Children's Place Inc (PLCE) 2016 Q1 法說會逐字稿

Good morning and welcome to The Children's Place first-quarter 2016 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 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 ask that each of you limit yourself to one question so that everyone will have an opportunity.

I will now turn the call over to Jane Elfers.

Thank you, Crystal, and good morning, everyone. As you saw in this morning's press release, we had a very strong Q1. We provided a detailed strategic update on our Q4 call, so we will keep our prepared remarks brief this morning and let our numbers speak for themselves.

For Q1, we delivered adjusted earnings per share of $1.32, a 59% increase compared to last year's first quarter. We delivered a comparable retail sales increase of 5.1% on top of a 0.7% comp increase in the first quarter of 2015.

US comp sales increased 4.4%. Canada comp sales increased 12.8%. We generated positive comps in all three months of the quarter. We had positive comps in all divisions and all channels, including a positive comp in both our US and Canada brick-and-mortar channels.

We increased our adjusted gross margin by 170 basis points in Q1 to 39.4%, compared to 37.7% in 2015. We leveraged our adjusted SG&A by 140 basis points in Q1 to 26.1%, compared to 27.5% in 2015. We increased our adjusted operating margin by 280 basis points in Q1 to 9.4%, compared to 6.6% in 2015.

And our inventories entering Q2 are in excellent shape. We ended the quarter with total inventory down 11% and that is on top of an 8% reduction in inventory for the first quarter of 2015.

We continued to return a significant amount of capital to shareholders. Prudent cash flow management and our strong balance sheet have allowed us to consistently reward shareholders. We returned $47 million to shareholders in the first quarter through the repurchase of approximately 595,000 shares and the dividend payments.

At the end of the first quarter approximately $227 million remained available for future share repurchases under our existing share repurchase program, and since 2009 we have returned over $671 million to our investors through share repurchases and dividends. Based on our strong results, we are raising our guidance for the full year despite the challenging environment and continued weakness in store traffic. This guidance assumes a low single-digit comp sales increase, expansion of gross margin, and continued strong expense control.

Now I will turn it over to Mike.

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

Here's a quick update on each of our major transformation initiatives.

Inventory management. We are seeing the benefits from our inventory management initiatives, as evidenced by the continued expansion in merchandise margin and gains in inventory productivity that we delivered in the first quarter. The inventory productivity capabilities derived from our assortment planning and allocation and replenishment tools have been key drivers of the comp sales and margin results we announced today, even as we continued to enhance our learnings.

The 2016 inventory management initiatives that I discussed on the last call are on schedule. We plan to go live in Q4 with an enhanced order planning and forecasting tool, which will automate and enable greater precision and timeliness on the reordering of our basics in time to influence our basic inventory position for our back-to-school 2017 season.

We are piloting our markdown optimization initiative in the second quarter and plan to go live with phase one in the second half of 2016. And we are targeting implementation of our [size and pack] optimization tool in the fourth quarter, which will enable us to impact our summer 2017 buy.

Digital capabilities. Our digital initiatives also remain on track. We are moving into the next phase of our mobile-first digital transformation, prioritizing enhancements to check out, search, browse, and navigate with checkout and search enhancements going live in Q2.

We will also pilot our first omnichannel initiative in the second half of 2016. And the redesign of our loyalty program and migration to our new private-label credit card provider will be happening in the fourth quarter of this year.

Fleet optimization. Our store fleet optimization initiative continues to drive positive results. We are maintaining our targeted level of store closures at 200 in the period from 2013 to 2017, including the 113 stores closed in fiscal 2013 through the first quarter of 2016.

Channel expansion. We are confident about the long-term global growth and profit potential associated with our expansion into alternative channels of distribution as we further develop our relationships with our international and wholesale partners. We continue to make significant progress in the first quarter on the investments in technology that will enable us to accelerate our channel expansion through international wholesale and e-commerce channels.

In international, we opened nine new points of distribution in the first quarter and now have 110 points of distribution. We are on track to open approximately 40 points of distribution in 2016. In our wholesale business, we will be implementing a replenishment program with our major e-tailing customer in the third quarter, which will enable us to add significant scale this business over time.

Finally, we are encouraged by the opportunity for our brand in China and have decided to accelerate the timing of our investment in that market so that we can be in a position to begin selling online by early 2017.

Now I will turn it over to Anurup.

Thank you, Mike. Good morning, everyone. In the first quarter we delivered adjusted income per diluted share of $1.32, compared to $0.83 per diluted share in the first quarter of last year, a 59% increase. The comparison to the first quarter of 2015 was negatively impacted by $0.01 due to foreign exchange.

Details for the first quarter are as follows. Net sales were $419.4 million. The comparison to the first quarter of 2015 was negatively impacted by foreign exchange of $2.2 million. Comparable retail sales increased 5.1% on top of a positive 0.7% increase in the first quarter of 2015, consistent with our guidance of a mid-single-digit increase.

Adjusted gross margin for the quarter leveraged 170 basis points versus last year to 39.4%, compared to our guidance of an increase of 70 to 90 basis points. We benefited from a strong merchandise margin increase, a higher AUR, and fixed cost leverage resulting from the strong comp.

Adjusted SG&A leveraged 140 basis points compared to last year to 26.1%, compared to our guidance of 50 to 60 basis points in leverage, driven by decreased store and administrative expenses which were partially offset by increased incentive compensation expenses. Depreciation was $16.5 million for the quarter and deleveraged 30 basis points, reflecting increased depreciation associated with certain transformation-related systems. Adjusted operating income leveraged 280 basis points to 9.4% of sales compared to our guidance of leverage of 90 to 110 basis points.

Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $234 million compared to $201 million last year. We ended the quarter with $25 million outstanding on our revolver.

Inventory at the end of the quarter was down 11% compared to our guidance of a high single-digit decrease. This is on top of an 8% decrease in the first quarter of 2015. We are pleased with these results and we will continue to tightly manage our inventory levels.

Our current and future inventory tools are designed to continue to drive productivity gains. It is important to note that we have now had six consecutive quarters of inventory reduction.

We generated $28 million in cash flow from operating activities in the first quarter compared to $13 million last year, a 111% decrease. 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.

Second-quarter guidance. We are projecting second-quarter adjusted loss per diluted share in the range of negative $0.30 to negative $0.22. This guidance range assumes that currency exchange rate will negatively impact this result by approximately $0.02 in the second quarter.

On a constant currency basis, adjusted loss per diluted share is projected to be negative $0.28 to negative $0.20 compared to negative $0.33 per share in the second quarter of 2015. We expect that comparable retail sales will increase in the range of 1% to 2%. We expect adjusted gross margin to leverage 130 to 180 basis points compared to last year.

We expect adjusted SG&A to deleverage 70 to 80 basis points compared to last year. Q2 SG&A will include the impact of acceleration of investments related to the startups of our business in China and our replenishment business with a major e-tailer. It is important to note that second-quarter SG&A will also include the impact of higher incentive comp expenses, resulting from our projected full-year outperformance compared to target.

Our second-quarter guidance assumes that depreciation will be approximately $16.5 million, deleveraging 30 to 40 basis points compared to last year. We project adjusted operating margin to leverage 20 to 80 basis points compared to last year. We are guiding inventory to be down low single digits at the end of the second quarter compared to last year.

Now on to full-year 2016 guidance. We increased fiscal 2016 adjusted EPS guidance to a range of $4.17 to $4.27 per share, compared to our previous guidance of $4 to $4.10 per share. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.12 for the full year.

On a constant currency basis, adjusted EPS is projected to be $4.29 to $4.39 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 90 to 110 basis points compared to last year.

We expect adjusted SG&A to be flat to slightly deleverage compared to last year, primarily driven by the impact of acceleration of timing of our investment in China and investments related to the start up of our replenishment business with a major e-tailer, in attention to higher incentive compensation expense, as mentioned earlier. As you model Q3 and Q4 you may also recall that there was a significant shift in incentive compensation expense from Q3 2015 to Q4 2015 based upon last year's quarterly results.

We expect depreciation for the full year 2016 to be approximately $69 million. We project adjusted operating margin to leverage 60 to 70 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) Anna Andreeva, Oppenheimer.

Thanks so much. Good morning, everyone, and congrats on great results. I guess a question on the second-quarter comp guidance for up 1 to 2. What are you seeing in the business quarter to date?

And we've been hearing a lot about volatility in retail. Your trends were nicely resilient in Q1. Maybe talk about what are you seeing in the environment in the kid's space and what kind of promotional cadence are you embedding for the second quarter. Thanks.

Sure, thank you. Well, as far as the first question, I would describe the current quarter trends to date as kind of the tale of two cities. Month-to-date we've experienced huge swings between our West and our East Coast stores.

Just as an example, in our US Place stores we have a 50 point trend swing between our best and our worst performing states. In our outlook channel we have a 57 points swing between the best and the worst states. And in Canada, where we are seeing the same weather disparity between the East and West Coast regions, we have a 55 point spread between those two areas.

I'm not sure if there's anyone on this call that spends as much time as we do studying the weather by city by day this year versus last year, but what is exacerbating the current situation versus potentially what happened to us in April is really kind of if you look at it from the weather relativity factor versus the absolute temperature.

So in other words, not only have we had temperatures in the Northeast and the Midwest that are significantly below normal temperatures for this time of year, if you look at last year in May the temperatures were significantly above normal for basically the whole month of May, in the mid-80s to high 80s for much of the month. So when we get those relativity differences, that's when we get huge swings between states and we've certainly seen that before in our business.

I think the good news is that the cooler weather is expected to pretty much only continue through the end of this week and then we should start to see the relief coming next week as we move into the Memorial Day holiday period. And we are pretty much anticipating that weather, from an absolute and a relative basis, will normalize into Memorial Day. And then certainly into June and July we are anticipating the same.

So if you look at those weather swings between the East and the West and you look at Memorial Day holiday moving out of May and into June, you have somewhat of a pressure on the month of May which results I think in a more modest comp for the quarter versus Q1.

The other thing that we are putting into the guidance that Anurup just covered for Q2 is the competitive environment. It was a pretty promotional first quarter. We heard a lot of reports last week that it's very difficult in the mall and we heard a lot of callouts of kid's being one of their tough businesses.

So we're anticipating that there is not only going to be -- companies are going to have to work through their inventory overhang from spring, but based on what we heard, they are probably going to have to start to work through some inventory overhangs from summer as well. So we anticipate that they will be very promotional as they will most likely need to get their inventories in good shape prior to the very important back-to-school period. We are also assuming that the mall is going to heat up from a promotional point of view.

The one thing I would add from a competitive point, though, if you look at all of our competitors, they have a very strong positive in their favor for Q2, which we don't, and that's last year's port disruption. If you guys remember, our logistics team really hit it out of the park last year, saw the port strike coming and diverted all our merchandise from the West Coast, so we had zero disruption to our flow of goods. And I believe we were the only retailer, at least the only retailer that I remember, who found themselves in that enviable position.

I would say that the significant port disruption was the major reason that most of our competitors pointed to as to why their margins were so tough last Q2. So I would assume, even with the tough macro environment and promotions heating up, it should be pretty easy for the rest of them to expand their margins in Q2 based on how severe they cited that port strike as impacting them.

I guess to sum it up, we don't see this market growing anytime in the near future, so we're going to just keep focusing on taking share, having the right products in the right place at the right time, and really increasing our chance of that conversion. I think the field is doing a great job on that score.

And as we mentioned, we were able to comp positive in all our brick-and-mortar channels during Q1, which in this environment I think is pretty impressive. As Anurup said, we are guiding to positive comps and margin expansion for Q2, so we feel pretty good about what's happening here.

Jay Sole, Morgan Stanley.

Good morning. Jane, if I can just follow up on the last question, if you could just talk about the change from March to April. A lot of talk about -- in retail just was it weather? Was it the calendar shift? Was it macro?

A lot of times we talk about March and April together. How are you thinking about it? Can you describe just what the change was from March to April in the comp trend, generally speaking?

We don't give comps by months, but as we said, we comped positive in all three months and we were able to comp positive in our brick-and-mortar channel in the month of April. So where we did see somewhat of a drop-off from March we were still able to comp positive, so we were pretty excited about that.

When you looked at February, and we talked about it when we were on the call in March, February started off as very favorable weather. We had some very strong wear-now assortments that really resonated with mom. Easter came at the perfect time for us. Again, very strong acceptance to the product in a strong month.

And then coming out of April we certainly saw the same situation with the weather that other people saw, but as I talked about a little bit before, from a relativity point of view, it wasn't like what's going on in the beginning of May. So we were able to really get a nice comp in the month of April as well, so I think we were a little different than the rest of the pack.

Adrienne Yih, Wolfe Research.

Let me add my congratulations. Tough, tough environment and great execution, so congratulations to the whole team.

Jane, can you continue to talk about the elevation in the product, the product improvements, and how that looks for the fall season back-to-school?

Then, Mike and/or Anurup, can you give us some quantification or any kind of magnitude in terms of the MDO? Obviously it will come on in phase one in the back half of this year, but probably the percentage of impact that we would see in 2016 and then I guess a greater impact when you get a full year of it in 2017. Thank you very much.

Sure, we continue to see very strong product acceptance from our customer. We have seen it; we've talked about Jennifer Groves, our head of Design, and the team that she has on board. It's a very strong design team.

We have a strong merchandising team. I think they are working very well together, certainly supported by a very strong sourcing team and a very strong planning team. So those four groups working together are really what's behind the success of the product.

I think as you move into back-to-school there's a lot of exciting product coming and then certainly into the holiday season as well. I think we've gotten much better in the past few years around here of really understanding wear-now and making our best in the right places so that it gives us the biggest chance for success. And I think you will continue to see that through the third and fourth quarters.

Then on MDO I will turn it over to Mike.

Well, we have been pretty happy with the results of our inventory management to date. Obviously the assortment planning and allocation tools are driving significant results for us. And as I indicated, we will start layering in MDO planning, order planning and forecasting. We obviously think that these have big opportunities for us there.

As we look at MDO, obviously it's a -- we'll pilot this in the second quarter and we will go live in the second half of the year. Our impact is all factored into the guidance that Anurup gave you. Obviously, it's a half-year impact and we will be learning off of these tools. And it's a phased-in approach so we think 2106 will obviously not have that dramatic of an impact compared to what we expect in 2017 when we implement the rest of the tools that I talked about.

Janet Kloppenburg, JJK Research.

Good morning, everyone. Congratulations. Really nice execution.

My first question is on the magnitude of the gross margin improvement. Perhaps you could help us understand to what extent the AUC benefit that I think you should experience all year has helped.

And maybe help us understand what happened on the promotional front. [Was it] lower year over year? Did you have to pace up in the month of April given what was going on?

And if your guidance includes -- well, I think it does -- includes greater promotional activity in the second quarter. But if maybe we could understand that cotton pricing advantage in the first quarter and how it looks for the rest of the year.

Secondly, I was hoping you could talk a little bit more about the China opportunity, if you will be entering China through a new commerce platform partner or a brick-and-mortar or a combination. And also if you had added any additional new wholesale partners in the quarter. Thanks so much.

Wow, which one of us wants to start? I will take the promotional one.

When you look at our promotions for the first quarter, they were all planned promotions. I really didn't see anything different than what we planned going in. I think you're going to see the same thing for Q2. They are very rational, not reactive.

And as you saw, our inventories are down 11% coming out of the quarter on top of 8% last year. And with the margin expansion we got -- I would say that it was safe to assume that our promotions were very controlled.

Janet, on the issue around AUCs, I would just say our gross margin, as you know, leveraged 170 basis points in the quarter. Compared to our original guidance, merchant margin increased as expected, but we also really benefited from strict expense control in supply chain and other product-related costs. Certainly AUCs continue to be a tailwind for The Children's Place between cotton, currency, and the work of our sourcing teams on currency migration.

Finally, we are really pleased with the results of our inventory management tools to date. As Mike mentioned, we have markdown optimization, size and pack optimization, order planning and forecasting yet to come this year, which will have a phased-in approach. We grew AUR and merch margin for the fifth consecutive quarter and our gross margin leveraged 170 basis points on top of 150 basis point improvement last year.

So very pleased with the composition and structure of our gross margin expansion. And I'll let Mike answer the question on China.

Sure. Overall, international business is growing very nicely for us. We added 9 points of distribution in the quarter; plan to add 40 for the year.

We're excited about the opportunities that we have in some of our new franchise partners, particularly in India and Mexico. And we're looking to accelerate the timing of the investment that we're going to make in China with the goal of beginning to sell online in early 2017.

The opportunity for us, at this point, is strictly online. We think that given our fashion and value proposition that we are uniquely positioned versus potential competitors in that marketplace.

Our thoughts are -- we're in the process right now of completing our legal and administrative requirements. We're working on our brand positioning and pricing equations and also in the process of finalizing our selection of trading partners. All things that will happen within the next six months to nine months so we're in a position to begin selling early in 2017.

Dorothy Lakner, Topeka Capital Markets.

Thanks and let me add my congratulations on a really just spectacular performance in the quarter.

Looking towards the back half of the year also, you are going to be, I think, introducing a new loyalty program. I just wondered if you could update us on where you are in terms of active customers in your database, what kind of changes you are planning or thinking about for the program. That would be great. Thank you.

We currently have around 16 million members in our database, of which about 8 million of them are loyalty card holders, so roughly about 50% of the customer base. They represent about two-thirds of our overall customer spend and, on the average, they spend about 2.5 times of our non-loyalty members.

We are on schedule to migrate to the new loyalty program in our new private-label credit card provider in the fourth quarter. And our thoughts are want to create a program that drives participation across that entire membership with differentiated awards and engage in experiences for our loyal members.

Susan Anderson, FBR.

Good morning, let me add my congrats on a very nice quarter. I was wondering if I could dig a little bit on the AUR expansion.

Obviously, very good performance there. It sounds like, though, you thought it was more promotional in first quarter. So was most of this just having a lot less clearance in the stores or were you also able to pull back on full-price promotions?

Then also, if I could touch on the online wholesale channel; it sounds like it's been very strong. If you could give some color around the growth and then also is it material yet to the total sales growth? And then how should we think about it as you add the new replenishment program longer term? Thanks.

Susan, it's Anurup; I'll take the first piece of it on AURs. Our AURs, as I mentioned earlier, from a structure perspective at the forefront it's product acceptance, which is our number one strategy. And we have been very pleased with the strength of product acceptance across the board, which Jane also alluded to in her opening comments.

It's less about clearance inventory and much more about having the right product at the right store at the right time, which is really a result of our -- which is really what our inventory management tools are driving. If you recall, our initial tools that we implemented early last year or back to school last year, excuse me, were really around assortment planning was our first tool, which addressed the quantum of inventory we will purchase. We're still seeing, in terms of 2016 buys, a forecasted retail unit decrease of around 7%.

The subsequent tools have addressed both the quantum of inventory, but, increasingly so, the productivity of our inventory, starting with our allocation systems and the new initiatives we are planning to launch this year such as markdown optimization, size of pack optimization, order planning, and forecasting. So we are seeing improved store-level inventory productivity based on in-stock service level and sell-throughs. These are obviously resulting in higher AURs and ADSs, so that's really what's been driving our AUR along with the aforementioned product acceptance.

And, Mike, on replenishment?

Yes, we are working on a replenishment system with our major e-tailer customer that overall we think can add significant scale to the business. We're going to begin with a very small pilot in Q2 and begin a rollout starting in Q3. We have taken a selection of items from our existing assortment and specifically sourced for this automated replenishment program.

The system will generate, basically, weekly orders based on demand and transmit them to us via EDI. The good news there is that there's no open-to-buy process involved so we will be feeding directly back into demand. And the requirement is that we ship these bulk orders back to the major retailer within a 72-hour period. But, again, small pilot starts in Q2 and we will start to add scale in 3 and 4.

Betty Chen, Mizuho Securities.

Thank you. Congratulations on a great quarter and the product looks terrific.

I was wondering if you can talk a little bit about the store closures and sales transfers. I know I think on the last quarter you remained pleased with some of the transfer to either nearby store or online. Just wondering, any changes in the first quarter?

And then also inventory was again very clean coming out of the quarter, down 11%. The guide for it to be down low single digit in the second quarter, is it because of some of the investments for the e-tailer and other programs? Or is it because we're still lapping some of the down inventory levels from a year ago? Just seems like a slightly smaller decrease. Thanks.

This is Mike. I'll take the store rationalization and then hand it over to Anurup for the inventory.

Our plans around store fleet rationalization have not really changed. We're still on target to close 200 stores through 2017. We just recently completed our assessment of the transfers and they're still in excess of 20% from the stores we closed, so all very encouraging. And as we've indicated in the past that this has the opportunity to add 100 basis points of operating margin to the overall company.

Betty, it's Anurup. On your point around inventories, we are projecting Q2 inventories -- we are guiding Q2 inventories to be down low single digits. Now just to point out, this is on top of an 8% decrease in Q2 last year. This would be our seventh consecutive quarter of inventory decrease and our forward retail buyers continue to indicate approximately a 7% decrease in units. So from a forward-buy perspective, we are still seeing the 7% increase in unit buys.

But specifically in Q2, the guidance reflects really our projected on-hand inventory and timing of in-transit inventory, which is really related to our product flows and inventory flows. So it's more of a timing and transit issue as opposed to anything. We are really pleased with our progress on inventory and, as we mentioned, really clean entering Q2.

Marni Shapiro, The Retail Tracker.

Congratulations, fantastic quarter. I had a quick question. We've noticed in the stores some interesting pricing differentials, even between boys and girls, and some slight changes. Have you been able to really surgically change some of the prices to that level across the fleet and across all of the products?

Are you -- have you been able to raise prices on some of the promotions where a promotion of two currents maybe had X price a year ago and now that price is X plus?

Marni, thank you; it's Jane. From a pricing point of view, yes, we are able to surgically price, so we have made obviously decisions based on how strongly the product has been performing across categories within the store.

As far as being able to raise pricing versus last year, because of some of the things that Anurup mentioned with our inventory tools, we're in much better shape by style by store and as far as our replenishment systems feeding in. So we're able to command a higher price for some of the category businesses this year versus last year, just based on how we own the inventory. So what you are seeing is real.

Taposh Bari, Goldman Sachs.

Morning. Congrats to the team. I had two questions. One, Jane, you mentioned a couple comments around weather and the competitive environment as risks. These seem to be risks that have been ongoing for a while and over the past six months at least you've been able to manage through them, so wondering what has changed now.

Then second, Anurup, on gross margins. The guidance for the quarter and the year suggests that the pace of expansion moderates in the back half versus what you are implying for the first half. Wondering why that is and if that is a product that's lapping some tough comps in the fourth quarter. Thanks.

Sure. Well, Taposh, as far as the question on weather, I don't want to go into the one explanation again because I spent a long time answering the first question about it, but when you look at what's happening in the weather, I think I mentioned it's a little bit different than what happened in first quarter, particularly in April, and it's a little bit different than what happened in fourth quarter.

Because when you look at last year's month of May in our big Northeast and Midwest regions, we are up against, for almost the entire month, 80 to 85 degree weather. And around here, I don't know if you live around here, but it was 36 degrees on Monday morning. The average high for this time of year is around 69 to 71.

So not only are we seeing temperature swings in the East and the Midwest that are 15 to 20 degrees below normal, we're up against temperatures that are 15 to 20 degrees above normal. So when we have those types of swings, and we've seen them, in the time that I've been here, through the polar vortexes and other situations, when we get those kind of relative weather swings, that's when we get these huge comps between states, particularly the East versus the West Coast.

So for that kind of weather behavior to carry on for probably three weeks out of the month, as we mentioned, we see the fourth week next week getting warmer and relatively being pretty similar in temperature. That coupled with the move out of Memorial Day and some of the inventory overhang we're seeing from the competitors, is going to produce somewhat more of a need in May, which will moderate the comp for the quarter.

I also think, when you look at it, we have had positive AUR, positive comps, and positive margins. And as Anurup covered in his guidance, we are anticipating all of those to be positive again moving into second quarter, so I'd say we're doing pretty well.

Taposh, on the second part of your question on gross margins for the year, as you would've noted, we have raised the gross margin average guidance for the year now 90 to 110 basis points. Part of this is obviously based on Q1's outperformance.

The fundamentals of our plan are intact in terms of AUR expansion, the results from our tools. We see AUCs continuing to be a low single-digit tailwind into 2016, into the holiday buy, and we continue to invest in our number one strategy, which is product. So from an overall perspective, we certainly see our gross margin structure intact and are pretty pleased with the results to date.

Dana Telsey, Telsey Advisory Group.

Congratulations. As you think about these systems enhancements that you're making and the new ones coming that are coming in the back half of this year, how do you see the impact on margins benefiting compared to the ones you did last year? And how should we see the progress of that margin improvement from the systems that you have in place?

Then two other quick things: Canada and online. Anymore qualitative commentary on business trends in Canada and also online with mobile? Thank you.

You know, our thoughts around the inventory management tools is that it's really a suite of tools. So obviously the assortment planning and allocation replenishment are driving the results that we've enjoyed over the last couple of quarters. But now we begin to refine as we look at markdown optimization in the second half of the year, our order planning and forecasting tool, which will take place for back-to-school of 2017, and then our size and pack optimization tool, which will take place for summer.

But we look at this all as the opportunity to improve the overall productivity and quality of our inventory and our expectations are that we have a huge runway in front of us in terms of gross margin expansion based on these tools.

Rick Patel, Stephens.

Thank you and good morning. Congrats on the strong execution.

Can you give us context on how we should be thinking about non-comp growth for the second quarter and for the year? I'm curious how we should be weighing the drag from store closures versus the potential to accelerate your wholesale business with this major e-tailer, which seems to be going in a strong direction. Thank you.

I think, from an overall sales perspective, I would think you could anticipate that there would be about 1 point of spread between our total and our retail sales. Total would be about a point lower as we look at the out-quarters as we get more into our replenishment and our other programs. As Mike talked about, we will update this further, but at this point in time it's probably a good way to model it.

Also sorry, Dana, it's Jane. On the Canada question, we're really happy with what's going on up in Canada, as we've been for a couple quarters now. We continue to place those receipts very tightly due to FX and certainly are monitoring closely expense, but very, very happy with what's going on up there.

Then we don't breakout online separately, but obviously a very, very important part of our business. And as we continue to focus on our mobile-first strategy, we anticipate that that will become even more important.

John Morris, BMO Capital.

My congratulations in a tough environment as well.

Jane, can you talk a little bit more about the product performance in the quarter, giving us a little bit more color around what you were happy with, particularly in terms of category classification, and comment a little bit about the execution over Easter, especially with Easter dressing and whatnot. But a little bit more color on what was really performing for you from a product perspective.

Thanks, John. You know what; I'm not going to answer that. We're longer providing color around product or gender category performance, obviously for competitive reasons. It's a very competitive space. We have a lot of imitators out there, so we're not going to provide color around product or any type of promotional roadmap.

I'd say it's safe to assume, based on us having positive comps in all three months and positive comps in all divisions and all channels, that the product is resonating with mom.

And a follow-up, can I get a little bit more from you guys about the SG&A dollar spend, particularly in the back half? Are we going to see -- what should we expect in terms of SG&A dollar spend year over year in the back half, with some of these systems and whatnot coming in?

I would just say, from a full-year perspective, we expect SG&A to be flat to slightly deleveraged. This is -- goes with our prior guidance of flat to slight average.

And the reason for this is -- there are really two fundamental reasons. One is we are accelerating our investment in China, as well as our investment in setting up wholesale replenishment for a major e-tailer. The other is that we have increased our incentive comp expense projection for the year based upon our outperformance in Q1.

I would just note that SG&A management, the management team here continues to do an outstanding job on cost control. There's been $55 million of SG&A reduction in the last three years, $10 million last year. And I think, as we look at our long-term operating margin targets, SG&A control will just continue to be a focus here at TCP.

Lorraine Hutchinson, Bank of America.

Morning, I wanted to follow-up on Dana's question on Canada. The margin increases there have been a big contributor to the total performance. Did that continue in the first quarter?

And then could you also just give us some of the reasons why those margins have been so strong and if you see further room for improvement?

We don't breakout those margins separately, but I would just say that we have prudently managed the Canadian business given some of the overall macro volatility up in Canada. We've been very pleased with our results in Q1, comps were up 12.8%, and we continue to want to manage that business prudently and drive profitability. But Canada has been a strong performer for us.

Richard Jaffe, Stifel.

Just I guess a follow-on with the elephant in the room, Amazon, and the potential for them to continue to be a partner or to, as we've seen, address the opportunity with private-label business. Wondering if you could explain more about the dynamics there and how you see the online challenge or opportunity. Thank you.

We have a very good working relationship with our major e-tailer. As we said, we're looking to expand the business replenishment program. We have a small pilot in Q2 and begin to roll it out in Q3, and that's about all we can say on that business at this time.

Thank you for joining us today. If you have further questions, please call Bob Vill at 201-453-6693. Thank you. You may disconnect your lines at this time.