The Children's Place Retail Stores' (PLCE) CEO Jane Elfers on Q2 2014 Results - Earnings Call Transcript

Aug.21.14 | About: The Children's (PLCE)

The Children's Place Retail Stores, Inc. (NASDAQ:PLCE)

Q2 2014 Earnings Conference Call

August 21, 2014 08:00 AM ET

Executives

John Taylor - VP of Finance

Jane Elfers - CEO, President and Director

Mike Scarpa - COO, CFO, Principal Accounting Officer and EVP

Analyst

Susan Anderson - FBR Capital Markets

Dorothy Lakner - Topeka Capital Markets

Betty Chen - Mizuho Securities

Anna Andreeva - Oppenheimer

Lorraine Hutchinson - Bank of America/Merrill Lynch

Taposh Bari - Goldman Sachs

Jennifer Davis - Buckingham Research Group

Steph Wissink - Piper Jaffray

Adrienne Tennant - Janney Capital

John Morris - BMO Capital

Dana Telsey - TAG

Brian Tunick - JPMorgan

Marni Shapiro - The Retail Tracker

Janet Kloppenberg - JJK Research

Rick Snyder - Maxim Group LLC

Lee Giordano - CRT Capital

Rick Patel - Stephens Incorporated

Jay Sole - Morgan Stanley

Richard Jaffe - Stifel Financial

Operator

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

John Taylor

Thank you, Steve. Thank you for joining us this morning. With me here today are Jane Elfers, President and Chief Executive Officer; and Mike Scarpa, Chief Operating Officer and Chief Financial Officer. We issued a press release earlier this morning, announcing second quarter 2014 financial results. A copy of the release can be found on our website.

Before we begin, I would like to remind participants that any forward-looking remarks made today are subject to the Safe Harbor statements found in this morning's press release, as well as in our SEC filings. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially.

The company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date hereof. After the prepared remarks, we will open the call to questions. We request that each of your limit yourself to two questions so that everyone will have an opportunity to speak.

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

Jane Elfers

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

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

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

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

As part of our continuing commitment to return excess cash to shareholder, we paid a quarterly dividend and repurchased 301,000 shares returning a total of 17 million to shareholders in the second quarter. Today, we also announced our third quarter dividend. Q2 business trends we delivered a consistent performance by region as weather was more normalized across the country.

As for merchandize performance our new born division comps positive low double digit in Q2, the third straight quarter of positive comps as customers continue to respond to our new merchandizing initiative. Accessories was the weak spot with the negative mid single comp. The balance of the business was very consistent, baby was only slightly down in the quarter and big kids in shoes comp positive.

For Q3, the key back to school tax free events were in line with our expectation and we expect the promotional environment to remain highly competitive as we move to the back to school selling period and into the balance of Q3.

Now I’ll turn it over to Mike.

Mike Scarpa

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

Details for the second quarter are as follows. Net sales were $384.6 million the comparison to the second quarter of 2013 was negatively impacted by foreign exchange of $2.8 million. Comparable retail sales increased 0.8% compared to a negative 0.4% comp last year.

The positive 0.8% comp for the quarter was primarily attributable to an increase in transactions and average transaction value as the increased units per transactions were somewhat offset by decline in average unit retails. U.S. comp sales declined 0.3% in Q2; a strong performance in e-commerce was offset by declines in store sales. Canada comp sales increased 9.5% as pent up demand for positive transactions and average transaction values. E-commerce accounted for 15.3% in net sales in the quarter compared to 13.2% last year. Adjusted gross margin rate for the quarter declined 200 basis points to 31% that the leverage of fixed expense on a negative store comp accounted for approximately 60% of the decline.

Adjusted SG&A declined $6.7 million to $216 million better than or guidance of $4 million to $5 million reduction. SG&A was 30.2% of sales, a 190 basis point improvement compared to last year. SG&A expenses were lower in both stores and in corporate. These savings were partially offset by training and cut over cost associated with our SAP systems implementation. We will continue to tightly manage SG&A going forward, while balancing this with technology investments consistent with our strategic plan. We recorded a non-GAAP charge of $4 million in the quarter, the majority of which was related to impairment charges associated with our store rationalization program along with severance cost associated with corporate restructuring.

Adjusted operating income leveraged 10 basis points or negative 3.2% of sales. Adjusted loss per share was $0.37 compared to a loss of $0.42 last year. This comparison to the second quarter of 2013 was negatively impacted by $0.01 due to foreign exchange.

Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $200 million compared to $185 million last year. We ended the second quarter with $27 million on our revolver.

During the last 12 month, the company has generated $123 million in operating cash flow while investing $65 million in CapEx and returning $66 million to our shareholders in the form of stock buyback and dividends. Additionally today, our Board declared a quarterly dividend for Q3.

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

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

Fleet optimization. We remain on track to close 125 underperforming stores through 2016 which includes the 41 stores we closed in 2013 along with approximately 35 stores we plan to close in 2014. We have been modeling a 20% sales transfer rate when accepting the financial impact of the store optimization program. As we have previously mentioned, when we examined the full year impact on the group of stores we closed in the fourth quarter of 2012, we achieved a sales transfer rate that was greater than 20%.

We have begun to analyze the sales transfer rate of stores we have closed in Q4 of 2013, and when we extrapolate the data, we are seeing the same result, a sales transfer rate in excess of the 20%. In addition, we have begun the process of customer segmentation and how it relates to our real estate optimization program including analyzing customer spending patterns at different store formats and the distances our customers travel to our stores. In addition, we are analyzing our store base to determine at what rate stores are adding new customers along with migrating up existing customer spend.

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

On the international front, we opened six stores in the second quarter and ended the quarter 54 international franchise stores. We remain on track to end the year with 75 franchise stores. We have been very pleased with the performance in the Middle East and Israel as customers continue to respond positively to our fashion and hit the [indiscernible] outfitting. In addition, this morning we announced a new franchise agreement with Arvind Lifestyle Brands Limited to expand into India with our first store opening slated for fall of 2015. We have the potential to open approximately 50 stores in this market overtime. In our wholesale business, we added distribution to a new account during the second quarter. We will be distributing to four new accounts during the second half of the year.

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

Now I’d like to move onto our guidance. Our guidance for the third quarter assumes comparable retail sales will be flat to negative low single digits. As a result, we project third-quarter adjusted net income per diluted share will be in the range of $1.74 to $1.82, compared to a loss of $1.89 in the third quarter of 2013. We expect to deleverage gross margins by 130 to 160 basis points.

We expect SG&A dollar spending will leverage approximately 80 basis points compared to last year as continued SG&A efficiencies are partially offset by investments in our technology road map. We expect inventory to be up mid-single digits at the end of the third quarter.

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

This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments. It also assumes that currency exchange rates will remain consistent with today's rates, which is expected to negatively impact adjusted net income per diluted share by approximately $0.05 in the third quarter and $0.09 for the year.

Additional guidance for fiscal 2014 is we expect depreciation expense to be flat in the back half of 2014 and down year-over-year, as a result of our year-to-date reductions. We expect our tax rate to be approximately 33% for the year.

We entered the third quarter with approximately $74 million remaining on our share repurchase authorization and we expect to continue to return capital to shareholders through both our dividend program as well as through share repurchase. Our capital expenditures for the year are expected to be between $80 million and $85 million consistent with our previous guidance.

At this point, we’ll the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Susan Anderson from FBR Capital Markets. Your line is open.

Susan Anderson - FBR Capital Markets

Good morning. Congratulations on a good quarter in a really tough environment and positive comp. I was wondering, if you can give us some more color on the merch margin, I think you said fixed costs were impacted the quarter by minus 40 bits, then maybe talk about merch margin whether you see with a higher promotional level and then maybe, if you can give some color to on your expectations for merch margins for their quarter and how they are trending so far? Thank you.

Mike Scarpa

From our merch margin perspective we said that the leverage of fixed expense is on the negative store comp accounted for about 60% on the decline or roughly 120 basis points. There was pressure on merch margins obviously based on the fact that it’s a pretty promotional environment out there, AURs were down in the quarter and that overall impacted the merch margins. Obviously we’re hoping as we move forward with some of our system implementations that we could see our gross margin rate start to stabilize. And as far as Q3 margins go, we’re looking the leverage of about 130 or 160 and again, we’re looking at fixed expense to leverage on a negative comp along with continued AUR pressure in the third quarter.

Operator

Our next question is from Dorothy Lakner from Topeka Capital Markets. Your line is open.

Dorothy Lakner - Topeka Capital Markets

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

Jane Elfers

Hi, Dorothy. As far as the business is concerned with new born, I think what we’re starting to see over these past three quarters is that our new born strategy is really starting to show traction, the focus has been on essential high volume core apparel products for babies and we’ve really gotten after things like body suits, sleepwear, playwear and we started to introduce beds and blankets. And those classifications are all really starting to resonate with our customer. So we’re going to continue to get behind those categories in an even bigger way as we move forward into Q3, Q4 and beyond. The baby business was much improved in the second quarter. As I said in my prepared remarks it was only slightly down so that was the strongest that we’ve seen in the baby businesses in the long time and I think the focus that we’ve been putting on that product and moving into more sleepwear and more playwear type kind of softer knit options and making sure that the outfitting is matched up is also this was really the first quarter that we thought such a strong performance in baby. So if you think about what our opportunities are for the balance of the year and into the early part of ’15, it’s really to continue to keep the new born and baby business going in the direction it is.

Operator

Our next question from is Betty Chen from Mizuho Securities. Your line is open.

Betty Chen - Mizuho Securities

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

Mike Scarpa

Sure. Betty from a wholesale perspective, we began the year basically shipping to three main customers. We’ve added some distribution to a customer in Canada in the second quarter and as I mentioned we will be adding distribution to four new customers in the second half of this year. I just want to again say that accounts take a while to ramp up, they come in, they test categories and from their initial order cycle to retail REITS, it can be as long as six to eight months.

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

From an international perspective, we ended 2012 with two partners and 12 franchise stores. We end this quarter with announcing today another new partner. So five partners and 54 doors and we are on track to be at 75 doors by year end. So we like the pace of where that’s going.

From a financial perspective, both the international and wholesale businesses are slightly dilutive to overall gross margin but are nicely accretive to our operating margin.

Operator

And our next question is from Anna Andreeva from Oppenheimer. Your line is open.

Anna Andreeva - Oppenheimer

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

Mike Scarpa

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

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

Operator

Our next question is from Lorraine Hutchinson from Bank of America/Merrill Lynch. Your line is open.

Lorraine Hutchinson - Bank of America/Merrill Lynch

Wanted to follow up on the accessories business and see if there are any specific strategies or inventory plans around trying to turn that business.

Jane Elfers

Sure. In accessories what we saw as we mentioned that was the weak spot in the quarter, we had negative mid-single comp where we saw the weakness was in hats and sleepwear and that was a product acceptance issue. And I think as we move through the balance of third quarter and fourth quarter, hats not meaning cold weather hats, just fashion hats is not a big business in the back half of the year. So I don’t think we’re going to see to be as hurt there as badly as we were in Q2. And I think we’ve made the adjustment in big kids when I say sleepwear, I mean the big kids sleepwear, the new born and the baby sleepwear has been pretty fantastic but the big kids sleepwear I think from a product point of view was just off. And we’ve adjusted that as we get into the important Q4. The other weaknesses in Q2 in accessories were hair and sunglasses and I think what really exacerbated that was the very weak Q1 with the tough weather and we had a lot of inventory in those categories coming out of Q1, so we really had to drive down the AUR which hurt the sales in Q2.

Operator

Our next question is from Taposh Bari from Goldman Sachs. Your line is open.

Taposh Bari - Goldman Sachs

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

Mike Scarpa

Well, just on that fact, in the last quarter we had an overall positive comp that our store actually comp down. We had a significant increase in our e-comp business that was offset by a negative in our store business. So when we look at leveraging fixed expenses we need to comp low single digits in our store based in order to leverage those fixed expenses. As far as cadence through the quarter it was pretty much as we planned we didn’t see any deviation from where we were from a plan perspective and promotions really just were pretty consistent throughout the second quarter.

Jane Elfers

And Topash, for Q3 early REITS on the tax REITS I said has been pretty much in line with where we expected them to be and that has all considered in the guidance we’re giving this morning.

Operator

Our next question is from Jennifer Davis from Buckingham Research Group. Your line is open.

Jennifer Davis - Buckingham Research Group

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

And then quick question on your cash and the revolver, how much of your cash is trapped overseas and are you doing anything to try to get that back over here? And did you take out on the revolver because of the amount of cash overseas?

And then one more actually, Mike. If you want to talk about -- you talked about the transfer rate from closed sales in excess of 20%. Do you want to give us a little more color? How much above 20%? Thanks.

Mike Scarpa

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

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

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

Operator

Our next question is from Steph Wissink from Piper Jaffray. Your line is open.

Steph Wissink - Piper Jaffray

Thank you. Good morning, everyone. I will add my congrats on the nice progress as well. Mike, if you could just help us with the third quarter guidance on the earnings side. I think you mentioned there was another $0.05 of an impact from foreign currency and also the deleverage on gross margins, but is that any reflection of what you are seeing August to date or is that just a level of conservatism like we've seen the last couple of quarters? And then also on the fleet rationalization, I think it's so interesting that you are capturing a better level than that 20%. Would you be able to give us some sense of whether that's a capture in other stores or whether that's what you are seeing in your e-commerce business? And if that has you thinking differently about the fleet beyond the 125 closures that you already announced? Thank you.

Mike Scarpa

Okay. So from a third quarter guidance perspective, we’re projecting our comp are flat to down low single digits with pressure on gross margins and we’re seeing pressure today and we expect to continue to see pressure. We’re seeing retailers out there our competition really promoting pretty heavily and it’s all a matter I am trying to capture that consumer. So we need to have all so, compelling pricing on our products. So our sense is that 130 to 160 is where we will end up. SG&A, we’ve done a pretty good job on SG&A. Over the last 18 months, we had a significant reduction last year, we reduced SG&A close to 14 million in the first half of this year and again see a leverage point of 80 bps in the third quarter.

And then like you mentioned we will definitely see the $0.05 on the FX. We saw the Canadian dollar strengthen a little bit at the beginning of July and then basically expect to where it was at $0.91 on U.S. where it was at the beginning of the year.

From a fleet rationalization perspective, quite frankly we like the fact now that not only are we measuring Q3 in terms of in Q4, 2013 closures and we’re seeing a transfer rate in excess of 20%, but we are also now bringing in some more data as we begin to make decisions around our store portfolio.

We’re marrying customer segmentation and real estate optimization looking at spending patterns in the formats distances that customers who travel to store. We're looking other KPIs like the amount of stores that our customers shopping whether they are multi-store and multi-channel customer. So all that intelligence is being factored in along with -- we want to understand specific stores and customer movement within those stores. So we are looking at the rate of customer adds or drop in given locations and we are also looking at the rate of spend per customer and whether that’s going up or down. So we believe all of this is going to better inform us as we continue work on our real estate rationalization program, so I wouldn’t be surprised whether you see the 125 number to start to move upward.

Operator

We will take our next question from Adrienne Tennant from Janney Capital. Your line is open.

Adrienne Tennant - Janney Capital

My question Jane is non-Canada. Big reversal there, I was wondering if that is -- how much of that is due to sort of normalized weather. You also said it there was improved contraction just with regard to the product. So is that as we go back go into slightly negative comp, is that expected to turn back negative, just wondering what the underlying trends were there? And then for Mike, can you sort of -- I know there are a lot of IP initiatives, supply chain initiatives. Can you kind of remind us of kind of the near, mid and longer-term impacts of each let’s say over the next kind of 15 months to 18 months, when do those start to materially show up in the financials? Thank you.

Jane Elfers

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

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

Michael Scarpa

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

Operator

Our next question is from John Morris from BMO Capital. Your line is open.

John Morris - BMO Capital

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

Jane Elfers

Sure. As far as performance by category in the second quarter it was really pretty remarkably consistent across classifications in the United States as well as Canada, so there really wasn’t any major call out, there wasn’t anything in Canada that really stood out, it was just strong performance across by category. So there’s not anything to really report there. As far as going forward into Q4 from a marketing and merchandizing point of view, from a merchandizing point of view I think that we have this opportunity to continue to try to, did need to go forward and ahead with the new born business. And hopefully continue to see nicely stabilization that we’ve seen in the baby business. So if we can hold on to that business as we did in Q2 we think that’s a big opportunity for us. As far as marketing and promotion we -- now that we have SAP behind us, we have a much boarder array of promotional options than we’ve ever had before and we plan to utilize this capabilities as we move to the back half of the year. So you’ll start seeing some very different promotion for us in Q3, the tail-end of Q3 into Q4 because just purely because we have the ability to do that.

Operator

Our next question is from Dana Telsey from TAG. Your line is open.

Dana Telsey - TAG

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

Mike Scarpa

So from an outlet perspective in -- again we saw some difficult traffic in the first half of the year. Comps are down but in the second quarter there was a big improvement when we were in the first quarter. We put out some pretty compelling promotions to increase conversion which help the overall business. We saw margins contract a little bit in the quarter, but currently they are still positive from where year-on-year, year-to-date and at this point there are about, still about 280 basis points behind the U.S. play store which has been pretty consistent. As far as some of the initiatives around the systems we definitely believe that these tools will help to improve inventory management across both our stores channels and our e-comp channel and we would expect to see additional sales and margin opportunities in both channels.

Operator

Our next question is from Brian Tunick from JPMorgan. Your line is open.

Brian Tunick - JPMorgan

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

Jane Elfers

On second half of the year we’re certainly helping in Q4 that we, weather plays out better for us then it did last year from where are now point of view I think the difference is, I think the big difference is that you’ll see in our assortments for Q4 is that we have play some of the cold weather categories and some of the outerwear categories a little bit tighter than we had last year to make sure that we don’t have inventory carry over into the January and February time period in those classifications that were really sold through on those, coming out of the holiday. I think the other thing that you’ll see as in our December we see, I think we’ve worked hard to make them a little bit more aware now, a little less but to little less short place and we brightened it up in the color palette and certainly brightened it with new styles and trend, but from a sleeve length and overall covered up outlook. I think we’ve done a better job there.

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

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

Operator

Our next question is from Marni Shapiro form The Retail Tracker. Your line is open.

Marni Shapiro - The Retail Tracker

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

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

Jane Elfers

I will answer the first one about licensed product. We’ve had NFL, NBA on the site for a while now and we continue to roll that out. We had first stated just with T-shirts and then we’ve been able to add some other categories to that. So that’s been productive for us. What’s been very strong for us on the license front has really been the movie properties. And if you remember, really started to take off last year when we had the exclusive arrangement for the Frozen movie with Disney which was just a huge success for us last holiday and then we are currently in back to school in another nice promotion with our license vendors, that is doing very well for us. So you will continue to see us partner with those people with new releases to drive traffic and bringing that excitement to our stores.

So we feel very good about our partnerships there and what we’ve seen in the past and how we are positioned to move forward. Thank you for the comments and noticing what we are doing on the site. I think you will see most of being tested on the site for the next period of time where we are really going to be focusing on marketing in the stores for the back half of year is really through more compelling pricing promotions.

I think that you can’t underestimate the power of the fact that now we have SAP behind us. We have been so handicapped in the past by such limited functionality across channels and certainly in pricing as well that now we are able to really kind of breakout and do promotions that other people have been doing for a long time. So I think that’s kind of where you will see our marketing changes for the balance of the year.

Operator

Our next question is from Janet Kloppenberg from JJK Research. Your line is open.

Janet Kloppenberg - JJK Research

Good morning, everyone and congratulations on a great second quarter. I apologize, I did get on the call late, so if my questions are redundant, we can handle them offline. Jane, I was wondering if you could talk a little bit about the denim category. Seems very promotional and I'm hearing that trends are soft there and being replaced by newer silhouettes and bottoms. I'm wondering what you think about that and how you think denim trends will be in the spring season and going forward? And Mike, I don't know if you addressed the issue of the lower cotton pricing, but I wondered if that would begin to influence your AUCs next spring and how impactful you thought it may be? Thank you.

Jane Elfers

Yes, on the denim question, denim is definitely softer and there it’s very, very promotional during the back-to-school period or certainly it’s from the start of the back to school period. I think what we are seeing at The Children’s Place, which maybe a little bit different than what we’ve seen over the past couple of years in the teen space is that there still is a demand for denim, it’s just the pricing is really under pressure, it’s not that the bottom has swollen out and that moms doesn’t want denim anymore. She just wants it at a very sharp price. So I think as you think about that as we play about the balance of the third quarter and into fourth quarter, there is going to continue to be significant pressure on AUR and the denim category. The [indiscernible] category the leisure category if you will is certainly coming on strong and has been for the past year or so. So I think the real focus for The Children’s Place is going to be on how to think about denim from next back-to-school and where that cycle will have taken that kids market by next back-to-school. We'll be able to promote our way out of this six months but the real challenge is going to be to get ahead of next back to school and figure out what the offsets are to that category because it is such a big, big category for us.

Mike Scarpa

And Janet, I did address the cotton costing issue. Basically to summarize it’s good news for us long-term based on the amount of cotton supply that, cotton fiber supply that’s usually in the marketplace any given time usually between six to nine months so we’re basically looking at potential impact in the second half of ’15, not in spring.

Operator

Our next question is from Rick Snyder from Maxim Group LLC. Your line is open.

Rick Snyder - Maxim Group LLC

I would like to follow up on Adrienne's question about Canada. And Jane, you said the 9.5% was pent-up demand, but it looks to me like the first half comped positively overall, which looks like it's the first positive comp from the great white north since Q4 of ‘12. What I’d like to hear is what you think the potential is for some margin recapture up there. Thank you.

Mike Scarpa

So we were pleased with the performance of Canada in the second quarter obviously up 9.5% which put our year-to-date comps to Canada a little over 1%. Coming off the last year where we saw a merchandize margin improvement we actually saw a little decline in the first half of this year. We’re getting some nice impact in terms of sales and margin dollars from our e-commerce site which continues to gain momentum roughly representing almost 11% of sales in Canada in the quarter. So pretty pleased with that. We still, as Jane said before we see the business still continuing to be difficult, we’re controlling what we can control as it pertains to inventory and costs, we’ve done the right things in terms of stores. And we feel good about the executive team up there but it’s a pretty difficult environment. So we’re also facing what we see at some AUC headwinds obviously with the Canadian dollar being where it is.

Operator

Our next question is from Giordano Lee from CRT Capital. Your line is open.

Lee Giordano - CRT Capital

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

Mike Scarpa

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

Operator

Our next question is from Rick Patel from Stephens Incorporated. Your line is open.

Rick Patel - Stephens Incorporated

Now that you are live with some of your new systems, can you talk about the initial rollout of planning and markdown optimization capabilities? I'm curious how much of your store base or merchandise assortment this will touch upon initially and how long you think it will be until it expands across the entire base. I know you expect the benefit in the back half of '15, but just some color around the ramp-up would be great?

Mike Scarpa

We’re just basically looking at some planning systems right now for spring and summer we’re doing some test for one of our division so it’s not completely rolled in, our hope would be to get by the back to school period of 15, couple of more division onto the planning insight of it, as far as the allocation replenishment we’re just beginning to work on those as those are also not allocated anywhere across any division at this point.

Rick Patel - Stephens Incorporated

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

Mike Scarpa

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

Operator

Our next question is from Jay Sole from Morgan Stanley. Your line is open.

Jay Sole - Morgan Stanley

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

Jane Elfers

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

Jay Sole - Morgan Stanley

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

Mike Scarpa

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

Operator

And we will take our last question from Richard Jaffe from Stifel Financial. Your line is open.

Richard Jaffe - Stifel Financial

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

Mike Scarpa

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

Operator

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

John Taylor

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

Operator

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

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