Children's Place Inc (PLCE) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to The Children's Place fourth-quarter and fiscal year 2013 conference call. At this time, all participants are in a listen-only mode. Later you have the opportunity to ask questions during the question-and-answer session. (Operator Instructions). Please note this call is being recorded and I will be standing by should you need any assistance.

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

Thank you, Zach. Thank you for joining us this morning. With me here today are Jane Elfers, President and Chief Executive Officer, and Mike Scarpa, Chief Operating Officer and Chief Financial Officer.

We issued a press release earlier this morning announcing fourth-quarter and fiscal 2013 financial results. A copy of the release can be found on our website.

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 everyone will have an opportunity to speak.

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

Thank you, Jane. Good morning, everyone. We delivered earnings at the high end of our guidance range for fiscal 2013 despite the highly promotional environment and the series of storms brought on by the polar vortex during Q4. We achieved these results through a combination of superior value, tight expense discipline, strong merchandise offerings that resonated with our customers, and well-controlled inventories.

2013 sales of $1.8 billion were flat compared to 2012 on a constant currency basis and adjusting for the 53rd week last year. Comp sales declined 2.8% compared to a 1.6% increase in 2012. Adjusted EPS increased to $3.26, near the top end of our guidance range. We generated $173 million in operating cash and returned $66 million to shareholders in 2013.

We are expanding our capital return program in 2014 with the initiation of our first-ever quarterly dividend. And our Board has authorized an additional $100 million share repurchase program.

Today we also announced we are changing our name from The Children's Place Retail Stores, Inc. to The Children's Place, Inc. Our business model today is markedly different from when I arrived in January of 2010 and The Children's Place, Inc. more accurately reflects our strategic positioning as a leading global children's brand.

For example, we didn't have any international stores outside of North America in 2010. At the end of 2013, we had 35 international stores and we expect to double that number to 65 to 70 by the end of 2014. We are also in talks with several new partners for planned 2015 openings. We didn't have a wholesale business in 2010. We began working with one major club customer in 2012, a major off-price retailer in 2013, and we are adding several new customers in 2014.

Online sales have doubled from 7% to 14% of total sales and the woefully inadequate legacy systems we inherited are being replaced this year by an ERP system which will set the foundation for sales and margin upside over time through state-of-the-art inventory management and omnichannel capabilities.

Before moving on I would like to comment on current business. The first five weeks of this year have been very difficult as we faced numerous storms and prolonged periods of below-freezing temperatures. Our traffic and sales have been significantly impacted and we are running a negative 6% comp quarter to date. We are approaching the rest of the quarter very cautiously without visibility into a sustained warming trend and the generally tough macro and promotional environment. For Q2 through Q4, we are projecting an improvement in the run rate of the business as weather patterns begin to normalize.

Now I would like to highlight the progress we achieved on our strategic initiatives in 2013. Overlaying all our strategic initiatives is talent; having the right team in place is critical to our long-term success and the Company has assembled a strong, experienced senior leadership team.

Our key growth strategies haven't changed. They are product, transforming our business through technology, channel expansion, and optimizing our North American fleet. And the foundation that supports our key growth strategies is operational excellence.

Starting with product, product is and will always be our number one priority. Over the past few years we have developed a superior assortment of value merchandise tailored for children from newborn to 10 years of age and I want to give you some insight into our merchandise positioning as we move into 2014 and beyond.

When I started here in 2010, we studied the current state of the business at The Children's Place, the competitive landscape, and the statistics surrounding the precipitous drop in birth rates beginning with the 2008 recession. We then made the strategic decision to focus on the big kid and accessory business and we did this for a couple of reasons.

First and foremost, the peak year for US births was in 2007 and with these kids turning five in 2012, we only had two years to get big kids right. It was clear back then that we were losing kids at the top end of our size range due to product that did not resonate with the older kids or with their mom. We knew we had to reverse that trend quickly and focus on designing in merchandising products that appealed to bigger kids through modernizing the assortment in apparel and at the same time develop an accessory business that would also appeal to this age range.

The team has done a good job in our big kids offerings in the past few years and the business clearly shows it.

Now with birthrates expected to modestly improve in 2013 and to start to move incrementally upward in 2014 and beyond, we need to make sure we are getting our fair share of the newborn and baby business. To this end, we have been focusing on further differentiating our newborn and baby businesses by making significant changes in artwork and silhouettes and upping the percentage of sleepwear, playwear, and sets in our newborn baby assortment. It is early in the process but for Q4 we posted the highest positive comp in newborns in 5 1/2 years.

Newborn is continuing to comp positive quarter to date and with our new March floor set, we are eager to see our progress through the first half of the year. Our goal is to make the same level of progress in our newborn and baby assortments that we did in our big kids and accessory offering.

Outlets; we have fully implemented our outlet strategy. 80% of our outlet merchandise is now made exclusively for our outlet channel. The merchandise margin gap with Place stores narrowed to approximately 280 basis points in fiscal 2013 from a 400 point spread a year ago and we were encouraged to see continued improvement during February.

Canada; we saw improve results during Q2 and Q3, which is encouraging, however, Canada was also hit hard by inclement weather in Q4, which negatively impacted their sales results for the year. We are being very cautious in Canada as there are currently no regional offsets to the severe weather they are experiencing.

Transforming our business through technology systems; working with legacy systems that are woefully out of date is one of the biggest challenges at The Children's Place, but at the same time, it's one of our biggest opportunities going forward. We have and will continue to invest significant resources to harness this upside potential.

The next major milestone is the completion of our ERP implementation. We remain on schedule to complete this implementation in Q2 of 2014, with the rollout of our core merchandising and pricing module. We are also launching a vendor portal this year to provide the necessary support for our global sourcing, logistics, and distribution initiatives.

These key implementations set the foundation to enable us to significantly improve sales and margins through inventory management and omnichannel capabilities as well as to more rapidly expand our international and wholesale businesses.

E-commerce; online sales reached $246 million in 2013 and now account for 14% of total sales. Over the past seven years, e-commerce sales have increased at a compound annual growth rate of almost 30%. We upgraded our US platform in February and we now have one global e-commerce site. At the same time, we also launched a new mobile optimized site and new mobile apps.

Our new digital experience helps our customers find what they are looking for faster, allows him to complete shopping transactions in less time, and enables them to redeem loyalty rewards seamlessly across channels. Navigation is now more intuitive. The product presentation is cleaner, with bigger images. Customers can view products and add them to their cart in fewer steps. And a new dynamic store locator makes it easier to find the nearest store.

We launched our first-ever loyalty program, called myPLACE Rewards, in Q4 2011. We had 6.7 million members enrolled in the program at the end of 2013. Compared to nonmembers, they spent 2.5 times more annually, have doubled the number of transactions, and account for two-thirds of our sales.

We strengthened our internal CRM and digital teams in 2013 and going forward we are now focused on strategic segmentation with the goal of delivering targeted personalized communications to our customers.

And operational excellence; we are in the process of optimizing our global supply chain. We have strengthened the capabilities of our sourcing team to better support our overseas apparel vendors in real time and we are working with an experienced agent to source footwear and accessories. We continue to make progress with respect to country migration and vendor consolidation. And finally in logistics and distribution, we are focused on realizing incremental improvements in reliability, cost, and speed.

Now I will turn it over to Mike to review the financials.

Thank you, Jane. Good morning, everyone. We are pleased with our overall performance in the fourth quarter, achieving adjusted earnings per share of $0.96. In doing so, we managed our ending inventory slightly better than planned, incurring deeper promotions which had an impact on both our topline and gross margin during the quarter. We made up for that shortfall by effectively managing our SG&A.

Details for the fourth quarter are as follows, net sales were $467 million. Comparisons to Q4 2012 were negatively impacted by foreign exchange and the 53rd week in fiscal 2012. On a constant currency basis and comparing similar weeks, net sales decreased 1.8% in 4Q 2013.

Comparable retail sales declined 4.3% compared to a positive 4.9% comp last year, which was our most difficult compared to last year. We anticipated traffic would be weak in the quarter, which would pressure AURs, [ADS], and transactions and the season played out the way we had predicted. However, the multiple number of severe storms and unseasonably cold weather in January put more pressure on our topline, resulting in a miss to our comp guidance.

The negative 4.3 comp for the quarter was primarily attributable to a 3.2% decline in transactions due to lower traffic partially offset by higher conversions. Average transaction value declined 1.1% with AURs declining high single digits being partially offset by higher units per transaction.

US comp sales declined 3.8% in Q4. Transactions were down 2.4% and average transaction value was down 1.3%. Canada comp sales declined 8%, which was entirely due to a decline in transactions. Average transaction value was flat. E-commerce accounted for 14.5% of net sales in the quarter compared to 12.7% last year.

Adjusted gross margin rate deleveraged 150 basis points to 35.5% of sales for the quarter due to deleverage on the lower sales base and higher promotions. Adjusted SG&A declined $17 million to 25.4% of sales, a decrease of 130 basis points driven primarily by a reduction in store and administrative payroll as well as costs associated with the 53rd week last year. We are pleased with the progress we made on our expense structure during 2013 and this remains a focus as we move into 2014.

Adjusted operating income deleveraged 10 basis points to 6.7% of sales. Adjusted net income per diluted share was $0.96 compared to $1.02 last year. The comparison to Q4 2012 was negatively impacted by $0.02 due to foreign exchange and $0.04 due to the 53rd week in 2012. These were offset by our share buyback program, which positively impacted the quarter by $0.06.

Moving on to the balance sheet, our cash and short-term investments at the end of the year were $236 million compared to $209 million last year. During 2013, the Company generated $173 million in operating cash flow while investing $73 million in CapEx and repurchasing $66 million in stock.

Our overall inventory was in excellent condition as we entered the first quarter. Balance sheet inventory at the end of the year increased $55 million or 21%. We had guided to a mid-20% increase at year-end primarily due to increased in-transits as a result of the earlier timing of Chinese New Year and caution around potential shipping disruptions in places like Bangladesh and Cambodia. Our carryover inventory is down 36% compared to last year.

Now I will provide a progress update on two key strategic and operational initiatives. One, optimizing our North American fleet, and two, driving additional growth and profitability through our international and wholesale distribution channels.

Fleet optimization; we continue to closely monitor the performance of each of our stores and have just concluded our year-end fleet review. As a result of that review, we now plan to close approximately 125 underperforming stores through 2016, which includes the 41 stores we closed in 2013. We booked a charge of $9.4 million in the quarter related to the initial impairment and closure expenses in connection with the underperforming stores.

We are encouraged from a review of customer data from a subset of stores we closed in Q4 2012 that we are able to affect customer migration to nearby stores into our e-commerce business. We will continue to monitor the results as more stores close and our stronger marketing programs kick in and we will update you on our findings in the ensuing quarters.

For your modeling purposes, we ended the quarter with 1107 stores and square footage of 5.21 million, a decrease of 0.8%. In 2014, we plan to open approximately 35 stores and close 30 for a net of five additional stores. Square footage is expected to remain comparable to 2013.

Additional channels of distribution; two major strategic planks for future growth are our international and wholesale businesses. On the international front, we had 35 franchised stores in the Middle East at the end of 2013. We recently announced that we have expanded our agreement with our Saudi Arabia partner to open stores in Egypt and the CIS region in 2014. We are also expanding into Israel this year with 12 stores planned for the first half of 2014.

We are very pleased with our franchised operations and expect to have approximately 65 to 70 stores in the Middle East, Israel, Egypt, and the CIS region by the end of fiscal 2014. Furthermore, we are currently in talks to expand into additional new markets potentially as early as the first quarter of 2015.

Wholesale; initial reads from our two US wholesale partners have been strong and we will be expanding distribution into Canada in 2014 with one of them. We have already added two new customers for 2014. We are in talks with other potential customers to further expand our wholesale distribution this year. Over time we expect both the international and wholesale businesses to become meaningful contributors to operating margin.

Now I would like to move on to our guidance. Weather has been a major drag on our February and early March business. The frequent storms and severe cold weather have had an impact on our traffic. Quarter to date, store traffic was down 10% with our consolidated comp down 6% and merch margins down 150 basis points.

We believe sales will improve when more seasonable weather arrives and expect to end the quarter with comps in the range of negative 2% to negative 4%. As a result, we project first-quarter adjusted net income per diluted share will be in the range of $0.58 to $0.66 compared to $0.83 in the first quarter of 2013. We expect to deleverage gross margins by 190 to 220 basis points due to our negative comp and our expectation that the promotional environment will remain unchanged.

We expect SG&A dollar spending will be down slightly as continued SG&A efficiencies are offset by startup costs for our SAP system primarily related to training and cutover activities. We expect inventory to be up low 20s at the end of the first quarter. We are accelerating shipments of transitional receipts ahead of the cutover date for our ERP implementation, which is occurring at the beginning of Q2. This will result in significantly more inventory in transit at the end of the first quarter.

We project fiscal 2014 adjusted net income per diluted share to be between $2.85 and $3.05, with comps in the range of flat to negative 1%. We expect gross margin to be down 90 to 140 basis points and we expect SG&A to leverage 30 to 50 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 which is expected to negatively impact adjusted net income per diluted share by approximately $0.03 in the first quarter and $0.12 for the year.

Additional guidance for 2014 is that we expect depreciation to be up slightly year-over-year. We expect our tax rate to be approximately 33.5% for the quarter and the year, and we expect another strong year of strong cash from operations in 2014. As such, we are expanding our capital return program with the initiation of a quarterly dividend and a new $100 million share repurchase authorization. Also we are planning to invest $80 million to $85 million in capital expenditures during the year. Over the past five years, we have returned over $400 million of capital back to shareholders in the form of share buyback.

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

(Operator Instructions). Betty Chen, Mizuho Securities.

Thank you. Good morning, everyone. Congrats on a great quarter in a tough environment.

Jane, I was wondering if you can talk a little bit about the baby business. It definitely sounds like the team has made tremendous inroads with some of the results already in the fourth quarter. Where do you expect the business to be size wise relative to the total Company sales over time? Remind us where it was in 2013, if you could.

And then my second question is regarding the weather variability. It certainly makes a lot of sense given the fleet exposure especially in the East and the Midwest. Could you share with us if perhaps you are seeing some differences in performance on the West where the weather is a little bit more cooperative? Thanks.

Sure, on the baby business, the way that I am thinking about it and the team is thinking about it right now is really the toddler size and the newborn size. And during the fourth quarter we saw as I mentioned on the prepared remarks, our best positive comp that we've seen in 5 1/2 years. What we've done in the newborn part of the business, which we really think about as 0 to 24 months is we have invested significantly in the sleepwear pieces of the business and cut way back on the fashion elements of the business. That is clearly working for us and I think it really speaks more to what that customer is looking for. So you will see through the balance of 2014 in newborn you will see us continue to put more receipts behind sleepwear and playwear and you will see us as we move towards the back half of the year, move more toward the sets business versus the separates business. By sets I mean two and three-piece sets versus single pieces of sportswear, if you will. That's newborn.

On the baby side of the business, baby has really lagged the Company over the last few years. We have spent a tremendous amount of time, an inordinate amount of time trying to fix big kids and to put an accessory business into a company where there really wasn't an accessory business when we came. I think the team has done a really good job on both those areas and both those categories and I think we understand the formula in big kids right now and we've seen good progress on that in the last few years.

In baby, I think that we have ceded a lot of business in baby over the last few years as we have been focused on bigs, so if you look at the new March floor set which is coming on now, I think you'll start to see what we hope is the beginning of the turnaround of that product. It's a lot more differentiated than it has been. It has taken a big step forward as far as I mentioned artwork and silhouette and it's really, really tailored to a much younger customer than it has been and the silhouettes as I said are pretty different.

So we will start to see when the weather breaks hopefully in April and go forward if those pretty big steps that we've put in will start to make a difference. What our hope is is that we can stabilize the business in baby and move it from negative comps to closer to flat comps and then hopefully over time move it into the positive territory.

As far as the other question on weather, we have dramatic differences quarter to date through the first five weeks in weather. We are positive comping in the West Coast and our business in the Southwest and the Southeast is significantly better than it is in the Northeast, the Midwest, the Rockies, and in Canada. The Southwest is doing extremely well with the exception of a couple areas that saw unusual ice storms and the same with the Southwest. There was some icing activity down in the Atlanta, Georgia, North Carolina region, but other than that, they are doing well.

So we are seeing a good response to our spring product where we have the traffic and where we have the customer. And when we were looking at it last week, we have anywhere to a 50-plus point swing between our warm states and our cold states.

So significant disparity based on weather and we still feel that it doesn't look like for the month of March that they are predicting any dramatic change in the weather or looking for a sustained warming trend. So we think that when we start to get that in April and forward, we will see the rest of our regions come in line.

Susan Anderson, FBR Capital Markets.

Good morning. Congrats on a solid fourth quarter in a really tough environment. And I agree it's not warming up anytime soon here in the Northeast. So I guess can you talk about product costs for this year? Are you still expecting them to be flat? How should we think about merch margin I guess probably first quarter and then because it's going to be so different and then the rest of the year also?

Sure, from the cost point of view and then I will turn the merch margin over to Mike, the [RAUCs] are flat in the first half and we have not finished the second half. We're working on that now. There have been significant increases in labor costs but our sourcing team, Greg and his team through his strategies that he put in place about a year and a half ago with country migration and vendor consolidation, we have really been able to mitigate all of those increases through those strategies so we are looking at flat AUCs in the first half.

We're working very hard to make sure that we keep those AUCs as close to flat as possible, as I said, we don't have the final numbers yet but with the AUR pressure this sector is under, it's clearly not an environment where we believe one could successfully attempt to pass on any type of price increase to the consumer.

From a merchandise margin perspective, quarter to date we are basically down 150 basis points. We would expect that to improve over the remainder of the quarter and expect to be settling in somewhere in the 80 to 100 basis points range of a negative merchandise margin. So improvement there and then we would expect improvement overall as we move throughout the rest of the year and are currently looking at probably around the negative 25 to 50 point range in terms of merch margins for the year.

Anna Andreeva, Oppenheimer.

Great, thanks. Good morning. Your guidance for down earnings for the year basically implies almost continuation of the difficult 1Q trends for the rest of the year. Just given the levers that you guys have, I guess we're trying to understand why would that be the case? Are you seeing promotional environment getting worse here just outside of the weather situation? Obviously we had a difficult 2013 and you guys still executed very well.

Just longer-term as we think about the 10% operating margin goal, maybe just remind us what are some of the levers you guys have to get there?

Then finally, I think you mentioned newborn is comping positive quarter to date which is great to see. Talk about the other categories maybe performance to get you to that negative 6% comp. Thanks.

So from a guidance perspective as we look at Q1, we are looking at operating income in the $20 million to $22 million range against a $28 million achievement in 2013, which is a $6 million to $8 million hit in Q1. As we look at the business so far quarter to date, the majority of that hit is behind us at this point. It's happened in the month of February and the first couple days in March so far, so we expect to see that starting to migrate.

For the remainder of the year, quarters 2 to 4, we achieved $82 million in operating income and are expecting somewhere in the $75 million to $80 million range and that includes what is about a $3 million impact on FX. So we are planning the business flat to slightly down in terms of operating income. Obviously as we get better visibility as we move forward, we will in a position to look longer-range but there's still a lot of uncertainty out there given the promotional environment.

To answer the question as to where everyone is -- where the rest of the businesses are Q to date, newborn is certainly the shining star and the rest of the businesses are pretty much kind of trending all at the same place. There's nothing bright spot, nothing worse than anything really else to speak of. Like I said, where we have the weather, the spring response has been good, and where we don't it's been real tough.

Just to talk a little bit about the leverage that we do have to get to a double-digit operating margin, as Jane talked about, we think we have the right team in place that can get us there. We are focused on our strategies. Those strategies have in turn changed long-term, still focused on product and Jane talked to you about all the improvements that we've made and the progress that we've made in that area.

Technology obviously is key in dealing with systems where we don't have markdown optimization, we can't assortment plan, our allocation systems are old, inadequate. Managing a replenish program by basically increasing weeks of supply is a basic. It's not really where we want to be. No omnichannel capabilities today.

So ways to go on that and obviously we are thrilled to have our e-commerce platform now in place and it was a successful launch in the US site. We are looking forward to get our SAP ERP in in the beginning of the second quarter. So we think that that will provide the framework for us to add these capabilities.

Obviously we are thrilled with where international and wholesale are headed. We have shown improvement in 2013. We've added new customers and are adding stores for 2014 and that will continue through 2015. And obviously fleet optimization, we announced today that we are moving our closure list from 110 to 125, which we think is the right thing. We are encouraged from early data in 2012 that we can migrate to customer.

So those are just a few of the things that we have that can add to that double-digit operating margin.

Janet Kloppenberg, JJK Research.

Good morning, everyone. I was wondering if you could talk a little bit about your e-commerce trends in the fourth quarter and in the first quarter and if there's a discernible difference in those trends versus the store comps?

I was also wondering about inventory levels in light of sales trends. Will you be making an effort to bring them down even further? And I understand about the in-transit adjustment.

And for Canada, it's been troubled for a while. I'm wondering what's going on with pricing pressure in Canada and how you are thinking about the margins there, which at one point were premium to the Company average but I think now have been pressured quite a bit.

And lastly, Mike, on gross margins, is there a big insourcing advantage to gross margins -- sourcing-based advantage to gross margin here offset by an outlook for increased promotional activity versus last year? Thank you.

On the e-commerce front, we certainly had a great quarter in e-commerce. We continue to deliver outsized results and quarter to date e-commerce is also out trending the other channels. We feel very good as Mike said about the new platform. When you look at what we are able to do on the new platform, really at the end of the day we think we have a big opportunity to increase conversion because of the new attributes that we put on there.

So we will keep you posted as we move into second and third quarter but we have a tremendous amount of traffic coming through our regular site as well as our mobile optimized site and we believe that with these upgrades we've made to the platform and to the navigation and to the other things we talked about on the call that we have a significant opportunity to get more of that traffic converted into sales.

From an inventory point of view, we feel very strongly that we are in great shape on our inventory. We are extremely clean on clearance. We liquidated what we needed to do in the month of January and we are entering the new season very clean. We were able to do some things in last quarter, as Mike had said, to bring goods ahead for Chinese New Year and with the disruption overseas in some of the markets that we deal with.

We were happy we were able to do that and now are being very careful as well going into second quarter with the SAP cutover to make sure that we have merchandise in place in advance of that cutover. So I think we've got a pretty good track record at this Company of inventory management, particularly in light of the fact that we don't have the tools that most other retailers of our size have to manage inventory through allocation assortment planning, replenishment, and so on and so forth. So as we said, the team has done a good job there.

From a just an overall gross margin perspective, as Jane said, we see that our costs in the first half of the year are relatively flat and we are currently working on the second half of the year, so that would kind of indicate that it's really the promotional aspect that's driving merchandise margins down.

Adrienne Tennant, Janney Capital.

Good morning. My question, the first one is kind of housekeeping. I was wondering of the stores, the 1107 at the end of the year, can you give us a breakdown US and Canada outlet? And given that you are increasing the number of closures, what's the ideal footprint for each of those divisions?

I'm not sure if I missed this but did you actually give any quantification of back half inventory or deliveries or receipts, however you want to talk about it, flat to down in terms of dollars?

Then finally, Jane, can you talk about the wholesale business? What opportunities are you seeing there in the early stages? If you can give us any more color, I think at one point, Mike, you had said that the wholesale margins are accretive to the overall business so if can get any more color on that, that would be wonderful. Thank you.

From a fleet perspective, we are looking at US right now which is about 974 stores and Canada is at 133. Square footage breaks up 4.574 million for US and 635,000 for Canada. We are looking from an inventory perspective; we're not giving guidance for the full year at this point because there's been certain things that have come up like accelerating shipments at the end of Q1 to ensure that we have goods on the water as we cut out our turnover. So we will continue to give quarter-by-quarter guidance and we will keep you updated.

But as Jane said, we feel really good about our opening inventory in terms of carryover goods and actually expect what is currently about a third down in overall inventory levels on carryover to approach 50% as we exit Q1.

From a wholesale perspective, we are thrilled with the wholesale progress we've made. Obviously we need to get both the international and wholesale businesses up to critical mass and that's a wave off but feel good with the progress we are making so far and both international and wholesale are accretive to our overall operating margins.

Dorothy Lakner, Topeka Capital.

Thanks, good morning, everyone. I just wondered, you've done a really good job in terms of supply chain, country migration and vendor consolidation. Just wondered where you are on China at this point and where you want to take that exposure to?

Secondly, just wanted to make sure -- SAP, the costs for that are going to be second quarter and not beyond if I'm not mistaken. But correct me if I am wrong on that. And if you could quantify that, that would be great.

Lastly, I wondered if you could just talk a little bit about trends between outlets and mall stores in the quarter. That would be helpful, too. Thank you.

Sure. On China right now we are at about 36% out of China. We were at 38% at the end of last year and Greg and his team have been working on that number to get that down I think over the next few years. We will see that number fall below 30, which is really where we are building it right now.

From an outlet versus a mall store perspective, we have the same issues that you've heard from other retailers in Q4 in outlets with the storms and the slow freezing temperatures, a lot of these outlet vendors are located outside, so we had some pretty big traffic hits in the outlet centers when we were experiencing the storms in Q4 and also into the weeks of this quarter as well.

From an SAP perspective, from a capital perspective, the total project will be in the roughly the $35 million range. We will spend the majority of our capital in Q1 and Q2 this year against that. Obviously we will keep some capital dollars to assist as we implement and refine what we have done from an SAP launch perspective, so there will be continued spending throughout the year from a capital perspective. And then obviously we are seeing some training dollars and cutover expenses in both Q1 and Q2. There will be minor expenses as we end the year in Q3 and Q4.

John Morris, BMO Capital Markets.

Thanks. Good morning, everybody. Back on baby, I guess thanking about newborn and I guess if you want to include toddler, can you just tell us, Jane, are the merchandising margins there above the Company average? And what would that category grow to be a percent of the mix with your new initiatives?

Then I guess maybe for Mike and/or Jane on the outlets, the margin is currently running about 200 basis points below the full-line stores, a nice improvement there. I think you had put out a target of achieving parity in 2014. Are you still on track to do that? Can you talk about the strategy and the main drivers to getting to that goal? Thanks.

Sure. Thanks, John. On the baby and newborn margins, we have struggled in baby and newborn margins I think because of the product offerings over the past few years and having them not resonate. When baby is doing well and the opportunity for margin is higher in baby, baby does run a higher margin than big but inherent in that is making sure that the product does resonate with mom.

So I think there is opportunity to move not only the sales forward in newborn baby but also as we get some traction on both of them to get some margin help there as well.

From an outlet perspective, we've closed what was a 1000-point gap to 280. We were projecting to be at 240 at the end of 2013 but obviously the fourth-quarter margins had an impact. We had guided that we would hope to be at parity by the end of 2014. We made progress in the month of February in our outlet business in terms of margins so it has kind of bucked the trend a little bit in terms of our overall business from a merch margin perspective.

So we continue to see that we will close the gap there in 2014 but given the difficult start on 2014, we will see where we end up and we will continue to update you on that.

John, on the percentages of the business, big right now is about 50% of the business, baby is about 30% of the business. Then accessories and footwear are about 20% of the business. Before we really started our push on big, baby was a bigger percent of the total, not hugely a bigger percent but it was a bigger percent so I think we do have as I said earlier, I think our opportunity is to really stabilize the negative comps in baby and move that business closer toward a (inaudible) comp and I think that's where the opportunity is for us over the next period of time.

Taposh Bari, Goldman Sachs.

This is Chad Sutherland] on for Taposh. Congratulations on a good quarter.

Looking out into 2014, how much flexibility is there in your SG&A? In other words, if the environment remains difficult, are there incremental cuts you can make or how are you thinking about that?

Well we have guided to leverage SG&A for 2014. We feel we've made excellent progress in 2013 in managing SG&A but there is a certain amount of investment that we need to continue to make in the business in order to fully realize where we want to go from an operating margin perspective. So all I can say is we continue to look. We continue to look for refinements. We continue to look at processes and efficiencies and continue to think that we can show progress overall on the SG&A line. But at this point we are not calling out anything that is significant in terms of overall.

Okay, then how are you guys planning promotions in the next year? Obviously the environment is promotional. How are you thinking about the environment for the full year? What's baked into the gross margin guidance?

We are pretty much anticipating that the promotional environment is going to be pretty heightened, particularly with emphasis on this quarter. When you look at where Easter is falling, last year Easter fell on March 31 so even though last year there was a lot of talk out in the marketplace of March being a difficult month because it was also extremely cold, you did have at least in the kids sector a natural catalyst to drive traffic in the month of March, which was Easter. Now you kind of have a double whammy in Q1 because Easter is not until April 21 so there's not a natural catalyst to drive traffic to our stores in the month of March without a sustained weather break.

So we anticipate that once the weather does start to normalize in April, that it will probably be a very promotional environment in the kids space heading into Easter with people running tougher business to the first nine weeks due to the weather. The rest of the calendar, the rest of the guidance pretty much assumes the promotional environment stays pretty intense, which is what we are used to and what we've seen for the last year or so.

Stephanie Wissink, Piper Jaffray.

It's actually Maria Vizuete on for Stephanie. Thanks so much for taking our question. We're just wondering if you can talk a little bit about the mobile based engagement and your loyalty program, maybe how your integrating the mobile strategies, your e-comm and marketing program as well? Thank you.

Sure, I think we are making solid progress on our loyalty program. We have several goals for our loyalty program but I think the two main ones are first and foremost to further engage mom with The Children's Place brand and then secondly, the goal would be to move our customers from single-channel shoppers to multi-channel shoppers. We have about 92% of our customers who are still single-channel shoppers, so the potential here is pretty significant to move some percentage of them over to dual channel.

The multi-channel shopper spends about three times as much as a single-channel shopper and the combination of our loyalty program, which we launched back in the latter half of 2012, that loyalty program requires customers to manage their account online and when you take that and couple it with our newly launched website, our mobile optimized site, and our two new mobile apps, it makes it much easier and faster for mom to navigate and to shop. I think the ability to seamlessly redeem loyalty points across channels is also a big plus for us. So it's a big win and we are encouraged by the potential here. We will keep you posted as we move through it.

Thank you and if I can just squeeze one more in, can you just remind us on the store closures, are they concentrated by mall type or are they primarily off-mall (inaudible)?

They pretty well represent the strategy of our fleet but 80% of the stores that we plan on closing are 2009 and prior openings. Also from a format perspective, approximately 60% are in the older formats of Apple-Maple, and Technicolor.

Jennifer Davis, Buckingham Research.

Good morning, I will add my congratulations on a solid finish to a difficult year. I am going to apologize in advance if this has been asked but, Mike, I was wondering if you could parse out some of the pieces around merchandise margins. Maybe better sourcing, the improvement in outlet margins, I guess offsetting or partially offsetting the promotional environment, which is obviously hurting merchandise margins.

And then was wondering if you could talk a little bit about the structure of wholesale sales. Operating margins are higher but I think gross margins are lower so how should we think about the impact of that going forward? Thanks.

Sure, so we could talk about merchandising margins, which we indicated would be down. We are seeing AUCs at least for the first half being flat. We are working on the second half but we obviously think that our sourcing strategy has added tremendously to our ability to keep AUCS flat this year. The country migration and the vendor consolidation, all the things that we are doing has helped our merchandise margins from a cost perspective.

The promotional environment, you are out in malls every week so you understand what we are facing and obviously with traffic down quarter to date down 10% and AURs under pressure, we are feeling it from an overall merchandise perspective.

From a gross margin perspective, we are also feeling a little bit as our fixed costs are not being leveraged based on the negative comp sales that we are forecasting for Q1 and the sort of flattish comp sales that we are projecting for the remainder of the year. We have made significant investments in supply chain which are adding costs overall to the gross margin and then we have also -- the bigger e-comm gets, the more e-comm freight gets added into that. So those are two things that are also hurting us a little bit on the gross margin line.

From a wholesale perspective, you called it right that gross margins are slightly dilutive and -- but we run a pretty lean operation in wholesale, which means that the overall operating margins are accretive to the business. We use the leverage of the organization in terms of merchandising and sourcing to help generate those stronger operating margins.

Richard Jaffe, Stifel.

Thanks very much, guys. A question about the e-commerce business and its opportunity. You talked about adding categories and broader assortments online. I'm wondering where that stands? How much more is available online than in stores either percentage or customer choices and how you see that business developing over time, over the next year?

Sure, from an e-commerce point of view, when we started this back in 2010 we didn't have any exclusive products on e-commerce. We've put a lot of effort back into that over the past few years and now over a third of the assortment online is exclusive. Right now the e-commerce assortment is still the same categories, if you will, that you find in stores, but you will find exclusive styles and extended sizes.

We think that we have a lot of opportunity with this new website and the ease of navigation and the upgrades that we've made to it to convert a lot more of the traffic that we are getting online and through the mobile optimized site for the balance of the year and beyond.

We also think that the loyalty program working back into the omnichannel capabilities is going to be a big win not only for our e-commerce but also for in-store. And I think also the next kind of frontier on our e-commerce site is to figure out through some of this segmentation and some of the CRM work that we are doing how to further engage mom and how to move from what is kind of a batch and blast mentality that we use now with our e-commerce customer to really understanding what it is they want to see from us and how they want to engage with us. And I think some of the segmentation work that I spoke about in my prepared remarks as we move forward with that in 2014 to really understand what customers respond to -- which customers respond to what, I think that will also inform us, to your point, if there are other categories or opportunities we can move forward with online.

Just one more thought regarding online. Given the competitiveness of the online space and what appears to be the trend toward free shipping, do you see this, the marketplace going to free shipping, free returns? Is this something you guys are anticipating?

You know what, Richard, we see that a lot at the higher end because of the AUR structure. I think when you look at our business and you see what our AURs are and what the shipping costs are, I think that we would be hard-pressed to move to an overall free shipping model. I think we are always going to have some element of a minimum purchase involved there in order for it to work financially for us.

We do continue to add incremental free ship days to the calendar based on competitive pressures, but I think a wholesale move to day in and day out free shipping would be difficult for us at this point.

Brian Tunick, JPMorgan.

Thanks, good morning. I guess, Jane, did you see any major changes from the competitive landscape over this holiday, particularly the big boxes or the off-pricers; a few of the other kids retailers were calling that out. So just wondering if you saw anything there?

And maybe, Mike, I guess two questions for you. Any earnings flow through from the store closings that we should expect this year? And on the systems implementations, any improvements in 2014 that we can look forward to? Thanks very much.

Sure, thank you. Brian, from the competitive landscape point of view, I think to the first couple months of the quarter in Q4 and November and December, I think that we really weren't surprised. We went in with the quarter with guidance that assumed an extremely promotional environment based on what was going on in Q4 and what we anticipated to go on.

I think what we did not anticipate was the last three weeks of January and how severely we would be impacted at least in the KidZone and other zones as well with the storms and with the weather. I think that we did see from the competitive set was an even more heightened promotional cadence in the latter part of January that put a lot of pressure on the sector from an AUR point of view and from a margin point of view.

But when you look at the competitive set right now it really doesn't appear to us that there's inventory issues. It's promotional but overall it appears that inventories seem to be under control and everybody looks pretty clean right now. I think really the question in the KidZone at least is when do we get a sustained break from the weather and start to see the traffic improve?

As we talked about, without a catalyst of an early Easter, we are not anticipating to see that until we get a weather improvement, which will probably be late March, early April. And then as we had said, our guidance pretty much assumes that the KidZone is going to be pretty promotional in the month of April ahead of Easter.

Brian, from a store closure perspective, the stores we closed in 2013 were pretty P&L-neutral for us, so if we see customer migration, we could see some upside. And we've made progress in terms of the stores that we had (technical difficulty) in terms of rent reductions but a lot of that have been offset by the fact that we opened more doors in 2013 than we closed so the occupancy rate is not really flowing through.

From a systems perspective, from an e-commerce perspective, a lot of that goodness is built-in. We've had a good run with e-commerce with double-digit growth over the last seven years and continue to anticipate that as we are in 2014.

As far as SAP, it's pretty early stages as we implement but we are definitely looking at proof of concepts and hopefully some quick wins around that that we can put into place for the second half of the year.

Jay Sole, Morgan Stanley.

Good morning. I have a question. You know, traffic is down 10%. Conversion has clearly become more important in the environment where traffic has been consistently down. Can you talk about the trade-off between finding SG&A efficiencies and perhaps maybe investing more in store employees to try to a conversion, maybe putting more than two employees in the store in some of your smaller stores?

Well, you know, we've been looking at the models and looking at the traffic patterns across and we definitely segregate our stores into volume groups and look at the coverage that's necessary. I think in the past we did have occasions to put additional individuals on the store floor and quite frankly didn't see the payback. And so we went after it in 2013 and we feel good about the productivity levels of the stores.

Interesting. Maybe, Mike, can you talk about the wholesale business? Going forward, how can you manage the wholesale business so it doesn't pose a risk to your own stores?

At this point in time, it's a relatively small business. But we are also using this wholesale business as an opportunity for customer acquisition, which we think is key. This is a different demographic than our current customer and feel that if we can expose our product to more consumers out there, that we have a better chance of them actually crossing our lease line.

Dana Telsey, Telsey Advisors.

Good morning, everyone. Can you talk a little bit about store closures that you've mentioned and before it had been recapture potentially of 20% of those sales. Do you still see that opportunity on the recapture? Then on the wholesale side, what percentage of the business do you think you can get to and how does that impact the margin structure? Thank you.

So, Dana, in my prepared remarks I did make the comments that we saw customer migration. It was from a very small set of closures that we did in the fourth quarter of 2012 but it appeared that the migration of those customers was actually a little greater than the 20% that we had modeled. So we are feeling optimistic about it. We think store closures is the right move for us. But at this point time we are not going to make big bold predictions based on a very small subset of data.

From a wholesale perspective, the jury is still out. We've gotten great response to our product. We are adding new customers. But at this point in time, we are not ready to make a big announcement in terms of what we think that volume could be.

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

Thank you for joining us today. If you have any further questions, please call me at 201-453-6955. Have a good day.

This does conclude today's conference. You may now disconnect have a wonderful day.