The Children's Place Retail Stores' (PLCE) CEO Jane Elfers on Q1 2016 Results - Earnings Call Transcript

| About: The Children's (PLCE)

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

Q1 2016 Earnings Conference Call

May 17, 2016 08:00 ET


Jane Elfers - President and Chief Executive Officer

Mike Scarpa - Chief Operating Officer

Anurup Pruthi - Chief Financial Officer


Anna Andreeva - Oppenheimer

Jay Sole - Morgan Stanley

Adrienne Yih-Tennant - Wolfe Research

Janet Kloppenburg - JJK Research

Dorothy Lakner - Topeka Capital Markets

Susan Anderson - FBR

Betty Chen - Mizuho Securities

Marni Shapiro - The Retail Tracker

Taposh Bari - Goldman Sachs

Dana Telsey - Telsey Advisory Group

Rick Patel - Stephens

John Morris - BMO Capital

Lorraine Hutchinson - Bank of America

Richard Jaffe - Stifel


Good morning and welcome to The Children’s Place First Quarter 2016 Conference Call. Thank you for joining us this morning. With us here today are Jane Elfers, President and Chief Executive Officer; Mike Scarpa, Chief Operating Officer; and Anurup Pruthi, Chief Financial Officer. A copy of the press release can be found on the company’s website.

Before we begin, I would like to remind participants that any forward-looking statements made today are subject to the Safe Harbor statement found in this morning’s press release as well as in the company’s SEC filings. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. The company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date hereof. After the prepared remarks, we will open the call for questions. [Operator Instructions]

I will now turn the call over to Jane Elfers.

Jane Elfers

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

For Q1, we delivered adjusted earnings per share of $1.32, a 59% increase compared to last year’s first quarter. We delivered a comparable retail sales increase of 5.1% on top of a 0.7% comp increase in the first quarter of 2015. U.S. comp sales increased 4.4%. Canada comp sales increased 12.8%. We generated positive comps in all three months of the quarter. We had positive comps in all divisions and all channels, including a positive comp in both our U.S. and Canada brick-and-mortar channels.

We increased our adjusted gross margin by 170 basis points in Q1 to 39.4% compared to 37.7% in 2015. We leveraged our adjusted SG&A by 140 basis points in Q1 to 26.1% compared to 27.5% in 2015. We increased our adjusted operating margin by 280 basis points in Q1 to 9.4% compared to 6.6% in 2015. And our inventories entering Q2 are in excellent shape. We ended the quarter with total inventory down 11% and that’s on top of an 8% reduction in inventory for the first quarter of 2015.

We continue to return a significant amount of capital to shareholders. Prudent cash flow management and our strong balance sheet have allowed us to consistently reward shareholders. We returned $47 million to shareholders in the first quarter through the repurchase of approximately 595,000 shares and dividend payments. At the end of the first quarter, approximately $227 million remained available for future share repurchases under our existing share repurchase program. And since 2009, we have returned over $671 million to our investors through share repurchases and dividends. Based on our strong results, we are raising our guidance for the full year despite the challenging environment and continued weakness in store traffic. This guidance assumes a low single-digit comp sales increase, expansion of gross margins and continued strong expense control.

Now, I will turn it over to Mike.

Mike Scarpa

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

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

The 2016 inventory management initiatives that I discussed on the last call are on schedule. We plan to go live in Q4 with an enhanced order planning and forecasting tool, which will automate and enable greater precision and timeliness on the reordering of our basics in time to influence our basic inventory position for our back-to-school 2017 season. We are piloting our markdown optimization initiative in the second quarter and plan to go live with Phase 1 in the second half of 2016 and we are targeting implementation of our size and pack optimization tool in the fourth quarter, which will enable us to impact our summer 2017 buy.

Digital capabilities, our digital initiatives also remain on track. We are moving into the next phase of our mobile first digital transformation prioritizing enhancements to checkout, search, browse, and navigate with checkout and search enhancements going live in Q2. We will also pilot our first omni-channel initiative in the second half of 2016 and the redesign of our loyalty program and migration to our new private label credit card provider will be happening in the fourth quarter of this year.

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

Channel expansion, we are confident about the long-term global growth and profit potential associated with our expansion into alternative channels of distribution as we further develop our relationships with our international and wholesale partners. We continued to make significant progress in the first quarter on the investments in technology that will enable us to accelerate our channel expansion through international wholesale and e-commerce channels. In international, we opened 9 new points of distribution in the first quarter had now have 110 points of distribution. We are on track to open approximately 40 points of distribution in 2016. In our wholesale business, we will be implementing a replenishment program with our major e-tailing customer in the third quarter, which will enable us to add significant scale to this business over time. Finally, we are encouraged by the opportunity for our brand in China and have decided to accelerate the timing of our investment in that market, so that we can be in a position to begin selling online by early 2017.

Now, I will turn it over to Anurup.

Anurup Pruthi

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

Details for the first quarter are as follows. Net sales were $419.4 million. The comparison to the first quarter of 2015 was negatively impacted by foreign exchange of $2.2 million. Comparable retail sales increased 5.1% on top of a positive 0.7% increase in the first quarter of 2015 consistent with our guidance of a mid single-digit increase. Adjusted gross margin for the quarter leveraged 170 basis points versus last year to 39.4% compared to our guidance of an increase of 70 to 90 basis points. We benefited from a strong merchandise margin increase, a higher AUR and fixed cost leverage resulting from the strong comp. Adjusted SG&A leveraged 140 basis points compared to last year to 26.1% compared to our guidance of 50 basis points to 60 basis points leverage, driven by decreased store and administrative expenses, which were partially offset by increased incentive compensation expenses. Depreciation was $16.5 million for the quarter and de-leveraged 30 basis points, reflecting increased depreciation associated with certain transformation related systems. Adjusted operating income leveraged 280 basis points to 9.4% of sales compared to our guidance of leverage of 90 basis points to 110 basis points.

Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $234 million compared to $201 million last year. We ended the quarter with $25 million outstanding on our revolver. Inventory at the end of the quarter was down 11% compared to our guidance of a high single-digit decrease. This is on top of an 8% decrease in the first quarter of 2015. We are pleased with these results and we will continue to tightly manage our inventory levels. Our current and future inventory tools are designed to continue to drive productivity gains. It is important to note that we have now had six consecutive quarters of inventory reduction. We generated $28 million in cash flow from operating activities in the first quarter compared to $13 million last year, 111% 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. Second quarter guidance, we are projecting second quarter adjusted loss per diluted share in the range of negative $0.30 to negative $0.22. This guidance range assumes that currency exchange rates will negatively impact this result by approximately $0.02 in the second quarter. On a constant currency basis, adjusted loss per diluted share is projected to be negative $0.28 to negative $0.20 compared to negative $0.33 per share in the second quarter of 2015. We expect that comparable retail sales will increase in the range of 1% to 2%. We expect adjusted gross margin to leverage 130 basis points to 180 basis points compared to last year. We expect adjusted SG&A to de-leverage 70 basis points to 80 basis points compared to last year. Q2 SG&A will include the impact of acceleration of investments related to the startups of our business in China and our replenishment business with a major e-tailer. It is important to note that second quarter SG&A will also include the impact of higher incentive comp expenses resulting from our projected full year out-performance compared to target. Our second quarter guidance assumes that depreciation will be approximately $16.5 million, de-leveraging 30 basis points to 40 basis points compared to last year. We project adjusted operating margin to leverage 20 basis points to 80 basis points compared to last year. We are guiding inventory to be down low single-digits at the end of the second quarter compared to last year.

Now onto full year 2016 guidance, we increased fiscal 2016 adjusted EPS guidance to a range of $4.17 to $4.27 per share compared to our previous guidance of $4 to $4.10 per share. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.12 for the full year. On a constant currency basis, adjusted EPS is projected to be $4.29 to $4.39 per share compared to $3.60 per share in fiscal 2015. We expect comparable retail sales for the year to increase low single-digits compared to last year. We expect adjusted gross margin to leverage 90 basis points to 110 basis points compared to last year. We expect adjusted SG&A to be flat to slightly de-leverage compared to last year, primarily driven by the impact of acceleration of timing of our investment in China and investments related to the startup of our replenishment business with a major e-tailer in addition to higher incentive compensation expense as mentioned earlier.

As you model Q3 and Q4, you may also recall that there was a significant shift in incentive compensation expense from Q3 2015 to Q4 2015 based upon last year’s quarterly results. We expect depreciation for the full year 2016 to be approximately $69 million. We project adjusted operating margin to leverage 60 basis points to 70 basis points compared to 2015. This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments.

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

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

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Anna Andreeva from Oppenheimer.

Anna Andreeva

Great. Thank you so much. Good morning everyone and congrats on great results. I guess a question on the second quarter comp guidance for up one to two, what are you seeing in the business quarter-to-date. And we have been hearing a lot about volatility in retail, your trends were nicely resilient in 1Q maybe talk about what are you seeing in the environment in the kids space and what kind of promotional cadence are you embedding for the second quarter? Thanks.

Jane Elfers

Sure. Thank you. Well, as far as the first question, I would describe the current quarter trend to-date as kind of the tale of two cities. Month-to-date, we have experienced huge swings between our West and our East Coast stores. Just as like an example, in our U.S. Place stores, we have a 50-point trend swing between our best and our worst performing states. In our outlet channel, we have 57-point swing between the best and the worst states. And in Canada where we are seeing the same weather disparity between the East and West Coast regions, we have 55-point spread between those two – those two areas. So I am not sure if there is anyone on this call that spends as much time as we do studying the weather by city, by day, this year versus last year. But what is exacerbating the current situation versus potentially what happened to us in April is really the kind of if you look at it from the weather relativity factor versus the absolute temperature. So in other words, not only have we had temperatures in the Northeast, in the Midwest that are significantly below normal temperatures for this time of year. If you look at last year, in May, the temperatures were significantly above normal for basically the whole month of May in the 80s – to the mid-80s to the high-80s for much of the month. So when we get those relativity differences, that’s when we get huge swings between states and we have certainly seen that before in our business. I mean the good news is that the cooler weather is expected to pretty much only continue through the end of this week and then we should start to see the release coming next week as we move into the Memorial Day holiday period.

And we are pretty much anticipating that weather from an absolute and a relative basis will normalize into Memorial Day. And then certainly into June and July, we are anticipating the same. So if you look at those weather swings between the East and the West and you look at Memorial Day holiday moving out of May and into June, you have somewhat of a pressure on the month of May, which results I think in a more modest comp for the quarter versus Q1. The other thing that we are putting into guidance that Anurup just covered for Q2 is the competitive environment. It was the pretty promotional first quarter and we heard a lot of reports last week that it’s very difficult in the mall and we heard a lot of call outs as kids being one of their tough businesses. So we are anticipating that there is not only going to be – companies are going to have to work through their inventory overhang from spring. But based on what we heard, they are probably going to have to start to work through some inventory overhangs from summer as well. So we anticipate that they will be very promotional as they will most likely need to get their inventors in good shape prior to the very important back-to-school period, so we are also assuming that the mall is going to heat up from a promotional point of view.

The one thing I would add from a competitive point though, if you look at all of our competitors, they have a very strong positive in their favor for Q2, which we don’t and not flash, here is port disruption. If you guys remember, our logistics team really hit it out of the park last year, saw the port strike coming and diverted all our merchandise from the West Coast. So, we had zero disruption to our flow of goods. And I believe we were the only retailer, at least the only retailer that I remember, who found themselves in that enviable position. So, I would say that the significant port disruption was the major reason that most of our competitors pointed to as to why their margins were so tough last Q2. So, I would assume even with the tough macro environment and promotions heating up, it should be pretty easy for the rest of them to expand their margins in Q2 based on how severe they cited that port strike is impacting them.

So, I guess to sum it up, we don’t see this market growing anytime in the near future. So, we are going to just keep focusing on taking share, having the right product in the right place at the right time and really increasing our chances at conversion. I think that the field is doing a great job on that fore. And as we mentioned, we were able to comp positive in all our brick-and-mortar channels during Q1, which in this environment I think is pretty impressive. And as Anurup said, we are guiding to positive comp than margin expansion for Q2. So, we feel pretty good about what’s happening here.


Your next question comes from the line of Jay Sole with Morgan Stanley.

Jay Sole

Good morning. Jane, if I could just follow-up on that the last question, if you can just talk about the change from March to April, lot of talk about in retail just was it weather, was is the calendar shift, was it macro, lot of times we talk about March and April together. How are you thinking about it? And then can you describe just what the change was from March to April in the comp trend generally speaking?

Jane Elfers

Yes, I mean, we don’t give comp by month. But as we said, we comp positive in all three months and we were able to comp positive in our brick-and-mortar channel in the month of April. So, where we did see somewhat of a drop off from March, we were still able to comp positive. So, we are pretty excited about that. When you look at February and we talked about it when we are on the call in March, February started off with very favorable weather. We had some very strong wear now assortments that really resonated with moms. Easter came at the perfect time for us, again, very strong acceptance to the product in a strong month. And then coming out of April, we certainly saw the same situation with the weather that other people saw. But as I talked about a little bit before, from a relativity point of view, it wasn’t like what’s going on in the beginning of May. So, we were able to really get a nice comp in the month of April as well. So, I think we were a little different than the rest of the pack.


Your next question comes from the line of Adrienne Yih with Wolfe Research.

Adrienne Yih-Tennant

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

Jane Elfers

Thank you.

Adrienne Yih-Tennant

Jane, can you continue to talk about the elevation in the product, the product improvements and how that looks for the fall season back-to-school? And then Mike and/or Anurup, can you give us some quantification or any kind of magnitude in terms of the MDO, obviously it will come on in Phase 1 in the back half of this year, but probably the percentage of impact that we would see in 2016 and then I guess a greater impact when you get a full year of it in 2017? Thank you very much.

Jane Elfers

Sure. We continue to see very strong product acceptance from our customer. We have seen it – we talked about Jennifer Groves, our Head of Design and the team that she has on board is a very strong design team. We have a strong merchandising team. I think they are working very well together certainly supported by a very strong sourcing team and a very strong planning team, so those four groups working together are really what’s behind the success of the product. I think as you move into back-to-school, there is a lot of exciting product coming and then certainly into the holiday season as well. I think we have gotten much better in the past few years around here of really understanding wear now and making our best in the right places that gives us the biggest chance for success. And I think you will continue to see that through the third and the fourth quarters. And then on MDO, I will turn it over to Mike.

Mike Scarpa

Well, we have been pretty happy with the results of our inventory management tools to-date. Obviously, the assortment planning and allocation tools are driving significant results for us. And as I indicated, we will start layering in MDO planning, order planning and forecasting and we obviously think that these have big opportunities for us there. As we look at MDO, obviously, it’s – we will pilot this in the second quarter, we will go live in the second half of the year. And so it’s – our impact is all factored into the guidance that Anurup gave you. And obviously, it’s a half year impact that we will be learning off of these tools and it’s a phased in approach. So, we think ‘16 will obviously not have that dramatic of an impact compared to what we expected in ‘17 when we implement the rest of the tools that I talked about.


Your next question comes from the line of Janet Kloppenburg from JJK Research.

Janet Kloppenburg

Good morning, everyone. Congratulations. Really nice execution. My first question is on the magnitude of the gross margin improvement, perhaps you could help us understand to what extent the AUC benefit that? I think you should experience all year that helped. And maybe help us understand what happened on the promotional front, lower year-over-year did you have to pace up in the month of April given what was going on? And if your guidance includes, well, I think it does, includes greater promotional activity in the second quarter. But maybe we could understand that cotton pricing advantage in the first quarter and how it looks for the rest of the year? And secondly, I was hoping you could talk a little bit more about the China opportunity, if you will be entering China through an e-commerce platform partner or a brick-and-mortar or a combination and also if you have added any additional new wholesale partners in the quarter? Thanks so much.

Jane Elfers

Wow, which one of us wants to start. I will take the promotional one. When you look at our promotions for the first quarter, they were all planned promotions. I really didn’t see anything different than what we have planned going in. I think you are going to see the same thing for Q2. They are very rational, not reactive. And as you saw, our inventories are down 11% coming out of the quarter on top of 8% last year. And with the margin expansion we got, I would say that it was safe to assume that our promotions were very controlled.

Anurup Pruthi

Janet, on the issue around the AUCs, I would just say, our gross margin as you know leveraged 170 basis points in the quarter. Compared to our original guidance, much margin increased as expected, but we also really benefited from strict expense control and supply chain and other product-related costs. Certainly, AUCs continue to be a tailwind for the Children’s Place between cotton, currency and the work of our sourcing teams on currency migration. And finally, we are really pleased with the results of our inventory management tools to-date. And as Mike mentioned, we have markdown optimization, size and pack optimization, order planning and forecasting yet to come this year, which will have a phased in approach. We grew AUR and merch margin for the fifth consecutive quarter. And our gross margin leveraged 170 basis points on top of 150 basis point improvement last year. So very pleased with the comp position and structure of our gross margin expansion and I will ask – I will let Mike answer the question on China.

Mike Scarpa

Sure. Overall, international business is growing very nicely for us. We added 9 points of distribution in the first quarter. We are planning to add 40 for the year. We are excited about the opportunities that we have in some of our new franchise partners, particularly in India and Mexico and we are looking to accelerate the timing of the investment that we are going to make in China with the goal of beginning to sell online in early 2017. So, the opportunity for us at this point is strictly online. We think that given our fashion and value proposition that we are uniquely positioned versus potential competitors in that marketplace. Our thoughts are – we are in the process right now of completing our legal and administrative requirements. We are working on our brand positioning and pricing equations and also in the process of finalizing our selection of a trading partner. So, all things that will happen within the next 6 to 9 months, so we are in a position to begin selling early in ‘17.


Your next question comes from the line of Dorothy Lakner from Topeka Capital Markets.

Dorothy Lakner

Thanks. Let me add my congratulations on a really just spectacular performance in the quarter, looking towards the back half of the year, also you are going to be I think introducing a new loyalty program, I just wondered if you could update us on where you are in terms of active customers in your database, what kind of changes you are planning or thinking about for the program? That would be great. Thank you.

Mike Scarpa

We currently have around 16 million members in our database, of which about 8 million of them are loyalty cardholders, so roughly about 50% of the customer base. They represent about two-thirds of our overall customer spend and on the average, they spend about 2.5x of our non-loyalty members. We are on schedule to migrate to the new loyalty program in our new private label credit card provider in the fourth quarter. And our thoughts are we want to create a program that drives participation across that entire membership with differentiated awards and engagement experiences for our loyal members.


Your next question comes from the line of Susan Anderson with FBR.

Susan Anderson

Good morning. Let me add my congrats on a very nice quarter. And I was wondering if I could dig in a little bit on AUR expansion, obviously very good performance there. It sounds like though you thought it was more promotional in first quarter, so was most of this just having a lot less clearance in the stores or were you also able to pullback on full price promotions. And then also if I could touch on the online wholesale channel, it sounds like it’s been very strong, if you could give you some color around of growth. And then also is it material yet to the total sales growth and then how should we think about it as you add the new replenishment program longer term? Thanks.

Anurup Pruthi

Susan, it’s Anurup, I will take the first piece of it on AURs. Our AURs is really, as I mentioned earlier it’s – from a structure perspective, at the forefront, its product acceptance, which is our number one strategy and we have been very pleased with the strength of product acceptance across the board, which Jane also alluded to in her opening comments. It’s less about clearance inventory, much more about having the right product at the right store at the right time, which is really a result of – which is really what our inventory management tools are driving. If you recall, our initial tools that we implemented early last year or back-to-school last year, excuse me, were really around assortment planning was our first tool, which addressed the quantum of inventory we would purchase. We are still seeing in terms of 2016 by the forecasted retail unit decrease of around 7%. The subsequent tools have addressed both in – both the quantum of inventory, but increasingly so the productivity of our inventory, starting with our allocation systems and the new initiatives we are planning to launch this year, such as markdown optimization, size of back optimization, order planning and forecasting. So we are seeing improved store level inventory productivity based on in-stock service level and sell-throughs. There are obviously resulting in higher AURs and ADS’, so that’s really what’s been driving our AUR, along with aforementioned product acceptance. And Mike, on the replenishment?

Mike Scarpa

Yes. We are working on a replenishment system with our major e-tailer customer that overall we think can add significant scale to the business. We are going to begin with a very small pilot in Q2 and begin to roll out starting in Q3. We have taken a selection of items from our existing assortment and specifically sourced for this automated replenishment program, this system will generate basically weekly orders based on demand and transmit them to us via EDI. The good news there is that a there is no open to buy process involved. So we will be feeding directly back into demand and the requirement is that we ship these bulk orders back to the major e-tailer within a 72-hour period. But again, small pilot starts in Q2 and we will start to add scale in three and four.


Your next question comes from the line of Betty Chen with Mizuho Securities.

Betty Chen

Thank you. Congratulations on a great quarter and the product looks terrific. I was wondering if you can talk a little bit about the store closures and sales transfers, I know I think on the last quarter you remain pleased with some of the transfer to either nearby store or online, just wondering any sort of changes in the first quarter. And then also inventory was again very clean coming out of the quarter, down 11%, the guide for it to be down low single-digit in the second quarter, is it because of some of the investments for the e-tailer and other programs or is it because we are still lapping some of the down inventory levels from a year ago, just seems like a slightly smaller decrease? Thanks.

Mike Scarpa

So I will take the – this is Mike, I will take the store rationalization and then hand it over to Anurup for the inventory. Our plans around store fleet rationalization haven’t really changed. We are still on target to close 200 stores through 2017. We just recently completed our assessment of the transfers and they are still in excess of 20% from the stores we have closed, so all of very encouraging. And as we have indicated in the past that this has the opportunity to add 100 basis points of operating margin to the overall company.

Anurup Pruthi

Betty, it’s Anurup. On your point about inventories, we are projecting Q2 inventories – we are guiding Q2 inventories to be down low single-digits. Now just to point out, this is on top of an 8% decrease in Q2 last year. This would be our seventh consecutive quarter of inventory decrease. And our forward retail buys continue to indicate approximately a 7% decrease in units. So from a forward buy perspective, we are still seeing whatever – the 7% decrease in unit buys. But specifically in Q2, the guidance reflects really our projected on-hand inventory and timing of in-transit inventory, which is really related to our product flows and inventory flows. So it’s more of a timing and in-transit issue as opposed to anything. And we are really pleased with our progress on inventory and as you have mentioned, really clean entering Q2.


Your next question comes from the line of Marni Shapiro with The Retail Tracker.

Marni Shapiro

Hi guys. Congratulations, fantastic quarter. I had a quick question, we have noticed in the stores some interesting pricing differential you bring between boys and girls and some slight changes, have you been able to really surgically change some of the prices to that level across the fleet and across all of the products and are you – have you been able to raise prices on some of the promotions where a promotion of two birds maybe you had X price a year ago and now that price is X plus?

Jane Elfers

Hi, Marni. Thank you. It’s Jane. From a pricing point of view, yes we are able to surgically price, so we have made obviously decisions based on how strongly the products have been performing across categories within the store. As far as being able to raise pricing versus last year, because of some of the things that Anurup mentioned with our inventory tools, we are in a much better shape by style, by store. And as far as our replenishment system is feeding in, so we are able to command a higher price for some of the category businesses this year versus last year just based on how we own the inventory. So what you are seeing is a real.


Your next question comes from the line of Taposh Bari with Goldman Sachs.

Taposh Bari

Good morning, congrats to the team. I had two questions, one Jane, you mentioned a couple of comments around weather and the competitive environment as risks, these seem to be risks that have been going ongoing for a while and over the past six months at least you have been able to manage through them, so wondering what’s changed now. And then second Anurup on gross margins, the guidance for the quarter and the year, suggest that the pace of expansion moderates in the back half versus what you are implying for the first half, wondering why that is and if that’s a product that’s lapping some tough comps in the fourth quarter? Thanks.

Jane Elfers

Sure. Well Taposh, as far as a question on weather, I don’t want to go into the long explanation again because I spent a long time answering the first question about it. But when you look at what’s happening in the weather, I think I mentioned it’s a little bit different than what happened in the first quarter, particularly in April and it’s a little bit different than what happened in the fourth quarter, because when you look at last year’s month of May and are big in Northeast and Midwest regions. We are up against for almost the entire month, 80 degree to 85 degree weather. And around here, I don’t know if you live around here, but it was 36 degrees on Monday morning and the average high for this time year is around 69 degrees to 71 degrees. So not only are we seeing temperature swings in the East and the Midwest that are 15 degrees to 20 degrees below normal were up against temperatures that are 15 to 20 degrees above normal. So when we have those types of swings and we have seen them in the time that I have been here through Polar Vortex’s and other situations, when we get those kind of relative weather swings, that’s when we get these huge comps between states, particularly the East versus the West Coast. So for that kind of weather behavior to carry on for probably 3 weeks out of the month as we mentioned, we see the fourth week next week getting warmer and relatively being pretty similar in temperature. That coupled with the move-out of Memorial Day and some of the inventory overhang we are seeing from the competitors is going to produce somewhat more of a muted May, which will moderate the comp for the quarter. I also think when you look at it we have had positive AUR, positive comp and positive margins. And as Anurup covered in his guidance, we are anticipating all of those to be positive again moving into second quarter. So I would say we are doing pretty well.

Anurup Pruthi

Taposh, the second part of your question on gross margins for the year, as you would have noted, we have raised the gross margin leverage guidance for the year now 90 to 110 basis points. Part of this is obviously based on Q1’s outperformance. The fundamentals of our plan are intact in terms of AUR expansion, the results from our tools. We see AUCs continuing to be a low single-digit tailwind into 2016 into the holiday buy and we continue to invest in our number one strategy, which is product. So, from an overall perspective, we certainly see our gross margin structure intact and are pretty pleased with the results to-date.


Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey

Congratulations. Can you hear me?

Jane Elfers


Dana Telsey

Okay. As you think about the systems enhancements that you are making and the new ones coming that are coming in the back half of this year, how do you see the impact on margins benefiting compared to the ones you did last year and how should we see the progress of that margin improvement from the systems that you have in place? And then two other quick things, Canada and online, any more qualitative commentary on business trends in Canada and also online with mobile? Thank you.

Mike Scarpa

Our thoughts around the inventory management tools, is that it’s really a suite of tools. So obviously, the assortment planning and allocation replenishment are driving the results that we have enjoyed over the last couple of quarters. But now we begin to refine as we look at markdown optimization. For the second half of the year, our order planning and forecasting tool which will take place for back-to-school is ‘17. And then our size and pack optimization tool which will take place for summer, but we look at this all as the opportunity to improve the overall productivity and quality of our inventory. And our expectations are that we have a huge runway in front of us in terms of gross margin expansion based on these tools.


Your next question comes from the line of Rick Patel with Stephens.

Rick Patel

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

Anurup Pruthi

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

Jane Elfers

And also sorry, Dana, it’s Jane, on the Canada question, we are really happy with what’s going on up in Canada as we have been for a couple of quarters now. We continue to place those receipts very tightly due to FX and certainly are monitoring closely expense, but very, very happy with what’s going on up there. And then we don’t breakout online separately, but obviously, a very, very important part of our business. And as we continue to focus on our mobile first strategy, we anticipate that, that will become even more important.


Your next question comes from the line of John Morris with BMO Capital.

John Morris

My congratulations in a tough environment as well. Jane, can you talk a little bit more about the product performance in the quarter giving us a little bit more color around what you were happy with particularly in terms of category classification and comment a little bit about the execution over Easter, especially with the Easter dressing, why not, but a little more color on what was really performing for you from a product perspective?

Jane Elfers

Thanks, John. You know what I am not going to answer that. We are no longer providing color around product or gender category performance, obviously, for competitive reasons. It’s a very competitive space. We have a lot of imitators out there. So, we are not going to provide color around product or any type of promotional roadmap. I would say it’s safe to assume based on us having positive comps in all three months and positive comps in all divisions and all channels that the products resonating with moms.

John Morris

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

Anurup Pruthi

Yes, I would just say from a full year perspective, we expect SG&A to be flat to slightly de-leveraged. This is versus our prior guidance of flat to slight leverage. And the reason for this is really two fundamental reasons, one is we are accelerating our investment in China as well as our investment in setting up wholesale replacement for a major e-tailer. And the other is that we have increased our incentive comp expense projection for the year based upon our outperformance in Q1. And I would just note that SG&A management, the management team here continues to do an outstanding job on cost control. There has been $55 million of SG&A reduction in the last 3 years, $10 million last year. And I think as we look at our long-term operating margin targets, SG&A control will just continue to be a focus here at TCP.


Your next question comes from the line of Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson

Good morning. I wanted to follow-up on Dana’s question on Canada. The margin increases there have been a big contributor to the total performance. Did that continue in the first quarter? And then could you also just give us some of the reasons why those margins have been so strong and if you see further room for improvement?

Anurup Pruthi

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


Your next question comes from the line of Richard Jaffe with Stifel.

Richard Jaffe

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

Mike Scarpa

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


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

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