Children's Place Inc (PLCE) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to The Children's Place first-quarter conference call. At this time all sites are in listen-only mode, but later there will be an opportunity to ask questions. (Operator Instructions). As a reminder, today's call may be recorded. It is now my pleasure to introduce our first speaker for the day, Miss 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. first-quarter 2012 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.

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 or two questions so that we will be able to take questions from as many of you 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. First I want to cover our first-quarter results, then move into an update on our strategic initiatives and end with second-quarter and full-year guidance.

The first quarter came in about where we expected -- net sales increased 2%; we delivered adjusted earnings per share of $1.10, comparable to the first quarter of last year; comp sales were slightly lower, down 0.7% for the quarter; and gross margin eroded 230 basis points, less than half the erosion we experienced in the fourth quarter as weather was more favorable, particularly during the pre-Easter period.

Several of our key initiatives produced strong results in the first quarter. Big girls and big boys posted positive comps and had the highest increases in AUR and average transaction value. We've been focusing on these businesses and the customers are responding.

Our Canadian business experienced a significant turnaround in comp sales during the quarter; we improved from a negative 15 comp in the fourth quarter to a negative 4 comp in the first quarter and we expect continued improvement in comp sales throughout 2012 and beyond.

We grew average unit retail across all channels during the quarter; AUR was up 6% on a consolidated basis on top of a 3% increase in the first quarter of last year, which is our sixth consecutive quarter of AUR increases.

Transaction trends improved in both US and Canadian Place stores as we lapped lower inventory levels during the quarter. And we continued our strong focus on inventory control. Balance sheet inventory per square foot was down 1% at the end of the quarter and carryover inventory was down 10%.

Our eCommerce channel once again delivered double-digit sales growth, it accounted for 11% of total sales reaching nearly 13% of the sales in the US and 4% in Canada.

We also had a couple challenges during the quarter. Baby girls and baby boys underperformed as AURs were flat to down during the quarter and we observed more promotional activity in the mall focused on the baby zone. And US outlets continue to lag on a comp basis as we transition our made for outlet strategy.

We had the lowest level of transfer activity into the outlet channel during the first quarter and while comps were down outlet margins continue to expand. We expect to see the outlet comps improve during the back-to-school period.

Update on our strategic initiatives -- overlaying all of our strategic initiatives is talent; getting the right team in place is critical to our long-term success. Steve Baginski joined us as CFO on May 8; he brings a very strong financial background as well as extensive experience in IT, logistics and procurement, which makes him a great partner as we continue our focus on operational excellence.

Steve joined us from Kellwood where he served as CFO. Before that he spent a number of years with Limited Brands, American Airlines and PepsiCo. Steve will be spending his first couple of months working with his team and partnering with the senior leadership team on our strategic initiatives. He will participate on our second-quarter conference call on August 16.

Moving on to key initiatives -- product. Product is and will always be our number one priority. As I mentioned, we're very pleased with the strong performance of our differentiated product in big girls and big boys during the first quarter. As costs come down in the back half we expect to increase unit inventories in select categories to drive sales. We also plan to keep prices relatively consistent with last year.

Brand -- digital marketing efforts continuing to include e-mail, search and social media engagement are the cornerstone of our marketing outreach and we'll continue to invest in them. Our CMO is finalizing her deep dive into customer segmentation and we are on track to launch our loyalty program this fall.

Geographic expansion and operational excellence -- we are excited to launch our international expansion beyond North America with a number of stores opening in the Middle East this year. The Middle East retail landscape is very well developed and has high potential for our brand.

In a couple of minutes Eric will give you more details surrounding our international expansion plans, key findings from our comprehensive fleet review that was completed during the first quarter, and an overview of the restructuring actions we took during the quarter to increase efficiencies and reduce operating costs going forward.

In terms of our 2012 outlook, our EPS guidance for the second quarter is a loss per share of $0.65 to $0.70. We anticipate our earnings will be negatively impacted by gross margin erosion similar to what we experienced during the first quarter. Summer product costs remain high and we expect the highly promotional environment to continue as kids retailers struggle to rationalize their inventory levels to be more in line with their sales trends.

We expect to drive positive low-single-digit comp sales and clear through in-season merchandise during the quarter in order to strongly position the Company for the important back-to-school selling season. We've updated our EPS guidance for fiscal 2012 to be in the range of $3.15 to $3.30 per share.

We remain optimistic about the second half of the year. We have several benefits working for us in the back half including significantly lower product costs for back-to-school and holiday; the turnaround in Canada has begun and we anticipate sales will continue to improve sequentially in the back half.

The outlet turnaround is expected to begin with the back-to-school floor sets as we continue to increase our made for outlet penetration in this channel. In addition, merchandise margins in outlets will continue to strengthen throughout the year. We anticipate continued double-digit sales growth in our eCommerce channel and we have a strong and talented leadership team in place to drive our key initiatives forward.

So in closing, we are thankfully nearing the end of a cycle of record high product costs and we fully expect to deliver growth in comp sales, gross margin and operating income during the second half of fiscal '12 and beyond. Now I'll turn it over to Eric.

Thank you, Jane, and good morning, everyone. As you saw in the press release today, the Company took several actions to reduce operating costs going forward which we expect will result in savings and operating efficiencies beginning in the back half of fiscal 2012.

DC rationalization -- to more effectively manage our inventory and to optimize our capacity we made the decision to consolidate our distribution network from three to two US distribution centers. As a result our West Coast distribution center, located in Ontario, California, discontinued operations on May 15.

The stores served by the West Coast facility have transitioned to our southeast distribution center in Fort Payne Alabama. As many of you know, the Fort Payne DC is our newest, largest and most automated facility. By more fully leveraging this facility we will gain scale advantages in our inbound and outbound shipping, our DC facility and payroll and better load balance our total pool of inventory. The transition has been seamless.

Restructuring -- in February we restructured a number of positions at corporate headquarters. We also undertook a rationalization of our store management structure as our goal was to better align management needs by location and reduce fixed labor costs in the stores so that we have greater flexibility to add associate hours during peak selling periods to drive conversion and improve the customer experience.

This project impacted about 10% of our field management positions. It was well executed by the field teams and we expect to begin reaping the benefits of a more flexible staffing model in the second half. We incurred one-time severance charges of approximately $2 million during the quarter for these restructurings.

We anticipate we will realize annualized savings of approximately $9 million beginning in the back half of fiscal 2012 as a result of the warehouse closure and the field and headquarter restructurings.

Lowering expenses while improving operational efficiency and execution is an ongoing initiative. We are continuing to look across the organization to ensure we leverage our scale, systems and vendor relationships to drive increased levels of efficiency.

Moving on to real estate. As we mentioned last quarter, we undertook a comprehensive review of our North American fleet during the first quarter. I'd like to share some of the results with you today. Overall we have a healthy fleet of stores with more than 97% generating positive cash contribution.

Value centers and small-market stores have been very successful for us, which allows us to exploit market opportunities with the most advantageous format.

We still have substantial runway ahead of us in North America. Our analysis points to a fleet of approximately 1,250 stores over the next few years with market voids, opportunities in both the US and Canada. Approximately 40% of our leases are up for renewal over the next three years. While our expectation is that rents will be increasing, particularly in the strong and successful properties, we also see this as an opportunity to right size our square footage.

Our goal will be to mitigate rent risk by optimizing square footage where possible as well as by targeting relocations and repositions of some stores to ensure that each store's rent remains commensurate with its top-line sales opportunity.

Further, for many of the previously mentioned real estate actions we will also be undertaking a (technical difficulty) store remodel as part of the square footage optimization. This will translate into benefits not only on the rent and occupancy lines, but also will yield better utilization of payroll and inventory in right sized store footprints. This is accounted for in our CapEx outlook. Overall we believe we can drive improved ROI with this initiative.

With an enhanced focused on ensuring our stores better meet customer expectations in their respective locations, we completed 27 remodels during January and the first quarter of 2012 and are pleased with initial results as top-line sales are tracking ahead of the rest of the chain. Our plans are to complete another 35 remodels during the rest of fiscal 2012.

International -- we are in the final contract stages with two very well-established franchise partners in the Middle East. We plan to open two stores during the second quarter followed by another 15 to 20 stores during the second half of the year. We believe it is important to enter the Middle East with a meaningful number of stores in order to establish scale and get a reliable indication of the longer-term brand potential.

We selected the Middle East for our initial international expansion for a number of reasons. These are large markets with high growth potential. They have fast-growing economies with over 20% of their population being children from newborn to 10 years of age, which is well above the US penetration of approximately 15%. Middle East customers shop more frequently than in the US.

There is a large expatriate community working in the oil, gas and financial industries. Additionally, they have large tourist populations from other geographies. Their mall infrastructure is well developed. They have successfully introduced Western brands and our merchandise assortment will be tailored to match the tastes and needs of each market.

We are excited about what international markets can mean to the business. We're starting with a meaningful proof of concept and will be very thorough in our assessment of the longer-term opportunities in the Middle East and elsewhere. We don't expect this to have a material impact on our fiscal 2012 results. We'll officially announce the franchise partners we will be working with in the very near future.

In conclusion, we continue to make significant progress enhancing and streamlining our operational capabilities. 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 first quarter ended April 28, 2012 increased 2% to $438.5 million. Comparable retail sales declined 0.7%. A 2% increase in average transaction value was offset by a 3% decline in transactions primarily due to a double-digit transaction decline in outlets. Average unit retail increased mid-single-digits during the quarter.

Comparable store sales declined 2.8% in the US and declined 4.4% in Canada. full price Place stores comped slightly negative in the US and negative low-single-digits in Canada. Outlet stores comped negative low-double-digits in both markets.

ECommerce sales increased 21%. Regionally sales were stronger in the Northeast and weaker in the South. Gross profit dollars declined 4% to $176.8 million during the first quarter and gross margin declined 230 basis points to 40.3%. The decline in gross margin was primarily due to higher product costs as well as slight deleverage of fixed costs.

SG&A spending on a GAAP basis was $122.2 million during the quarter. As Eric mentioned, we incurred costs associated with a corporate restructuring and the write-off of obsolete supplies and fixtures. Adjusted SG&A spending excluding these items, which are not indicative of the performance of the core business, was $119.5 million, a 2% increase compared to last year. Adjusted SG&A as a percentage of sales deleveraged 10 basis points to 27.2%.

The non-GAAP items excluded from adjusted SG&A spending are detailed in table 3 of the press release.

As part of the fleet review we negotiated an early exit for an oversized 20,000 square foot store in the West which resulted in an impairment charge of $1.25 million during the quarter. We also incurred $834,000 in other costs during the first quarter associated with the closure of our West Coast DC. We anticipate additional costs of approximately $2.6 million in the second quarter due primarily to the write-down of the West Coast property lease.

Depreciation and amortization expense as a percentage of sales during the first quarter was 3.9%. Excluding the accelerated appreciation on Canadian store remodels, depreciation expense was 3.7% compared to 4.1% last year.

Net income was $23.6 million or $0.96 per diluted share in the first quarter of 2012. Excluding non-GAAP items adjusted net income was $27.1 million or $1.10 per diluted share in the first quarter of 2012 compared to net income of $29.1 million or $1.10 per diluted share in the first quarter of 2011. Our diluted weighted average share count for the first quarter was 24.7 million shares.

Moving on to the balance sheet, our cash balance at the end of the first quarter was $204.8 million compared to $212.3 million last year. We were able to maintain a sizable cash balance while repurchasing 1.9 million shares for a total of $92 million and investing $77 million in CapEx over the past 12 months.

Balance sheet inventory per square foot at the end of the first quarter was down 1%. Carryover inventory was down 10%. During the first quarter we opened 18 stores and closed five. At the end of the quarter we operated 1,062 stores with a total of approximately 5.16 million square feet which was a 1.7% increase compared to the first quarter of 2011.

Moving on to guidance for the second quarter and fiscal 2012. For the second quarter we are projecting a non-GAAP adjusted loss of $0.65 to $0.70 per share assuming positive low-single-digit comparable retail sales. For fiscal 2012 we now project that non-GAAP adjusted earnings will be between $3.15 and $3.30 per diluted share assuming positive low-single-digit comparable retail sales.

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 further potential share repurchases in fiscal 2012.

To briefly summarize our share repurchases during the first quarter of 2012, we repurchased 377,000 shares for approximately $19.2 million which completed the $100 million share repurchase program announced in March 2011, a new $50 million share repurchase program was authorized the Board of Directors in March 2012.

In terms of inventory, we expect to end the second quarter with total inventory per square foot up low-single-digits compared to last year. Now we'll open the call to your questions.

(Operator Instructions). Adrienne Tennant, Janney Capital.

Let me say that the product does look much improved in spring. Jane, one of my questions is on the comp guidance. What gives you the confidence that the comps should be positive low-single-digit? And for the year I agree with that, but for second quarter it sounds like some of the issues that are pressuring the comp still exist in very much the same order of magnitude as maybe they did in the first quarter perhaps Canada getting better.

And then also specifically with the product, the big girl/big boy, obviously there's been a lot of focus on that, you can absolutely see it. Is there something with the target income demographic that may not be rising to the new price points? And how do you prospect to get maybe a less price-sensitive consumer who really appreciates all that you're doing and increasing the value proposition? Thanks.

Sure. Well I think in the comp guidance we thought that we would be flat to around positive 1% for Q1 and we were pretty close at negative 0.7%. When you look at really what happened in the first quarter, we were running low-single-digit comps through Easter and then in the post-Easter business, particularly in the baby side of the business, was a lot tougher once we got into the April time period.

I think when you look at second quarter we feel very strongly that the Canadian turnaround that began in a significant way in Q1 is going to continue strongly through Q2 and into the second half of the year. And as John mentioned, outlets was a negative double-digit decline in comp. And we think that that turnaround, as we've been saying, is going to -- you're going to start to see that with the back-to-school floor sets. So we feel strongly about that.

In addition, we are up against the lowest -- the easiest, I should say, compare from last year with a negative 6% comp in the second quarter. So we think if you take into account all those things and we believe that the big businesses, as you mentioned, will continue to stay strong.

To answer your question on the product in big, we've really been focusing a lot on big products since I arrived. I think we mentioned a couple years ago when you look at the demographics, 2007 was the highest birth rate year and it has been going down since. And it is not projected to even achieve 2008 or 2009 levels until maybe the earliest 2015.

So those babies born in 2007 are turning five this year and one of the strengths of our model is that we go after that zero to 10-year-old. So we're starting to see what we believe will be a continued run of strength in those big zones. And as I said, we've been focusing a lot not just on the apparel, but on the accessories and shoes that also appeal to that little bit of an older customer.

We don't think that there is a price-sensitivity issue with this customer. We were able to increase AUR overall 6% in the first quarter and significantly higher in the big businesses. And we've had a little bit of a run in the last six quarters of AUR increases so we think that what we've put into the product the customer is certainly responding to and we'll continue to hold that outlook for the foreseeable future.

Dorothy Lakner, Caris & Co.

Just to follow up a bit on your last comments, Jane. So, do you see the stores flexing to represent more of the big product using less space for the more promotional area in baby? Is that something that we should see going forward?

Then secondly, on the outlet business I wondered if you could just update is a bit on margins in that business and the progress that's been made in the quarter and where the made for outlet product will be by the time we get to back-to-school? Thanks.

Sure. On the flexing question, as I said, one of the beauties of our model is that we do appeal to a broad age range of kids and we are able to flex it. If you take the back-to-school time period, for instance, we learned last year that we probably put too much emphasis on baby during the back-to-school time period and not enough emphasis on big.

So when you see our back-to-school floor sets that start on 7-9 you'll see that we're devoting more floor space from that 7-9 to let's say 9-15 time period to the big businesses and I think we'll see the return on that. So we will continue to make those trade-offs and those options where we see fit.

As far as the outlet margins, we had about a 200 basis point increase in outlet margins in Q1 and we expect to see those margins continue to strengthen throughout 2012 and beyond. As far as made for outlet product, we'll be over 50% when we get to the back-to-school setup and closer to 80% when we end the year in '12.

Betty Chen, Wedbush.

I was wondering if we could maybe begin -- John, perhaps you can give us a little bit of color around the Q2 EPS guidance. How should we think about gross margin since I think we start to see some input costs alleviate in the end of the quarter around back-to-school and any color around SG&A given the cost savings that you unaccomplished in Q1.

And then I was also curious, Jane, if you can speak to what you, I think, alluded to in prepared remarks in regard to competition in baby girl and boy. Maybe you could give us a little bit more color around what you're seeing in the marketplace and how we can expect you to apply those learnings going forward. Thanks.

Sure, I'll take the competition question and then I'll turn the guidance over to John. I think what we saw in Q1, particularly in the mall-based competition that compete heavily in the baby space, is a lot of store-wide promotion.

I think there was a lot of promotional activity from everyone in Q1, but there's a lot of blanket promotions going on where you'll see the windows in 25% off the entire store or 30% off the entire store. And we really started to see that ramp up in Q1. And we anticipate that that will probably continue in Q2.

Betty, this is John. From a Q2 guidance perspective we're expecting gross margin to deleverage in a similar range as we experienced in Q1 and that's really a continuation of the theme that we've been managing through over the last four quarters.

The slight difference from Q1, we grew AURs in Q1 up mid-single-digits, which was the sixth consecutive quarter of AUR growth. As we look at AUR in the second quarter we're not expecting the same kind of elevated AUR performance versus last year. We were up high-singles I think in the second quarter last year.

So we're expecting more flattish AUR growth. Sequentially costs are coming down, but they're still up mid-single-digits year on year and that's generating deleverage on the margin line.

From an SG&A perspective, we expect to see modest deleverage in the second quarter specifically on SG&A and the benefits associated with the corporate restructuring will begin to kick in in the back half of the year and fully kick in in 2013.

So modest deleverage in SG&A and that's really driven by continued investment in the administrative expenses to support both the international growth initiatives and the work that we're doing on the business here domestically.

Rick Patel, Bank of America.

Just a question on your real estate review. Now that you have defined a target store count can you update us on how we should expect square footage to grow beyond this year? And do you also expect to incur any incremental expenses as it relates to executing your Middle East strategy this year?

You bet, Rick, it's Eric. So, as far as square footage growth, I think it's going to be modest because I think it's going to be a balance of new stores and then optimizing existing real estate. And I think we see opportunity on the existing real estate to be just ever so much more efficient with the square footage we've got even as we add new stores. So I think it will be relatively modest square footage growth albeit unit growth.

From an international perspective our costs are already embedded within our SG&A structure for the team and, frankly, that's part of the beauty of this is that it really allows us to scale that. So we don't really see a huge incremental cost structure coming with the launch of these stores, that's already embedded in our numbers.

Janet Kloppenburg, JJK Research.

Jane, I was wondering if you could talk a little bit more about the progress you made with the Canadian outlets. Did you see steady improvement throughout the quarter? And does that have to do with -- I think the new merchandise -- I think you put some new merchandising management in place for the Canadian business and are there any obstacles to that channel turning positive for the remainder of the year? That's one question.

And the second question is, given your posture on lean inventories and given what you just said, that you expect the industry to continue to do these blanket promotions. I'm just wondering if you think you could be comp challenged for the rest of the year, because you won't be able to come up -- you won't be able to match the promotions that some of your bigger competitors are presenting? Thanks.

Sure. Well, I think as far as the Canadian business is concerned we're pretty proud of the turnaround that we were able to affect in Q1 going from a negative 15 to a negative 4. We have, as we mentioned maybe on the last call, a new zone vice president up there who is very strong. He's Canadian and very familiar with that market and he has really done a terrific job of putting together a very, very strong team in a short time and we can see the results of that.

In addition, we have lapped our inventory levels from last year and we also, to your point, have put in the same assortments in the US that you'll see in a Northern US store into Canada and we've seen the same -- where we've seen positives in the US business we've seen the same positives in the Canadian business. So we do expect the Canadian business to experience sequential improvement through the balance of 2012 and we do fully expect that channel to turn positive in the back half of 2012.

As far as being comp challenged, I think when you look at our guidance for the full year we're in positive low-single-digit comps. I think we have a really good strategy in place and we feel strongly that we will see the comps turn positive in Q2 of this year.

I think with the effort that we've put into the merchandise and the product for the balance of 2012, coupled with the costs coming down significantly as they are in the back half. And then you take a lot of the drag that we saw last year from the outlet in the Canadian channels out of the picture, I think it really is a very clear path to us being able to achieve that positive low-single-digit comp that we're expecting this year.

Anna Andreeva, FBR.

I was hoping to understand a little bit on the full price of stores comping negatively. I think you started out the quarter with February up mid-single-digits. And I understand the weakness in April just post Easter, but did you not get the lift in March? Just historically this is such a weather driven business, I would have expected with the warm weather that we had and the strong product we would see better results in the full price stores. And what were transactions like in this channel?

Well, transactions have flattened out in the US channel. And as far as the comps, you're right, through March we were doing low-single-digit positives. We had a very strong pre-Easter period, February and March. Where we really lost it a little bit it was in the post-Easter business in April and it was really focused on the baby areas.

We were able to do quite well in the big areas, the shoe and accessory areas and we held our own in newborn, but in the baby business both baby and girls post-Easter, we were not able to anniversary last year's Easter businesses. So wovens and polos and sweaters and the businesses that were strong in those first few weeks of April last year with the later Easter, we weren't able to overcome those with summer product in baby.

So they didn't move to summer product with some of the weather challenges we had post-Easter. If you look in the big zones, the reason I think that we were able to hold our own and move ahead in big was that they responded to the alternatives that we had on the floor in big, which were a lot more modern offerings.

They responded to the summer delivery post-Easter in the big world, which was quite different in look and feel than the baby delivered. So they responded to the skirts and the rompers and the dresses and some of the new styling we had in big boy. We just couldn't overcome the Easter business in April in baby from [LY], and that's really where you saw the comps go slightly negative on the quarter for US.

Margaret Whitfield, Sterne, Agee.

Jane, with the important back-to-school season coming up I wondered if you could give us a preview in terms of any material changes that have been made to the line versus last year. And for John, with all these restructuring benefits in the back half plus outlets in Canada hopefully improving, I wondered if you could give us some thoughts on how we should model the gross margins and the SG&A in the back half of the year?

Thanks, Margaret. I think really the biggest change that we are looking for for back-to-school is certainly in the costs. And the costs coming down are really a huge driver and give us a lot of confidence that we feel the back half of the year is going to be a strong one for us.

As far as specific merchandise changes, I think our category ownership -- and I alluded to it a little bit on a couple of questions ago -- I think our category ownership is better than LY because I think we've got the focus in the right place on the big businesses. I think that we are funded in the right categories. I think we own the classifications appropriately. I think we space the floor appropriately, and I think we have a very solid and strong marketing campaign leading us into back to school.

From a guidance perspective on the full-year basis and into the back half, we fully expect to see gross margin improve in the third and fourth quarter. And we are maintaining our margin, full-year margin guidance leverage of 70 to 90 basis points.

Nothing has really changed from our perspective in terms of the way the year is going to play out. We see average unit cost down, and that should be wind at our backs in terms of March and in the back half of the year. And from SG&A, again, not a lot of change in the guidance on a full-year basis. We are looking for deleverage on the full year in the 80 to 100 basis points range. And the deleverage primarily is driven by variable compensation. We obviously had a significant credit in the fourth quarter last year for variable comp, and we expect to have meaningful deleverage in the fourth quarter because of variable compensation.

The restructuring and ongoing cost-savings initiatives that we detailed in today's comments are going to kick in on a full-year basis in 2013, but a lot of that we have already embedded into the full-year guidance for 2012.

Kimberly Greenberger, Morgan Stanley.

Jane, every -- there have been different opportunities and challenges on a quarter-by-quarter basis, but if I step back and look at the last three years we have about 2% to 2.5% comp declines in 2011, 2010 and 2009. And I think through that period the average unit retail price is higher. So it would seem that there has been a loss of customer base over the last three years. And I know ultimately your goal is to stabilize and actually start to grow that.

So I am wondering if you can just share with us some of the strategies as you look out at the rest of 2012, for how you would like to go about reacquiring customers. And then if we could just drill down into a couple of the exception items for the quarter. I am wondering on the impaired oversized stores, do you have any more of those to go? So as you look out at the rest of the year into 2013, is this something we should really just see this quarter or are there future charges that we could see?

Also, how much more -- how many more stores in Canada will we need to see accelerated depreciation on? And then are we done with the write-off of supplies and fixture costs? So is this truly just a first-quarter issue or are these things that could linger into future quarters? Thanks so much.

Okay, so on the first part of the question about customers, I think when you look at what we've been doing for the last couple years, which is really turning around this business, we've made some decisions and some big decisions on how to get control of our inventories, which was one of the issues that when I came in here we clearly didn't have control of.

So the way that we've been going about that is we really needed to walk our inventories down back to a more manageable level. And when we got into 2011 and we saw the dramatic cost increases that we were going to be living with for a year, we made the decision, as we've talked about several times, that we were going to cut back significantly on units and we were going to hold gross profit.

So we wanted to make sure that we were going to not -- we're going to be -- put the Company in the best position to weather the storm of these high prices. And I think when you look back at what's happened in 2011 and how we've been able to hold our gross margin percentage and how we've been able to hold our market share.

For us to pull down units the way we did last year and only lose 20 bps of market share on the year I think it really speaks volumes to the way that we've been able to manage the business in light of these tough cost increases and manage the businesses as far as holding the units down.

The second big part of that answer I think would go back to the outlet channel. We made the decision that we were -- even though we had outlets we really weren't running an outlet business. So we needed to redefine the way we were running outlets and by redefining it we needed to completely change the model there.

So we've been living for over a year of significant declines quarter after quarter after quarter in the outlet channel as we right sized that channel and really rethought how we were going to run an outlet business at The Children's Place.

So I think when you start to think about how we're going to get customers back and how we're going to get traffic and transactions back where we want them to, there's a couple things going on. Number one, we're going to start to get a little bit more units into the system in the back half of the year with the costs coming down and I think that will be able to drive some comp.

I think when you look at the outlet business, as with Canada, we're looking for that to turn with the back-to-school deliveries. So I think when we start to get the outlet top-line moving in the right direction we're going to see those transactions obviously and that traffic increase.

And then certainly with all the product changes we've put in place and the way the customer has responded then through the six straight quarters of AUR increases, I think that speaks to being able to not only keep our current customer but potentially be able to reach out to some new ones.

On the marketing front, Lori has been doing a lot of work on customer segmentation. We're on track to launch a loyalty program this fall; we filter strongly that that loyalty program is going to be critical for us not only to keep our current customers and increase share of wallet, but also to reach out to new customers.

And as I think we mentioned on the last conference call, we feel that now the merchandise is right, we think that in early 2013 is the time that we're going to launch more of the national, if you will, media type campaign to really get the word out on what we've done. As far as the numbers, I'm going to turn that over to John.

Hi, Kimberly. Kimberly, from an impairment standpoint, the good news is, as Eric mentioned, 97% of our stores are cash flow positive and we don't really have any more oversized stores that we would be closing prematurely as a result of the outcome of fleet review. We will continue to look at our fleet on an ongoing basis and look for ways to optimize square footage and productivity, but there isn't any substantial additional impairments in the foreseeable future.

Canadian -- the Canadian store remodel program is being performed in three waves and there will be accelerated depreciation in the second quarter for the third wave of stores. We will conclude that program in the third -- late second/early third quarter, so there will be accelerated depreciation in the second quarter and then that should be it from an accelerated depreciation standpoint on the Canadian stores.

We did mention in our prepared remarks that there would be a write-down in the second quarter for the property lease for the West Coast distribution center and that's in the range of $2.6 million. And then we're pretty much concluded in terms of any of the obsolete supplies and fixtures; we'll continue to look at that but that is pretty much behind us at this point.

Lee Giordano, Imperial Capital.

Can you talk a little bit about the performance of the value centers versus your other stores and how it's performing? Thanks.

You bet, Lee. Value centers are actually a beautiful vehicle for us. Economically the rent structures tend to be more advantageous, so from a contribution perspective typically they perform better than a lot of our other locations. And the key is just really right sizing it for the volume that those stores and locations are able to generate. So we're very pleased and are continuing to look at that as a channel.

John Zolidis, Buckingham Research.

A question on the closure of the distribution center. Obviously there's some cost savings involved, but what are the challenges with serving a whole fleet, particularly the West Coast stores now getting their goods from the Southeast? And can you talk about what the capacity of the remaining distribution centers is relative to that 1,250 store opportunity that you discussed?

You bet, John. So first of all, the challenges of managing out of the Southeast, if anything I'd say it's an opportunity. Because we're really able to consolidate our inventory and with our outbound transit partners, the logistics is just really more about wave planning. And so what we found actually is that that gives us a great scale and advantage.

Remember that 40% of our stores are in the Northeast and the North Central region and so balancing that in the Northeast DC we think gives us a powerful opportunity. We believe we still have opportunity in terms of capacity to serve additional stores. So we feel like we're well-positioned for that ultimate fleet size and if anything I think we're going to continue to just look at where we have room to be even smarter about how we leverage the capacity we've got.

Dana Telsey, Telsey Advisory Group.

On the operating cost reductions what should be the benefit to operating margins over time? What else do you see being done as you look through the landscape? And given the AUR comparisons become a little bit tougher, what are you looking for AURs to do in the second half of the year? Thank you.

Dana, this is John. On an ongoing basis the operating margin op savings is going to be in the 25 basis points to 50 basis points on an annualized basis. And there's probably going to be more opportunity. Steve and Eric and our team are continuing to look at our cost structure and we're going to continue to find ways to be rigorous in terms of managing our fixed expense so that we can continue to drive toward double-digit operating margins.

From an AUR standpoint, as we mentioned earlier, we've grown AUR six straight quarters. We're expecting AURs to be flattish in the second quarter and also in the back half of the year. So from an AUR standpoint we're not expecting to see pronounced AUR growth for the balance of the year.

Marni Shapiro, Retail Tracker.

I have a couple housekeeping I just want to run through if that's okay with you. Could you just clarify -- you keep talking about the baby area being the issue. And I was curious if you can parse that from newborn because I know you've done some work in newborn. I was wondering if you were looking at it as two separate categories.

And if you can also talk about the promotional pressure that you're seeing in the malls, are you also seeing that in the outlets? Is it just as aggressive in the outlet stores in that area and is there any difference there between the baby business and kid business that you're seeing the same at the retail stores, are you seeing that in the outlet stores as well?

As far as the outlet question is concerned, we're seeing the same type of promotional activity in the outlet centers as we are in the Place stores. And to answer the question about newborn and baby, our newborn business, which is a very small business for us, it's around 5% of our business, leveled off in Q1, it was down slightly but it had been down significantly for the past few quarters.

It was really the baby business, both baby boy and baby girl, that was tough in the post-Easter period and that was really in the last few weeks, two to three weeks of April we really saw the baby business go negative. And that was due to the big sellers that we were up against in Easter businesses and April and they did not trade into other categories in April.

They did not buy summer product in baby in April with some of the challenges that we had in some of our big markets in the Northeast, whereas in the big businesses they really did transfer off Easter product from LY into what we were offering, which I think, as I had said, was a little bit more modern and a little bit more multi end use.

Brian Tunick, JPMorgan.

I guess it feels to us like we need to give you back like almost all of the 500 basis points or something like that you lost in Q4 last year to sort of get to some of your gross margin guidance for the year.

So we were just sort of hoping you could maybe talk about as we look at the back half, particularly Q4 there, what are you assuming roughly for how much you get back from AUC, how much comes from the outlet in Canada recovery and then the Q4 whether comparisons because it clearly sounds like the weather does have an outside affect on your businesses.

And then the second question -- just on the eCom business, any color you can give us on sort of where margins there are falling relative to your corporate margins? Thanks so much.

Brian, this is John. From a margin perspective in the fourth quarter we deleveraged 540 basis points against -- in the fourth quarter and that was a combination of the extreme markdowns we took on cold-weather product and the average unit cost that we were faced with across the entire assortment.

For the 2012 fourth quarter we're looking for margin recapture, not all the way back to 2010 levels, but we do expect to make a meaningful improvement in gross margin in the fourth quarter and it's going to be, again, driven by more appropriate weather across the entire balance of the season and high-single-digit AUC declines that we expect to see in the back half of the year.

And we do believe that both Canada and outlet, as those businesses turn, we'll get less leverage. And then I missed your eCom question, I'm sorry.

He wondered what eCom (inaudible).

Oh, eCom margins were pretty consistent with US full price stores in the first quarter, again down slightly on merch margin but that was driven by average unit cost increases.

John Morris, Bank of Montreal.

Congratulations on a great quarter and pulling it out and everything. I wanted to hear, Jane, a little bit more -- you touched on it quite a bit, but a little bit deeper on the success that you're getting in big girl and big boy. And tell us with an eye towards those benefits continuing to help you into Q2 and certainly the fall.

And then I also wanted to just quickly check, are we still assuming the same tax rate for the full year? And then the third question is just the sourcing cost benefits that you'll be seeing in the back half. Obviously we'll see those coming, I'm just wondering whether or not that's changed at all, either slightly better, slightly worse than your original expectations? Thanks.

Sure. No, the back half, the product costs are where we've been saying down high-single. So that really hasn't changed through fall and holiday. On the big businesses, we've been experiencing success with the big businesses for a while now. The entire Q1 all month were very strong in big.

And I think when you look at the big girl business certainly there's a lot of classifications that we have a lot of depth in that we didn't own or we didn't believe in as a company before. So we didn't really have a dress business when I came; we didn't really have a lot of skirt business and more modern skirts; we didn't have a romper business.

There was a lot of businesses that we weren't in as a company and the customer is responding, the customer is showing us through the big AUR gains that we've been getting that they believe in the product. And I think you're just going to continue to see that get better and better with Michael Giannelli and his team and Natalie and her team as we go through 2012 and beyond.

Tax rate we're modeling 33.5 for the full-year, same as what we've been modeling all year.

Richard Jaffe, Stifel Nicolaus.

A bookkeeping question, just wondering what the depreciation or how we should calculate depreciation for the second quarter and then for the balance of the year given the charges you've mentioned?

Depreciation will grow sequentially in the second quarter as we put more capital to use and pretty consistent with what we've seen over time. Although if you back out the accelerated depreciation from Q1 and back out for Q2, we were at $16.3 million in Q1 adjusted which was pretty low relative to our history and we expect that to be -- we expect sequential growth in the second quarter, but, again, off of that $16.3 million. For a full-year basis we see modest improvement on a total dollar versus last year.

Jim Chartier, Monness, Crespi & Hardt.

I had a question on the outlet margins. A year ago you said that the outlets were running -- operating margin 1,000 basis points below the Company average. You talked about margin improvement the last few quarters. Are you talking just gross margins or operating margins and where do the outlet margins on an operating basis stand versus the Company average today?

The 1,000 basis points opportunity has been merch margin, but it drops to operating margin as that business grows. We've been deleveraging somewhat as we've been transforming that business and having low-double-digit negative comps. We've been growing merch margins 300 bps last year, 200 bps again in Q1.

We think there's a continued opportunity to grow merch margins 400 basis points to 600 basis points over the next 12 to 24 months and as that business begins to comp that will all drop to operating margin over time.

Tom Filandro, Susquehanna.

One hindsight question for you, Jane. Can you talk about the fourth quarter, in particular I'm kind of curious about the cold-weather goods. Are you planning any adjustments to the assessment, timing of product or maybe slower pricing? That's my first question.

Second question, I heard you mention that you were planning increases in units in the back half. I was hoping you can give us a little more color or detail on the type of goods you're planning on increasing units in, whether it's basic fashion or something else.

And then the final question is on the first quarter or spring season, can you just give us a sense of how the cash -- place cash performed from a distribution and redemption standpoint, please? Thank you.

Okay, that's a lot of questions, Tom. Let's take them one by one. On Place Cash, the Place Cash performance we were pleased with. We made a change to Place Cash in Q1. Last year we (technical difficulty) and redeemed in the pre-Easter period and we knew that that wasn't a great strategy from a promotional point of view, that it was going to hurt us on the margin to have the redeem period also be before Easter.

So we've moved the re-deem piece to the post-Easter so we weren't double dipping on the pre-Easter period where we had a lot of traffic. So we were happy with the results of moving that off the Easter period and happy with the margin results we got from that.

As far as fourth-quarter cold weather is concerned, our cold-weather for fourth quarter is a lot more fashionable than it was last year and it really is going to appeal not only to the baby customer where we do pretty well most of the time, but also it's going to look very different to the big boy and big girl customer, so we're excited for that to come in.

From a timing point of view it comes in pretty commensurate with last year's delivery of cold-weather and we are not backing down on the amount of cold weather that we're owning just because we're up against a very, very warm freakish winter of last year. We are in a good ownership position and are expecting the weather to be more seasonal this fourth quarter.

As far as the fashion categories are concerned versus the basic categories, we don't want you to think that we're buying tonnage more of units in the back half of the year. We're taking our shot selectively where we think that we have sales comp driving opportunity as well as margin opportunity.

So you're going to see us take shots not only in some of the basic categories where the costs have come way down and that are a historical strength for us, but you will also see us take some shots in the fashion categories, particularly when you get into the fourth quarter because I think as we had mentioned a couple times, we felt that we were lacking a little bit of fashion on the big side in the fourth quarter. So you're going to see us correct that this year.

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

Thank you for joining us today. 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.