Children's Place Inc (PLCE) 2011 Q4 法說會逐字稿

Good day everyone and welcome to The Children's Place fourth quarter and fiscal 2011 earnings conference call. At this time all sites are in a listen-only mode but later there will be a chance to ask questions. (Operator Instructions). As a reminder today's call may be recorded.

It is now my pleasure to introduce our speaker for today, Ms. Jane Singer. Please go ahead, ma'am.

Thank you, Josh. Good morning everyone and thank you for joining us today for a review of The Children's Place Retail Stores Inc. fourth-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 now I will turn the call over to Jane Elfers for her opening remarks.

Thank you, Jane, and good morning, everyone. I would like to start off by recapping our progress to date followed by a summary of our 2012 key initiatives and then conclude with our outlook for 2012.

When I joined The Children's Place two years ago getting the right team in place was my top priority and I am happy to report that we have made tremendous progress. Since then we have replaced and upgraded over half of our headquarter staff including key roles such as Chief Operating Officer, Head Merchant, Head of Design, Chief Marketing Officer and Head of International.

In addition, we have made substantial progress on several other major initiatives including a complete repositioning of our apparel, accessories, and footwear assortments in our US and Canadian channels; a reengineering of our planning processes; a relentless focus on inventory management leading to a healthier inventory position with eight straight quarters of significantly reduced carryover inventory. This lower carryover inventory combined with lower product costs sets us up for margin expansion in fiscal 2012.

The development and implementation of our outlet strategy with a shift to made-for-outlet product and a fundamental change in the way we source, merchandise, and operate our outlets. We started the year with 3% made-for-outlet product and ended with 35%. Our plan for 2012 is to end the year with over 80% made-for-outlet merchandise.

While comps are pressured during the transition away from a clearance model, it led to over 300 basis points in gross margin expansion in 2011. This repositioning should result in substantial margin expansion again in 2012 and a much healthier and more profitable outlet business longer-term. But it will likely continue to dampen our topline growth in 2012, particularly in the first half.

These are the kinds of strategic decisions we need to make to fulfill our long-term goal and ultimately achieve a sustainable double-digit operating margin.

The realignment of our production and sourcing teams in New Jersey and overseas which we expect will result in a significant cost savings and a more nimble organization better equipped to support our current and future business needs, the development and execution of an international strategy and the launch of our first international stores by our franchise partners in the back half of 2012.

We are very excited about these openings and believe this represents a significant long-term growth potential for The Children's Place brand. We are not in a position to announce our partners today as we are in the midst of active negotiations and will announce the markets and the partners as soon as we have the signed agreement.

And lastly, the implementation of fundamental processes and basic disciplines across all areas of the organization. And we achieved these milestones while continuing to manage through a major systems implementation that is more than a decade overdue and critical to our future growth plans.

To summarize our fiscal 2011 financial results, our net sales increased to $1.7 billion. We were able to hold gross profit dollars flat at $664 million for fiscal 2011 given our significantly improved product and our tight inventory control.

Despite double-digit product cost increases and the substantial margin pressure created by the unseasonably warm weather in the fourth quarter, our full-year gross margin decline was less than 100 basis points. Adjusted earnings per share declined 4% to $2.92 and the strong cash generation of our business in fiscal 2011 allowed us to invest $50 million in brick-and-mortar locations, $25 million on significant upgrades to our technology and distribution infrastructure, and to return over $90 million in cash to shareholders through our buyback program.

And as you may have seen this morning, we announced a new $50 million stock buyback program going forward.

Inventory management really benefited us all year. We approached 2011 very cautiously from an inventory perspective given the high product costs. We bought substantially fewer units in the back half with the goal of protecting gross profit dollars for the year and we did. As a result of our lean inventories all year, we ended 2011 with inventory per square foot down 3% and carryover inventory down 15%. This strategy led to margin expansion for the first three quarters of 2011 and less than 100 basis points of margin erosion for the full year.

Looking ahead, we believe there will be targeted opportunities to buy additional units of product that has been resonating with our customers in the second half of 2012.

AUR increased in the high single digits during fiscal 2011 due to significantly improved product and again disciplined inventory management. AUR was up across all channels, regions and merchandise divisions with the largest increase in the girl's division as the improved product continued to resonate with our customers.

E-commerce sales continued strong with positive double-digit comps all year and US Place stores continued to lead the turnaround and delivered positive comps in the third and fourth quarters of 2011.

As you may recall, our Canadian channel was significantly over inventoried entering the year and during 2011 we right sized our Canadian inventories and better aligned the mix of products in Canada. Our inventories are now better controlled and for the first time our Canadian stores have the same merchandise assortment as our US Place stores.

2011 ended with a fourth quarter that produced disappointing sales and earnings primarily due to warm weather coupled with record high product costs. Comp sales declined 2.7% which was disappointing. When we revised guidance in early January, we expected comp sales for the quarter to be negative 1 to positive 1.

We ended December with two very strong weeks and we're on track for the quarter; however, January was very challenging as the warm weather persisted and we continued to be highly promotional to clear the remainder of our winter merchandise. We ended the quarter on a positive note. Inventory was clean and comp sales strengthened toward the end of the month as customers responded well to our spring assortments particularly in US Place stores. That positive trend continued into February with our Easter dressy set.

2011 was a transformation year for The Children's Place. Taken as a whole we made tremendous progress last year and the business is positioned to deliver sequential improvements in results in 2012 and beyond.

Moving on to 2012, I want to share our key strategic initiatives. They build on our 2010 and 2011 initiatives but we have enhanced them due to the significant progress that has been made over the past two years as well as the depth of leadership that is now on board.

Overlaying all our strategic initiatives is talent, talent acquisition, retention and development. Getting the right team in place is critical to our long-term success and based on my earlier comments, you know how focused we are on making the personnel changes necessary to grow this brand for the long term.

Our four strategic initiatives for fiscal 2012 are number one, product. Product is and will always be our number one priority. Given the strong and consistent product execution we achieved throughout 2011 under Natalie Levy's leadership, we are broadening this initiative to include all critical elements supporting the end product including product development, sourcing, inventory management, logistics and distribution.

The goal is to get the highest quality, lowest cost, trend-right merchandise and to more quickly and efficiently distribute it to the appropriate channel to drive sales productivity.

Number two, brand. Lori Tauber Marcus is focusing both on increasing loyalty and share of wallet among current customers as well as developing a marketing program to reach out to new customers and build brand equity and drive traffic. We relaunched our Place card in July 2011 offering a 5% discount on all purchases. We saw a 9% increase in activation rate and a 13% increase in sales per active cardholder after the relaunch and expect those positive results to continue into 2012.

We are also expanding the number of customers who shop both in-store and online. Both of these initiatives are important because Place cardholders and multichannel shoppers are our most loyal customers. They shop more often and their annual expenditure is more than three times higher than the average.

We plan to launch a loyalty program later this year that will be tender neutral but will provide additional benefits to our valuable Place cardholders. Lori is in the process of updating our brand vision which will lead to more targeted marketing programs in late 2012 and early 2013.

Now that the merchandise is where we want it to be, we believe that later this year or early next is the right time to launch a broader-based marketing effort to encourage new customers as well as existing customers to shop at The Children's Place.

e-Marketing efforts including search, e-mail and social media engagement continue to be a cornerstone of our marketing outreach. Industry research indicates that our moms love a daily deal. According to the research, more than half of US moms subscribe to a group shopping site and a third of moms share deals on Facebook before shopping.

Number three, geographic expansion. We are thinking more holistically and longer-term about where and how we will leverage real estate as well as an integrated strategy for e-commerce on a global basis. Geographic expansion includes US and Canadian real estate, market planning, international market entry, international market business optimization and e-commerce.

And number four, operational excellence. With the addition of Eric Bauer and several key members of the senior leadership team we can now focus on the critical need for operational excellence to support our other strategic initiative. Operational excellence includes how we operate our stores, our IT infrastructure, finance, legal, human resources and compliance and Eric will spend more time on this during his presentation.

Our 2012 outlook. Our new spring fashions continue to resonate with our customers and we are encouraged by February results. However, we will continue to take a cautious approach to 2012 in light of this past fourth quarter, sustained record high product costs in the first half of the year, rising gasoline prices, conservative consumer spending, and our expectation that the highly promotional environment will continue for the foreseeable future. We are guiding EPS of $3.10 to $3.30 for fiscal 2012.

Barring a material weakening of the economy or extreme weather patterns like we saw in the fourth quarter we firmly believe that the significant progress we have made to date will result in positive comp sales growth, gross margin expansion and operating margin expansion in 2012.

We expect to generate approximately $150 million in operating cash flow in fiscal '12 and remain committed to driving growth in targeted investments in stores, e-commerce and information systems and returning excess cash to shareholders through our sustained buyback program.

Now I will turn it over to Eric.

Thank you, Jane, and good morning, everyone. This morning I want to focus on three of our key operational areas, real estate, global sourcing and information technology where we have a number of major initiatives under way in fiscal '12 to strengthen the business and accelerate long-term profitable growth.

Real estate, we are in the midst of a comprehensive review of our North American fleet which will be completed in May. Coming out of that, we will define internally first, our square footage growth opportunities in North America by geography and market size.

Second, our ultimate fleet potential in the US and Canada including the number of stores we plan to open and close over the next three years. The current Children's Place fleet is very healthy with very few stores that are cash negative but we believe there are opportunities to enhance fleet metrics through targeted closings and a greater focus on optimizing our store footprint.

Third, opportunities to improve the performance of some existing stores in the fleet through downsizing, relocating to a better location within an existing center or repositioning to another center within the market.

As we make these decisions, the primary metrics we will focus on are cash contribution, sales productivity and internal rate of return. While we have not fully completed the review, we have already taken several preliminary steps.

In fiscal 2011, we opened 88 stores and close 34 including 27 in January, a few more than originally planned. We ended the year with a net increase of 54 stores and a 4.6% increase in square footage. Most of the closed stores were at the end of their lease term so this was an optimal time to close them. Although many of the stores were cash positive, they tended to be marginal performers in declining centers with cash contribution in the lower 20th percentile. (technical difficulty)

In fiscal 2012, we will adjust the pace of new store openings to approximately 60 for a net of 25 after planned closures equating to square footage growth of approximately 0.6% at the end of January 2013.

Many of our new stores will have smaller footprints, under 4000 square feet, as we believe there is an opportunity to increase both productivity and store contribution as well as more effectively deploy inventory and payroll in a right size box.

We will accelerate remodels in 2012. In Canada, we will complete 23 remodels from Technicolor to the new Tech II format by the end of June 2012 and expect to complete another 10 or so in the back half of the year. So nearly a third of the Canadian fleet will be remodeled as Tech II by year-end.

We also plan to remodel approximately 30 to 40 US stores that are at the end of their lease in fiscal 2012 to ensure the fleet remains brand right.

Sourcing, one of The Children's Place core competencies is great sourcing which has enabled the Company to offer high-quality merchandise at a low cost. Over the past 20 years, the landscape has changed in the global sourcing marketplace and we believe there is an opportunity to add new tools and capabilities to our arsenal. The overarching goal is to lower product costs, improve quality, enhance innovation and increase speed through a focus in the following areas.

Strategic vendor consolidation. We will be identifying the very best vendors and growing our relationship with them in order to get more scale, better quality and greater flexibility.

Geographic migration. While China represents 39% of our sourcing base in fiscal 2011 and will remain an important market, we have the opportunity to expand in other key markets like India and Bangladesh and to continue growing our sourcing in Cambodia and other countries in order to improve costs, execution and flexibility.

Bulk negotiations across the entire product supply chain. We are now aggregating volumes across product categories, departments and multiple time periods to increase scale which we expect to translate into lower costs.

Pipeline planning, this includes shortening the lead time for fashion, chasing into sales and finding opportunities earlier in the process to innovate while still effectively managing cost and timing constraints.

More targeted use of agents. We will more fully leverage the capabilities of our global offices to directly source many programs with the mills and factories. We expect this will result in lower costs, greater control and enhanced speed. For outlets, we are using a discrete sourcing model with different vendors and different make, trim and fabrics in order to achieve the AUCs required for that channel.

While cost is and always will be a paramount focus for The Children's Place business model, we also believe that flexibility and the ability to react and respond quickly to trends will be critical for our long-term success, especially with the growth of our international business. That is why we are taking a multi-pronged approach to our global sourcing model to ensure we are able to minimize our costs and adjust as opportunities present themselves.

Technology. As we have discussed a few times, The Children's Place operated a network of antiquated legacy technology systems which we are in the process of transforming to a more integrated, state-of-the-art technology footprint that will facilitate the flow of information across the Company.

We are focusing on delivering a number of key capabilities grounded in the basis of stability, scalability and flexibility, all with a view towards building a foundation upon which the business can grow and thrive.

While the bulk of our efforts in 2011 were around defining requirements and project planning, we also successfully deployed a number of new capabilities during the year. For 2012 into 2013, we are planning numerous smaller development and deployment projects in order to mitigate risk, make changed management easier and adhere to financial and timing constraints.

In conclusion, we are focused on a myriad of operational areas across the business in order to deliver a more efficient and responsive global operational capacity for fiscal 2012 and beyond and I will continue to provide you with updates as we continue along our path.

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 fourth quarter ended January 28, 2012 increased 1% to $457.5 million. Comparable retail sales declined 2.7%. A 2% increase an average transaction value was more than offset by a 5% decline in transactions, primarily due to double-digit transaction declines in outlets and Canadian stores. Average unit retail increased high single digits for the quarter.

Comparable store sales declined 2.8% in the US and declined 14.6% in Canada. Full price US Place stores comped positive low single digits. US outlets comped negative midteens. E-commerce comp sales increased 14.9%. Regionally sales were stronger in the Northeast and the West and weaker in the South and Midwest. By department, accessories and footwear comped highest followed by girls, boys and newborn.

Gross profit dollars declined 12% to $164.6 million in the fourth quarter of 2011 and gross margin declined 540 basis points to 36%. The decrease in the gross margin rate was primarily due to significantly higher markdowns during the quarter. The unseasonably warm weather this winter suppressed demand for cold weather apparel and accessories and we were much more promotional than planned to clear through that inventory. There was also modest deleverage of distribution and occupancy expense.

SG&A spending was $121.7 million during the fourth quarter of 2011, a 3.6% increase compared to last year primarily due to higher administrative expenses. SG&A as a percentage of sales was 26.6%, 70 basis points higher than last year. On an adjusted basis, SG&A deleveraged 50 basis points in the quarter which was better than planned as we reversed accruals for bonus and equity compensation for the year given the below target performance in the fourth quarter.

Depreciation and amortization expense as a percentage of sales during the fourth quarter was 4.3%, 30 basis points higher than last year primarily due to accelerated depreciation on the Canadian stores that were either remodeled in January or will be remodeled during the first quarter.

Excluding this accelerated depreciation which is one of the items in our non-GAAP measurement in table three of the press release, depreciation and amortization deleverage 10 basis points.

The earnings in our Asian subsidiaries became permanently reinvested during the quarter resulting in a lower effective tax rate and the reversal of $900,000 related to prior-year earnings. In addition, we reversed tax accruals of approximately $2.2 million for state tax audits that were settled during the quarter. As a result, we had a negative 7.5% effective tax rate for the fourth quarter.

Our adjusted tax rate for fiscal 2011 was 32.1%. The tax benefits included in our non-GAAP measurement are itemized in table three. In 2012, our tax rate will be approximately 33.5%.

Income from continuing operations was $24.2 million or $0.97 per diluted share in the fourth quarter of 2011. This compares to income of $32.7 million or $1.24 per diluted share in the fourth quarter of 2010. Excluding non-GAAP items, adjusted income from continuing operations was $21.9 million or $0.87 per diluted share in the fourth quarter of 2011 compared to $1.22 per diluted share in the fourth quarter of 2010.

Our diluted share count for the fourth quarter of 2011 was 25 million which compares to 26.5 million shares last year.

To briefly touch on fiscal 2011, income from continuing operations was $77.2 million or $3.01 per diluted share. This compares to income of $83.6 million or $3.05 per diluted share in fiscal 2010. Adjusted income from continuing operations was $2.92 per diluted share in fiscal 2011 compared to $3.03 per share in 2010.

Moving onto the balance sheet, our cash balance at the end of fiscal 2011 was $176.7 million compared to $185.9 million last year. During 2011, we repurchased 1.9 million shares for approximately $91 million and spent $80 million on capital expenditures. As we announced in our press release this morning, we plan to complete the remaining 2011 share repurchase authorization during the first quarter of 2012.

We also announced that the Board has authorized a new share repurchase program in the amount of $50 million. We believe this share buyback program is consistent with our commitment to increase returns on capital and create long-term shareholder value.

Balance sheet inventory per square foot at the end of the fourth quarter was down 3%. Carryover inventory was down 15%. We ended the year with 1049 stores and a total of approximately 5.14 million square feet which represents a 4.6% increase compared to fiscal 2010.

Our initial guidance for fiscal 2012 and the first quarter is as follows. For fiscal 2012, we are projecting adjusted earnings per diluted share to be in the range of $3.10 to $3.30 assuming positive low single digit comparable retail sales. We expect approximately 80% of our net income for the year to be produced in the second half of 2012 with lower product costs and progress on our strategic initiatives benefiting earnings later in the year although bonus and incentive compensation that was not paid in 2011 should impact earnings growth in the fourth quarter of 2012.

For the first quarter of 2012, we are projecting adjusted earnings per diluted share from continuing operations to be in the range of $1.03 to $1.08, assuming flat to slightly positive comparable retail sales. We expect gross margin deleverage in the first half, mostly in the first quarter due to higher product cost on the spring and summer lines. Product costs are expected to be significantly lower in the back half and we expect margin expansion of 70 to 90 basis points for fiscal 2012.

We anticipate SG&A spending will increase in fiscal 2012 and SG&A will deleverage 80 to 100 basis points primarily due to target payout of variable compensation.

As I mentioned earlier, we expect our effective tax rate to be approximately 33.5% for fiscal 2012 and net interest expense to be in the range of $500,000 to $1 million. Our guidance excludes unusual costs or events that are reported in our non-GAAP measurement. It assumes currency exchange rates will remain where they are today and does not include the impact of potential share repurchases associated with the $50 million authorization announced today.

Fiscal '12 is a 53-week year. Our comp calculation for fiscal 2012 will exclude the 53rd week.

In terms of inventory, we expect to end the first quarter of 2012 with total inventory per square foot approximately flat. We plan to open 60 new stores in fiscal 2012 for a net of approximately 25 additional stores after planned closures. Square footage is expected to increase 0.6% at year-end as the new stores we are opening in fiscal 2012 will have a smaller footprint. Bear in mind however, that square footage will expand approximately 1.5% in the first half of 2012 as most of the store closures are scheduled for the back half.

We expect capital expenditures to be in the range of $80 million to $85 million. About two-thirds of the CapEx spending will be store related similar to fiscal 2011 although spending on remodels will be higher and spending on new stores will be lower than in fiscal 2011. The remainder of the 2012 CapEx spending will be for the distribution centers and IT projects.

Now we will open the call to your questions.

(Operator Instructions). Dorothy Lakner, Caris.

Thanks and good morning, everyone. Jane, I wanted to ask just about product costs and where you are expecting those product costs to be in the first quarter and then what we can look at going through the rest of the quarters this year as those product costs begin to come down?

Sure, Dorothy. In the first quarter, product costs are still up double-digit. As we go in to the summer delivery in second quarter, they start to come down a little bit but they are still up high singles. And then as we get into the back half of the year into back-to-school, we are looking at year-over-year decreases right now approximately high singles and we are thinking that holiday will be pretty close to that.

We don't finish our holiday buy for another month or so but we are thinking that those same back-to-school prices will probably hold through holiday.

Great. And then just a little bit more color on the product initiatives this year. You did such a good job in 2011 in improving the girls product. What is really on your slate for this year in terms of improvement?

Well, I think we did have a good year as far as consistent product execution which was one of our number one goals. I think that we do still have opportunity in 2012 to continue along that vein. You will see us continue I think to strengthen the shoe assortment, strengthen the accessory assortment. And then within the classifications not only in girls but across boys and baby as well, I think you will continue to see improved product as well as improved buying by classification meaning being in the right classifications and the right trends.

Tom Filandro, SIG.

Hey, thanks very much. Jane, there has been a lot of controversy within the investment community I think related to the level of promotional activity compared to last year I think thus far in the spring season. So I think you mentioned earlier you were feeling good about spring trends in February.

Can you just address the level of promotional activity thus far and how it compares to plan and last year? And if you could also address just the overall AUR view of the spring assortment versus last year. Thank you.

Sure. As far as the promo activity as we came out of fourth quarter, we had significant promo activity as we have discussed and January had more promo activity on winter than we had anticipated when we revised guidance in early January. When we started to see the business really turn was at the end of January when we set our dressy assortment.

We set our dressy assortment around 1-28 on the floor which was the last week of January. We had our dressy assortment on the floor for almost a month at regular price and did no promoting on that dressy assortment and it produced very good results for us in the month of February.

In addition, our shorts or swim, none of those categories were promoted in the month of February and we anniversaried a Presidents' Day event in the month of February where we had a significant portion of the store at $5 which we -- this year we are not at $5. We were at a $6 day.

So from a level of promotional activity within the spring assortments, I don't think that that necessarily rings true. I think it certainly did for the clearing up of the winter merchandise. And I think maybe some of that promotional activity or the feeling that we are more promotional than LY could be driven by our focus on e-mail. We have made a concerted effort to increase our use of e-mail as we decrease our use of low ROI direct-mail.

And from the research we have done with our customers and some of the early reads coming back from what Lori Tauber Marcus, our new CMO, has brought to the table is that our customers really like hearing from us on e-mail. And as I mentioned in my opening remarks, really like hearing what is going on almost on a daily basis.

So that may be what you are seeing in the promotional environment but those e-mail blasts if you will are to a certain customer. It is not an all store promotion. You won't see a sign in our store and take 25 off the whole store. That is only something we do on Black Friday. So I think that may be where some of the opinion that we are more promotional is coming from but when you step back and look at it, we are really not.

Stacy Pak, Barclays Capital.

Hey guys, thanks. So I am looking at the AUR and just the guidance and I guess I am wondering given what you said for Q1 and the AUC, it looks to me like you must be assuming a very conservative AUR going forward. And I am wondering sort of what you are assuming in terms of the step down on AUR and what the rationale for that is? I am wondering if the Q1 guidance you gave embeds weather risk for the rest of the quarter -- sorry but I have got a few here.

What you are assuming in terms of markdown recapture for Q4 '12? And then lastly, Jane, can you just comment on your view of the forward product? Because obviously Easter dressy sold quite well. How are you feeling about the forward product?

Okay, well I will tell you how I am feeling about the forward product and then I will turn the AUR piece back to John. We set our summer delivery next week. We feel very strongly about that set. We had -- when we conceptualized summer last year, we were thinking about the earlier Easter this year so you will see a tremendous amount of dresses and skirts that can also be worn for Easter but are more multi-use than the dressy delivery that was on the floor for the month of February.

We have our summer up on e-comm and have had it up on e-comm for a couple of weeks now and we are very encouraged by what we have seen. John?

Yes, so Stacy, from your questions around AUR guidance and margin guidance in Q1, as you recall when we guided in fourth quarter, we expected some margin deleverage sequentially from third quarter as we had a little bit tougher compare in 4Q relative to second and third quarter 2011 as the inventory management initiatives that Jane employed had already taken hold and were in our history. We obviously had a difficult fourth quarter from an AUR perspective and from a promotion standpoint and our margin was down 540 basis points.

We are expecting in our guidance in the first quarter that we do not have the same weather related impacts that we experienced in the fourth quarter but we are expecting average unit cost to be consistent with what we faced in the fourth quarter, up double digits. Our average unit retail in the fourth quarter was up high singles and we are expecting average unit retails to be up sort of mid singles in the first quarter as we are up against solid AUR performance year on year.

So this is -- and the fourth quarter was the fifth straight quarter that we grew AUR and our AUR in 2011 was up high singles for the whole year. So as we look at the first quarter, we are expecting markdown recapture associated with the weather but we are expecting to still maintain -- still be focused on managing through very high AUCs, a continued promotion environment from our competitors and AUR growth that is on top of AUR growth.

Adrienne Tennant, Janney Capital.

Good morning. Jane, first of all, let me tell you that the spring assortment looks wonderful.

Thank you.

So Jane, can you talk about any changes to sort of the planning by category maybe the allocation of product that will be heavy winter goods as you think about the fall and holiday assortment for this coming year?

And then John, if you can talk to us sort of philosophically if costs are coming down, how should we think about units? So should we have dollars down and flat units for the back half? And then the AUR component of that, should we expect AUR to come out down in the back half? Thanks.

Sure. On the fall particularly the holiday I think is more the focus of what you are looking for. We will still have assortments geared into cold-weather product as that is really the basis of our business in fourth quarter. We are not assuming that we are going to have another one of the warmest winters on record so we still are going after those key cold-weather categories, the key sweater categories.

Having said that, you may recall that we doubled our spring buy in the fourth quarter this year versus last year. In 2010, it was only 10% of the fourth quarter. In 2011, it was 20% of the fourth quarter. We think there is opportunity to deliver it a little bit higher next year because it was one of the strongest responses from our consumer. So we will put more receipts into that 12/1 delivery, that spring piece than we did LY.

And I think you know understanding the where now component and the fashion component that the customer is really responding to not only on the girls side but on the boys side as well, we will relook a little bit harder on the 11/1 holiday delivery to see if there is some more fashion we can put into that delivery as well.

And from a -- your questions on planning and allocation and units for the back half. We expect as costs come down in the back half that we will make some targeted investment in units to buy into categories that will drive comp sales. We are going to remain very focused on inventory management and ensuring that we have the right units and the right categories and the right channels. But we will make some targeted investments as we look at the back half of the year from a unit perspective.

On average unit retails, the way we are thinking about AUR for 2012, we do expect to grow AUR in the first half of the year and then we expect AUR to be flattish in the back half of the year.

Janet Kloppenburg, JJK Research.

Good morning, everyone. Jane, I was looking at the breakdown of your comps. First, I would like to know in the full price stores, how the boys and newborn businesses fared in the fourth quarter? I think the accessory and girls business has been healthy for a while. But also I think some of the comp constraint has been due to the outlet business and the Canadian business of which I think you have a fix in place and I am wondering what the outlook is there for churn and timing? And perhaps if you could tell us how things are going in those channels right now? Thanks.

Sure. Well as far as the Canadian and outlet channels in the fourth quarter, they were certainly pressured particularly the outlet channel in Q4. When you look at what the outlet channel was up against, not only is it going through the transition to made-for-outlook product but it experienced the same thing with warm weather as the US Place stores. It experienced the higher AUCs at the US Place stores experienced.

But what it did also experience was extremely low levels of carryover. For the first time we did zero transfer from Place stores to outlet in the fourth quarter and Place stores were responsible for liquidating their own goods. So they received zero transfers in which also continued to pressure their comps. So their comp was very depressed in Q4 compared to where it had been.

On the question of the boys product as to how it is doing to the girls, as we said, we were able to comp positive in the Place channel. Girls was stronger than boys but not by much. Shoes was the strongest piece of the business in the fourth quarter and I think a lot of that goes back to the pressure that we were under in the accessory categories as it relates to the cold-weather product.

Margaret Whitfield, Sterne, Agee.

Yes, I know earlier Jane you said that the inventories in the channel were elevated from your competitors. I wonder what your thought is in terms of the current level of inventories? And also do you have a marketshare number for the year that just ended?

Yes, for 2011, we were basically flat. I think it was 20 bps -- yes, it was 20 basis points from NPD. So I think based on when you look at the market and you look where the increase was in kids, it really came from an AUR increase and for us to have brought our units down as substantially as we did in the back half of the year I think we held our own quite well.

From a competitor inventory levels, I think the promotional activity is what we had spoken about continues to be high. I do see inventory levels though somewhat abating at the competitors which I think is positive for the whole sector.

Anna Andreeva, FBR.

Great, thanks so much guys. Good morning. I had a couple of questions. First, could you possibly break down the components of merchandise margin degradation in the fourth quarter? Just curious on the higher sourcing versus markdowns fees. And just as we think about gross margins up 80 to 100 basis points for the year, are you guys expecting gross margin to be up in the third quarter as we lap some of the costing tailwind or is most of that improvement coming in the fourth quarter?

And then just to follow up, you said the first quarter comps were running positive. Could you quantify that? And John, I think you said you expect flat AUR in the back half so are you guys expecting transactions to turn positive to get to positive comps? And just looking at transactions, they have been trending negative for some time so I am just trying to understand that.

Anna, this is John. So on merch margin in the fourth quarter it was really driven by markdowns. Our markup didn't really -- was pretty flat year on year but markdowns to clear through warm weather apparel was the primary factor in our merch margin degradation.

From a gross margin perspective in 2012, we obviously expect headwinds as we call down in the first quarter, but we do see margin opportunity in the third and the fourth quarter. And we expect to see traffic and transactions start to moderate as our inventory is rebalanced and more apples-to-apples year-on-year across all of our channels. So from a comp driver perspective in the back half of the year, we expect it to be driven out of transactions.

Kimberly Greenberger, Morgan Stanley.

Great, thank you, good morning. Jane, I was wondering if you could talk about some of the strategies to drive positive traffic in the stores. And is this a marketing function, and what are the other levers that you have other than marketing to try to get more customers into the stores?

We thought as we anniversaried the lower inventory levels and walked away from that clearance customer that we would see the transaction trends stabilize. And I am not sure if you have traffic counters in your stores. If you do, could you just help us understand the differential between the traffic walking in the front door versus the number of transactions that you are seeing? That would be helpful, thanks.

Sure. On the traffic driving as we had mentioned, Lori, our new CMO, is working on some programs to help us further enhance our traffic. But when you really look at where the traffic is hurting us, it is in the same two channels that we have been talking about that have been depressed all year. It is in the Canadian channel and it is in the outlet channel.

So as we -- I believe that the thing that is going to turn around the traffic is when we anniversary those inventory levels and then let's take them channel by channel. When you look at the Canadian channel, the Canadian channel is about a quarter ahead of the outlet channel, and we will see the turn in Canada before we see the turn in outlet.

We now have the assortments in Canada. We have the same merchandise and the same fashion we have in the US, and we are I think able to anniversary those inventory levels by the time we get out of Q1. So I think you will start to see the traffic and transaction levels in Canada start to turn around towards the end of this quarter.

When you look at the outlet channel, when we get closer to the beginning of the second half of the year where we feel we are going to have about 50% of the product made-for-outlet, that is when we think that we will start to see the turnaround in traffic and transactions in the outlet channel. So I think that is a bigger play in 2012 than the marketing piece is.

Betty Chen, Wedbush Securities.

Thank you. I was wondering if you can give us a little bit more color regarding the sourcing initiative especially vendor consolidation and perhaps migration to additional countries or territories? If you can give us a sense of the timing and perhaps what percent of your sourcing could benefit from this initiative? And also from a margin perspective, what kind of lift can we also see?

And related to that, how are you managing the quality control as you go into some new factories that you may or may not have worked with before?

And then lastly, John, I just wanted to clarify, did you say the 53rd week is or is not included as part of the annual guidance? And I just want to make sure I have captured your color around gross margin SG&A. Did you say that gross margin will be up 70 to 90 bps for the year primarily up in the second half while SG&A will be delevering by 80 to 100 basis points? Thank you.

Hi, Betty. It's Eric. I will see if I can answer the first three or four of those. So on strategies, I mean I think a lot of these things we are already moving on as we think about holiday but I think you are going to start feeling it more profoundly in 2013. So a lot of these things around vendor consolidation is merely where I think we have been a bit more transactional versus relationship driven and I think the opportunity now is to pick from what are actually a stable of very, very good vendors, really the biggest, the best the strongest and start really trying to consolidate volumes with those large vendors. And really identify in some cases new geographies and territories where perhaps we haven't been as present in prior years where there are cost advantages.

From a QA perspective, I think probably the biggest piece there is shifting more of that offshore closer to the factories versus necessarily doing some of it onshore and I think we continue to view that as a huge priority because obviously cost, quality and speed and flexibility all sort of work hand in hand. So we are building that capability even more strongly on an offshore basis so that we don't really need to be managing it once the product comes to our shores.

And, Betty, from a sourcing perspective, the margin opportunity is in the back half of the 2012 and into 2013 and it is really about driving AUCs down and maximizing AUC across the channel. And then from your other clarifying questions, if Jane and I can just catch up you after the call, we will be happy to clarify those.

Lee Giordano, Imperial Capital.

Thanks, good morning, everybody. You talked earlier on the call about pipeline planning as a focus and shortening lead times for fashion. Just wondering how fast you think you can shorten those lead times and where do they stand today? Thanks.

What I would say is I mean first of all for our segment, probably speed and fashion is perhaps slightly less germane. But I think to me, the speed comes into play most notably on chase when we are really identifying categories that are working and trying to get into those more quickly. That being said, I do think there is an opportunity to create different pipes of speed for basic, seasonal basic fashion product and to be able to frankly accelerate the entire process in some cases reinvesting that up front into design, in other cases, just building the ability frankly to react much more quickly with business.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone. Can you talk a little bit about or just more color on the systems implementations that you are doing? Where are you along the pipeline there, the cost and the benefit over time? Thank you.

You bet, Dana. So where we are is right in the middle of it. We are right in the thick of it as we speak and I think it really touches virtually every aspect of our technology footprint. I mean we have this somewhat archaic combination of legacy systems and the intent here through an enterprise system and then touching some of the legacy architecture around it is to create a much more integrated view to our technology footprint.

We see -- we have made some progress over the course of 2011, are continuing that work through 2012 into 2013, but again I think the fundamental strategic priority is to break it down into very manageable chunks so that you mitigate risk, you mitigate deployment risk and change management and from a cost-benefit perspective, those are all embedded in the numbers that we have been talking about.

Richard Jaffe, Stifel Nicolaus.

Thanks very much, guys. I am wondering if the comp challenge in the flagship stores or the full price stores is due to the absence of a greater depth of newness. Do you think the push this spring to build spring earlier to be productive later in the spring can you build spring merchandise to a higher level sooner and get the full price inventory higher in either the first quarter or second quarter or is it a second half initiative as you push the seasons earlier?

Yes, Richard, I think that the comp, the challenge in comp isn't in the US Place stores, it is really in turning the Canadian and the outlet channels. When you look at the US Place stores, we had mid single digits comps in the month of February and I think that is really what has been leading the turnaround for the past couple of quarters.

Marni Shapiro, The Retail Tracker.

Hey guys, thanks. First of all I just have to say I have been online looking at your summer line and I think it is fantastic and bright and off-line I would love to know how you made a sequined dress to sell at $39.95 because that is outstanding.

Thank you. I hope you bought one.

It's amazing. I'm hoping my daughter fits into it. So could you talk about two quick things? First of all, could you quantify any marketing costs for 2012 and will it be back-half weighted? And can you talk a little bit about the shoes which have been truly outstanding and more plentiful in store but really outstanding on line -- just a little bit more color around the plans for 2012 in footwear?

And anything you could -- I will take the rest of it off-line. Just those two.

Sure, the marketing costs are planned flat and as far as the shoes are concerned, the business as we mentioned in fourth quarter was outstanding. It certainly led the pack on comp. It has been strong for the last year or so and it is going to continue to increase in percent to total as we go into 2012. Online, we offer extended sizes and extended styles. And that has been very successful as well. Thank you.

John Zolidis, Buckingham Research.

Hi, great I got in so I will take two questions then. So the first is a follow-up on Tom's questions on the promotional levels. I guess when you look at the e-mails and what is happening in the stores, I don't think the customer sees those as distinct channels. So in sum when you look at all the promotional activity including the daily e-mail, are promotional efforts kind of increasing, you are giving more discounts to the customer than last year? So that is question number one.

And then second is on the long-term operating margin target, you've talked about double digits. It looks like roughly the guidance for this year implies a 7% operating margin and we don't seem to be recapturing much of the lost merchandise margin from 4Q last year in the guidance.

So what is the path to achieving double digit op margin in the context of the guidance you provide for this year? Thank you.

Sure. On the promo efforts, I think when you look at our multichannel shopper it is a very small percent to total right now and it is something we are working on expanding. So as you look at the customer that shops online and the customer that shops in store, it is a very low single digit customer where you have overlap.

So I really stand by what I said when I answered the question the first time that I really think when you look at the promotional strategy for the month of February, and we will see how it plays out in March and April. I do not think that we are more promotional on spring product than we were LY. As far as the LTM operating profit, I will turn that over to John.

John, we remain very focused on the initiatives that Jane has laid out. We still see a path to low double digit operating margins over time. We are not happy with what has happened in the last -- this quarter in Q1 and Q4 but it has really been driven by average unit costs that have been historic in the industry and a really tough fourth quarter based on the warm weather.

So we remain focused on the same initiatives that we have laid out and we still see an opportunity to drive double-digit operating margins over time.

I would now like to turn the call back over to Ms. Jane Singer for any closing remarks.

Thank you for joining us today. I am sorry we went a little over but we did want to get to all of you for questions. If you have further questions, please call me at 201-453-6955 and thank you for your interest in The Children's Place.

This does conclude your teleconference. Thank you for your participation. You may now disconnect. Have a great day.