Children's Place Inc (PLCE) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to The Children's Place second-quarter conference call. At this time, all participants are in a listen-only mode. Later you'll have the opportunity to ask questions during the question-and-answer session. (Operator Instructions).

It is now my pleasure to turn the conference over to Ms. Jane Singer. Please go ahead, ma'am.

Thank you, Zach. Good morning, everyone, and thank you for joining us today for a review of The Children's Place Retail Stores Inc. second-quarter 2012 financial results.

Participating on this morning's call are Jane Elfers, President and Chief Executive Officer, and John Taylor, Vice President of 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 two questions 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 will start off with an overview of our second-quarter results, move into an update on two of our key strategic initiatives -- geographic expansion and brand marketing -- and end with a discussion of product costs for the back half of the year and third-quarter and full-year guidance.

We had solid sales growth in the second quarter which resulted in a narrower than planned loss. Net sales increased 5%. Adjusted net loss was $0.62 per share versus our guidance of a $0.65 to $0.70 loss. Gross margin rate came in better than our projection due to leverage of fixed expenses on positive comp sales. Comp sales increased 3.4%, led by a positive 21% comp in our e-commerce channel.

Total US stores had a positive 2% comp. US Place Stores delivered a positive mid single-digit comp led by a mid-teen increase in the big girl division. Canadian stores delivered flat comp sales in the second quarter, beating our internal projection. Outlets improved to a negative mid single-digit comp for the quarter with flattish comp sales in July also beating our internal projections.

Transactions, average transaction value, and conversion were all up low single digits for the quarter and AUR flattened out as expected as we began lapping similar pricing and inventory levels for the first time during Q2.

By division, the big kids division led the way in the second quarter with high single-digit comp increases in girls and boys. Our results through the first half of the year have demonstrated that our focus on big kids is paying off.

As expected, the baby businesses improved sequentially to a negative low single digit comp in Q2 and we expect baby to continue to strengthen when we set our holiday line in September. As you may recall, we strategically pulled back on baby inventory and floor space during back-to-school this year to focus on big kids, which drives the majority of back-to-school sales. Newborn comped positive for the first time in 3 1/2 years, which was great to see.

Now onto the key initiatives. First for real estate, we completed our extensive market analysis during Q1 and we now have a detailed strategy in place for each of our 1,080 stores that's focused on driving higher productivity and lower operating costs fleetwide. The four key strategies that will drive our North American real estate activity over the next few years are as follows.

Number one, expand our North American footprint. Our analysis points to a fleet of between 1,250 and 1,300 stores over the next few years with market voids in the United States as well as Canada. We increased our net store count by 2% in the second quarter and square footage increased by 0.5%. We anticipate square footage will be up 1% at the end of fiscal 2012.

Number two, continue our focus on value centers in small markets. Since my arrival in 2010, The Children's Place has been focused on this initiative. We sharpened our internal definition of value centers versus small-market stores as part of our fleet review. Value centers are primarily strip center locations which have value anchors or at least 40% value apparel retailers if there is no anchor tenant.

Small market stores on the other hand are frequently located in enclosed malls in DMAs with fewer than 200,000 people and no other Children's Place store within 30 miles. Today, value centers and small-market stores account for approximately 20% of our fleet and they have the highest cash contribution due to lower occupancy costs.

Approximately 25 new stores or 40% of the openings this year will be in value centers or small markets and we expect their penetration to grow to about 25% of the fleet over the next few years.

Number 3, selectively right size our square footage. We've downsized several US stores so far this year and expect to downsize several more in the second half. We only have a few months of sales data, so it's early, but total sales per store have remained relatively flat despite the lower square footage and we will continue to provide updates as we learn more.

Four, continue to invest in remodels into our Tech2 format. We have completed 44 remodels so far this year, 25 in Canada and 19 in the US and we plan to complete another 16 remodels in the second half of the year for a total of 60.

Similar to the downsizes, preliminary results on remodels are encouraging. So far, the remodeled stores have had a positive mid single-digit swing in sales post versus pre-remodel.

International expansion, we opened our first two stores in Saudi Arabia during the second quarter and were pleased with the early results. Grand opening sales at both stores far exceeded our sales plans and we are excited about the openings slated for the third quarter, which include new stores in Saudi Arabia and the United Arab Emirates. We chose the Middle East to begin our international expansion outside North America because these are established retail markets with a high percentage of children and significant growth potential.

In addition, there is a void of high quality value children's retailers in the market particularly for big kids and we believe we have the potential to build significant market share.

Our strategy was to enter the Middle East with enough stores to establish scale and get a reliable indication of the longer-term brand potential. We expect to end the year with more than 20 stores in this region, which will give us a good base to judge future expansion potential and timing.

If we are able to replicate the sales momentum of the first two stores when we open the additional stores in the back half of this year, we would be well on our way to becoming one of the largest children's apparel retailers in these markets in the space of just six months.

Brand marketing. We are continuing to see strong results from our marketing campaigns and we have a better understanding of the types of offers and marketing channels our moms respond to. We are now able to segment our communications to customers who shop US Place stores versus US Outlets and in Canada, English versus French-speaking customers.

In addition, our enhanced CRM capabilities allow us to tailor messages to customers based on their purchasing behavior and we believe these CRM advances have helped drive the improvement in our traffic and conversion during Q2 and will continue to benefit us going forward.

With our increasing focus on digital communication to the young moms we target, we continue to reduce our reliance on direct mail. However as we've seen with all of our marketing programs, our direct-mail response rate continues to improve.

We kicked off our first-ever radio campaign for back-to-school this year and we will continue to monitor results from this new channel. We have expanded our efforts in social media and now have a presence on Pinterest, YouTube, foursquare, Twitter, Mom Bloggers, and of course, our 1.2 million Facebook fans, making us a leader in the children's apparel social media space. We are on track to launch our loyalty program later this year.

By keeping our marketing budget flat but shifting the spend, we were able to ramp up e-mail, reduce our reliance on direct mail, introduce radio, expand our social media effort and plan for the launch of our loyalty program and we believe this is a more relevant marketing campaign for The Children's Place.

Now I want to talk about product costs and unit buys for the back half of the year. We ended the second quarter with inventory per square foot down 3% in dollars and we are fully set for back-to-school in all stores with very little carryover inventory. Apparel costs for back-to-school and holiday are down high single digits. On a total inventory basis when you take shoes and accessories, product costs for the back-to-school line are down mid-single. Based on these lower costs and stronger products, we bought deeper into key apparel programs for big kids to drive sales for back-to-school and we took a similar buying strategy for holiday. We expect to end the third quarter with balance sheet inventory per square foot flat to slightly positive. And looking forward to early spring 2013, apparel costs continue to decline in line with fall and holiday.

Outlook, our EPS guidance for the third quarter is $1.53 to $1.58 compared to $1.33 last year and we are assuming positive low single-digit comps for Q3. We have updated our EPS guidance for fiscal 2012 to be in the range of $3.20 to $3.30 per share.

And in closing, we are very aware of the continuing economic difficulties our customers are experiencing and we project that total children's apparel spending will increase only moderately in the back half of the year. However, with lower apparel costs, great value in fashion, compelling marketing programs, growth in conversion, and the improvement in our Outlet and Canadian businesses, we fully expect to continue delivering positive comp sales and to expand gross margin and operating margin during the second half of fiscal 2012 and beyond.

And now I will turn it over to John.

Thank you, Jane. Good morning, everyone. Net sales for the second quarter ended July 28, 2012 reached $360.8 million, which is a 5% increase over last year. Comparable retail sales increased 3.4%. The positive comp was driven by a 2% increase in transactions and a 1% increase in average transaction value. Comparable store sales increased 1.8% in the US and declined modestly, 0.4%, in Canada.

Full price Place stores comped positive in both the US and Canada. Outlet stores comped negative in both markets. E-commerce sales increased 21.2%.

Gross margin dollars were $114.2 million, a 1% decline versus last year. Gross margin rate declined 190 basis points to 31.7%, due to higher product costs. The margin rate was a little better than we expected as we were able to leverage fixed costs on the positive 3.4% comp.

SG&A spending on a GAAP basis was $120.3 million during the quarter. Adjusted SG&A spending excluding items which are not indicative of the performance of the core business was $119.1 million, a 6% increase compared to last year. We are continuing to invest in the business to drive growth and administrative expense was up year-over-year. SG&A on an adjusted basis deleveraged 40 basis points to 33%.

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

Depreciation and amortization expense as a percentage of sales during the second quarter was 4.8%. On an adjusted basis, depreciation was 4.7% compared to 5.4% last year. GAAP operating loss was $26.9 million during the quarter. Adjusted operating loss was $22.1 million excluding items which are not indicative of the performance of the core business. That compares to an operating loss of $15.8 million during the second quarter of last year.

GAAP net loss for the quarter was $18 million or $0.74 per share. Excluding non-GAAP adjustments, net loss was $15.1 million or $0.62 per share, which was below the second quarter of 2011 when our net loss was $0.38 per share. The larger loss was driven primarily by higher product costs and SG&A deleverage.

Also our share buyback program and a lower tax rate in the second quarter of 2012 had an unfavorable $0.10 impact on EPS compared to last year. Share buybacks and a lower tax rate are unfavorable in Q2, when we report a net loss, but are favorable in the other three quarters when positive profit is reported.

Moving onto the balance sheet, our cash balance at the end of the second quarter was $158.6 million or 5% higher than last year. Over the past 12 months, we were able to increase our cash balance while repurchasing 1.7 million shares for a total of $79.1 million and investing $77 million in CapEx.

Balance sheet inventory per square foot at the end of the second quarter was down 3%. During the second quarter, we opened 19 stores and closed one. We operated 1,080 stores at the end of the quarter with a total of 5.22 million square feet. This represents a 0.5% increase in square footage compared to last year.

Moving onto guidance for the third quarter and fiscal 2012, for the third quarter, we project non-GAAP adjusted earnings between $1.53 and $1.58 per share. This is based on positive low single digit comp sales growth. Gross margin is expected to leverage 50 to 70 basis points due to the lower product costs. We anticipate SG&A deleverage of 60 to 80 basis points due to higher administrative expense compared to last year.

For fiscal 2012, we project non-GAAP adjusted earnings between $3.20 and $3.30 per diluted share compared to our previous guidance of $3.15 to $3.30. This is based on positive low single-digit comp sales growth. For the year we now expect gross margin to leverage approximately 20 to 40 basis points and SG&A to deleverage 50 to 70 basis points.

This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments. It also assumes that currency exchange rates will remain consistent with today's rates and does not include the impact of further potential share repurchases in fiscal 2012.

To briefly summarize our share repurchases during the second quarter of 2012, we repurchased 336,000 shares for approximately $15.6 million. At the end of the second quarter we had approximately $34.4 million available under our current share repurchase authorization. We expect to end the third quarter with total inventory per square foot flat to slightly positive.

As we discussed in today's press release, our Northeast distribution center will be closed at the end of December. This will result in annualized savings of more than $4 million beginning in fiscal 2013. We will have charges of approximately $5 million in the third quarter this year, primarily for accelerated depreciation and $11 million of charges in the fourth quarter primarily associated with liabilities under the Northeast DC lease.

Consolidation into one US distribution center is a key efficiency initiative. Capacity utilization will increase and trans-shipments will be reduced. These savings will more than offset higher shipping costs to service our stores in the Northeast region of the country.

The West Coast DC closure went very smoothly in May. We are confident the Northeast DC closing in late December will proceed smoothly as well.

At this point, we will open the call to your questions.

(Operator Instructions). Rick Patel, Bank of America.

Thank you, good morning, everyone. Just a question on gross margins. It looks like you're guiding up 20 to 40 bps for the year but I think your expectations for that were a bit higher at the end of the first quarter. Can you just walk us through what's changed in those assumptions?

Yes, Rick, this is John. We have updated our model slightly as we enter the third quarter and at the beginning of the year, we had guided to $3.10 to $3.30 with leverage slightly higher on gross margin and slightly more deleverage in SG&A. We have been able to manage through the first six months effectively. Our gross margin delevered 190 basis points in Q2, which was better than what we expected.

But as we look at the back half of the season, we have wanted to make sure that we are very prudent in the way we guide for the third quarter based on the potential incremental units that could be in the channel. We are guiding for flat AURs. We've tightened up our SG&A model and our guidance for the full year is right where we expected it to be at this time of the year.

Okay, then can you give us an update on a made-for-outlet strategy? What sort of impact the changes in made-for-outlet have on margins in the second quarter and what are your expectations for that piece of the business in the back half?

Yes, made-for-outlet strategy continues to perform well for us. As we enter the back-to-school season, made-for-outlet is north of 50% of the total assortment. The Outlet business margins have strengthened over the last 12 months. We are 500 basis points lower right now than our full price business, which is much, much better obviously than where we started and were very pleased with the way the Outlet business performed in the second half of Q2 and into the back-to-school season.

So we are very pleased with the performance of our outlet transformation and we feel good about the fact that we are going to end the year with as much as 85% made-for-outlet assortment in the Outlet channel.

Kimberly Greenberger, Morgan Stanley.

Jane, I was intrigued by your inventory strategy here for the back half and I'm wondering if you can -- I just wanted to confirm first that in the third quarter you expect to end the quarter flat to up slightly on a per foot basis. Can you just talk about your receipt plan during the quarter and also during the fourth quarter? And would you be hoping that that could support positive comp store sales?

Yes, you are correct that we are looking for flat to slightly positive in dollars at the end of third quarter. What we did is we went after more units in the big kids division. From our point of view, a positive comp sales trends based on higher retails alone is not sustainable particularly as input costs decline. We expected AUR to flatten out and it did and that's why we are excited to see the increase in transactions in UPTs as we kind of view that as key to the turn around and we expect to continue to see that into third quarter.

Okay, great. And then I know you've been investing in SG&A and I'm wondering when you lap those increased SG&A expenses such that you will be able to start leveraging your SG&A on a low single-digit comp? Thanks.

Kimberly, this is John. There's been a lot of work in the organization over the last two years to sort of transform this business. We fully expect over time that a positive low single-digit comp sales will generate leverage on SG&A.

Our SG&A guidance this year has slight deleverage. It is primarily driven by variable compensation in the fourth quarter but we have had modest deleverage. We had 40 basis points of deleverage in Q2. Costs were up 6%.

When you look at our total cost structure including costs in our gross margin, we did leverage in the quarter but on an SG&A basis, we had a slight deleverage in Q2. We expect that modest deleverage to continue into Q3 but over time it's our full expectation that with positive low single-digit comps we can leverage SG&A.

Anna Andreeva, FBR.

Great, thanks so much and congrats, guys, on positive comps. I had a couple of questions. Looking at your 3Q guidance and putting in what you guys are saying on the gross margin line versus SG&A, I just wanted to make sure I'm not missing anything. Is the D&A less of a leverage than what you've seen historically? It's just a little tough to get to the low end of your guidance. That's my first question.

Second question, I was hoping to talk about the baby business. Nice to hear that baby has improved in the second quarter. What are some of the initiatives as we get into the back half and just again to make sure that that business continues to resonate?

Jane, you usually talk on these calls about the competitive environment out there and you guys are guiding for flattish AURs but what are you seeing out there just Gymboree from the inventory perspective seems to be a little better than last year, certainly the JCPenney dislocation should be benefiting you guys as well. Maybe just some color on that.

Sure, as far as the baby businesses, we expected -- we had a little bit of difficulty in Q1 in baby and we expected baby to turn around. It pretty much happened as we expected and we were happy to see it. In the baby businesses, boys was up slightly, slightly down. Girls was down low single-digit and a lot of that was driven by the Outlet. If you think about it, the difficulty we had in Q1 in the product kind of continued into the outlet channel as it follows Place a little bit in Q2.

Other than that in baby, the Place channel, the e-commerce channel, they were much stronger in Q2.

As far as going forward in baby, we pulled down floor space and inventory for baby during the back-to-school period, which really would be like mid July 7/10 through Labor Day and when we go to set our holiday in September, we believe that we will continue to strengthen the baby business and then certainly into the fourth quarter as well.

So we feel good about the baby business. We feel good that it's on track and certainly we've talked a lot about demographics. The baby business is going to be tough from a demographic point of view for several years to come. We know that the height of the birthrate was in 2007. Those kids are turning five right now and that is why we are putting a lot of effort behind our big businesses.

The baby businesses will be a lot more promotional in the upcoming years and I think that that will be much more of a fight on AUR for some time to come. So we are happy that we took the strategy a couple years ago to really go after big.

From a competitive environment, AURs did flatten out in the second quarter. We are guiding that they will continue to be flattish in the back half of the year as we do not believe with these input costs coming down that we would be planning anything other than a flattish AUR.

From competitive environment, I see two things. From an inventory level overall, I feel like it is relatively under control from what we are seeing but I do see from a pricing point of view very sharp promotions going on in the competition and what I would call sustained promotions. So whereas maybe some of the sharp pricing was for a shorter period of time last year during back-to-school, some of the competition is staying at those price points for a longer period during back-to-school.

We think, as John mentioned, that may have something to do with units starting to build up and with those input costs coming down.

From a modeling perspective, Anna, we can certainly go through and detail off line but we expect depreciation to leverage in Q3 but not to the same extent that it leveraged in Q2.

Janet Kloppenberg, JJK Research.

Good morning, everyone and congratulations. I had a couple of questions on the comp outlook, Jane. Are we to think that -- I think that Canada will comp positive and should we be expecting the Outlet channel to comp positive in the third quarter and going forward? It feels like there's a turn coming there.

I'm wondering just based on your AUR projections and your -- I think you said your units were going to be up, inventory units would be up, if you are planning to be a little -- take the offensive and be a bit more promotional in the quarter with respect to what you said about the increased promotions going on in the environment.

Lastly, I got on a little late but I don't know if you commented at all about how the back-to-school season has opened up and I would appreciate that. Thanks.

Sure, we did see a turnaround in Canada in Q2 and we are projecting flattish going forward into the third quarter. Outlet, we had talked about with you guys really seeing that turnaround happen during back-to-school. We were very happy to see as the quarter progressed, as Q2 progressed, the Outlet business did get stronger and stronger. And as I said in the opening remarks, I don't know if you were on for those, that we flattened out in Outlets in July. So that was really, really good to see going into the back-to-school period.

From a promotional point of view, I have said it. I will say it again. We did take a posture that we went after certain key categories during back-to-school and holiday and we bought deeper into units where we think that we have strengths and where we have category dominance, we feel that if the promotional -- we have said all along that we don't see pricing from a promotional point of view getting deeper than it was in 2010. And I think that we are pretty much still seeing that same thing.

If we need to get deeper and we need to promote more as the season goes on, we certainly will be in a position to be able to do so.

As far as the third question on back-to-school, back-to-school is about around 15% of Q2 sales so it's not inconsequential and we were very pleased with what we saw in back-to-school in the month of July.

Adrienne Tennant, Janney Capital Markets.

Good morning. Let me add my congratulations.

Thank you.

Jane, my question is sort of on shopping behavior particularly in the kid's sector, it's obviously much more concentrated. I'm just wondering when she does shop should we be thinking that the peaks are higher but the interim periods are still quite soft and that's where you are going to be using your promotional strengths during those sort of low periods?

My second question is for John. Can you remind us was there any bonus accrual reversal that we should be thinking about in the fourth quarter? Thank you.

Let me answer the bonus accrual first, Adrienne, and again we can certainly go through it in more detail off-line if necessary. But there was substantial bonus accrual reversed last 4Q so we are expecting to have a significant deleverage in the fourth quarter as a result of incremental bonus expense.

So we actually had a credit in the fourth quarter last year in total and we expect a fairly substantial expense in 4Q, so that's what's driving the predominance of our deleverage on a full-year basis.

Then as far as the shopping behavior, what I would say to that is we are certainly right now in the height of back-to-school, so we think of back-to-school as really starting in the third week of July and going through September. That's a very, very promotional time period as it focuses extensively on basics. So I would consider it a peak time but I would also consider it a peak promotional time.

Then after Labor Day we go into holiday and from the point of view of holiday, that was our strongest period last year, our strongest months. So I think that when you look at that, a lot of it is regular priced selling and hopefully we will continue to see that line strengthen as it was very, very successful for us last year.

And when you come out of that, you go into October really into that Columbus Day period which is also promotional again and a peak time. So I don't really -- I wouldn't really consider it a lull. I would just look at it as very promotional and basic-driven in the first part of the quarter moving into more of a fashion quarter with -- a fashion month I should say with the holiday delivery and then getting more promotional again in October with Columbus Day and as we clean up on fall getting ready for the big holiday set in November.

Dorothy Lakner, Caris & Co.

Thanks. Good morning, everyone, and congratulations also. I wondered if you could give us an update on Canada. You seem to be making progress there. Just maybe some comments on how the environment is different or similar to the US and how performance is product wise there?

Then also just on the environment in the Outlet business, we are hearing a lot about outlets being very aggressive in terms of pricing, so just wondering what you are seeing? Obviously you've got more made-for-outlet product which is working well for you.

And then lastly on the remodels, where are we in the entire store fleet in terms of how many you have left that you are going to want to do in that Tech2 format? Thank you.

Sure, as far as Outlets are concerned, our business like I said is promotional during back-to-school. We are not seeing anything in Outlets at all more promotional than we've seen in the past. There was a little bit of issue in Outlet during the quarter with the heat wave that was going on in the Midwest and I think that hurt Outlet traffic a little bit, but we are not seeing anything that is more promotional than we have seen. I think the fact that we have that made-for-outlet product now building and a little bit north of 50%, that's really starting to drive some business in Outlets for us and really we're at the inflection point of the turnaround in Outlets, which I think we saw in the month of July and hopefully going forward into the back half of the year. So we are pretty comfortable with what we are seeing in Outlets.

As far as Canada is concerned, we were really, really happy during the quarter to see the units increase, the transactions increase, and the UPTs increase up in Canada. So there is a strong business up there. We have been up there for a long time. We're thrilled with that business and as we head into third quarter, we are hoping to see the margin get back to more historical levels than we saw in the first half of the year.

And on the remodels, I'll turn that over to John.

Yes, from a remodel perspective, we still have 40% of our fleet is coming due over the next three years and as you know, we've gone through a store by store, market by market assessment of the entire fleet. We still have about 30% of our fleet in our old Technicolor 1 format. Now not every single one of those stores will be remodeled into a Tech2 format but we think over the next three or four years, there will be a number of remodels in the US done to improve productivity, right size our space in markets, and also leverage the economics of those stores and make sure that we are brand-right in each market in which we serve.

So we still have a lot of work to do on remodels in the US. Nothing substantially different than the kind of trajectory that we've been on over the last couple of years but we will continue to invest in the fleet to make sure that we are brand-right for our customers in the markets we serve.

Betty Chen, Wedbush.

Thank you. Good morning and I will add my congratulations as well. I was wondering, Jane, maybe you can start off and talk a little bit more about the store fleet analysis that the team just completed. Specifically I think you had mentioned that over the longer-term, you've identified a store count of roughly 1,250 to 1,300. Could you give us a sense of the mix in US versus Canada on how that kind of pans out for North America?

And then longer-term, there is definitely an opportunity in the value centers and small markets. I think you've mentioned the penetration will reach almost 25% at the end of this year. When we think about that longer-term store count, what should the mix look like for these value centers in smaller markets?

And then I also had a question in terms of the rightsizing. You did quite a few already year to date. How many more should we look for in the second half and maybe over the next few years as the leases come due?

My last question is in regard to the international market, Jane. It sounds like Saudi Arabia is off to a very good start. And you mentioned that by the end of the year we should anticipate at least 20 locations. Is that when we start to see you shift some focus away from the Middle East into some new international market or how should we think about that international business evolve over time? Thanks.

Sure, on the new store question of the 1,250 to 1,300, we see probably 85% in the US and 15% in Canada. On a small market and value center, percent to total, there are 20 now. We're looking for them to be over time around 25%. And we will continue to monitor it and if we see more opportunity that number could go higher, but 25% is what we're looking at now.

As far as the Saudi question, it's more than Saudi. It's really all through the Middle East and we're looking to have 20 to 25 stores there by the end of the year. What we are doing is we did that for a test because we wanted to have enough scale to measure whether -- how much potential there really was. When we get a good read when the year ends and we see what we are doing when we have all those stores open, we will then judge the potential, the future potential not only for expansion but for timing. And then we certainly are in talks with several other people about future expansion potential, but we will not make decisions on that until we see what happens in the Middle East.

Brian Tunick, JPMorgan.

Thanks, good morning and congrats as well. I guess two questions. One again on the real estate growth side here, just trying to think how you are thinking about maybe e-commerce penetration, how big could that be over the next couple of years versus how you built up sort of the ultimate size of your fleet? Do you have any stats on the multichannel shopper, what she is doing off-line and online?

Then you shared with us in the past the industry statistics. Just curious if you are seeing any updated data on market share in between the specialty versus the big-box players? Thanks very much.

Sure, our e-commerce penetration right now is around 11% of our total and we see that that number could be well north of 15% at some point. It is a huge strategic growth initiative for us and we have been able to get that business double-digit comping almost every single quarter since I have been here, so certainly there is no one taking the foot off the gas on e-commerce.

We see our multichannel customer as our best customer. We have a very, very small percentage of our customers right now are multichannel. They are our most profitable customers and they spend significantly more than a single channel customer so we believe one of the strengths of our franchise is to be able to continue to open these stores and continue to build that ecomm business at the same time and convert more of those shoppers into multichannel shoppers.

Our loyalty launch that we are going to be doing later this year will help us tremendously in that effort to continue to move people from single to omnichannel customers.

John Zolidis, Buckingham.

Good morning. Two quick questions. One is on the distribution center consolidation. Is there -- the first question is is there any intangible benefit to having a DC close to your headquarters that you might be sacrificing in the consolidation?

And then my second question is on the 3Q comp guidance plus low single-digit. Obviously the comparison is more difficult. I guess what gives you confidence that with the more difficult comparison you can maintain the plus low single-digit comps? Thanks.

John, this is John. On your question regarding the distribution center consolidation, there's not really an intangible benefit from having a distribution center close to headquarters. Our northeast distribution center is 50 or 60 miles from headquarters. We obviously have key operators who are in that building often, but they are also in our Alabama distribution center very often. So the actual productivity benefits far outweigh any intangibles for having a distribution center close to our headquarters.

In terms of Q3 comp guidance, you are right. We are up against our toughest compare. We had a 0.9% positive comp last Q3. We are fully expecting the transformation that we have seen sequentially both in Canada and the Outlets, as we expected, to carry forward into Q3. We are looking for flattish comps in both of those channels driven by improved conversion, improved transactions, and improved units per transaction or transaction value.

We also were pleased with the traffic performance that we saw in our full price Place business and that gives us confidence based on the traffic performance we've seen and based on our inventory ownership in the key big girl and big boy programs that we will be able to drive positive low single-digit comps in the Place business.

And then e-commerce continues to be a double-digit growth business for us, so we fully expect that trend to continue. We are feeling encouraged about the way the business is performing and that is baked into our positive low single-digit comp guidance for Q3.

John Morris, Bank of Montreal.

Thanks. My congratulations, too. Great work. Two questions. One is unless I missed it, you have seen some real nice strength and pick up in the big kids business. Maybe talk a little bit, Jane, about what's behind that success. I assume it probably has something to do with the fashion content that you are able to deliver. And then also for John, the DC savings that we would expect to see in 2013, how would we look at apportioning those over the quarters or are they evenly balanced? Thanks.

I will take the DC real quick. They are pretty balanced. The units that we flow through our DC by quarter are pretty consistent and so from a modeling perspective I would just apportion it evenly across the four quarters.

Then, John, on the big kids business, as we said, they both had high single-digit comps during the quarter. There really isn't a classification or a category I can point to within either one of big girls or big boys that wasn't strong in Q2. We are really, really excited to see the performance. Certainly in girls, there's a lot more fashion than there is in boys. The strength of ownership behind key categories in boys really drove the quarter and in girls as well, I think we did a much better job. Natalie and her team did a much better job buying the line, sorting the line to the strengths.

And then as I said earlier, the back-to-school portion of July is not inconsequential at about 15% of the total, so to see that off to the start that it's off to is also real encouraging.

Margaret Whitfield, Sterne, Agee.

I'll add my congratulations, Jane. I was wondering if we are into August now if you could comment on August. There was a very warm trend early in the month and are you seeing consumers put off shopping for fall lines? I wonder what the composition of wear now product was in the store currently? And if you have any changes to tell us about your holiday dressy line as well as the component of winter attire given the weather trends we experienced last year in quarter four. Thank you.

Yes, we don't comment on monthly comps when we are in the quarter, but certainly what we saw in July was a good start to the back-to-school season. I think your comment about wear now is right on. Another thing that Natalie and the team were really focused on was making sure that a much bigger percentage of the buy this year was focused into wear now categories, so transitional short-sleeved, transitional shorts, transitional skirts and skorts on the big girl side. And then certainly on the boys side, transitional colors and more short sleeves and the knit categories and keeping presentation of shorts going.

So both of those were very important and I think really resonated well with the customer certainly for the July periods that we are going to talk about.

As far as holiday dressy, we feel great about holiday dressy. It was an extremely strong category for us last year and now when you think about how strong the big businesses are and have been year to date, we think that's only going to get better when we deliver our holiday in September. I would say that we have put more emphasis on the modern piece of it versus the traditional piece of it that you will see when we set it in September.

And then from a wear-now point of view, we have pretty much held to the same thing we were saying all year. We are not anticipating that it is going to be the hottest, hottest ever fourth quarter. We are certainly hoping that it isn't, so we have certainly put receipts and inventory behind your more traditional cold-weather categories like cold weather accessories and outerwear and sweaters and we are counting on a seasonable back half of the year. Nothing too cold, but seasonable let's call it.

Marni Shapiro, The Retail Tracker.

Congratulations. For what it's worth, I heard on the news this morning from AccuWeather that we are supposed to have a very snowy winter in the northeast along the entire East Coast.

Well, good.

There you go. I just have a couple of quick questions. If you could just talk about an update on the normalized tax rate and how many stores you plan to close in the back half of this year? And then just any update you have on shoes because they happen to look fantastic for back-to-school.

Marni, John here. On a normalized tax rate, we are modeling 33.5% on a full-year basis for our go forward tax rate and we are expecting to close 30 stores, around 30 stores in the full year and we've closed six or so year to date. So we expect to close 20, 25 stores in the back half, most of those in January.

Then as far as the shoe business is concerned, we're still certainly going after that in a big way. It's a little bit more important on the girls side than it is on the boys side with the different fashion that we're able to offer. I think we did a much better job as we head into July and the setting up of back-to-school to get the shoes more balanced with the boots versus wear now and go forward and there's really no new update on that other than we are continuing to go after that category.

Richard Jaffe, Stifel Nicolaus.

Thanks very much. A couple of follow-up questions. Could you talk about profitability or operating profit contribution by division, Outlet, international, and full-priced stores?

And then if you could help us with international, how we should think about the contribution there going forward as it becomes a more meaningful business? Lastly the average unit retails for second half?

Richard, this is John. We don't break out our operating profit by channel with the exception of our US business consolidated in Canada. We expect the Canada margins, which have been -- operating margins which have been hampered in the first half of the year to improve in the back half of the year as AUCs come down and as we lap some of the drag on SG&A.

In terms of international, the way the international business will flow through our P&L, we have -- we will sell inventory and mark that inventory up so we have a cost-plus arrangement on inventory purchases, which will drive revenue. We will also have a retail royalty on the sales. Those are the drivers of revenue and of course the cost of sales is basically the inventory. So over time the international business will be a drag on margin rate but will obviously drive operating margin and EBITDA.

It's not meaningful enough this year to articulate what that drag would be but over time we will break that out and articulate margins with and without the international business.

Dana Telsey, Telsey Advisory.

Good morning, everyone, and congratulations. On the marketing segmentation, how do you think of that impact as a driver of sales, given how specialized it's getting? Is that one of the reasons why the comp is coming in how it's coming in?

Then the DC consolidation that's underway, how do you think about the expense benefits and the timing of that and the impact on long-term operating margins? Thank you.

Sure, on the segmentation, we're just in the beginnings of that and we spent a lot of time in the first year or so that I was here bringing our database in-house and making sure that that data was clean and ready to go. So our ability as we go forward now that we have that database in-house and the work that we have done on our customer base, our ability to segment our communication going forward between US Place and our Outlet channel and then up in Canada between English and French speaking is I think a big competitive advantage as go forward.

The ability for us to personalize e-mails and the ability for us to really understand who our customer is, what zone of business they are buying in, how much they buy, how much they spend, how frequently they shop with us, is I think going to be, as I said, a big competitive advantage as we go forward. And I think what we started to see in Q2 was the beginnings of a much more focused marketing campaign and a much more strategic marketing campaign.

Dana, from a DC consolidation, DC expenses primarily hit in our cost of sales, so we should see a little bit of margin improvement over time by the $4 million in annualized savings that we expect to generate from the consolidation of the Northeast DC. And right now I would model it pretty much flat across the four quarters. We move a pretty consistent amount of units through those DCs each quarter, so it's a pretty spread evenly over a four-quarter period. We think longer-term with DC consolidation and the efficiency of running one DC that there could be more opportunity, but right now we are not quantifying that.

Jim Chartier, Moness, Crespi, Hardt.

Good morning. My first question, could you give us a little more color on where you see the inventory unit growth by channel, Outlets, US full price, and Canada? How many stores have you right sized to date?

And the gross margin guidance, are you assuming a higher markdown rate versus last year given the lower product costs? I would have expected more gross margin improvement? Thank you.

Sure. This is John, Jim. From an inventory unit perspective, we've balanced our inventory unit buys by channel in the back half of the year. We have made some targeted investments in the Canadian business and also in our Outlet businesses we are now -- now have a more meaningful assortment in the made-for-outlet. So there's a little bit more inventory on a per square foot basis in both of those businesses in the back half of the year.

In terms of gross margin guidance, we are modeling right now flattish AURs in the back half and leverage on merchant margin driven by the lower average unit costs and we're not looking for a lot of leverage in our fixed expenses in the gross margin for the back half of the year.

I would like to turn the call back over to Ms. 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 today's teleconference. You may now disconnect and have a wonderful day.