Children's Place Inc (PLCE) 2016 Q3 法說會逐字稿

Good morning and welcome to The Children's Place third-quarter 2016 conference call. (Operator Instructions)

Thank you. I will now turn the call over to Mr. Bob Vill, Group Vice President, Finance.

Thank you, Crystal, and thank you for joining us this morning. With me today are Jane Elfers, President and Chief Executive Officer; Mike Scarpa, Chief Operating Officer; and Anurup Pruthi, Chief Financial Officer. A copy of our press release can be found on our 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.

In addition, to find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our investor relations site. 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, Bob, and good morning, everyone. Our momentum continues and we delivered another outstanding quarter. Let's review our Q3 accomplishments.

We delivered adjusted diluted EPS of $2.29, a 19% increase versus last year and $0.28 above the high end of our guidance. Comparable retail sales increased 4.6%. We comped positive every month of the quarter in our digital channel as well as in both our US and Canada brick-and-mortar stores, and our positive monthly comps accelerated as the quarter progressed.

US comp sales increased 4.3%. Canada comp sales increased 6.2%. All key comp metrics were positive: AUR, conversion, UPT, and ADS.

Traffic in our stores improved versus our Q2 and year-to-date trends. Inventory decreased 0.6%, our eighth consecutive quarterly decrease, and is in excellent shape as we enter Q4.

Adjusted gross margin increased 140 basis points in the third quarter compared to last year. And we returned $123 million to shareholders year-to-date through the repurchase of over 1.4 million shares and dividend payments, compared to $90 million in the 2015 year-to-date period.

Before we review the significant progress we have made on our strategic growth plan, I would like to first highlight one of our biggest competitive advantages, our leadership team. We are fortunate to have a very talented senior leadership team who consistently deliver on and execute against our four strategic growth initiatives. The continued strong execution of these initiatives is responsible for the sustained momentum in our business and looking ahead, each one of these growth initiatives still have significant opportunity. So let's start with product.

We have an extremely talented design team. Our product development and sourcing capabilities are core strengths of our company and I took on the additional role of chief merchant one year ago. This powerful combination is a significant competitive advantage, the result of which is product that consistently meets or exceeds our customers' expectations. As a result of our superior product offering, we have generated strong increases in AUR, comp retail sales, and merchandise margin in each of the last four quarters and we are confident that are strong product acceptance will continue.

As I alluded to on our last call, we have some terrific news to share with regard to extending our brand's reach. We saw a void for trend-right quality product in the tween space so we began offering size 16 online for both big boy and big girl, starting with our back-to-school 2015 delivery. Based on the overwhelmingly positive results, we introduced size 16 in all our brick-and-mortar stores starting with our October 2016 receipt. This extended size range has been very well received and it is clear that our tween customer is thrilled to enjoy our brand a little longer.

Importantly, due to the progress we have made with regard to inventory management, we did not have to take any product out of our stores to be able to accommodate size 16. Looking ahead, we will closely monitor size 16 selling to see if there is more opportunity to further extend our brand's reach.

Moving on to our second strategic initiative: business transformation through technology. There are two key initiatives embedded within business transformation through technology: inventory management capability and digital transformation capability. I am going to highlight our progress on both and Mike is going to take a deeper dive into the status of our digital transformation efforts.

We continue to realize the benefits of our inventory management initiative, as evidenced by the seventh quarter of continued gross margin expansion we reported in today's results. Let's share some highlights.

We launched our size and pack initiative in Q3, impacting a portion of our summer 2017 receipts. This tool has increased the number of pack configurations by up to 35% and this will result in less stranded inventory and increased inventory productivity. We will continue to roll this out through holiday 2017, at which point 100% of our units will be optimized for size and pack. We believe this initiative will generate further increases in sales and margin.

We launched a new order planning and forecasting tool in Q3, which impacts 100% of our basic deliveries for the key 2017 back-to-school period. This tool automates and enhances the precision of both our initial and replenishment basic orders at the SKU level.

We continued our markdown optimization analytics pilot in our Canadian business. We are encouraged by the results to date and we will utilize these learnings as we finalize our approach for this initiative.

Looking ahead with respect to inventory management, we have much more opportunity still to be realized. For instance, based on the tools we now have in place, we are seeing the potential for further inventory reduction in the back half of 2017.

Moving on to our digital initiatives. Although we are only in the beginning stages of our digital transformation, we made great progress in Q3. We successfully relaunched our loyalty program in conjunction with our new private-label credit card program. By enhancing the value proposition of both of these growth levers, we have a significant opportunity to increase our customer acquisition and retention numbers.

While we are only four weeks into these initiatives, we have already seen a notable increase in the penetration of both our loyalty and private-label credit card programs. Looking ahead, we will be able to leverage this strong foundation as we work to develop increasingly sophisticated customer personalization strategies in 2017 and beyond.

We also launched our first omnichannel initiative in Q3. We piloted reserve online, pick up in store in 100 stores across three states. Customer engagement in this program is building and we are seeing upsized transactions as customers add additional items in store to their original online order. It is imperative that we offer our customer the convenience to browse and shop in any channel she chooses, and we're excited that we have started to implement these capabilities.

Moving on to our third pillar: alternate channels of distribution. Several years ago we anticipated the need for a strategy that was less reliant on brick-and-mortar-based growth. Our e-commerce, wholesale, and international channels are accretive to our earnings and continue to build, enabled by our ongoing technology enhancements.

In our wholesale business, we launched our replenishment program with Amazon in Q3 for the important back-to-school time period and it is off to a terrific start. We are seeing impressive increases each week as this program continues to build. This replenishment program is a very important part of our relationship with Amazon and it is incremental to the fashion wholesale business that we launched with them in 2015.

We also launched on Tmall in China in October, ahead of our original schedule, and we are encouraged by the long-term opportunity for our brand in China. In our other international markets we opened 16 new points of distribution in the third quarter and now have 139 points of distribution in 17 countries. These include stores, shop-in-shop, and e-commerce websites operated by our partners. We are on track to open approximately 50 points of distribution in fiscal 2016.

And our fourth initiative: fleet optimization. We closed five stores in Q3 and have now closed 120 stores as part of our 2013 to 2017 fleet optimization initiative. We have a healthy portfolio of stores that allows us to continue to negotiate favorable rent deals and lease terms in this tenant-friendly environment.

Looking ahead, we have an average of approximately 300 lease renewals annually between 2017 and 2020, providing us with a significant opportunity to continue to optimize our store portfolio.

Before I move on to our Q4 outlook, I want to highlight a few items. First, due to the experience and foresight of our logistics team, we had zero impact with regard to the Hanjin Shipping issue.

Second, we determined years ago that a fully-direct sourcing model would deliver the best value to our shareholders. Our well-diversified sourcing strategy is diligently managed by our experienced sourcing team and our apparel AUC for the first half of 2017 remains favorable, trending down low single-digits.

And, third, macro issues that have been cited as negatively impacting retailers' results include weak consumer demand, outsized promotional activity, record-setting warm weather, negative traffic, currency exchange rates, and reduction in tourism, just to name a few. These are significant issues facing all retailers; however, the difference at The Children's Place is that we developed a growth strategy several years ago that relies on numerous self-help initiatives. Our steady, strong, and focused execution of those initiatives has allowed The Children's Place to deliver superior results, in spite of the negative macro issues, and helped us make significant progress towards our 10% operating margin milestone.

Looking ahead to the fourth quarter, we are providing initial guidance for adjusted EPS in the range of $1.43 to $1.48 compared to $1.19 in the fourth quarter of 2015. In addition, we are updating our full-year 2016 adjusted EPS guidance to a range of $5 to $5.05 compared to $3.60 in 2015. With today's updated guidance, we expect to achieve an 8% to and an 8.1% adjusted operating margin in 2016, a 240 to 250 basis point improvement in two years.

These are impressive results; however, what is even more impressive is the tremendous opportunity that is still ahead of us. We've made excellent progress with respect to inventory management, but there is still so much opportunity for improvement now that we have the foundation of tools and systems.

We are in the infant stages of our digital transformation and customer personalization strategies. We have significant upside in our wholesale and international businesses and several more years of benefits to be realized from our fleet optimization initiatives. And let's not forget the significant competitive advantage we have with respect to our product, because after all great product is what it's all about.

Our number one priority is the creation of shareholder value and we look forward to the continued momentum in our business for the fourth quarter and beyond. Now I'll turn it over to Mike.

Thank you, Jane. You have all see the strong results that our new inventory management systems have delivered over the past several quarters. While we are in the early stages of our digital transformation, we believe our digital strategy will be a significant contributor to us achieving our 10% operating margin milestone.

Let me provide more details around our digital strategy. Millennials are the driving force behind digital adoption. As you know, our core customer is a Millennial mom. They are digitally savvy and have grown up with technology, resulting in a high comfort level with digital and social engagement.

Digital influence in the children's sector is growing at a fast pace. We know that our customer spends significantly more when using digital devices, so ensuring a seamless brand experience is more important than ever.

Our digital strategy consists of five major initiatives. Number one, enhancing our digital foundation. In concert with our strategic partners, we are laying the foundation for a new platform architecture that equips us to better meet our customers' needs and expectations. We will migrate to this new, responsive, service-oriented architecture during 2017, allowing for efficient development of improvements in user features and functionality across devices.

Two, digital capabilities. We will deliver value on desktop and mobile devices through a series of digital releases that enhance the customer experience. Our goal is to improve the shopping experience by significantly enhancing our search capabilities, browsing navigation, checkout, and by providing a robust outfitting experience.

We plan to sequentially deliver these releases during 2017. Once completed, we will have delivered approximately 125 new or redesigned features and functions, resulting in an improved conversion rate and basket size.

We recently implemented a redesigned mobile checkout, which has improved our conversion rates by over 20%. We have also enhanced our search engine optimization capabilities, resulting in a 25% improvement in top 10 keyword rankings on page positioning.

Three, omnichannel experience. In order to enable both a seamless view of our inventory and cross-channel growth, our first step was the implementation of a new distributed order management system, which we delivered in the back half of 2015.

Following that implementation, we piloted our first omnichannel initiative in the third quarter of this year -- reserve online, pickup in stores -- in 100 stores across three states. To date, we have seen positive adoption by our customers and excellent execution by our field organization. Currently, we are experiencing a 3-to-1 attachment rate to the units being reserved online.

Our next omnichannel capability, buy online, pickup in store, is scheduled to be launched in the second quarter of 2017.

Four, increase customer engagement. In October, we relaunched both our private-label credit card and our loyalty programs. Our loyalty members and private-label credit card holders represent our most loyal customer segment, exhibiting a greater visit frequency and average spend.

Our new private-label credit card program with Alliance Data Systems is off to a strong start with a 500 basis point increase in penetration of our US sales. In just the first four weeks, both new applications and approval rates are up over 100% versus last year and we have opened up over 70,000 new accounts.

We also successfully relaunched our loyalty program in the third quarter. This program offers enhanced value and simplicity that we expect will drive additional customer engagement. We have already seen a 100 basis point increase in sales penetration since inception.

Five, customer marketing platform. The development of our customer marketing platform over the next 18 months will allow us to deliver personalized marketing content, optimizing the customer journey based on our individual behaviors. This key step will drive customer segmentation and retention, resulting in more loyal customers seamlessly engaging in both our digital and store channels.

In closing, we are excited about the significant opportunity to further improve our operating results through our digital transformation. Now I will turn it over to Anurup.

Thank you, Mike. Good morning, everyone. In the third quarter we delivered adjusted diluted earnings per share of $2.29, compared to $1.93 per diluted share in the third quarter last year, significantly above the high end of our guidance range. There was no impact on adjusted net income per diluted share in the quarter from currency exchange rate fluctuations.

Details for the third quarter are as follows. Net sales increased 3.9% to $473.8 million. Comparable retail sales increased 4.6% compared to a negative 3% comp in the third quarter of 2015, exceeding our guidance of a low single-digit increase.

Adjusted gross margin for the quarter leveraged 140 basis points versus last year to 41%, compared to our guidance of an increase of 80 to 90 basis points. We benefited from a strong merchandise margin increase and higher AUR, with fixed cost leverage resulting from the comp. Strong product acceptance and our new inventory management tools have now generated seven consecutive quarters of increases in merchandise margin and AUR.

Adjusted SG&A deleveraged 140 basis points compared to last year to 24.4%, compared to our guidance of 160 to 170 basis points in deleverage. As we said on our Q2 call, the deleverage was primarily due to increased incentive compensation expenses, which were partially offset by decreases in store and administrative expenses and the positive impact of the higher comp sales.

Depreciation was $16.6 million for the quarter. Adjusted operating income leveraged 10 basis points to 13.2% of net sales, compared to our guidance of deleverage of 70 to 90 basis points.

We expect our adjusted tax rate for the year to be 32.5% compared to our previous guidance of 34%. This is a result of our ongoing efforts in the area of international tax planning.

Based upon this updated adjusted full-year tax rate, our Q3 adjusted tax rate was 31.3% compared to 33.1% last year. This positively impacted Q3 adjusted EPS by $0.06 versus last year.

Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $267 million, compared to $219 million last year. We ended the quarter with $66 million outstanding on our revolver compared to $34 million last year.

Balance sheet inventory. Inventory at the end of the quarter was down 0.6%, compared to our guidance of a low to mid single-digit increase as a result of higher comp sales and timing of in-transit inventory. It is important to note that we have now had eight consecutive quarters of inventory reduction.

We generated $126 million in cash flow from operating activities year-to-date, compared to $85 million last year, a 48% 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. This guidance excludes certain costs or events that are set forth in our non-GAAP adjustments included in this morning's press release.

Fourth-quarter guidance. We are projecting fourth-quarter adjusted income per diluted share in the range of $1.43 to $1.48. We expect no impact on adjusted net income per diluted share in the quarter from currency exchange rate fluctuations.

We expect that comparable retail sales will increase low single digits. We expect adjusted gross margin to leverage 30 to 50 basis points. We expect adjusted SG&A to leverage 90 to 100 basis points.

Our fourth-quarter guidance assumes that depreciation will be approximately $17 million, deleveraging 10 basis points compared to last year. We project adjusted operating margin to leverage 120 to 140 basis points.

We are guiding inventory to be up mid single digits at the end of the fourth quarter compared to last year, due to the timing of floorsets and in-transit inventory. Our fashion buys continue to indicate a decrease in units in the low to mid single range.

Full-year 2016 guidance. We increased fiscal 2016 adjusted EPS guidance to a range of $5 to $5.05 per share, compared to our previous guidance of $4.60 to $4.70 per share. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.03 for the full year.

We expect comparable retail sales for the year to increase low single digits. We expect adjusted gross margin to leverage 130 to 140 basis points. We expect adjusted SG&A to leverage 30 to 40 basis points.

We project adjusted operating margin to be in the range of 8% to 8.1%, an increase of 160 to 170 basis points compared to 2015. This would represent a two-year increase of 240 to 250 basis points, substantial progress towards our milestone for a double-digit operating margin.

Lastly, here is additional guidance for fiscal 2016. We expect our adjusted tax rate to be approximately 32.5% for the year. We expect apparel AC 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 $45 million to $50 million for the year. We plan to open five stores and close approximately 30 stores in 2016.

In conclusion, our business model continues to rapidly evolve from a legacy US mall-based specialty retailer to a global omnichannel operator. At the same time, our strong balance sheet and cash flow provides us with the financial flexibility to make the required investments to drive continued improvements in operating performance and return significant amount of capital to shareholders.

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

(Operator Instructions) Stephanie Wissink, Piper Jaffray.

Good morning, everyone, and congratulations on a great quarter. Jane, I have a question for you. I know you don't like to get into category specifics, but the level of fashion in the stores and online looks significantly stronger than it has been in a number of years.

Talk a little bit about the team you've put in place there, some of the risks you are taking around some fashion directions, and then where you are seeing some of the AUR increases and if that the direct benefit from taking some risk around some fashion choices. Thank you.

Thank you. As we said many times, we have an extraordinarily talented design team led by Jennifer Groves. I think, without getting into too many specifics around product for the third quarter, when you look at a 4.6% comp across all channels and a positive comp across all the months, you can pretty much say it's safe to say that we had good performance in every division, apparel as well as accessories.

I would say the story around third quarter was wear-now. We have been delivering more frequent deliveries of wear-now products over the past few years and that strategy is clearly working for us. So if you look at categories like long-sleeve knits, graphics, things like that, they were very successful. I would say that the fact that we took our inventories down in the heavier categories in the third quarter -- outerwear, sweaters, things like that -- that has certainly been helpful.

We understand our customer. We have a lot of studies we do on our customer. We know where the Millennial mom is thinking and I think that we have been able to take that information and share that information with our merchandising and design teams and really come out with some outstanding products that really, I think, shines when you look across the kids' space.

Jay Sole, Morgan Stanley.

Great; thank you, good morning. Jane, I had a question about the comp. It was obviously 4.6 in 3Q, but you are also guiding to low single-digit positive in 4Q even though there's a very tough compare versus last year. So obviously you talked about many different reasons the comp is strong, but it seems like the comp is now accelerating on a two-year basis as we get into 4Q, despite the macro headwinds that you mentioned and maybe some of your competitors who are talking about negative comp growth currently.

Can you just maybe shed some light on why it's accelerating? What's even getting better right now about your ability to deliver same-store sales growth?

You know, Jay, what I really think it is is what I said in my prepared remarks. I think it is the strategy that we put in place several years ago and that we have been executing on diligently really relies on a tremendous amount of self-help initiatives, even in spite of all the macro issues that are going on.

And when you just check down the list of the four key growth pillars -- number one, product. Our product is our strength. As I said, very talented design team. Our sourcing and production area is in a league on its own.

And so I think that when you just think about product and how steady we've been with consistent product acceptance, we don't see that abating at any point. We know our customer; we understand our customer. We are not going to get off track and we're going to continue to deliver products that she likes.

When you look at inventory management, the fact that we have those tools and systems in place, we're just scratching the surface on inventory management. We've done a lot. We've had some really impressive progress, but when we listed all the things that we did in third quarter and that we have going forward in 2017, we just keep getting better and better.

When you look at the digital transformation, we've done a lot of great things on digital, again just scratching the surface. The things Mike brought up about the private-label credit card and the myPLACE Rewards program, that is incredible numbers in four weeks to see that kind of penetration. So that's going to help us as me move forward on personalization strategies.

You look at alternate channels of distribution; the business with Amazon has been terrific. We just opened the replenishment business with them. Our international business is really strong and getting stronger. Our e-commerce business has been tremendous.

And then also the size 16 thing that I mentioned, that is really, really exciting for our brand. The fact that since Jennifer came on board -- we've been working on big kids for a long time, but when Jennifer and her team came on board we really doubled down on big kids. We think it is a differentiator for us, particularly when you look across the market.

And based on how well we were selling our higher sizes, like 12 and 14, we really thought that 16 could be an opportunity. So after testing it online and seeing how successful that was, we brought it into all our stores this past October. We think that could be a $50 million opportunity over the next couple of years.

Then when you just look at things like fleet optimization, 300 stores coming up every year for the next four years in this tenant-friendly environment, huge opportunity. So I just think the list goes on and on and on, and we're just focused, like we said, on self-help initiatives.

We're working hard and just keep going on the strategy that we put in place and continuing to execute. We're excited about what we can do on our own, despite the macro environment.

Stephen Albert, Bank of America Merrill Lynch.

Good morning. I think I just wanted to touch a little bit more on 4Q. I think on prior calls you talked about the fact that you are even more conservatively positioned on inventory on cold-weather gear this year than last year. Do you view that at all to be a constraint on sales growth if we have a more normalized winter?

No, I don't. I think that when you look at what has happened so far, we are three weeks into the quarter and we have had some crazy warm weather again this year. We positioned ourselves in a very safe, I will call it, place as far as outerwear is concerned and particularly as far as cold-weather accessories are concerned.

If it gets cold in December, that will be great. It'll make up for some of the miss in November on cold-weather gear, but as far as it constraining sales, not concerned at all. We have plenty of inventory in the wear-now categories that will be fine for us for Q4.

Anna Andreeva, Oppenheimer.

This is Sam on for Anna. Congrats on the quarter, very strong results. To Jane, what are you seeing in the promotional environment out there in the value kids' space?

Obviously guys are executing very well. What kind of promo cadence are you expecting for the fourth quarter? And as far as quarter-to-date trends go, given -- can you talk to that a little bit given the choppy weather trends?

And then to Mike. Gross margin recapture has been very strong this year, fourth-quarter guidance for up 30 to 50 basis points; what's driving the moderation versus year-to-date? Thank you.

Sure. I think we talk about our promotions first. I think we have been very orderly and planned upfront and you can see that by the continued AUR and margin increases and a very well-controlled inventory position. All in the space of what continues to be negative traffic trends, even though ours did improve in Q3 from where we have been.

I think that's not the same case in the competition. In my opinion, several of the kids' retailers are way too heavy in inventory. You are seeing a build up there and in some cases it even appears to be aged inventory.

They are promoting it quite heavily now and I think they will continue to have to promote it throughout Q4 to be able to go into the spring season clean, so I think it's pretty heavy out there. We anticipate it will be an extremely promotional environment like it is now, like it has been for a while, and we continue to see that going into fourth quarter.

As far as our comps, we are running positive comps, but there are swings between the West and the East Coast with the weather.

As far as gross margin expansion in Q4, we haven't really changed our outlook for Q4 from when we guided back in the second half of August. Our gross margin leverage of 30 to 50 bps is on the back of inventories being in excellent condition.

As you know, our gross margin has expanded 170 bps year-to-date. This would put us in a range of 130 to 140 bps on a full-year basis. Substantial progress in gross margin, over 220 to 230 bps on a two-year basis.

Assortments are very clean; inventories are in excellent condition going into Q4. AUCs, as we look at our buys in 2017, continue to be a tailwind, so all in all, pretty comfortable with our gross margin guide for Q4.

Janet Kloppenburg, JJK Research.

Good morning, everyone. Congratulations, really nice quarter. Just a couple of questions.

When I look back historically, your operating margins I think peaked around 40%, maybe higher. I'm just wondering what that -- if that opportunity exists to get back there, given all of your initiatives on the inventory and sourcing side. And also, given your success in the digital channel, I was wondering how you were thinking about your brick-and-mortar store closings as they come up for expiration and if we could see an acceleration there going forward. Thank you.

As far as our gross margin, as we talked about on the call today, Janet, you would've heard several levers that were discussed regarding product around our digital initiatives. Around our inventory initiatives, we have three new tools that we are rolling out/evaluating; fleet optimization, which Jane talked about earlier about the amount of lease actions we have every single year. So significant levers in the business to continue to drive operating performance towards our double-digit operating margin milestone.

We'll certainly spell that out more when we get into 2017, but I think suffice it to say very pleased with the momentum in the business. Seven quarters of AUR in merch margin growth, eight quarters of inventory reduction, and we continue to drive self-help levers, as we talked about today.

From a store optimization perspective, we are pleased with the results that we have had to date. The program has allowed us to address problem locations while reducing our overall occupancy rate each of the last three years. We will end the year with approximately 140 closures from 2013 to 2016 and to date we still continue to see that transfer rate in excess of 20% driving nice improvement in neighboring stores and in e-commerce.

As Jane mentioned, we have -- over the next four years we have about 1,200 lease actions coming up so it gives us plenty of opportunities to assess where we are going to be from an overall perspective in terms of either accelerating or just maintaining a pace. But we have had good performance; our portfolio is very healthy. We are giving time to assess our new inventory management tools and the impact that that has been having a merchandise margins.

Obviously, we're developing omnichannel capabilities, which also will have an impact, and then obviously ongoing lease renegotiations have been very favorable for us.

Susan Anderson, FBR.

Good morning, congrats on a very nice quarter. I was wondering if you could maybe give some more color on markdown optimization, which you guys had been implementing. Have you guys seen any benefits from it yet? Or maybe talk about what inning you are in with this and how we should think about it flowing through over the next few quarters.

Then also on the wholesale part of the business, maybe just give some color on how this is trending versus your expectations. I think you guys had talked about accelerating the growth there this year now that you have the systems in place. And then any thoughts on any new wholesale partners? Thanks.

Sure. From a markdown optimization perspective, obviously we're looking at a very structured, analytical approach around pricing to generate improved margins and inventory turns. We piloted markdown optimization analytics during the second quarter, which was slightly ahead of our schedule, and we had said at that time we were very encouraged by the results. We are piloting with our Canadian stores now in Q4 as we finalized our approach for a company-wide rollout.

From a wholesale perspective, obviously we are very pleased with our performance with Amazon and the establishment of a replenishment program. That program started in July with a pilot of about 75 styles. It has grown to over 300 styles in October and it will continue to grow nicely we think through the end of the year.

The performance at Amazon has been great. We've seen sales above plan, solid margin, outstanding conversion rates; pretty much it's the same story across our customer base in wholesale. At this point in time, we are pretty pleased with the results overall in that business.

Betty Chen, Mizuho Securities.

Good morning. I would like to add my congratulations as well; the stores look terrific.

I was wondering, in terms of the wholesale business, Mike, is the philosophy to kind of deepen the relationships with existing accounts, given some of the traction you're seeing with Amazon, or is the team also pursuing some new accounts as well?

My second question is, Jane, really interesting to hear about the opportunity around size 16. How do you think about the opportunity to perhaps even expand beyond that or do you think at that point they've kind of outgrown Children's Place? Or perhaps the brand and quality will retain the parents and the customers even beyond that size and age group? Thanks.

Thank you. I think when you look at what's happening in our business I think that we continue to gain share, obviously, with our comps and we continue to be able to reach an older customer. I think that the addition of Jennifer and her team and, as I said before, really focusing on that bigger kid, we started to see a higher penetration in size 12s and a higher penetration in size 14. So we said it makes sense for us to try to test size 16, which we did online.

We thought it would be good, but it was overwhelmingly good, so we had the courage to then put it in all our brick-and-mortar stores -- not just in the US, but in Canada as well -- with this past October. And very, very well received by the customer.

We will take -- particularly on the boys' side, I think there is opportunity. There's a lot of kids' departments that run size 8 to 20 in boys. Now we are just 8 to 16, so the opportunity in size 18 I think is still there for boy and I think when you look at size 16 in girl we're just kind of scratching the surface by category there.

We said that would be worth we think $50 million over the next couple of years. There could be opportunity in 18 for boy and we will continue to watch it.

From a wholesale perspective, really our focus is growing existing partners that we have. So we think we still have tremendous upside in terms of where we are with the off-price and club community. Then obviously we've talked about Amazon as a tremendous opportunity for us also.

Marni Shapiro, Retail Tracker.

Congratulations, the stores look absolutely outstanding. I was curious; you talked a little bit about reserve in store and pick up in store. Are the customers --? Two things. Is this across the board that you are seeing success? I know it's still fairly new, but is it a city store, a mall store, strip, or is it across the board that you are seeing success here?

I'm also curious, when they reserve in store, is the associate adding on the extra items or is the customer walking in and spending time in the store shopping around?

We piloted reserve online, pick up in store basically across 100 stores in three states and that was rolled out over the last eight weeks. From a store --

And it's across different store types.

Right. From a store profile perspective, we are seeing similar results across all stores so we are pretty excited about that opportunity. As I mentioned and Jane mentioned also, we are seeing a great attachment rate of 3 to 1. It's a combination of our sales associates suggesting items, but also we think once we get the consumer in the store that she gets to see the full breadth of assortment and is excited by that also.

Adrienne Yih, Wolfe Research.

Good morning, congratulations. I mean great results in a tough, tough environment.

Jane, I was really intrigued by the launch on Taobao and I am wondering, now that it seems like the domestic North American business is on a nice glide path recovering, how much more quickly are you willing to go international and even beyond Taobao, perhaps on the ground with stores in the Asian market.

Mike, really quickly, what's the transfer rate on the store closures? And then longer term what do you think the right brick-and-mortar to online kind of combination should be?

My final one is a really quick one for Anurup. That tax rate, it's kind of a permanent reduction, so as we look into 2017 should we be thinking about a 32% tax rate? Thanks so much.

I'll start off with Tmall. Obviously we were ahead of schedule in terms of launching on Tmall. We did basically a very soft launch in October.

We are part of Tmall's strategic partner program designed to really help us with exposure and drive traffic. We're very encouraged by the long-term opportunities, but at this point we have been in it for a couple of weeks so stay tuned for that.

And from an overall perspective, we are happy with what we are doing from a franchise perspective. Our focus was to grow the existing partners that we have. We think we can easily double the amount of points of distribution that we have over the next couple years with these existing partners.

It's not to say that we are not looking for additional ones in other parts of the world, but at this point we're sticking with the franchise model. We like the return on invested capital and where we are headed from an operating margin perspective with very little capital at risk.

As far as the tax rate goes, from a -- well, it was a result of our initial international tax planning this year and obviously we only have one quarter of the year left to go, so it's easier to nail down the rate from that perspective.

For 2017, I would say it would be in that range. Obviously as we finalize our 2017 plans and our income by jurisdiction it will get a lot clearer and sharper, but I would say it's safe to plan in that range for now. And we will give you more of an update when we talk about 2017.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone, and congratulations on the tremendous results. As you think about the size and pack initiative, the order planning and forecasting tool that you have, what could these add to sales and margins as we go forward? And is this 2017, 2018? Where does it take us?

Jane, as you think about product now that you have size 16, are there other categories within clothing? Is it accessories that you can go into also? It sounds like you didn't have to take anything away from other categories in the store because of the clear inventory management. Does that hold going forward? Thank you.

Yes, that holds going forward. We have significantly reduced the inventory in our stores and become a lot more productive, so we have the space and we have the room. I think from a sizing point in accessories, the first thing that would come to mind would be footwear and we're looking at that to go with the size 16. Is there another size range we can extend in footwear?

I think from an accessories point of view, when you speak to Jennifer about I think what she is thinking is not necessarily as much from a size range, because a lot of those aren't size-specific in the accessory categories, but more so a customer mentality. In other words, how do we appeal to an older customer through our accessory offerings?

I think when you look at our assortments over the past couple of seasons, they also tend to -- they are trending a little bit older and a little bit more sophisticated of a girl customer. Same in boy. So I think the opportunity is more around the sensibility of the product in accessories versus the size and I think the opportunity in footwear is the size.

We have had the assortment planning and allocation replenishment systems in effect for about 15 months now. We really launched them with back-to-school 2015 and you can see that the impact has been pretty significant on our merchandise margin and inventory productivity over that timeframe.

So our expectation is we will continue to derive benefits from those two systems along with the three new tools that will impact 2017. We think it's a major contributor to our goal of a 10% operating milestone.

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