Children's Place Inc (PLCE) 2012 Q3 法說會逐字稿

Welcome to today's Children's Place third-quarter conference call. At this time all the participants are in listen-only mode. (Operator Instructions) Please note today's call is recorded.

It is now my pleasure to turn the program over to Jane Singer. Please begin.

Thank you, Kevin. Good morning, everyone, and thank you for joining us today for a review of The Children's Place Retail Stores Inc. third-quarter 2012 financial results. Participating on this morning's call are Jane Elfers, President and Chief Executive 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 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.

Thanks, Jane, and good morning, everyone. I will start off with an overview of our third-quarter results, move into a review of sales by channel and an update on three of our key strategic initiatives, and end with a discussion of the impact of Hurricane Sandy and our updated guidance.

Net sales increased 3% for the third quarter. Adjusted operating income increased 4%. Adjusted earnings were $1.60 per diluted share, which exceeded our guidance range for the quarter. Comp retail sales increased 1.1% driven by higher transactions, average transaction value, and conversion which partially offset by a 1% decline in AUR.

And our SG&A spending was well-managed during the quarter with the rate deleveraging only 10 basis points which exceeded our expectations of 60 to 80 basis points of deleverage. Gross margin deleveraged 10 basis points, which was a significant improvement over the first half of this year. However, we expected lower product costs would drive 50 to 70 basis points of gross margin expansion during the quarter on top of the 110 basis points of expansion we achieved last year.

I will provide the detail regarding our sales results during the quarter and John will review margin in detail during his remarks.

Starting with our channel performance, e-commerce comp sales increased 12.8% driven by strong performance in the big kids business. US outlets posted a 5.4% comp increase. Two-thirds of the assortment is now made for outlets. We are very pleased to see the strong increase in average transaction value driven by increased AURs and UPTs during the important back-to-school season.

US Place comped down 1.6% for the quarter. The big kids division posted strong sales gains throughout the quarter; however, we were disappointed in the performance of the baby holiday dressy line. Canada stores comped negative 2.9% for the quarter. Similar to the US, the big divisions were strong while the baby holiday delivery struggled.

Across our channels sales fluctuated dramatically by week as our customers continued to buy closer to need and when the weather was seasonally appropriate. Starting with August and continuing into early September we had very strong back-to-school sales. We dedicated more floor space to big kids for the back-to-school season versus last year, and we were laser focused on our external marketing and our in-store efforts during this very important timeframe.

The business continued to perform well during September and into the key Columbus Day period. Coming out of Columbus Day we were running a positive 3% comp on a consolidated basis for the quarter. Sales slowed significantly in the last two weeks of October due to warmer than normal weather across most of the country. However, despite the soft finish, we ended up with a 1% consolidated comp for the quarter.

The unfavorable response to our holiday baby dressy line, which hit stores in mid-September, also negatively impacted our US and Canadian Place stores. As you may recall, when we set our dressy delivery last year we had a terrific response to our big kids product. When we set our holiday line in mid-September this year we delivered an expanded baby dressy assortment which, unfortunately, did not resonate with our customers. In our outlets, where the baby dressy line was different, the category performed well.

In Q4, our baby receipts are focused on basics and seasonal basics at sharp price points, and we anticipate a better response to this delivery. The baby zone is becoming a more promotional business every quarter, and while we don't expect baby to enjoy the same comp increases we are seeing in the big division, we anticipate sequential improvement in Q4.

As for the Canadian channel, we have a number of initiatives underway in Canada to position the business for future growth. During the past couple of years we have expanded square footage by 20%, launched a Canadian website, remodeled a third of the Canadian fleet, and brought in a new head of Canadian stores -- all in an effort to better position Canada to compete in an increasingly crowded retail environment. We expect sales and gross margin in Canada to improve sequentially in Q4.

Moving on to real estate. We opened 23 stores in the quarter and expect to end the year with a net 42 new stores and the 2% increase in square footage. As you know, we completed an extensive market analysis in the first quarter of 2012 which indicated a fleet potential of 1,250 to 1,300 stores in North America.

We plan to open approximately 95 new stores in fiscal 2013. After closures, net new stores are expected to be approximately 75 and square footage is expected to increase 3.5% in fiscal 2013.

International; by the end of the third quarter we had a total of eight stores open in the Middle East and we expect to end fiscal 2012 with approximately 20 stores. We continue to be pleased with the early results and the enthusiasm in that market for our brand. There is a void of high quality, value children's retailers in the Middle East and we believe we have the potential to build significant market share.

While international is still very small, accounting for less than 1% of sales, it is an important future growth vehicle for The Children's Place. We will carefully monitor the results in the Middle East for the next several months before making a decision to further expand internationally.

Brand marketing; we launched our loyalty program on October 4, one month ahead of schedule. More than 3.3 million customers are enrolled in the program since the launch.

Our goal is to increase share of wallet as well to increase multichannel purchasing. Customers who shop online and in-store spend three times more than single channel shoppers. Initial results are positive and we believe our loyalty program will be the cornerstone of our marketing efforts going forward.

Now let's review the impact of Hurricane Sandy. Our thoughts and prayers are with all those whose lives were impacted by the storm. Hurricane Sandy was extremely challenging for our company and for our associates.

As many of you know, our headquarters is in New Jersey. Many of our associates experienced significant flooding, lengthy power outages, and lingering transportation issues. Despite these disruptions to their personal lives, our team banded together to get our stores operating as quickly as possible and we are very grateful to them.

To assist those most affected by the storm, our company donated clothing to the American Red Cross and the Salvation Army to outfit more than 4,000 children in New York and New Jersey.

About 280 stores in our northeast e-commerce business, which together account for 31% of total company revenues, were in the area impacted by Hurricane Sandy. The key question now is the extent and duration of the recovery process, and at this point it remains unclear how Sandy will impact category spend in Q4.

We are already seeing a ramped up promotional environment, and coupled with our soft start to the quarter, we are adjusting our outlook for the fourth quarter and fiscal 2012. We now project fiscal 2012 EPS will be in the range of $3.10 to $3.15 per share compared to $2.92 last year, and we expect fourth-quarter EPS to be in the range of $1.01 to $1.06 compared to $0.87 last year.

We anticipate positive, low single-digit comps for the quarter, and we expect transactions and conversion will remain positive. After an extraordinarily challenging two weeks our sales trends have returned to more normalized levels, but we now expect less gross margin expansion for Q4 than we had originally planned. We will continue to manage our SG&A spend in order to help drive positive earnings and EPS for the quarter and for the year.

Now I will turn it over to John to discuss the financials in more detail.

Thank you, Jane. Good morning, everyone. Net sales for the third quarter ended October 27, 2012, reached $500.9 million, which is a 3% increase over last year. Comparable retail sales increased 1.1%.

The positive comp was driven by a 0.7% increase in transactions and a 0.3% increase in average transaction value. Comparable store sales declined slightly in the US, down 0.1% and declined 2.9% in Canada. E-commerce comp sales increased 12.8%.

Gross profit dollars increased 3% to $206.2 million. Gross margin rate declined 10 basis points to 41.2% on a consolidated basis and was lower than our Q3 guidance.

I want to take more time to provide details on our margin performance versus last year and guidance. First, let me start with merchandise margin on a consolidated basis and by segment.

Consolidated merchandise margin increased in Q3 due to lower product costs, although we did not get as much merch margin expansion as we anticipated due to poor performance of our baby holiday dressy fashion delivery that Jane talked about. US merch margins were up across all channels. US outlet merch margins are now within 350 basis points of Place.

While Canada merch margins improved sequentially, they were lower than last year as this region had a difficult compare against very strong merchandise margin performance in 3Q 2011. Canada's merch margins were also negatively impacted by the performance of baby dressy.

Now let's talk through gross margin on a consolidated basis and by segment. Recall our 3Q 2011 gross margin increased 110 basis points. Our consolidated margin rate decline of 10 basis points during 3Q 2012 was primarily due to deleverage of fixed costs on a 1% comp. In addition, gross margin for the quarter was modestly impacted by our international business and our new loyalty program.

International is somewhat dilutive to gross margin, although accretive to sales and operating margin. Our new loyalty program will also be dilutive to margin over the next few quarters, but like international, we expect it to be accretive to sales and operating margin in fiscal 2013.

By segment, US gross margins expanded 40 basis points in 3Q as the increase in merch margin was only somewhat offset by deleverage of fixed cost and the impact of loyalty program. Canada gross margins sequentially improved from an 800 basis point decline in the first half of 2012 to a 430 basis point decline in the third quarter. In addition to the lower merch margin, we deleveraged fixed costs on the negative 2.9% comp. International, which is reported in our Canadian segment, also negatively impacted the gross margin during Q3.

Moving on to SG&A, our spending increased 4% during the third quarter to 26.3% of sales and deleveraged 10 basis points. We are continuing to invest in the business to drive growth resulting in higher administrative and marketing expenses year over year, but we were able to effectively manage store expenses for the quarter and overall came in better than we expected.

GAAP depreciation and amortization expense as a percentage of sales during the third quarter was 4.6%. On an adjusted basis, excluding accelerated depreciation for the East Coast DC closure and Canada store remodels, depreciation was 3.4% compared to 3.8% last year.

GAAP operating income was $50.2 million during the quarter. Adjusted operating income was $56.8 million, excluding items which are not indicative of the performance of the core business. This was a 4% increase compared to the same quarter last year.

The non-GAAP items excluded from operating income are detailed in Table 3 of this morning's press release.

GAAP net income for the quarter was $35 million, or $1.44 per share. Excluding non-GAAP adjustments, net income was $39 million, or $1.60 per diluted share compared with $1.33 in the third quarter of 2011. Our GAAP tax rate for the quarter was 30.3% and the effect of the non-GAAP items resulted in an adjusted tax rate of 31.3%.

Moving onto the balance sheet, our cash balance at the end of the third quarter was $203.1 million, a 33% increase compared to last year. Over the past 12 months we were able to increase our cash balance while repurchasing 1.25 million shares for a total of $64.1 million and investing $87.3 million in CapEx. During fiscal 2012 we have implemented a number of sourcing and supply chain initiatives in conjunction with our vendor partners to optimize our working capital, and in the third quarter we began to see positive cash flow effects of those initiatives.

Balance sheet inventory per square foot at the end of the third quarter was up 3%. Salable inventory was down 1%. During the third quarter we opened 23 stores and closed one. We operated 1,102 stores at the end of the quarter with a total of 5.29 million square feet. This represents a 0.6% increase in square footage compared to last year.

For 2013 we are expecting to increase our net store count by approximately 75 stores and increase square footage by 3.5%.

Moving on to guidance, for the fourth quarter we project non-GAAP adjusted earnings per share to be in the range of $1.01 to $1.06. This is based on positive, low single-digit comp sales growth. As a result of Sandy, we have a soft start to November but we still believe we can comp positive in the quarter as we are up against a minus 2.7% comp last year.

The promotional environment has intensified as retailers are promoting deeper to clear inventory post Sandy. We now expect consolidated gross margin leverage of 170 to 190 basis points, driven by merch margin expansion in both the US and Canada due to lower product costs. We expect fixed costs to be relatively flat on a rate basis.

We have refined our SG&A projections to be approximately flat as a percentage of sales as benefits from the restructuring programs earlier in the year are now expected to offset year-over-year increases in bonus and equity comp in the fourth quarter. For fiscal 2012 we project non-GAAP adjusted earnings per share to be between $3.10 and $3.15. For the year we now expect gross margin to deleverage 50 to 70 basis points and SG&A to deleverage 10 to 20 basis points. We expect our full-year adjusted tax rate to be approximately 33%.

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 third quarter of 2012, we repurchased 222,000 shares for approximately $12.8 million. At the end of the third quarter we had approximately $21.6 million available under our current share repurchase authorization. We expect to end the year with total inventory per square foot up mid-single digits, which will be entirely driven by higher in-transit due to the earlier Easter timing in 2013.

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

(Operator Instructions) Dorothy Lakner, Caris & Company.

Thanks. Good morning, everyone. Jane, I wondered if you could just give a little bit more color on what went wrong with the baby dressy business this year, what you are doing to rectify it. Any differences between the reaction in the US versus Canada, so any changes necessary there?

Then just secondly, if you could just update us on the improvement that you have made to supply chain and what we should expect from that going forward. Thanks.

Sure. As far as baby dressy is concerned, when we delivered our dressy delivery last September we were pretty much alone in the market for two or three weeks and we had a very, very successful delivery. If you recall, that was our strongest month from last year in third quarter.

When you looked at this year when we delivered baby dressy, most of the mall-based competition delivered dressy at the same time we delivered dressy this year, which was a couple weeks earlier than they had last year. And if you walk the mall now you can see baby dressy that is very similar in look and is running anywhere between 50% and 70% off. So I think there was a couple problems with it.

I think, number one, there was certainly too much baby dressy out there and it is all very similar in look. And I think when you think about this space, certainly over the last year it is getting more and more promotional. I think as there are less and less customers available in the baby space it's getting more promotional.

And I think what we need to do at TCP is we need to refocus and limit our liability in the higher AUR fashion goods and really focus on key items at sharp price points going forward so that we don't find ourselves in the situation we found ourselves in in Q3.

If you look to Q4, to answer your question what are we doing to mitigate it, we don't have a dressy delivery in baby in Q4. So our Q4 assortments are key item driven and they are at sharp price points. We are not going to see the level of receipts that we saw and we are not going to see a delivery.

When you look at Canada versus the US, the Canadian response to baby dressy was worse than the United States response to baby dressy. And I think in keeping with the Canadian customer I think that it was just too high of a percentage of the receipts and the AUR was just not where that customer wanted it to be.

As far as the supply chain initiatives are concerned, we are moving away from the agents as we had spoken about. We have made significant progress in moving away from the agents. We are also taking a really hard look going into 2013 and beyond at what percent of the business that we are doing in China. We think there is a lot of opportunities to move our sourcing to other parts of the world where the AUC advantages are there for us.

Rick Patel, Bank of America.

Thank you. Good morning, just a question on Sandy. Can you give us some color on just how many stores were closed during that period and for how long, and how many stores remain closed today, if any?

Rick, we had 280 stores that were affected during the first week or so of Sandy. Most of those stores have come back online. We have three stores right now that are closed. One is completely damaged and destroyed, and we have a couple stores that we think will come back online in the next, say, three months.

We had 280 stores that were impacted, I have mentioned that. We at 225 stores closed for several days, but about 30% of our revenues were impacted in the Northeast due to Sandy.

Okay, great. Then can you help us understand the guidance revision a little bit better? I understand the store impacted a huge number of stores, but I would think that the sales for the first couple of weeks of November are relatively small compared to what is going to happen between Black Friday through holidays.

So the question is were you anticipating on selling a lot of products for the first couple of weeks of November, or is it that you are seeing a lot more promotions on the horizon for the holiday given the weak demand after Sandy? Or is it a combination of the two or something else entirely?

It's a combination of the two. The first two weeks of the quarter represent about 15% of the quarter, so they are very important. They are full-price selling weeks for us.

We had very soft business across the entire Northeast and very -- we were impacted, in our outlet business specifically, in regards to transportation issues. And so the inventory we think from what we are seeing is backing up in the channel. We are seeing a much heightened promotional environment already. And so we do expect a clear through that inventory in the fourth quarter and we do feel that we will drive sales to positive low single-digit comps in the fourth quarter.

But we expect to do it in a shorter time frame, in a compressed time frame, and in a much higher promotional environment and so that is what really drove the change in our guidance for the fourth quarter. We really feel like we are going to need to be aggressive to promote and to compete in this marketplace over the next 11 weeks.

Adrienne Tennant, Janney Capital.

Good morning. Jane, just to follow up on the baby. Last year did you have a dressy capsule within the fourth quarter? So should we be comparing sort of a more basic assortment versus a second less basic assortment versus last year?

Then for John, sorry to keep harping on this, but how long was the e-com site down? And sort of within the guidance what gives you the confidence that the comp can still be positive? Is it really just because you are promoting fairly aggressively? Are you comping positively at this point or do we need to see an acceleration? Thank you.

Sure. Adrianne, on the e-com site question it wasn't a certain time period. It depended on the customer. The Northeast was so heavily impacted with power outages that there were days where that customer was not able to get online, so it really varied by where you lived.

As far as the comp guidance, we feel strongly that we can deliver low single digits because we own the inventory. We bought into inventory for the fourth quarter based on what happened last year. Fortunately where we did take our shots was in the big businesses, so I think we fill comfortable with where we own it from a classification point of view.

But with the ramped up promotional environment what the guidance assumes is that the AURs that we thought that we would be moving through will probably be less than we thought. We really think that it is the right and the prudent decision to take a look at these AURs and to take a look at where the margin really could be and to really revise this guidance to something that we feel is realistic and conservative.

As far as the baby delivery, we did not have a baby delivery last year in holiday and we did not have a baby fashion delivery in third quarter. We brought in this enhanced baby delivery for third quarter. We had very few pieces last year in Place stores of dressy baby in the third quarter.

What we had last year was a very large presentation of big boy and big girl, which really resonated with the customer. If you remember we had a 16% increase in AUR in the third quarter, which was really driven by this dressy delivery and really driven in the month of September into early October.

Based on that and based on some feedback we got from stores and from customers, we went and we enhanced our baby dressy delivery to mirror what we did last year in big and that did not work. It did not resonate for a couple reasons. One, I think that the market is too crowded with that product. Number two, I think that is not an AUR that the customer is ready for at that level of product that we had.

Betty Chen, Wedbush Securities.

Thank you. Good morning, everyone. I was wondering, Jane or John, I think you had mentioned that November happened off to a slower start. I was wondering, besides the Northeast, did you see any sort of different performance on the West or the Midwest to give you some indications, perhaps customer reaction, to some of your early holiday assortments?

Then my second question was regarding Canada. I think you had mentioned a new head had been appointed for the Canadian region. Can you remind us when did this person join, their background? And also when do we expect the Canadian business, especially in terms of gross margin can be much more on par with the US business? Thank you.

This is John. In terms of regional performance we had a tough week in the first week of the quarter. Obviously much, much more pronounced in the Northeast because of Sandy, but I think the entire country was somewhat soft. But the business trends are much more normalized since the end of the first or middle of the second week, and so that gives us confidence as we think about our comp guidance for the fourth quarter.

And in Canada margin, can you ask the question again? I am sorry.

I think, John, that you had mentioned that the Canadian gross margin did improve during the third quarter but it seems like the difference is still significantly below the US business if we are correct in assuming that. And if so, when do you expect the Canadian gross margin to be perhaps more on par with the US business?

Sure. Betty, I apologize. Canada margins were down in the third quarter. Merch margins were down year on year, up against a much, much tougher compare. On a two-year basis the merch margins in Canada were up more than 200 basis points and really consistent with the US margins.

So we have made real progress on merch margins on a two-year basis, both in the US and Canada. Sequentially our gross margins improved substantially from the first half of the year to the third quarter and in the fourth quarter our guidance assumes that merch margins and gross margin will be up year on year, both in US and Canada. So we are making progress on the Canadian margins and those margins are starting to trend back to what would be a more normalized pattern.

On the Canadian question, the person who runs Canada his name is Conrad Lemieux and he is an experienced Canadian retailer. He has been with us for a while and he has made some significant personnel changes up in Canada since he started. We are feeling good about having someone up there who is Canadian and who understands that market well.

Just to touch back on the first part of your question, too, as far as what the regions look like. We certainly struggled mightily for the first two weeks of the month, mostly in the Northeast and also on our e-commerce site, impacting a good deal of our Northeastern customers. But when you look at this past weekend when we started to go into the Veterans Day period, that is when we really started to see our comps normalize much more by region. So that is where we feel that we can have the opportunity to comp low singles.

Brian Tunick, JPMorgan.

Thanks, good morning. I guess one for a Jane just maybe on your thought process of having some wholesale product in Sam's Club for the holiday. Just sort of what is the mindset? Are you going to consider getting bigger in the wholesale channel?

Then maybe for John, on the gross margins can you maybe remind us which weeks last year were most challenging from the weather and sort of what are your gross margin assumptions that you recapture versus those weather-induced markdowns? On the AUC side can you give us a little more color on what kind of benefit maybe you are seeing now and what you are seeing as you book product for the first half of next year?

And just lastly can you explain why the loyalty program is dilutive? I just don't remember offhand. Thanks very much.

Sure. On the thought process as far as the wholesale product, we have been approached for some time about partnering with different people on wholesale. We chose Sam's Club to have our first foray into the wholesale channel and it is a very small test. It is outlet product, it is not Children's Place product, and we feel strongly about that to limit the potential for cannibalization.

Further than that, Brian, I don't really want to talk about it on this call for competitive reasons. I am just going to leave it that we will watch it and we will keep you posted over time.

Brian, this is John. From the weather perspective, we got off to a pretty good start last fourth quarter. The first two weeks of Q4 2011 were really seasonable cold weather and we had a solid start to the quarter. Really from Black Friday through most of December we had really warm weather and we had to promote to clear through cold weather gear.

So baked into our assumptions that we articulated today is a more seasonable winter. It is our expectation that it will be colder this fourth quarter than what we experienced from Black Friday through December last year.

In terms of AUCs, AUCs in aggregate have been down mid-singles in the third and the fourth quarter. Down more in apparel and flattish in shoes and accessories.

We see that trend continuing into spring as we are still anniversarying the high AUCs. That starts to normalize itself, we think, in the back half of next year, but we haven't placed those buys yet. So we are still seeing AUC declines into spring of 2013.

In terms of the dilution around loyalty, loyalty -- we give points to customers upon purchases and we also give points to customers when they sign up to the program. They accrue points and every dollar of sales they earned 5 points; 1,000 points generates a coupon that they can use as currency in our store.

So we are booking expense essentially for those points as they are earned. And so we are having a little bit of a discounting expense in the transaction today and in the incremental sales opportunities in the future when customers earn those loyalty coupons and make that extra trip to the store or add units to their transaction.

John Zolidis, Buckingham Research.

Good morning, a couple of questions. You mentioned that the comps outside of the Northeast were also disrupted. I guess we also had the election and there were other things going on in that may have impacted business trends. When you see that normalize now does that mean kind of flat to slightly positive?

Yes, it is within the guidance, John. So not flat, slightly positive.

Okay, great. Then my second question is on the SG&A in the quarter. Using your previous guidance for a 60 to 80 bps of deleverage and it came in only a little bit -- it is roughly $3.5 million lower expenses versus what was implied. Just wondering if you could kind of walk through some of the big buckets where you were able to take some costs out, thanks.

Sure, this is John. On the SG&A, John, we made a real prescriptive effort to reduce expenses in our stores. We did -- in management we did some work on store expenses that we talked about at the beginning of this year. Some of the work that we did in rationalizing our store management teams and reducing fixed expense in our store payroll came to fruition in the third quarter.

We also managed -- just up and down the store lines we managed expenses effectively. We also were able to manage administrative expenses, professional fees. Some corporate payroll savings were also embedded in our third-quarter results.

Then from a fourth quarter, the change in terms of our guidance for the fourth quarter is really tightening up our expectations for expense management in our retail operations and then making sure that every dollar of marketing expense is judiciously spent in the fourth quarter.

Marni Shapiro, The Retail Tracker.

Congratulations on a great quarter and best of luck for holiday, if I don't remember to say that. Could you talk a little bit about the marketing efforts? You have had some changes in the marketing area. I'm curious as we think about holiday, beyond just promotions and in-store promotions, what you guys are thinking about marketing for the rest of this year and then heading into 2013.

Sure. I think when you look back on the third quarter I think we had a really strong marketing program around back-to-school and we had outstanding back-to-school sales in the big kids division. We are really proud of the team and really proud of what we were able to accomplish in that August through beginning of September period.

I think our focus on external marketing, as well as our in-store visual really paid off for us. As we go forward into the fourth quarter, we have e-mail -- e-commerce site and our e-mail efforts are big. We have been walking down direct mail. But I think when you talk about this loyalty program we are really thinking of this as the cornerstone going forward of our marketing efforts.

There is a lot of opportunity for us to this loyalty program to increase share of wallet. There is a lot of opportunity for us to increase transactions and to increase ADS through more visits from our most loyal customers.

I think the fact that we have had this loyalty program up and running for five weeks or so and we have 3.3 million of our customers on our loyalty program and some of the feedback we are getting from the stores is very positive.

Also, I think a big benefit from our loyalty program; we have talked a couple of times before about our push to get our customers to be multichannel versus single channel shoppers. We have a very low percentage of our shoppers that are multichannel and those that are spend three times more than single channel shoppers.

The way that this loyalty program works is that the customer has to manage their loyalty account on the website. So we feel good about the fact that we can make some incremental progress on transforming some of these single channel shoppers into multichannel shoppers over time. Thank you.

Anna Andreeva, FBR Capital Markets.

Great, thanks so much. Good morning, everyone. On gross margins in this third quarter I was hoping you guys could comment how gross margins were running through Columbus Day, kind of similar to the comments you made on sales. I am starting to understand, did the miss come in the last few weeks of October with obviously warmer weather and promotional activity spiking a little bit?

Also not sure if I missed that, but did you quantify within merchandise margins while was AC benefit versus higher markdowns? And, Jane, I was hoping you could remind us how big is the baby business for you guys versus big. Just trying to understand what were comps baby versus big, just how big of a drag was the baby business during the quarter?

The baby business is about 30% of the total and it was a significant drag on the quarter. If you look at the big businesses by channel we were up million singles in Place in the big business. We were up high singles in outlet, we were up high-teens in e-commerce, and we were up between mid to high singles in Canada.

So we had outstanding performance in the big businesses and the baby businesses held their own in the month of August. Usually we don't provide this color by channel by month, but through August the baby business was hanging in there. Then really with the delivery in September, with the holiday dressy delivery is really where we started to see the drag on baby through the rest of the quarter.

In terms of margins, margins were impacted. We deleveraged our fixed cost on the 1% comp and we were running a 3% comp through Columbus Day, so we were impacted negatively from that standpoint from Columbus Day through the end of the quarter.

From a margin perspective, baby didn't resonate. Baby set in mid-September and we worked hard to move that inventory in October, so it had an impact on our merchandise margins in October.

From an AUC markdown perspective, AUC was definitely a benefit and we did have higher markdowns than our expectations. And so that was a little bit of an impact to our merchandise margin. Again, we had to take action to clear through that dressy product that did resonate.

Margaret Whitfield, Sterne, Agee.

Good morning. Given what is going on in baby, Jane, what are your plans for next year? Will you be shrinking the baby business as a percent of total?

I wonder if you could provide more color on the competitive environment that you discussed. It seems like it is much worse in baby than in big. And if you could give us some color on boy versus girl in quarter three, accessories and footwear, that would be great. Thank you.

Sure. As far as shrinking baby, we are not looking to necessarily make a big move to shrink our baby percent to total. It is still 30% of our business and it is an important business.

I think when you look at what happened in third quarter I think that lot of our problem was in the merchandise. We delivered too much dressy, we went after too big of a percentage of the receipts with the September holiday delivery and it did not resonate with the customer.

I think next year when you think about baby the change will be in trading out those dressy receipts into a much smaller capsule delivery and putting the receipts behind classifications that did resonate in baby -- the key item knits, the micro-fleece, the denim -- those types of things. So I think that is what you will see from us next holiday.

From a competitive environment, the baby environment is more competitive and we believe is getting more competitive each quarter. I think that there is shrinking customer base there and there is much more of a focus right now on AUR and on sharp price points in the baby division versus the big division.

I think the way that we are thinking about combating that is as we go into fourth quarter we are already item driven in the fourth quarter. As we mentioned before, we don't really have a presence of dressy or much fashion to speak of in the fourth quarter. So I think that is going to help us sequentially improve certainly from where we were in third quarter.

To answer the question about girl versus boy, both genders had difficulty with dressy. In girl it was particularly in the dresses and the sweaters in baby where we had tough performance. And in boy in a lot of the woven bottoms that were more holiday driven, meaning embroidered, and some of the woven tops that go back with it and some of the embroidered holiday sweaters which really speak to kind of one end use project where we really struggled. So both divisions were difficult.

[Jay Saul], Morgan Stanley.

Good morning. Just want to take a step back for a second. Looking out to 2013, without giving explicit guidance, can you just talk about what some of the margin drivers could be to improve gross margin and SG&A? And at the same time, if there are any headwinds that you see looking out into next year for both lines?

Sure, this is John. For 2013 in terms of gross margin opportunity, certainly the average unit cost headwinds that we faced in the first half of 2012 should be a benefit or will be a benefit to us in the first half of 2013.

Our gross margin was 220 basis points behind LY at the end of six months in 2012 and that was really by the AUC headwinds that we faced. So we think there is opportunity from a margin perspective.

We also see opportunity as our outlet business -- the transformation in our outlet business has continued to stay on track. We had a positive 5% comp in the quarter which was better than our expectations. We feel really encouraged by how customers are responding to the made for outlet assortments and how that business is improving both on the sales line and from a margin perspective.

So those are opportunities for us in 2013. We think that there is also opportunity in our e-commerce business to continue to grow that business. That business has been growing at double digits for a long time.

We are very, very focused on improving our execution, investing in our capabilities to provide cross-channel experiences for our customers, so we think that can be really an opportunity to grow in 2013. And from a SG&A perspective, we have taken some actions in 2012 to rationalize our cost structure, both in our DC, our supply chain business, which is in our cost of goods, but also in our SG&A and in our stores.

We have expectations that we can continue to manage expenses efficiently and leverage over time. Maybe not in 2013, but certainly over time we expect to leverage SG&A. So those would be the opportunities we see for fiscal 2013.

Lead Giordano, Imperial Capital.

Thank you. Good morning. Can you talk some more about the international business and the opportunity you see there? Then also how long do you think that gross margin will be pressured by the international ramp up? Thanks.

The international business, as Jane mentioned, we had eight stores open at the end of the third quarter. We expect to have 20 stores open by the end of the fourth quarter. That business has been accretive to operating margin in the third quarter.

In terms of being dilutive to gross margin, the business is not very much SG&A expense. The economics of that business is really we partner with franchise partners, we sell inventory at a cost plus. We generate a royalty on sales. And so from a margin rate perspective it will be dilutive as it grows, but from an operating margin perspective it drops.

We really have very little SG&A. We already own the SG&A expense to manage in those relationships, so it is accretive on operating margin. And as it gets bigger we will continue to articulate the impact to international.

In terms of opportunities beyond the Middle East, we are not really ready to speak beyond that, but we are certainly investigating opportunities in other regions. We are really taking a very measured approach to understanding how to do business overseas with a partner.

John Morris, Bank of Montreal.

Thanks, good morning. Jane, I know we have talked an awful lot about the storm, a little bit of a nuance here. The higher promotional activity that you saw resulting from the storm, I get the sense that it is not just the Northeast where you are seeing that.

I am wondering if that is happening more broadly geographically. And if so, why is it abating already? If not, when do you see it abating? Obviously, you have captured a lot of the anticipation of this in your guidance but I'm just trying to understand what that would look like in December and January.

Then it sounds like -- on a positive note, it sounds like back-to-school had worked really well. I know you touched a little bit about the marketing drivers that worked for you there. Given that it is such kind of a competitive piece at the beginning of the quarter, what was it that was working really well for you guys from a product perspective? What were the key drivers and did you handle pricing any differently?

Sure. I think as far as the promotional environment is concerned, unfortunately, the Northeast region is very important region to us in the fourth quarter and a little bit over indexes in the fourth quarter due to the cold weather components of the business. So we own a lot of inventory in the Northeast as we prepare to get ready for Black Friday and for the Christmas period.

So having that level of receipts in the Northeast certainly is going to impact us a little bit more than it might have on another time of the year. We are also more promotional now than we were last year in an effort to drive through these goods that have backed up, based on the weakness in the business in the first two weeks of November in an effort to drive through these goods at the highest margin we can drive through them at.

So we are really looking to try to move through them through the balance of November and into December leading up to Christmas so that we don't face a liquidation situation in January that would be more erosion in our margin. That is really where we are coming at. We just do not think that it would be prudent to not recognize that there is going to be much more AUR pressure throughout the quarter based on what happened to us for the first two weeks.

As far as back-to-school is concerned, we had outstanding performance in the big divisions from the beginning of August through the end of the Labor Day period. There really wasn't anything that I can speak to that didn't work for us.

We had outstanding tax-free performance. We had outstanding performance by region. All channels worked for us during back to school, heavily driven by the big businesses. We have put a lot of receipts behind the big businesses for back-to-school in the key classifications. Every one of those key classifications worked for us so it really was a terrific six weeks that we had.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone. Can you touch a little bit on, as you think about fashion and basic product with the increased promotional environment, how are you positioning fashion versus basic in boy and girl and in the different channels go forward? And how do you think about the pricing difference? Thank you.

Well, there is a couple of answers to that. I think when you look at girl versus boy we certainly have a higher percentage of fashion in girl versus boy just based on the nature of the business. As I think about the business going forward into 2013 and work with Natalie and Michael on how to position it, we feel very good about what we are seeing in the big areas.

We feel that we have made significant strides in the last two years in those areas in balancing fashion versus basic. The customer is certainly, I think, agreeing with us and that product has resonated.

I think basically, in a nutshell, what we did for third quarter is we just took it a step too far and we took the acceptance that we are seeing to the fashion in the big zones and we applied it to the baby zone. And it didn't work. It didn't resonate and that is not really what that customer is looking for.

So as we go forward into 2013 in the baby zone we really will not taken any different tact at this point in the big zone because it is working so well for us. In the baby zone, and particularly on the girls side where there is more fashion, we will be very judicious in the amount of receipts we dedicate to fashion. And we will be very careful on the basic and the seasonal basic side, on the AUC side, and on the out-the-door price that we are very, very competitive on those key items.

That is what we are seeing out in the market. When you go to department stores, when you go to the other mall-based competition, there are major key item statements in baby $5, $6, $7. And, as I had mentioned, it is getting more and more promotional.

So we need to be able to compete in that environment. That is really the DNA of this brand, sharp value-priced goods. It is certainly somewhere where we are very capable of competing, so I think we just need to pull back our appetite in fashion in the baby zones and get much more focused on basics and seasonal basics.

Susan Anderson, Citi.

Good morning. Can you talk a little bit about where you are with the made-for-outlet product benefit? I think last quarter you had gained about 500 basis points in margins, so maybe where you are at now and where you expect that to go through 2013.

Then just one more question on the promotional front. Is there -- it sounds like it is definitely across the board, but are there any certain categories or products that are heavier on inventory, such as outerwear, versus other categories?

Well, first, on the outlet question, we are 350 basis points behind Place. We were 1,000 when we started this journey on outlet, so I think when you look through the end of 2013 we are looking to get closer to parity. So I think we are making good strides there.

As far as the promotional environment, there isn't a classification that I can point to that says that we own too much of. It is just when you look at the product across the board the drop that we had in the first two weeks of November we need to move through that product. And what we are really trying to focus on is moving through that product between now and Christmas and not have to move through it in the month of January. So there is not a certain clog that I can point to by classification.

This concludes our Q&A session. I will turn the program back to Jane Singer for closing remarks.

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

This concludes today's program. Have a great day. You may disconnect at this time.