Children's Place Inc (PLCE) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to today's The Children's Place second-quarter 2014 conference call. (Operator Instructions). Please note this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the program over to Mr. John Taylor. You may begin.

Thank you, Steve. 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 second-quarter 2014 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, John and good morning, everyone. I will be brief with my prepared remarks as the quarter played out very much in line with what we outlined on the last call. We saw normalized weather patterns in Q2 and the combination of more seasonable weather and pent-up demand from Q1 produced a significant trend reversal, particularly in our Canadian channel.

Starting off with Q2 financials, Q2 sales of $385 million were 1.3% higher versus last year on a constant currency basis and comp sales increased 0.8% for the quarter. US comp sales were relatively flat. Canada comp sales were up 9.5%. Adjusted EPS was negative $0.37, exceeding the top end of our guidance range.

Some key accomplishments during the quarter include we opened five stores in Israel, bringing our total to 15. We ended the quarter with 54 international franchise stores. We remain on track to end 2014 with 75 international franchise stores. As our international business gains momentum in our current markets, we continue to focus on additional market opportunities. Today, we announced a new franchise agreement with Arvind Lifestyle Brands Limited to open stores in India. The first openings are slated for fall 2015. India is a key market for us with the potential to open 50 stores over time.

After successfully migrating to our SAP ERP system, our teams are now focused with our partners on implementing an assortment-planning tool and sophisticated allocation, replenishment and price optimization tool. We remain on track with these projects and continue to target the back half of 2015 for meaningful sales and margin benefits.

As part of our continuing commitment to return excess cash to shareholders, we paid a quarterly dividend and repurchased 301,000 shares, returning a total of $17 million to shareholders in the second quarter. Today, we also announced our third-quarter dividend.

Q2 business trends, we delivered a consistent performance by region as weather was more normalized across the country. As for merchandise performance, our newborn division comped positive low double digits in Q2, the third straight quarter of positive comps as customers continue to respond to our new merchandising initiatives. Accessories was the weak spot with a negative mid-singles comp. The balance of the business was very consistent. Baby was only slightly down in the quarter and big kids and shoes comped positive.

For Q3, the key back-to-school tax-free events were in line with our expectations and we expect the promotional environment to remain highly competitive as we move through the back-to-school selling period and into the balance of Q3. Now I will turn it over to Mike.

Thank you, Jane and good morning, everyone. In the second quarter, we delivered a positive 0.8% comp, above our negative low single-digit guidance. This solid comp performance combined with disciplined expense management enabled us to post a better-than-expected loss per share of $0.37.

Details for the second quarter are as follows. Net sales were $384.6 million. The comparison to the second quarter of 2013 was negatively impacted by foreign exchange of $2.8 million. Comparable retail sales increased 0.8% compared to a negative 0.4% comp last year. The positive 0.8% comp for the quarter was primarily attributable to an increase in transactions and average transaction value as increased units per transactions were somewhat offset by a decline in average unit retails.

US comp sales declined 0.3% in Q2. A strong performance in e-commerce was offset by declines in store sales. Canada comp sales increased 9.5% as pent-up demand drove positive transactions and average transaction values. E-commerce accounted for 15.3% of net sales in the quarter compared to 13.2% last year.

Adjusted gross margin rate for the quarter declined 200 basis points to 31%. The deleverage of fixed expense on a negative store comp accounted for approximately 60% of the decline. Adjusted SG&A declined $6.7 million to $116 million, better than our guidance of a $4 million to $5 million reduction. SG&A was 30.2% of sales, a 190 basis point improvement compared to last year. SG&A expenses were lower in both stores and in corporate. These savings were partially offset by training and cutover costs associated with our SAP systems implementation. We will continue to tightly manage SG&A going forward while balancing this with technology investments consistent with our strategic plan.

We recorded a non-GAAP charge of $4 million in the quarter, the majority of which was related to impairment charges associated with our store rationalization program along with severance costs associated with corporate restructuring. Adjusted operating income leveraged 10 basis points to a negative 3.2% of sales. Adjusted loss per share was $0.37 compared to a loss of $0.42 last year. This comparison to the second quarter of 2013 was negatively impacted by $0.01 due to foreign exchange.

Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $200 million compared to $185 million last year. We ended the second quarter with $27 million on our revolver. During the last 12 months, the Company has generated $123 million in operating cash flow while investing $65 million in CapEx and returning $66 million to our shareholders in the form of stock buyback and dividends. Additionally, today, our Board declared a quarterly dividend for Q3.

Balance sheet inventory at the end of the quarter increased $13 million or 4%, lower than our guidance of 12% as a result of lower-than-planned in-transits and higher-than-anticipated sales. Our carryover inventory at quarter-end is down $7 million compared to last year.

Now I will provide a progress update on three key strategic and operational initiatives -- one, optimizing our North American store fleet; two, driving additional growth and profitability through our international and wholesale distribution channels; and three, our SAP implementation and transformation initiatives.

Fleet optimization. We remain on track to close 125 underperforming stores through 2016, which includes the 41 stores we closed in 2013 along with approximately 35 stores we plan to close in 2014. We have been modeling a 20% sales transfer rate when assessing the potential financial impact of the store optimization program. As we have previously mentioned, when we examined the full-year impact on a group of stores we closed in the fourth quarter of 2012, we achieved a sales transfer rate that was greater than 20%. We have begun to analyze the sales transfer rate of stores we have closed in Q4 of 2013 and when we extrapolate the data, we are seeing the same result, a sales transfer rate in excess of the 20%.

In addition, we've begun the process of customer segmentation and how it relates to our real estate optimization program, including analyzing customer spending patterns at different store formats and the distances our customers travel to stores. In addition, we are analyzing our store base to determine at what rate stores are adding new customers, along with migrating up existing customer spend.

We are very encouraged by the early results on sales transfers we are seeing and the early learnings of our customer segmentation work. We believe this will lead to insights that will better inform our decision-making process and potentially lead to additional opportunities for closures when we evaluate our real estate portfolio.

On the international front, we opened six stores in the second quarter and ended the quarter with 54 international franchise stores. We remain on track to end the year with 75 franchise stores. We have been very pleased with the performance in the Middle East and Israel as customers continue to respond positively to our fashion and head-to-toe outfitting.

In addition, this morning, we announced a new franchise agreement with Arvind Lifestyle Brands Limited to expand into India with our first store opening slated for fall of 2015. We have the potential to open approximately 50 stores in this market over time. In our wholesale business, we added distribution to a new account during the second quarter. We will be distributing to four new accounts during the second half of the year.

SAP implementation and transformation initiatives. Transitioning to SAP in early May was a terrific accomplishment for the Company and we successfully navigated through the second quarter with no major issues. We are now positioned to accelerate our inventory transformation initiatives with SAP at the core. Our focus remains on developing data-driven systems to optimize our assortments both during the preseason planning process and in season as we improve allocation, replenishment and pricing across our diverse network of stores.

Now I would like to move onto our guidance. Our guidance for the third quarter assumes comparable retail sales will be flat to negative low single digits. As a result, we project third-quarter adjusted net income per diluted share will be in the range of $1.74 to $1.82 compared to $1.89 in the third quarter of 2013. We expect to deleverage gross margin by 130 to 160 basis points. We expect SG&A dollar spending will leverage approximately 80 basis points compared to last year as continued SG&A efficiencies are partially offset by investments in our technology roadmap. We expect inventory to be up mid-single digits at the end of the third quarter.

We are updating our fiscal 2014 guidance and expect adjusted net income per diluted share to be between $2.95 and $3.05 with comps in the range of flat to negative 1%. We expect gross margin to be down approximately 160 to 180 basis points and we expect SG&A to leverage approximately 90 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 $0.05 in the third quarter and $0.09 for the year.

Additional guidance for fiscal 2014 is we expect depreciation expense to be flat in the back half of 2014 and down year over year as a result of our year-to-date reductions. We expect our tax rate to be approximately 33% for the year. We entered the third quarter with approximately $74 million remaining on our share repurchase authorization and we expect to continue to return capital to shareholders through both our dividend program, as well as through share repurchase. Our capital expenditures for the year are expected to be between $80 million and $85 million, consistent with our previous guidance. At this point, we will open the call for your questions.

(Operator Instructions). Susan Anderson, FBR Capital Markets.

Good morning. Congratulations on a good quarter in a really tough environment and a positive comp. I was wondering if you could give some more color on the merch margin. I think you said fixed costs were impacted in the quarter by minus 40 bps, but maybe talk about merch margin. Was it AUCs, was it higher promotional levels? And then maybe if you could give some color too on your expectations for merch margins for third quarter and how they are trending so far. Thank you.

So from a merch margin perspective, we said that the deleverage of fixed expenses on the negative store comp accounted for about 60% of the decline or roughly 120 basis points. There was pressure on merch margins, obviously, based on the fact that it's a pretty promotional environment out there. AURs were down in the quarter and that overall impacted the merch margins. Obviously, we are hoping as we move forward with some of our systems implementations that we could see our gross margin rate start to stabilize.

And as far as Q3 margins go, we are looking at deleverage of about 130 to 160 and again, we are looking at fixed expense to leverage on a negative comp along with continued AUR pressure in the third quarter.

Dorothy Lakner, Topeka Capital Markets.

Thanks. Good morning, everyone, and congratulations on the positive comp in such a tough environment. My question would be I guess for Jane, if she could talk about certainly the successes that you are seeing on -- in the merchandise assortments. Clearly, baby has been such a big win after the big improvement in big kids. Where do you think, in addition to just comments on where the biggest successes were, where is the biggest opportunity having done so much to kind of remake the whole assortment?

Hi, Dorothy. As far as the business is concerned with newborn, I think what we are starting to see over these past three quarters is that our newborn strategy is really starting to show traction. The focus has been on essential high-volume core apparel products for babies. We've really gotten after things like bodysuits, sleepwear, playwear and we started to introduce bibs and blankets. Those classifications are all really starting to resonate with our customer, so we are going to continue to get behind those categories in an even bigger way as we move forward into Q3, Q4 and beyond.

The baby business was much improved in the second quarter, as I said in my prepared remarks. It was only slightly down, so that was the strongest that we have seen in the baby businesses in a long time. I think the focus that we've been putting on that product and moving into more sleepwear and more playwear type kind of softer knit options and making sure that the outfitting is matched up is also -- this was really the first quarter that we saw such a strong performance in babies.

So if you think about what our opportunities are for the balance of the year and into the early part of 2015, it's really to continue to keep the newborn and baby business going in the direction it is.

Great, thank you.

Betty Chen, Mizuho Securities.

Good morning, everyone. I would like to add my congratulations as well. I was wondering if you can talk a little bit about the wholesale and international business. Any additional color you can share with us regarding the new distribution to the accounts. Is that accounts that you've already announced and you just started to see distribution or are these new clients to the roster? I think in the past you have talked about some additional IP needed to really address the wholesale opportunity. Can you remind us where we are on that front? And then also in terms of international for both of these segments really, can you remind us regarding the contributions to the overall business in terms of sales or margins? Thank you.

Sure, Betty. From a wholesale perspective, we began the year basically shipping to three main customers. We have added some distribution to a customer in Canada in the second quarter and as I mentioned, we will be adding distribution to four new customers in the second half of this year. I just want to again say that accounts take a while to ramp up. They come in, they test categories, and from their initial order cycle to retail reads, it can be as long as six to eight months. Business is small at this point, but we believe it has a huge potential.

As we look at some of the systems initiatives that we needed to help expand the wholesale business, we were virtually working with manual order processing and purchase order generation, which limits us in terms of developing meaningful relationships with our accounts. So SAP allows us to systematically generate sales and purchase orders and provides the foundation to build EDI capabilities, which is essential for growing a business. So we see that out on the horizon.

From an international perspective, we ended 2012 with two partners and 12 franchise stores. We end this quarter with announcing today another new partner, so five partners and 54 doors and we are on track to be at 75 stores by year-end. So we like the pace of where that's going. From a financial perspective, both the international and wholesale businesses are slightly dilutive to overall gross margin, but are nicely accretive to our operating margin.

Anna Andreeva, Oppenheimer.

Hi, thanks so much. Good morning, guys and congrats on a strong finish to the quarter. Was hoping to follow up on 3Q gross margin guidance. Just curious what's driving that decline. Are you seeing anything in the environment? Obviously, it is promotional out there. Your inventories are in very good shape though and you guys have come in more or less in line on gross margins for the past few quarters. So maybe talk about that and also remind us how big is cotton as a percent of your COGS and with cotton prices at these levels, how should we think about the AUC tailwind for next year? Thanks so much.

Sure, so like I said before, our gross margins are planned in the third quarter to deleverage about 130 to 160 basis points. We are seeing AUR pressure out there, as Jane mentioned and back-to-school has been pretty promotional. We expect to see continued promotional activity as traffic continues to be an issue in the stores. Our sense is also that we have certain fixed expenses and on a negative comp, it's going to cause some deleverage.

From a cotton perspective, we have seen cotton indexes down significantly since the beginning of the year and we think that cotton overall with it declining is good news for us on a long-term basis. Usually there's anywhere from six to nine months of fiber supply in the marketplace at any given time. So that fact along with our buying cycle indicates that we should hopefully begin to see some impact on costs in the second half of 2015. That is given all else being equal. Considerable headwinds are out there around wages and general inflation, so those are things that we have to keep in mind as we try to assess the impact of cotton.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you, good morning. I wanted to follow up on the accessories business and see if there are any specific strategies or inventory plans around trying to turn that business.

Sure, in accessories, what we saw, as we mentioned, that was the weak spot in the quarter. We had negative mid-singles comp. Where we saw the weakness was in hats and sleepwear and that was a product acceptance issue. I think as we moved through the balance of third quarter and fourth quarter, hats -- not meaning cold weather hats, just fashion hats -- is not a big business in the back half of the year, so I don't think we're going to be as hurt there as badly as we were in Q2. I think we've made the adjustments in big kids. When I say sleepwear, I mean the big kids sleepwear. The newborn and the baby sleepwear has been pretty fantastic, but the big kids sleepwear, I think from a product point of view, was just off and we've adjusted that as we get into the important Q4.

The other weaknesses in Q2 in accessories were hair and sunglasses and I think what really exacerbated that was the very weak Q1 with the tough weather and we had a lot of inventory in those categories coming out of Q1, so we really had to drive down the AUR, which hurt the sales in Q2.

Taposh Bari, Goldman Sachs.

Hi, good morning. Two questions for you guys. One is can you talk to the cadence of comp and/or merch margin throughout the quarter? Jane, you mentioned key back-to-school tax-free events in line. Does that mean you are tracking in line with guidance or are you expecting a change from here over the next couple of weeks throughout the rest of the quarter? And then the second question is a gross margin follow-up for Mike. What kind of store comps do you need to get leverage? And if you could remind us the last quarter where you had a positive store comp. Thanks.

Well, just on that fact, in the last quarter, we had an overall positive comp, but our stores actually comped down. We had a significant increase in our e-comm business that was offset by a negative in our store business. So when we look at leveraging fixed expenses, we need to comp low single digits in our store base in order to leverage those fixed expenses.

As far as cadence through the quarter, it was pretty much as we planned. We didn't see any deviation from where we were from a plan perspective and promotions really just were pretty consistent throughout the second quarter.

For Q3, early reads on the tax-free, as I said, have been pretty much in line with where we expected them to be. That is all considered in the guidance we are giving this morning.

Jennifer Davis, Buckingham Research Group.

Let me add my congratulations. A couple of follow-ups. Could you talk about, Mike, a little more about the four new wholesale accounts in the back half? What type of accounts are those? You are in the warehouse clubs and off-pricers now. Are those four new accounts similar or are you entering a kind of different channel?

Then quick question on your cash and the revolver. How much of your cash is trapped overseas and are you doing anything to try to get that back over here? Did you take out on the revolver because of the amount of cash overseas? And then one more actually, Mike. If you want to talk about -- you talked about the transfer rate from closed sales in excess of 20%. Do you want to give us a little more color? How much above 20%? Thanks.

So let's hit the first question first on wholesale before new accounts. We are not in a position to be talking about that at this point in time. So from a competitive perspective, we are going to pass on that question.

As far as cash goes, we ended the quarter with cash and short-term investments at approximately $200 million. Less than 10% of that is US cash. And we really tapped our line due to certain working capital needs that we had really as a result of our inventory flow and the timing of payments. So overall, we are in excellent condition as far as liquidity.

Then from a transfer rate, we looked at the stores we closed in the fourth quarter of 2012, which were roughly 10 stores, and we said it was north of 20%. We're just beginning to look at the fourth-quarter closures of 2013 and we have a little more work to do on it, but we were confident in saying that the rate was above the 20% and at this point, this is all the color that I am providing.

Steph Wissink, Piper Jaffray.

Thank you. Good morning, everyone. I will add my congrats on the nice progress as well. Mike, if you could just help us with the third-quarter guidance on the earnings side. I think you mentioned there was another $0.05 of an impact from foreign currency and also the deleverage on gross margins, but is that any reflection of what you are seeing August to date or is that just a level of conservatism like we've seen the last couple of quarters?

And then also on the fleet rationalization, I think it's so interesting that you are capturing a better level than that 20%. Would you be able to give us some sense of whether that's a capture in other stores or whether that's what you are seeing in your e-commerce business? And if that has you thinking differently about the fleet beyond the 125 closures that you already announced? Thank you.

Okay, so from a third-quarter guidance perspective, we are projecting our comps at flat to down low single digits with pressure on gross margins and we are seeing pressure today and we expect to continue to see pressure. We are seeing retailers out there, our competition, really promoting pretty heavily and it's all a matter of trying to capture that consumer. So we need to have also compelling pricing on our products. Our sense is that 130 to 160 is where we'll end up.

SG&A, we have done a pretty good job on SG&A over the last 18 months. We had a significant reduction last year. We have reduced SG&A close to $14 million in the first half of this year and I again see a leverage point of 80 bps in the third quarter. Then, like you mentioned, we definitely see the $0.05 on the FX. We saw the Canadian dollar strengthen a little bit at the beginning of July and then basically it's back to where it was at $0.91 on US, where it was at the beginning of the year.

From a fleet rationalization perspective, quite frankly, we like the fact now that not only are we measuring Q3 in terms of -- I mean Q4 2013 closures and we are seeing a transfer rate in excess of 20%, but we are also now bringing in some more data as we begin to make decisions around our store portfolio. We are marrying customer segmentation and real estate optimization, looking at spending patterns and the formats, distances that customers will travel to store. We are looking at other KPIs like the amount of stores that our customers shop in, whether they are a multi-store and a multi-channel customer. So all that intelligence is being factored in along with we want to understand specific stores and customer movement within those stores. So we are looking at the rate of customer adds or drop in given locations and we are also looking at the rate of spend per customer and whether that's going up or down. So we believe all of this is going to better inform us as we continue to work on our real estate rationalization program. So I wouldn't be surprised whether you see the 125 number start to move upward.

Adrienne Tennant, Janney Capital.

Good morning, everybody and nice job on the inventory. My question, Jane, is on Canada. A big reversal there. I was wondering if that is -- how much of that is due to normalized weather? You also said that there was improved kind of traction just with regard to the products. So is that -- as we go back into a slightly negative comp, is that expected to turn back negative? Just wondering what the underlying trends were there.

Then for Mike, can you sort of -- I know there are a lot of IT initiatives, supply chain initiatives. Can you kind of remind us of the near, mid and longer-term impacts of each let's say over the next kind of 15 to 18 months? When do those start to materially show up in the financials? Thank you.

Sure. As far as Canada is concerned, if you remember back on the Q1 call, we had an extraordinarily difficult performance in Canada in Q1 and there were no regional offsets like there were in the United States. So we did see quite a nice rebound in Q2 in Canada, but there was a tremendous amount of pent-up demand from that very weak Q1. I think that's what we saw play out during the second quarter. If you think about Canada, the challenges and the headwinds that are up there are still up there. You've got FX as a drag up there and you've got the same cautious consumer and the concerns about the economy as well that you see in the United States.

Having said that, I think we have a good team up there. We have a seasoned team. We are being very careful on continuing to control costs up there and we're going to continue to be very judicious as far as our receipts up there for the foreseeable future. We have a nice marketshare up there. We have got the number one marketshare in the country behind Walmart. We've done a lot on refreshing the stores and as I said, we have a pretty strong executive team up there. So we think there was a lot of that 9.5% comp was due to pent-up demand.

From a systems perspective, obviously, we have been digesting the SAP implementation, which went live in May. So we are just beginning now to look at implementing, planning, allocation, replenishment and pricing tools. We've made some progress in terms of the planning tools and are in the process of really taking a hard look at allocation and beginning that process. Our sense is that we should be able to be in a good point in the second half of 2015 as we begin to layer on these tools that we should start to see some nice margin -- sales and margin upside. Along with that, we have been working on the digital front obviously around customer segmentation, the impact that has on store rationalization, and really looking to do a better job in terms of communicating with our consumer via digital.

John Morris, BMO Capital.

Thanks. Good morning, everybody. Congratulations on a real nice progress for the quarter. Jane, just kind of a question here on the performance by category. Was it different directionally between the US and Canada versus the overall direction that you gave us? Or was that generally similar, if there was any callout there between the two countries in terms of performance? And then thinking ahead to holiday, any particular initiatives that you have planned this year in terms of marketing and/or merchandising as we get to Q4? Thanks.

Sure, as far as performance by category in the second quarter, it was really pretty remarkably consistent across classifications in the United States, as well as Canada. So there really wasn't any major callout. There wasn't anything in Canada that really stood out. It was just strong performance across the board by category. So there's not anything to really report there.

As far as going forward into Q4 from a marketing and merchandising point of view, from a merchandising point of view, I think that we have this opportunity to continue to try to continue to go forward and ahead with the newborn business and hopefully continue to see nice stabilization that we have seen in the baby business. So if we can hold onto that baby business as we did in Q2, we think that's a big opportunity for us.

As far as marketing and promotions, now that we have SAP behind us, we have a much broader array of promotional options than we have ever had before and we plan to utilize these capabilities as we move through the back half of the year. So you will start seeing some very different promotions from us in Q3, the tail end of Q3 into Q4 because -- just purely because we have the ability to do (technical difficulty).

Dana Telsey, TAG.

Hi, good morning, everyone. As you think about the outlet business and the full-line store business, trends in each and is the margin gap narrowing? Then just lastly, as you think about e-commerce and the SAP implementation with more planning and allocation tools, do you see that helping to drive e-commerce down the line? When should we see that and how do you think it changes the growth rates? Thank you.

So from an outlet perspective, again, we saw some difficult traffic in the first half of the year. Comps are down in the second quarter, but that was a big improvement from where we were in the first quarter. We put out some pretty compelling promotions to increase conversion, which helped the overall business. We saw margins contract a little bit in the quarter, but currently they are still positive year on year year to date. At this point, they are still about 280 basis points behind the US Place stores, which has been pretty consistent.

As far as some of the initiatives around the systems, we definitely believe that these tools will help improve inventory management across both our stores channel and our e-comm channel and we would expect to see additional sales and margin opportunities in both channels.

Brian Tunick, JPMorgan.

Thanks, good morning. I guess two questions. One on your second-half guidance, just curious what are you assuming for weather in the holiday this year or any adjustments to the assortment you are making to ease the weather risk? Then maybe, Jane, just thinking about the merchandise margins longer term, what do you think has to happen out there in the competitive landscape to actually see some relief, opportunity for AUR or merchandise margin expansion? Obviously you are putting in your SAP, improving your inventory, but what has to happen in the competitive landscape to start seeing some relief on your merchandise margins? Thanks very much.

Sure, in the second half of the year, what we are certainly hoping in Q4 that we -- weather plays out better for us than it did last year. From a wear-now point of view, I think the big differences that you will see in our assortment for Q4 is that we have placed some of the cold weather categories and some of the outerwear categories a little bit tighter than we had last year to make sure that we don't have inventory carry over into the January and February time period in those classifications that were really sold through on those coming out of the holiday.

I think the other thing that you will see, and it's in our December receipts, I think we've worked hard to make them a little bit more wear-now, a little less sleeveless, a little less short sleeves and we brightened it up in the color palette and certainly brightened it up with new styles and trends. But from a sleeve length and an overall covered-up outlook, I think we've done a better job there.

As far as the competitive landscape, there are a lot of kids competitors out there right now fighting for fewer customers with the decline in birth rates we've seen over the past period time. I think we are starting to see some of the fallout in some of the kids players with some recent announcements on some people starting to get out of the kids business. We certainly saw some people last year do the same.

I think that we are going to continue to be under pressure from an AUC -- I mean an AUR perspective and I think we're going to see that through the back half of the year and into 2015. Hopefully we're going to see birth rates start to stabilize in 2014 and into 2015 and I think for us, and I can only speak for The Children's Place, I think that that's a positive, particularly as we are starting to see this nice turnaround in our newborn and baby business and we take advantage of that.

Marni Shapiro, The Retail Tracker.

Hey, guys, nice quarter and I'm very excited for the back half of the year on some new marketing. Can you just give us a quick update? You've had some new licenses that have been rolling in over the last year like the NBA and the NFL away from the kind of media-driven. Can you give us an update on the success you are having there and if it's working well?

Then also the site over the last several months you continue to update and test things and try things and it has looked really good, particularly things like -- you had that selfie style guide and a couple of other things I thought have been very cute. Is there a way to roll some of that into the stores on a marketing basis or kind of take it to the next level beyond just the site?

From the -- I'll answer the first one about licensed product. We have had NFL, NBA on the site for a while now and we continue to roll that out. We had first started just with T-shirts and then we've been able to add some other categories to that. So that has been productive for us. What has been very strong for us on the licensed front has really been these movie properties and if you remember it really started to take off last year when we had the exclusive arrangement for the Frozen movie with Disney, which was just a huge success for us last holiday. Then we are currently in back-to-school and another nice promotion with our licensed vendors that is doing very well for us. So you will continue to see us partner with those people and with new releases to kind of drive traffic and bring in that excitement to our store. So we feel very good about our partnerships there and what we've seen in the past and how we are positioned to move forward.

Thank you for the comments and noticing what we are doing on the site. I think you will see most of it being tested on the site for the next period of time. We are really going to be focusing on marketing in the stores for the back half of the year is really through more compelling pricing promotions. I think that you can't underestimate the power of the fact that now we have SAP behind us. We had been so handicapped in the past by such limited functionality across channels and certainly in pricing as well that now we are able to really kind of break out and do promotions that other people have been doing for a long time. So I think that's kind of where you will see our marketing changes for the balance of the year.

Janet Kloppenberg, JJK Research.

Good morning, everyone and congratulations on a great second quarter. I apologize, I did get on the call late, so if my questions are redundant, we can handle them off-line. Jane, I was wondering if you could talk a little bit about the denim category. Jean is very promotional and I'm hearing that trends are soft there and being replaced by newer silhouettes and bottoms. I'm wondering what you think about that and how you think denim trends will be in the spring season and going forward.

Mike, I don't know if you addressed the issue of the lower cotton pricing, but I wondered if that would begin to influence your AUCs next spring and how impactful you thought it may be. Thank you.

Sure. On the denim question, denim is definitely softer and there -- it's very, very promotional during the back-to-school period or certainly from the start of the back-to-school period. I think what we are seeing at The Children's Place, which may be a little bit different than what we've seen over the past couple years in the teen space, is that there still is a demand for denim; it's just the pricing is really under pressure. It's not that the bottom has fallen out and that mom doesn't want denim anymore; she just wants it at a very sharp price. So I think as you think about that as we play out the balance of the third quarter and into fourth quarter, there's going to continue to be significant pressure on the AUR in the denim category.

The knit category, the athleisure category, if you will, is certainly coming on strong and has been for the past year or so. So I think the real focus for The Children's Place is going to be on how to think about denim for next back-to-school and where that cycle will have taken the kids market by next back-to-school. We will be able to promote our way out of it in the six months, but the real challenge is going to be to kind of get ahead of next back-to-school and figure out what the offsets are to that category because it is such a big, big category for us.

Janet, I did address the cotton costing issue. Basically to summarize, it's good news for us long term based on the amount of cotton supply that -- cotton fiber supply that is usually in the marketplace in any given time. It is usually between six and nine months. So we're basically looking at potential impact in the second half of 2015, not in spring.

Rick Snyder, Maxim Group LLC.

Thank you. Good morning, everybody. I would like to follow up on Adrienne's question about Canada. Jane, you said the 9.5% was pent-up demand, but it looks to me like the first half comped positively overall, which looks like it's the first positive comp from the great white north since Q4 of 2012. What I would like to hear is what you think the potential is for some margin recapture up there. Thank you.

So we were pleased with the performance of Canada in the second quarter, obviously up 9.5%, which put our year-to-date comps in Canada up a little over 1%. Coming off of last year where we saw a merchandise margin improvement, we actually saw a little decline in the first half of this year. We are getting some nice impact in terms of sales and margin dollars from our e-commerce site, which continues to gain momentum, roughly representing almost 11% of sales in Canada in the quarter. So pretty pleased with that.

We still -- as Jane said before, we see the business still continuing to be difficult. We are controlling what we can control as it pertains to inventory and cost. We have done the right things in terms of stores and we feel good about the executive team up there, but it's a pretty difficult environment. So we are also facing what we see as some AUC headwinds obviously with the Canadian dollar being where it is.

Lee Giordano, CRT Capital.

Hey, good morning, guys. It's Lee Giordano. Can you remind us, you've got CapEx this year at $80 million to $85 million. How much of that is from the systems initiatives and then what do you look at as normalized CapEx once you get through all these initiatives? Thank you.

So we're looking at CapEx in the $80 million to $85 million range. Roughly two-thirds will be dedicated to the systems initiatives. We see that type of spend over the next, call it, two years or so and we will reevaluate once we get a lot of these systems initiatives behind us. But definitely focusing more on systems and infrastructure versus what has historically been focused on opening stores.

Rick Patel, Stephens Incorporated.

Good morning, everyone. Congrats on the progress. Now that you are live with some of your new systems, can you talk about the initial rollout of planning and markdown optimization capabilities? I'm curious how much of your store base or merchandise assortment this will touch upon initially and how long you think it will be until it expands across the entire base. I know you expect the benefit in the back half of 2015, but just some color around the ramp-up would be great.

We're just basically looking at some planning systems right now for spring and summer. We are doing some tests in one of our division, so it's not completely rolled out and our hope would be to get, by the back-to-school period of 2015, a couple more divisions onto the planning side of it. As far as the allocation and replenishment, we're just beginning to work on those, so those are also not allocated anywhere across any division at this point.

And then a follow-up on the earlier cotton questions. I know the benefit is still a few quarters out, but if costs do remain low, how do you weigh the potential to recapture some of your lost gross margins versus passing along some of those savings and going after marketshare?

I think we are going to have to wait and see what the environment looks like in another 12 months to really talk about that. Obviously, we are seeing a very promotional marketplace. Our sense is our consumers are going to continue to be under pressure. So we're going to wait and see how that all plays out.

Jay Sole, Morgan Stanley.

Good morning. Jane, I have a question about online versus stores. When you do a big online promotion, I'm assuming it drives sales, but is there at tension between doing online promotions and maybe exacerbating the traffic problem in your stores where you are not seeing the traffic in your stores, so you don't align promotion? That only makes the traffic worse because people can just buy online, not the stores. Can you just talk about how you think about that and what the strategy is going forward to try to drive both channels?

I think we are doing a lot of things to try to drive both channels, particularly through the customer segmentation work that we have been beginning over the past couple quarters and also through the loyalty program that we've talked pretty extensively about. If you look at the crossover between our customers, our multi-channel customers, it is very, very small at this point. It is less than 10%, so we are still at a single-digit percent as far as customers who shop both channels. So we really don't see the pressure from running online events on the store traffic.

Interesting. Okay, great. If I could just follow up, Mike, SG&A, like you mentioned, for the last 18 months has been really well-controlled; this quarter down almost 6%. It looks like next quarter you're looking down at a low to mid-single digit range. Are the sources of the SG&A cuts from just store closures or can you talk about other ways that you are really saving on SG&A? Is it maybe SAP implementation costs rolling off? Could you just talk about that for a little bit and how long you think you can keep SG&A dollars going negative?

It is less about store closures because I think if you look at what we opened last year versus what we closed, we were net positive. So we have been definitely streamlining the labor force within the stores as we look at proper allocation of labor to sales productivity, so we are getting benefits there. But we've also seen benefits across the corporate side of the business and we mentioned today that we did a non-GAAP charge of $4 million, a portion of which was related to a corporate restructuring and we had a little bit in the first quarter also. That is the direct result of SAP. As we move onto systems, we are refining what we do from an organization perspective and also looking to make sure that we have the right talent level within the organization. So it's across both corporate and stores.

Richard Jaffe, Stifel Financial.

Thanks very much. If you could just to go back for a second and clarify the transfer of sales from closed stores. Is that from store to store or does that include the online business? If you could just I guess clarify also on the SAP implementation and its impact in 2015, will that be the benefit of 100% implementation or is it being staged and so you'll see the impact of the first stage with more to come? Thank you.

So from a store transfer perspective, it is stores transferring to both stores within the existing marketplace and also our e-commerce business, so it's both channels. And from an SAP perspective, it is a staged rollout. So we will continue to see benefits as we move through 2016.

I would now like to turn the call back over to Mr. John Taylor for final remarks.

Thank you for joining us today. If you have further questions, please call Mike and me at 201-453-7351. Thank you so much.

This does conclude today's program. You may now disconnect at any time.