profile of our customer. What I think we are doing is we are doing what we said we would do, which is differentiate the big girl and the baby girl assortments. And when you look at the product that came in, particularly in the September delivery, there was much more modern elements of that than we have had before. And I think that we know that there were some concerns that the product was too elevated for The Children's Place customer, but as we have said all along and have clearly shown in the third quarter, our customer very much wants that trend-right, color-right product and we intend to keep giving it to her. The customer wants versatility and I think with our value leader position in the kids space, we are priced notably below the mall-based competition by about 30% and in line with the value players. So I think you will continue to see more of the same.

Nicole Shevins, Goldman Sachs.

Hey, good morning, guys. Thanks for taking my question. So we were really happy to see the positive comps this quarter. Can you give us any incremental color on what classifications drove the positive comp? Any specific successes that you had and how you're incorporating this into your strategy for spring. Thanks.

Sure. Some of the categories that were very strong during the third quarter were the dress-up categories. We had extremely strong business in the dress category, the sweater category, not meaning heavy sweaters, but more dressy cardigans with the sparkles and the beads; the skirt category was outstanding. And then as I had said in the call, we were able to compete very effectively in August on the key basics. So our denim performance, our graphic T performance, our uniform and our backpack performance was very strong during the quarter.

Where you saw the elements that weren't strong during the quarter were the carryover businesses. So the lighterweight goods that we had last year, which we didn't anniversary due to the inventory discipline we put in place, that was really where we saw the business erode, which was as planned and that is why you were able to see the margin expansion as well.

And then traffic trends by month, can you give that out?

I don't think we give the traffic trends by month, but we were relatively inline within our TI in the quarter.

Okay, thanks.

Dorothy Lakner, Caris.

Thanks, good morning and let me add my congratulations. Could you give us a little bit more color on what is next in terms of the refinding of allocation or the localization strategy you have just started with a hot and tropical strategy. Where do we go from here? Kind of what is the roadmap next year to further localization of the product? Thanks.

Hey, Dorothy, it's Eric. What I would say is there is a precision -- going back to the word precision -- I think getting tighter on category ownership at the store level and then also from a distribution and logistics perspective, balancing how much arrives at the store and then feeding demand and really moving, I think, ever more from a push to a pull model and getting tighter with where individual pockets of demand sit for individual categories. So both on initial and replenishment, just ever more precise on how we feed that demand as it materializes.

Okay, and then just secondly, in terms of Canada, everybody has heard about the macro difficulties up there. Could you just give a little bit more color on what you are doing to kind of move the needle in your Canadian business?

Yes, Dorothy, we talked about this a little bit on the last call, and I firmly believe -- there obviously are macro issues in Canada and a lot of retailers talk about them. We have all read about them. But I very much believe that the issues that are going on with The Children's Place in Canada are issues that are going to correct themselves in the near term.

When you look at the amount of inventory we had up in Canada, it was even more substantial than the inventory we had down here. So we had a lot of cutting back to do and we are about a quarter behind the United States Place stores and cutting that inventory back. We are anticipating sequential improvement in our Canadian business into the fourth quarter and a stabilization of that Canadian business into 2012.

Besides the inventory levels that need to rightsize themselves up there, there was also what I believe is an opportunity to get more fashion-right product into Canada. I think that the way the Company operated in the past was there may have been a misconception that the Canadian customer was different and didn't want fashion pieces in apparel, as well as the fashion pieces in accessories and shoes. We have worked very hard to correct that. So when this spring delivery hits on 12/1, the Canadian assortments will 100% mirror the United States assortments with the exception of, in the October/November time period next year, they may get some more coat assortment or some more heavyweight assortment, but we will not be holding pack on the fashion elements in the accessory elements in Canada. So I believe that that is something we can control, something we're working very hard to control, and I am looking forward to reporting in the near future that we have turned that -- turn the corner up there.

Adrienne Tennant, Janney Capital Markets.

Good morning. Let me add my congratulations. My first question is just a clarifying question. So I believe the last time we were looking for SG&A dollar growth in the mid-single digit range, am I to assume that the delta between mid-single and the 11 is the incentive compensation?

And then secondarily for Jane, can you talk about the clearance, the outlet strategy? I know that you're moving toward the made-for-outlet and will be close to 100% by the start of maybe next year, the end of next year. So I guess my thought there is are you going to change the way that you are clearing the excess goods perhaps through the website? And if you do that through the online, does that allow even more margin enhancing to run some of the product through the website? And then just as a component of that, how much of a drag were the outlets in 2011? Thank you very much.

Yes, this is John. Just on the SG&A question, it was predominantly -- the delta was predominantly driven by variable compensation expense.

Great.

And then on the clearance outlet strategy, we are going to probably be close to 70% made-for-outlets in 2012 and the strategy there is really to have separate goods for the outlet and separate goods for the Place stores. So what the Place stores have basically done all year and will certainly continue to do is clear their inventory in their own channel. So we have dramatically reduced those transfers back and forth down to almost a zero level this year, and next year, looking to just, at the very, very end of season, possibly use the outlet channel to clear end-of-season goods.

As far as the drag that outlets were, outlets have been a drag on top line all year. Not something that surprises us. We pretty much had anticipated that the outlets would be a drag with the drop in traffic and the drop in transactions. But certainly a very positive on the margin line and that is our strategy for outlets is to continue to get the margin enhancement out of outlets and we see that business -- that traffic stabilizing probably sometime in the first half of 2012. So I would say by the time we get to back to school of 2012, that is when the lion's share of the outlet assortment will be exclusive to outlet and that is when we will have anniversaried the traffic and the transaction negative trend.

Janet Kloppenberg, JJK Research.

Hi, everybody. Congratulations on a good quarter. Jane, I know the girls business had a very strong quarter. Did boys and baby comp positive in the US as well?

Big boys comped positive in the US and newborn still continues to struggle. Newborn did not comp positive.

And can you just talk a little bit about your outlook there? I know it's not as big a percentage of the business, but what can we look forward to and when do you see that business improving?

Well, I think the boys business was just, as I said, the big boys comped positive. The baby boys business was slightly negative and overall, it was close to flat. The boys business has been stable. We don't see that changing. I think the big news in the quarter is certainly the girls, which led the way and really all due to the new product design. When you look at accessories and shoes, which have also been completely redone, to see them double-digit comp positive is also very exciting. Newborns has been under pressure since we came. We continue to work on that business and I think that we will see some improvement there. As we mentioned on the last call, we do have a new head of newborn design who Michael has brought in and we are feeling good about the line that you're going to see set in stores on 12/1.

Anna Andreeva, FBR Capital Markets.

Great, thanks so much and congratulations on a very strong result. I was wondering, Jane, if you could talk a little bit about the competitive landscape out there? Certainly the children's value space has been promotional all year, especially at some of your mall-based competitors. If you could just maybe speak to that. And just curious on AUR increases going forward, so should we think that you guys will continue to be competitive on some of the basic categories and elevate prices on fashion? Obviously you mentioned holiday will be competitive. Just more color on that. Thanks.

Yes, thanks. We anticipate being competitive on basics as we have been all year and that will continue into holiday and continue into 2012. From a fashion point of view, we certainly did see great increases in the AUR and we will continue to support that and you will continue to see that through holiday, the balance of holiday and then spring on 12/1 and then to spring 2012.

What we have seen from our competition has been a little bit different depending on which competition you are referring to. When you look at the mall-based competition, we have kept our value space and kept notably below their price points 25% to 30%, but I think what we have seen there is we have seen very high inventory levels and very high degrees of promotion really all year. You can see it in the margins with the mall-based competitors and you can see it in the sales they are running. We don't anticipate, based on their inventory levels, that that is going to end anytime soon so we are continuing to approach that as if it will continue into 2012 until they rightsize their inventory.

Rick Patel, Bank of America.

Thank you. Good morning. Just a question on your international strategy. Can you just update us on the progress you have made here since the last call and perhaps touch upon any early reads you have on what the key opportunities and challenges are as you execute that strategy for next year?

Hey, Rick, it's Eric. So I would say international is progressing exactly as we anticipated. The more time we are spending out there really sizing up both the markets and also the (inaudible) in the markets, we continue to get ever more content that we feel like we have a really great proposition to offer out there. We still plan on opening our first stores in the back half of '12. I think that is still very much on track and really the work now is both about sort of parallel pathing, that opening, as well as subsequent markets and making sure we have clear line of sight to how we want to sequence our entry across the globe.

Thank you very much.

Margaret Whitfield, Sterne, Agee.

Good morning. I will add my congratulations to the quarter. Curious, with 80 remodels next year and 12 remodels costing $0.04 in Q4, what will be the effect of the remodels on earnings next year? If you could give us some color on what the new spring line is all about, that would be terrific. And also an update on costing would be helpful. Thank you.

Well, I will give John the remodel question.

Yes, so Margaret, the 80 remodels next year -- we aren't giving fiscal 2012 guidance today and we will update you on that in March. Most of those 80 remodels next year are natural end-of-lease remodels. The remodels we are doing in January for the Canadian stores are -- we are remodeling some stores a little bit earlier than we normally would, which is why it is impacting our earnings a little bit more significantly this fourth quarter.

And then on the costing front, Margaret, we are in the middle of the highest costs of all year on the holiday line. For spring, going into spring, the costs are substantially higher than they were for spring 2011, but they're down from where they were for holiday '11 and then when you go into summer, they are down sequentially from spring, but still up from summer 2011. We are in the middle now of working on our back-to-school buy for 2012 and that is when we are starting to see what we hope will be costs coming down year-over-year.

As far as the spring line is concerned, I think you will be very pleased when you see it. As I had mentioned, this is the first line all year designed under a head designer and Michael Giannelli has done a fabulous job. I think you will see the continuation of the split between big and baby in boy and girl. I think you will feel very good about how the accessories and the shoes work back to the apparel and it really tells one story.

I think you will see Michael's expertise on print, pattern and color coming through. We will continue to go after the categories that have been working. You will see us continue to believe in the dress business and the skirt business and the sweater business on the girls side and you will continue to see us focus on bottoms and key item tops on the boys side of the business.

Baby continues to get more outfit-driven with more sweeter details and really further separate itself from the bigger girl assortments, which are I would characterize as a little bit more modern separates, so we will be anxious to hear your feedback.

Brian Tunick, JPMorgan.

Thanks, good morning and congrats. I guess two questions. I guess, Jane, on the inventory side, I think you mentioned units will be down significantly at the end of the quarter. Just curious if that is sort of a change in philosophy. Usually we think of Children's Place as really a marketshare, unit-driven story. So just curious how you are thinking about units as we move into next year.

And then if someone can just talk a little about the Canadian dollar. Any impact you have seen obviously this year from -- I think it was up 8% or 9% versus last year and sort of how we should think about that as we move into next year given where the Canadian dollar is and what line items that could have a negative impact on.

Sure. On the units, we have been saying all year long that we were buying units down substantially in the back half of the year. With the cost increases that we experienced for fall and are experiencing for holiday, we needed to buy the units substantially down in order to increase our margin and get our inventories under control. So, that is no different from what we have been saying all year long. If you look at where we will be at the end of holiday at the end of the fourth quarter, units will be significantly down and then as we go into the first quarter with spring, same story, units will be down as costs are still up. I'm going to turn the Canadian part over to John.

Yes, from a Canadian dollar standpoint, the Canadian dollar is weaker today than it was say three months ago when we last updated you on our fourth-quarter guidance. It is a little bit of a drag in the fourth quarter relative to our prior guidance and where it impacts us is on the sales line, a couple tenths, maybe 2/10 to 3/10 in the fourth quarter and then it also has an impact on EPS. We -- it has been a benefit in the year-to-date. It has been a benefit of a penny or two I think in the third quarter, so --.

Marni Shapiro, Retail Tracker.

Hey, guys. Congratulations. The stores look beautiful for holiday.

Thanks, Marni.

So could you talk -- you have a bunch of new hires and the one that strikes me as most interesting is you have somebody new in marketing. And your message has been getting clearer -- more clear and on point all year. So if you could talk a little bit about I guess what you would like to see her tackle first and foremost. And then I am just curious if you could update us on the pajama/sleep business in your stores, which have looked pretty good and outerwear, which I know in the last couple of years has been a bit of a drag as the inventory has built up.

Sure, well, Lori Tauber Marcus has been here all of one day, so we are thrilled that she has joined. Really what Lori will be concentrating on is really looking at the brand and I think really focusing in on the voice of the consumer, the voice of the brand, doing some market research to really understand our customer a little bit better and then really help us develop a voice around that consumer.

As far as the businesses -- and more to come on that. Like I said, she has only been here a day.

As far as the merchandise categories you are talking about, the PJ and sleep business has been outstanding, driven by the fashion sleepwear business. When you look at what the business used to be here, it was a lot of packaged sleepwear and we have really gone after a separates business, separate tops and bottoms. We have also added in robes and slippers, which have been very strong quarter-to-date. The outerwear business was also very strong during the third quarter. We focused the assortments into the jackets that really work for us that really sell, and even though you didn't ask about it, the cold weather accessory business has also been outstanding. So we feel like we have found the formula in outerwear and cold weather accessories that really works for us.

Kimberly Greenberger, Morgan Stanley.

Great. Thank you, good morning. Jane, I'm wondering if you can talk to us about the promotional environment. And you mentioned that you are expecting to engage in a promotional strategy this holiday season. Is your plan or your strategy to develop your list of promotions and just move forward with them sort of regardless of what is happening in the mall environment? Or do you watch what is happening week to week and if you have an opportunity to step away from one of those promotions, do you have an ability to pull back if they are not needed?

Yes, we do have the ability to pull back and we did that in the third quarter. We had a lot less promoting in the third quarter this year versus last year and that certainly is what helped us, one of the things that helped us on the margin line. We didn't deviate much from our promotional strategy in the third quarter, other than pulling back on a couple. We certainly didn't add.

We have a very sound promotional strategy for the fourth quarter and we don't anticipate moving off of that strategy. We think that it will be very competitive in the fourth quarter and we feel strongly that we're going to need to be in there promoting. But because our inventory levels are so clean and because we have been focused on inventory discipline all season, we don't find ourselves in the unfortunate position of having to promote our way out of inventory clogs. So I think between the well-thought-out promotional strategy and the disciplined inventory approach, we will continue kind of along the lines we did in third quarter.

-- a lot of sense. And then just a follow-up on the sourcing cost inflation question. If you think about the magnitude of the increases, is there a way to help us understand what your first-quarter and second-quarter increases look like maybe relative to your third-quarter increase this year? Would they be similar, for example in Q1 and Q3, or is it even less?

Yes, I think that you can say that the Q1 increases are similar to Q3 and the Q2 -- let's just talk about the deliveries. The spring costs are pretty close to the increases of the fall costs, the back-to-school costs. The summer costs are down off the highs of fall and back-to-school, but still up from summer 2011 and then back-to-school is the first season where it's a year-over-year down. How far down, we don't know yet, we're working on that line.

John Morris, Bank of Montreal.

Thanks, good morning. Nice, nice work, everybody. Really good quarter.

Thanks, John.

Thank you.

Two questions, I think one for John, unless I missed it hopping on and off there. On the SG&A outlook for 2012, I know just looking for directional thoughts, I know we are not going to give any specific numbers or guidance there, but I am thinking with the possibility of positive comps into next year, would we look to see some leverage theoretically or do you plan to do other significant investment areas that we should be thinking about that would come in in SG&A and what would those be?

And then for Jane, you have commented a lot on the merchandising, so we have heard all that. Inventory, I think up where it was, shy of I think what your initial plan was up high single digits. So it looks like you moved through it really well. What could you have used more of? What would you have wished that you would have had even more of in the quarter?

John, this is John. Let me take the SG&A question. SG&A for 2012, to your point, we are not giving guidance today on 2012, but we are balancing -- we continue to balance making investments for this franchise for the longer term with managing within season. It is our expectation over time that we can leverage SG&A, assuming a low or positive low single-digit comps, and we will continue to look for ways to unlock value longer term. And we are also in a transition -- sort of a transformation in this Company and there are some legacy costs that eventually we believe we can manage to reduce over time, which should give us further leverage in the out time period. So for 2012, as we think about it, we will balance investment with being efficient on our SG&A line.

And, John, on the inventory question, I am not sure in my 25 plus years in the business I have ever wished to have more inventory in anything, so I can't tell you I wish I had more. Probably what I wish is that I maybe would have rebalanced by classification and I probably would have wished for more shoes and more boots and then maybe a little bit less on some of the categories in the baby divisions during back-to-school, but overall, no more.

Lee Giordano, Imperial Capital.

Thanks, good morning and congratulations as well. In terms of the value center stores, can you talk about the merchandise assortment in those stores? Is it the same as your other store locations? Secondly, in the smaller footprint stores that you are thinking about, what will the offering be in those? Will it be bestsellers or how are you thinking about that? Thanks.

Okay, good morning, Lee. Yes, I would say in value center stores today we've been very fortunate. We've really maintained the identical assortment and offer the same broad range across all the different classifications.

In the smaller footprint, really the intent is to say how can we more efficiently utilize the space to maintain the same level of assortment, albeit potentially a level of depth that you would -- that would be different than a larger store. So again, it's trying to align the depth with the top-line potential of the store. But in terms of the breadth and range of the assortment, the intent is to be more or less the same as we see elsewhere.

John Zolidis, Buckingham Research.

Hi, congratulations on a great quarter.

Thanks, John.

Thank you.

Question -- two questions. First, can you just elaborate a little bit more on the fourth-quarter gross margin outlook? I understand the comparison is more difficult, but with the carryover inventory down so much, one would think that you could have -- and especially positive comps -- additional margin improvement.

And then a second question is on the e-commerce business. Can you just comment on the relative margins, the op margins on that business versus the retail business? Is it higher? Is it lower? And where do you think the e-commerce merchants can go over time? Thank you.

Sure, John. This is John. In terms of fourth quarter, as we mentioned in our prepared remarks, we expect modest deleveraging gross margin in the fourth quarter based on three factors. Number one, we're up against a difficult compare year on year. Last Q4, we were able to substantially reduce inventory, which drove a 120 basis point improvement year-on-year. So we don't expect to see the same level of improvement from inventory management, although we do believe that we can continue to tighten our inventory management up and drive margin through rigorous inventory management.

From an average unit cost standpoint, holiday, which is the bulk of what we will be selling in the fourth quarter, when we purchased holiday, it was at an all -- costs were at an all-time high. So we are faced with the highest costs we have had all year. We had excellent performance in the third quarter on our AUR and we expect that to continue, but we also are judicious when we think about the competitive environment. It is a highly promotional environment in the malls and we expect it to be that way in the fourth quarter. And so when we think about our margin for fourth quarter, we wanted to make sure that we were thinking about the competitive environment as well.

From an e-commerce standpoint, the e-commerce business continues to be a terrific business for us. We grew 27% in the third quarter. From a margin standpoint, it obviously doesn't have the fixed expense of the store business, so it is accretive and we are really excited about the long-term opportunities of that business.

Richard Jaffe, Stifel Nicolaus.

Thanks very much and a follow-on question, as the Company has been so effective at being trend-right or fashion-right, I wonder does this change the risk profile for the organization that, with higher fashion content, obviously higher margin and greater sellthroughs when it is right, but perhaps a little bit more challenged when it is not. Wondering how you are trying to I guess put guard rails around the fashion or protect yourself from some fashion misses.

Hey, Richard, it's Jane. Really when you think about it, when you look at the fashion at The Children's Place, we are down in fashion versus last year. It is a smaller percent to total than it was. I think you are just seeing how improved it is and how much better it is selling and how much more it is resonating with the customer, which may be making you think there is more of it than there was last year. It is just better, so I don't consider it a risk at all. I consider it as what is going to continue to propel the business.

As we all know, the girls side of the business and the shoe and accessory side of the business was the elements that needed the most work and having completely retooled them without the benefit of a head designer and now having a head designer, we think that we are just going to continue with that strategy. And you are going to continue to see pretty much the same amount of fashion, but I think you are going to continue to see it improve.

Got it. Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone and congratulations.

Thanks, Dana.

Thank you.

You have talked a lot about some of the changes taking hold on the infrastructure and backroom side, whether it is localization, back-of-house stockroom, store remodels. As the guts of the business improve, what is the expected margin impact or expense savings? And then just lastly with the AUR going up, where could AUR go and how does it differ boys versus girls? Thank you.

Dana, this is John. In terms of the opportunities operationally, the work that we are doing to improve the operations and the infrastructure of this business is what really resonates in how we drive to double-digit operating profit over time. We continue to believe that, with positive low single-digit comps, we can improve margins and we also firmly believe we can leverage SG&A. So as we look at our SG&A cost structure and as we become more efficient as a business, we can take costs out of the business and leverage and that is going to drive double-digit operating profits over time.

Dana, let me just add something. It's Eric. What I would say is when you look at all of the different components from an operational perspective, you see that benefit really up and down the P&L. You're going to see it in top-line comp in terms of greater precision on how we get product to the right locations and the right stores and so forth. You will see it on margin, you will see it in SG&A efficiency over time, so it really does manifest itself up and down the P&L.

And then, Dana, to finish up on the AUR side, while the girls led the way with the highest AUR increases in apparel, boys was very close behind, so there is not a big delta between those two.

And this concludes our Q&A session. I would like to turn the call back over to Jane Singer for 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.

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