Children's Place Inc (PLCE) 2015 Q4 法說會逐字稿

Good morning and welcome to The Children's Place fourth-quarter and fiscal year 2015 conference call. Thank you for joining us this morning. With us here today are Jane Elfers, President and Chief Executive Officer; Mike Scarpa, Chief Operating Officer; and Anurup Pruthi, Chief Financial Officer.

A copy of the press release can be found on the Company's website. Before we begin I would like to remind participants that any forward-looking statements made today are subject to the Safe Harbor statement found in this morning's press release as well as in the Company's SEC filings.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. The company undertakes no obligation to publicly release any revisions 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. (Operator Instructions). I will now turn the call over to Jane Elfers.

Thank you, Lori, and good morning, everyone. During our Q2 2014 earnings call we stated that our companywide multipronged transformation strategy would begin to deliver results in the back half of 2015. So let's recap how we are doing against that commitment.

For Q4 we delivered adjusted earnings per share growth of 27% to $1.19 per share compared to last year's fourth quarter. This exceeded our updated guidance range of $1.05 to $1.12. On a constant currency basis adjusted earnings per diluted share grew 30% to $1.22 compared to 2014. We delivered our strongest comp in eight years in Q4 with comparable retail sales up 6.7% on top of a 3.7% comp increase in the fourth quarter of 2014.

US comp sales increased 6%, Canada comp sales increased 13.1% and, importantly, we also delivered a positive comp in both our US and Canada brick-and-mortar channels. We increased our adjusted operating margin by 70 basis points in Q4 to 6.7% compared to 6% in 2014. We returned $41 million to shareholders in the fourth quarter through the repurchase of approximately 676,000 shares in dividend payment.

Our inventories entering Q1 are in excellent shape. We ended the quarter with total inventory down 9.7% and that is on top of a 7.7% reduction in inventory for the fourth quarter of 2014. For the full-year 2015 we delivered a superior merchandise assortment, disciplined expense management and strong inventory control which resulted in five consecutive quarters of year-over-year decreases in inventory and four consecutive quarters of increases in AUR and gross margin.

We increased our adjusted gross margin by 90 basis points in 2014. We leveraged SG&A by 10 basis points versus 2014. We increased our adjusted operating margin by 80 basis points to 6.4% compared to 5.6% in fiscal 2014. And we returned over $131 million to our shareholders through the repurchase of nearly 2 million shares and dividend payments.

Now let's review in more detail the significant progress we have made and the key milestones we have achieved with respect to our strategic growth plan.

Operational excellence is the foundation for everything we do. Operational excellence supports our four strategic pillars which are: superior products; business transformation through technology; growth through alternate channels of distribution; and fleet optimization. Talent is the halo that ultimately defines our success so let's start there.

Our management team is the reason for our success. Over the past five years we have built a best-in-class management team. And those of you who have followed us for the past several years have seen firsthand the extensive talent upgrade that has taken place throughout our Company. This world-class management team is a significant competitive advantage for The Children's Place and it is their commitment to deliver on our long-standing strategic growth plan that sets them apart.

It is so rare in retailing to affect a successful turnaround, particularly of this magnitude, and this team deserves all the credit.

Moving on to the four strategic pillars of our growth strategy let's start with number one, superior product. Over the past 18 months we have significantly upgraded our design talent. This talented team has been focused on consistent product execution across all divisions and more frequent fashion deliveries to maintain currency of inventory flow.

For competitive reasons I am not going to get into specifics about our products or category performance, but when you shop the kids space we believe our assortments speak for themselves.

Moving on to pillar number two, business transformation through technology. As most of you know, when I joined TCP in 2010 the systems had not been addressed or upgraded in more than two decades. We were woefully behind the competition and the task of replacing every major system in the Company, while also effecting a companywide transformation, was a big challenge.

However, our team has done a remarkable job modernizing our systems over the past three years. We have made significant investments in our systems and have delivered all of our major implementations on schedule and on budget.

In 2015 we implemented a state-of-the-art inventory allocation and replenishment tool for back-to-school 2015 which has enabled us to significantly improve our inventory management capability. We began implementation on a markdown optimization tool with a plan to go live in the second half of this year.

We implemented sophisticated technologies to further enable our omni-channel capabilities, allowing us to focus on customer segmentation to increase acquisition, retention and engagement. We implemented a new distributed order management system in Q3 which will enable us to begin to unlock cross channel fulfillment capabilities in the second half of 2016.

We enhanced our digital capabilities including organic search and dynamic lifecycle email campaigns triggered by individual behaviors. And we launched e-receipts in June which enabled additional customer contact opportunities, adding 1.2 million new emails to our database.

Although 2015 marks the end of the third year of our five-year systems implementation plan, we are only at the beginning of a long runway of improved operating results enabled by these enhanced technologies.

Our third pillar is growth through alternate channels of distribution. Our wholesale and international businesses have continued to expand since they were launched in 2012 and the investments we have made in technology will enable us to scale both the international and wholesale businesses.

We now have six international franchise partners operating in 16 countries with 102 points of distribution and expect to add 40 points of distribution in 2016. We have been a success in every market we have entered with our franchise partners and this gives us confidence that there is a tremendous amount of white space globally for our unique brands.

Our international team has also been making preparations to enter e-tailing in China focusing on building the right partnerships while putting the operational building blocks in place. We now have large technologically sophisticated e-tailing and brick and mortar wholesale customers who are poised to grow with us in 2016 and beyond.

And our fourth pillar is our fleet optimization initiative. We began our fleet optimization initiative in 2013 and initially targeted 100 store closures from 2013 to 2016. At the beginning of 2015, based on the continuing work with our external partners on customer segmentation and shopping patterns, we increased the store closure target to 200 stores through 2017.

We are maintaining our targeted level of store closures at 200 for the period from 2013 to 2017. Our fleet optimization initiative should ultimately result in operating margin accretion in excess of 100 basis points.

As we mentioned earlier, operational excellence is the foundation for all that we do. Our SG&A management has been spectacular. We have done an outstanding job on SG&A management, reducing adjusted SG&A by $55 million, or 180 basis points, over the past three years and we are committed to further leveraging SG&A in 2016.

Our ability to continue to leverage SG&A while making the critical investments required for our companywide transformation speaks to the strength and focus of our management team. And we have returned a significant amount of capital to shareholders.

Prudent cash flow management and our strong balance sheet have allowed us to consistently reward shareholders. Since 2009 we have returned approximately $624 million to our investors through share repurchases and dividends. Our share repurchases over the last three years as a percentage of our market capitalization totaled 19%.

In fiscal 2014 we instituted a dividend for the first time in our history. In the first fiscal quarter of 2015 we increased the dividend by over 13% and today we announce that we increased the quarterly dividend by an additional 33.3% to $0.20 per share, a total increase of 51% over two years. At the end of fiscal 2015 approximately $271 million remained available for future share repurchases under our existing share repurchase programs.

So when you look at the commitment we made to our shareholders back in 2014, that our transformation strategy would start to deliver results in the back half of 2015, I think it is safe to say we delivered. Now let's move on to 2016.

For fiscal 2016 we are providing initial adjusted EPS guidance in the range of $4.00 to $4.10, inclusive of a negative $0.16 impact from foreign exchange compared to adjusted EPS of $3.60 in fiscal 2015. For Q1 we are providing initial adjusted EPS guidance in the range of $1.00 to $1.06 inclusive of a negative $0.03 impact from foreign exchange compared to adjusted EPS of $0.83 in the first quarter of 2015.

While we still have a significant portion of the quarter ahead of us, we are off to a terrific start with comp store sales running positive 9.7% quarter to date. Now I will turn it over to Mike.

Thank you, Jane, and good morning, everyone. We have made substantial progress on implementing our transformation roadmap. We are very encouraged with the results thus far. We have a significant runway ahead of us and opportunity to continue to deliver improved operating results.

We are just beginning to build out our digital platform and deliver against this initiative. Meanwhile, we continue to enhance our learnings and build additional capabilities in our inventory management rules which went live successfully during the back-to-school 2015 season.

Finally, we will complete the build out of our technology capabilities to scale alternate channels of distribution. Here is an update on each of our major transformation initiatives.

Inventory management. As anticipated we are seeing the benefits from our inventory management initiatives. We continue to refine our learnings from our assortment planning tool to optimize our overall buys and better match breadth of assortment with depth of inventory. For the first half of 2016 our overall unit buy decreased high-single-digits and, as we are finalizing our second half buys, we also see unit buys down in the high-single-digit range.

Our new allocation and replenishment system allows us to allocate product closer to need, increasing our allocation frequency and lowering our average units per allocation. Allocation frequency on our fashion product is up over 60% while our average units per allocation is down over 50%. This is providing us with additional inventory to flow back into stores based on actual store selling results. This inventory productivity capability has been a driver of the comp sales and margin results we announce today.

In the second quarter we will begin implementation of an enhanced order planning and forecasting tool which will automate and enable greater precision and timeliness on the reordering of our basics, allowing us to optimize the levels of replenishment inventory. We are scheduled to go live in Q4 in time to influence our basic inventory position for the back-to-school 2017 season.

Markdown optimization will drive the profitable and on-time liquidation of our seasonal inventory. We are piloting this initiative in the second quarter and plan to go live with phase one in the second half of 2016.

We are also planning to implement a size and pack optimization tool which will generate accurate size scales and optimal pack types, further optimizing inventory at the SKU level by store. We are targeting implementation of this tool to impact the summer 2017 buy.

Digital capabilities. The continued development of our digital capabilities will be critical to our omni-channel strategy. These capabilities will give us the opportunity to capitalize on our digitally savvy customer. Here is a review of our key 2016 digital initiatives.

One, we see an opportunity to significantly improve our mobile capabilities. We are moving into the second phase of our mobile first digital transformation, prioritizing enhancements to browse, navigate, search and check out.

Two, we will pilot our first omni-channel initiative in the second half of 2016. Our omni-channel initiatives will facilitate cross channel traffic and create the potential to drive additional sales.

And three, the redesign of our loyalty program and migration to a new private label credit card provider will be happening in the fourth quarter of 2016. We are working now to create a program that drives participation across the entire membership with differentiated rewards and engaging experiences for our loyal members. The new program will be easy, seamless, personalized and most importantly digital.

Fleet optimization. Our store fleet optimization initiative continues to drive positive results. The 12-month sales transfer rate on the stores we have closed continues to be in excess of 20%. We are maintaining our targeted level of store closures at 200 in the period from 2013 to 2017, including the 108 stores closed in fiscal 2013 through 2015.

We continue to evaluate our stores and their level of profitability as we assess the impact of a number of factors. One, our new inventory management tools and their impact on merchandise margins. Two, our developing omni-channel capabilities and the advantage of leveraging an extensive existing store network. Three, our overall transfer rates. And four, our ongoing lease renegotiations.

Channel expansion. We are confident about the long-term growth and profit potential associated with our expansion into alternate channels of distribution as we further develop our relationships with our international and wholesale partners.

We continued to make significant progress in the fourth quarter on the investments in technology that will enable us to accelerate our channel expansion through our international, wholesale and e-commerce channels.

In our wholesale business we are working collaboratively with a major e-tailing customer, set up a replenishment program which will enable us to add significant scale to this business.

We are also encouraged by the opportunity in our international business. Our international franchise partners opened 11 points of distribution in the fourth quarter and we ended the year with 102 international franchise points of distribution in 16 countries. As Jane mentioned, we expect to add another 40 points of distribution in 2016 and during the year we will look to lay the foundation for entering into China through e-commerce.

In summary, 2016 will be the fourth year of our five-year systems transformation plan and we expect the benefits from our strategic initiatives to enable us to make continued progress toward our 10% adjusted operating margin target. Now I will turn it over to Anurup.

Thank you, Mike, and good morning, everyone. In the fourth quarter we delivered adjusted income per diluted share of $1.19 compared to $0.94 per diluted share in the fourth quarter last year, a 27% increase.

The comparison to the fourth quarter of 2014 was negatively impacted by $0.03 due to foreign exchange. On a constant currency basis adjusted earnings per diluted share were $1.22, a 30% increase compared to the fourth quarter of 2014.

Details for the fourth quarter are as follows. Net sales were $498.5 million; the comparison to the fourth quarter of 2014 was negatively impacted by foreign exchange of $8.8 million. On a constant currency basis net sales were $507.3 million, a 5.9% increase compared to net sales of $479.2 million in the fourth quarter of 2014.

Comparable retail sales increased 6.7% on top of a positive 3.7% increase in the fourth quarter of 2014 compared to our updated guidance of an increase in the range of 6% to 7%. Adjusted gross margin for the quarter leveraged 130 basis points versus last year to 35.6%. We benefited from a strong merchandise margin increase, a higher AUR and fixed cost leverage resulting from the positive comp.

Adjusted SG&A deleveraged 40 basis points compared to last year to 25.5% driven by increased incentive compensation expenses which were partially offset by decreased store expenses. Depreciation was $16.9 million for the quarter and deleveraged 20 basis points, reflecting increased appreciation associated with certain transformation-related systems.

Adjusted operating income leveraged 70 basis points to 6.7% of sales compared to our guidance of leverage of 10 to 60 basis points. For the year are comparable retail sales increased 0.4% with our e-commerce business expanding to over 17% as a percentage of net sales. Adjusted gross margin expanded 90 basis points, adjusted SG&A leveraged 10 basis points and adjusted operating income leveraged 80 basis points.

Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $228 million compared to $225 million last year. We ended the quarter with no outstanding balance on our revolver.

Balance sheet inventory. Inventory at the end of the quarter was down 9.7% compared to our guidance of a mid-single-digit decrease. This is on top of a 7.7% decrease in the fourth quarter of 2014. We are pleased with these results and we will continue to tightly manage our inventory levels.

We generated $183 million in cash flow from operating activities in fiscal 2015 compared to $161 million last year, a 13% increase. Our strong cash flow and liquidity profile provides us with the financial flexibility to continue to fund our strategic initiatives and return capital to shareholders.

Now let me take you through our guidance. First-quarter guidance -- we are providing initial first-quarter adjusted EPS guidance in the range of $1.00 per share to $1.06 per share. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.03 in the first quarter.

On a constant currency basis adjusted EPS is projected to be $1.03 to $1.09 per share compared to $0.83 per share in the first quarter 2015. Our first-quarter guidance assumes that comparable retail sales will increase mid-single-digits.

We are off to a strong start quarter to date and our comp guidance for the quarter reflects the impact of an earlier Easter compared to last year, warmer weather in the quarter to date period, as well as a shift of certain promotional events to earlier in the quarter compared to last year.

We expect adjusted gross margin to leverage 70 to 90 basis points compared to last year. We expect adjusted SG&A to leverage 50 to 60 basis points compared to last year. Our first-quarter guidance assumes that depreciation will be approximately $16.5 million, deleveraging 40 to 50 basis points compared to last year.

We project adjusted operating margin to leverage 90 to 110 basis points compared to last year. We are guiding inventory to be down high-single-digits at the end of the first quarter compared to last year.

Now on to full-year 2016 guidance. We are providing initial fiscal 2016 adjusted EPS guidance in the range of $4.00 to $4.10 per share. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.16 for the full year.

On a constant currency basis adjusted EPS is projected to be $4.16 to $4.26 per share compared to $3.60 per share in fiscal 2015. We expect comparable retail sales for the year to increase low-single-digits compared to last year. We expect adjusted gross margin to leverage 80 to 90 basis points compared to last year.

We expect adjusted SG&A to leverage 10 basis points compared to last year including the impact of a restructuring we executed in the fourth quarter to further streamline our business. We expect appreciation for the full-year 2016 to be approximately $69 million. We project adjusted operating margin to leverage 50 to 60 basis points compared to 2015. This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments.

Additional guidance for fiscal 2016. We expect our adjusted tax rate to be approximately 35% for the year. We expect apparel AUC to be down low-single-digits for the year compared to 2015. We continue to forecast another year of strong cash from operations in 2016. Our CapEx is expected to be approximately $50 million to $60 million for the year. We plan to open seven stores and close approximately 35 stores in 2016.

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

(Operator Instructions). Jay Sole, Morgan Stanley.

Good morning. So a few questions. Just first on the guidance, can you talk about -- you mentioned the comp guidance for the full-year; can you talk about the total Company guidance for sales? Will it be kind of above the same-store sales number, will it be below? How are you thinking about that line item? That is just to start off.

Overall from a total perspective there's a spread of about 3 points [between] our total sales and our comp sales. So from an overall perspective that is how I would model it. As we have talked about, we have reflected a low-single-digits comp for the year. Our plan is also based upon gross margin and AUR expansion, superior product and execution is our first tenet and certainly we expect continued benefits from our transformation initiatives.

Susan Anderson, FBR.

Good morning. Thanks so much for taking my question and congrats on a very nice quarter. I was wondering if you could maybe give us an update on your longer-term operating margin goal. I think you guys had talked about getting to double-digit over time and it looks like you are well on your way there.

So, maybe if you could talk about kind of the path to get there, the timing and the drivers. Is it going to be a lot of the new systems and obviously really good product? Maybe if you could just update us there? Thanks.

Good morning, it is Mike. We are pleased with the progress that we have made to date, obviously 80 basis point improvement in operating margin in 2015 and then the guidance of 50 to 60 which will get us from roughly a 5%, 6% up to about a 7% toward our goal of 10%.

Obviously the keys to this margin expansion, number one, is all about product. To focus on putting the right product into the channels is key to all of this. And then we can move into -- from there go into systems transformation, real estate rationalization and then expansion of the alternative channels of distribution.

So systems -- we outlined on the call today that we continue to make progress with our inventory management systems, APT, our assortment planning tool and our allocation replenishment went live for back-to-school in 2015.

And as we go through 2016 and into 2017 we will add markdown optimization, order planning and forecasting for our replenishment side of the business, and then size impact optimization which will generate accurate size scales and optimal pack types for the summer of 2017 buy.

From a digital perspective we are really focused on mobile capability enhancements around browse, navigate, search and check out. We have done a fairly good job with customer acquisitions where we received, as Jane mentioned, 1.2 million new names since June. And we are looking obviously at retention and then customer engagement through the new loyalty and new PLCC program.

And then obviously omni-channel strategy we are piloting in 2016. So maintaining our store real estate portfolio at 200, which we think underperforming doors that will close through 2017 will add roughly 100 basis points of margin. And then obviously wholesale and international which are growing nicely hand are small but are overall accretive to the Company's operating margin.

Yes, and Susan, I would just add, the midpoint of our guidance for next year, if you compare it to 2015 it includes $0.18 of increased appreciation, $0.16 of FX.

So from a long-term perspective as our CapEx now reflects the low depreciation, I think it is important to note those facts, along with the fact that Mike mentioned, our 2015 results have maybe expended operating income and certainly our guidance for 2016.

Betty Chen, Mizuho Securities.

Thank you, good morning, everyone. Congratulations on great effort, a wonderful quarter and year. I was wondering if you can talk a little bit about the alternative channels of sales opportunity now that the -- I guess remind us, if you can, what is the sales penetration for wholesale and international. And we recall that they are higher-margin and accretive to the overall business.

And now that the system is in place, how can we think about the growth in 2016 or going forward? And then related to that, what -- with laying the foundation for China, any additional color you can give us there and when we can expect that sales contribution to kick in? Thanks.

Obviously we are pleased with the growth and the progress we have made in both our international and wholesale businesses. During the fourth quarter we made significant progress on our investments in technology, fully automating key processes, supporting sales orders, inventory receipts and deliveries. We have also developed EDI capabilities that will greatly enhance our interaction with our customers.

As we look out through 2016, obviously from a wholesale perspective I mentioned we are focused on setting up some replenishment programs with a major e-tailer. When we look at international our focus in 2016 is really on growing our existing partners and laying that foundation that we talked about in China.

The fact that the technology is now in place we are able to add 40 new points of distribution in international and then, with the wholesale side, really start to push on some of these accounts and drive the overall businesses.

Dorothy Lakner, Topeka Capital Markets.

Thanks and good morning, everyone. Congrats on a great quarter and finish to the year. Wondered if you could talk a little bit about the drivers of comp. Obviously AUR is a big part of that, but I just wondered if you could kind of go through the components of AUR traffic, conversion, etc.

And then looking at the guidance for the first quarter of comp, obviously you are running very, very strong now and you mentioned I think a shift in a promotional event that might be impacting that as well as the earlier Easter. But just wondered how we should think about the progression of comps throughout the quarter? Thanks.

Dorothy, on the first part of the question, or the second part I should say, besides -- we have seen an outstanding customer response to our merchandise which is great. Obviously we saw it in Q4 and we are seeing it into Q1.

Some of the things that are driving comps early in the quarter is the earlier Easter shifted up a week. We are certainly seeing warmer weather versus last year which is also helping and, as Anurup had mentioned, there are some promotional shifts.

So those things together are accelerating comps earlier in the quarter and we expect that post Easter we will experience some comp deceleration and that is why our guidance assumes a mid-single-digit comp which we think is realistic.

The other thing I think you should note which is pretty impressive that is going on right now is that, as we mentioned, we are certainly seeing favorable weather in the East compared to last year.

Last year you might remember we had some storms and some store closures. So we are obviously trending better in our East Coast stores, but I think what is so impressive is that every single channel of our business is positive comping right now.

So US Place stores, US outlet stores, Canada brick and mortar stores and of course our e-commerce channel all positive comping quarter to date. And not only is every channel positive comping, but every single region that we trade-in is positive comping.

So it is not just the East where we are experiencing more favorable weather, it is the West Coast, the Southwest, the Midwest, the Southeast and every single region in Canada as well. So there isn't one region in all of North America that isn't positive comping and within those channels and regions every single division is positive comping.

So big girl, big boy, toddler girl, toddler boy, newborn, all of accessories and all of shoes. So, every channel, every region, every division all positive quarter to date in spite of some, as we have talked about, persistently negative traffic trends. So nice to see.

Anna Andreeva, Oppenheimer.

Great, good morning and congrats to the entire team. I had two gross margin-related questions. First, your inventory per square foot, much below last year levels, but I think still well above historic levels. Is there a target that you guys think about either from inventory per square foot or turns type of metrics?

And then secondly, just wanted to follow up, how much occupancy leverage did you get on that very strong comp in the fourth quarter? Maybe remind us what is your occupancy hurdle rate. Has that changed at all versus history? Thanks.

On the occupancy side a positive comp does give us leverage on the occupancy number. We don't break that out specifically, but obviously a very positive comp has helped in terms of leveraging overall occupancy.

In terms of inventory per foot, we were down 7% as of year-end. We are very pleased with that number. We are on our internal plans and, as far as the outlook goes, we will continue to drive inventory productivity as opposed to an absolute number as we look forward and as our tools deploy and we learn from the current systems.

And what Mike alluded to, we have markdown optimization, size and pack optimization, basic order planning and forecasting to come. And so, we will update you as we make progress on those tools as well.

Janet Kloppenburg, JJK Research.

Good morning, everyone, and congratulations. Jane, I was wondering if you could address the strength in the outlet channels. Is that related to more made for factory product or other promotional strategies you may have in place there?

I was also wondering if you could give us your outlook for promotional activity here in the first quarter. Do you think that because of the strength of the merchandising execution you'll be able to rein that in year-over-year? Maybe you could give us an overview of what is happening on the competitive front in terms of pricing.

And just lastly on cotton pricing, I was wondering if the impact in the -- for the full-year would be even or if you would gain some incremental margin opportunity as the year unfolded? Thanks so much.

Sure. Okay, where to start, lots of questions. On the promotional strategy we are certainly more restrained in our promotional strategy. We had talked about that a lot during Q4 and we continue to be restrained in Q1 which is adding to the consecutive quarters of higher AURs and higher gross margins. We own a lot less clearance and we are driving new product at a much higher AUR, so we feel good about where our promotional activity has been for the past several quarters.

As far as outlet merchandise is concerned, no, Jennifer, our Head of Design, certainly has her stamp on that product as we go forward. I think we are learning a lot through her and her design team. And I think that we are putting some things into the outlet channel that are much more similar to what we have in our Place channel and that is really resonating with our customer.

On the competitive front, I think that we have heard that some of the competitors are still struggling under the weight of their excess winter inventories from Q4 that potentially during the month of February they had to work their way through.

We did not have that issue at The Children's Place, so we were able to experience a very, very strong February; not only through comps, but also through AUR and through margin. So I would say that we have a little bit of a different situation than a lot of our competition based on the strength of our merchandise.

And then I will turn it back over to Anurup to talk about cotton.

As far as cotton goes, as we've talked about in the previous calls as well, we expect AUCs to be a general tailwind for The Children's Place. At this point in time, as we placed our buys for back to school and we get ready for holiday, we expect AUCs to be low single digits. But it is a general tailwind.

We will continue to strategically invest in our number one initiative, which is product, and that is where we stand at the moment.

Taposh Bari, Goldman Sachs.

Good morning. It is Chad on for Taposh. I wanted to ask on the wholesale business, it seems like you are having continued success there and obviously expanding it. Can you help us better understand the margin accretion?

Is it a product of higher product margins than your retail business or is it less overhead? Or is it a combination of both? Thanks.

Regarding the overall margin, our wholesale gross margins are dilutive to the overall Children's Place gross margin, but the business is nicely accretive on the operating line due to the Lean SG&A structure supporting the business and the fact that we can leverage the existing mass of the Company.

Adrian Yih, Wolfe Research.

Good morning. Congratulations on a great quarter. Jane, my first question is a follow-on from Janet's and it is really about the competitive landscape. Can you talk about some of the historical specialty players, like Gymboree, the pressure that they are under and whether you are seeing any positive impact from that?

Then, Mike, I rarely ever have to ask; your inventory is so clean. Units down high single digit, AUC down low single digit, so I'm assuming the dollar buy is down more so than the high single digits. So is the productivity coming from better terms and allocation, so best and highest use of the product, unit of product?

If you can help us out how you continue to strengthen positive comps based on the mathematical metric there. Thank you so much.

On the competitive question, we are not going to discuss specific competitors. But what I will tell you, we spend a lot of time looking at our market share. And with the many, many entrants that come into the kids' space, be they brick-and-mortar entrants or pure play digital entrants, we have been able to maintain/gain market share consistently since I have been at The Children's Place.

So that share is obviously coming from somewhere. And I think when you look at our assortment, we really have strength through the fourth quarter certainly and into the first quarter, and we believe certainly through the rest of 2016 and beyond.

With the design and merchandising teams we have here now it really is a competitive advantage of ours. And if you look at the team that we have established at the Children's Place and you look at the depth of the talent, particularly on the design side, we are really killing it as far as merchandise and they really deserve all the credit.

So, I think that we are just going to continue to focus on the Children's Place, continue to focus on what we can control and continue to focus on what we do best which is put out great product.

And now for the first time in our history that we are on a level playing field with the competition as far as systems, I think that combination of systems and superior design and superior merchandising, coupled with the field execution which has been absolutely superb -- the field is doing a great job.

I think really -- everything is kind of coming together, as we said on the call. Really all the work the team has done on the strategy we are really starting to see the results.

Marni Shapiro, The Retail Tracker.

Congratulations on a great year, great quarter. The stores look fantastic. So I wanted to touch on China a little bit more. What is the competitive landscape like in China for American brands? As I understand it they don't trust their own brands for their children. So I am curious what your perspective is on that.

And will you launch directly your own site or would you consider going on to [T-Mall] or something like that or both in conjunction? And I guess finally, have you thought about as you launch into China the social media push and play as it's very important there?

We are very early stages in terms of our entrance into China. The goal for 2016 is to really begin to lay that foundation. So we are working through all the legal and regulatory requirements, working through picking the right partners in terms of distribution and logistics, site maintenance.

We are working through right now inventory management around merchandising and pricing strategies, sourcing strategy. So early days yet overall.

Obviously it is a pretty fragmented market; it is a huge market but highly fragmented. And our sense is that our brand can compete very well there as it has in the rest of the international markets that we have been involved with. So I'd just ask you to stay tuned and we will have more information as we move forward.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone, and congratulations. As you think about merchandise margins and the higher AUR going forward what are the buckets to drive those higher and where do you think it could get to from where you are now? Thank you very much.

I think as you probably noted, we are very pleased with merch margin expansion now four quarters in a row, AUR expansion four quarters in a row, 130 bps of margin expansion in Q4 and we have guided significant expansion in Q1 and for the year.

I think number one it starts with product acceptance. I think we are very encouraged by the results to date which Jane has also alluded to, pretty consistent across channels, geographies and categories.

Secondly, we implemented our assortment planning tool and allocation systems in back-to-school last year after small pilot. So we have a runway ahead of us in terms of using those tools further this year, the learnings, the processes.

And we have additional enhancements to come, significant enhancements to come such as markdown optimization, size and pack optimization, basic order planning and forecasting. So we believe there is a significant runway ahead as far as margins go.

And those inventory management tools obviously are helping us overall with the fact that our inventories were down almost 10% heading into Q1. I mentioned on the call that our assortment planning tool we're looking at purchasing from a unit perspective net negative high-single-digits in units. And obviously Anurup has talked about the fact that our AUCs in apparel will be lower.

So obviously all that is adding toward lower inventory and the fact that our allocation frequency of fashion product is up over 60% and allocations per cycle is actually down in units 50%. It's giving us the opportunity to make our inventory much more productive.

And we figure from a go forward perspective that that will continue and improve with the new tools that we are actually implementing in 2016 and 2017.

Rick Patel, Stephens.

Thanks and I will add my congrats on a solid execution. A question on the rollout of markdown optimization. Can you just provide some granularity on how many stores this will be piloted in in the second quarter before it is fully rolled out in the back half?

And also, is it safe to assume that we will start seeing the meaningful benefits in the back half of the gross margins? Or will this take time to ramp up and be more of a 2017 event? Thank you.

As we pilot markdown optimization we are actually going to start with our e-com business and then move forward with a small grouping of US stores. So we will expect some impact in the back half of 2016, but the major impact will be -- from a gross margin expansion perspective will happen in 2017.

Steph Wissink, Piper Jaffray.

Thanks, good morning, everyone; we'll add our congratulations as well. Just a couple of housekeeping, I think you mentioned your e-commerce business was over 17%. If you could just talk about the plans for the growth in that channel.

And then also, Jane, I think you talked about 1 million or so email sign-ups. If you could just update us on your CRM program size and what that may represent as a percentage of sales. Thank you.

First on the e-com question, e-com and our digital growth strategy is an integral part of the Children's Place future operating plans. However, we are not going to break out e-commerce separately going forward.

We believe from an investor perspective and from a business perspective given all of our omni-channel development that a consolidated view of the Company is the best guide to our results into our guidance. So that is as far as e-com goes.

As far as all the CRM activity goes, and Mike might jump in after this, is as you know we have done various foundational work in 2015 such as a distributed order management system, launching of e-receipts and we have a significant roadmap ahead in 2016 building our mobile capabilities, enhancing all of our private label credit card and loyalty program.

So there's a lot more to come -- and piloting cross channel fulfillment. So a lot is on the slate for 2016 and beyond as far as digital goes. So that is where I would leave it at this point.

Richard Jaffe, Stifel.

Thanks very much, guys, and I guess two follow-ons. One is the benefits many retailers are seeing regarding average unit costs -- costs falling in China, not only cotton but transportation, labor and the strong dollar. I'm wondering if you could give us some help in terms of quantifying that in 2016 or getting a handle on that metric.

And then if you could talk a little bit more about the wholesale opportunity as you build better systems and as you have talked about gearing up. How big or how important do you see wholesale becoming? Obviously I'd love to know your partners, but if you can't share that with us just give us a sense of size or change year-over-year in 2016. That would be very helpful. Thank you.

Richard, on AUC, it continues to be a tailwind for the Children's Place, cotton, currency, our sourcing mix, the work of our sourcing offices across the globe certainly has created a tailwind for us. It does allow us to continue to strategically invest in our number one initiative which is product. So as we look at 2016 we are planning AUCs to continue to be a tailwind and low-single-digits at this point in time.

And from both a wholesale and international perspective we've been talking all along about the systems work that we needed to do to begin to expand these businesses beginning in 2016. So we are planning some aggressive growth in 2016. At this point we are not prepared to provide any more information than that, but just note that it will be a pretty aggressive growth plan.

Thank you for joining us today. If you have further questions please call Bob Vill at 201-453-6693.