The Children’s Place Retail Stores Q3 2007 Earnings Call Transcript

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

Q3 2007 Earnings Call

November 21, 2007, 10:00 a.m. ET

Executives

Chuck Crovitz – Interim Chief Executive Officer

Neal Goldberg – President

Tara Poseley – President, Disney Store

Susan Riley – Executive Vice President, Finance and Administration

Richard Flaks – Senior Vice President, Planning, Allocation and Information Technology

Amy Hauk – Senior Vice President, General Merchandise Manager, Disney Store

Jill Kronenberg – Senior Vice President, General Merchandise Manager, The Children’s Place

Heather Anthony – Senior Director, Investor Relations

Analysts

John Zolidis – Buckingham Research

Kimberly Greenberger – Citigroup

Paula Kalandiak – Broadpoint Capital

Anna Andreeva – JP Morgan

Margaret Whitfield – Sterne Agee

John Morris – Wachovia

Janet Kloppenberg – JJK Research

Dana Telsey – Telsey Advisory Group

Rob Wilson – Tiburon Research Group

Presentation

Operator

Good day, ladies and gentlemen, and welcome to The Children’s Place third quarter earnings call. At this time I will now turn the call over to Ms. Heather Anthony. Please go ahead.

Heather Anthony

Thank you, Curtis, and good morning, everyone. Thanks for joining us today for a review of our preliminary fiscal 2007 third quarter financial results. Joining us on this morning’s call is Chuck Crovitz, Interim Chief Executive Officer, Neil Goldberg, President, Tara Poseley, President of Disney Store, and Sue Riley, Executive Vice President of Finance and Administration.

Also on hand to answer your questions at the end of our prepared remarks are Richard Flaks, Senior Vice President of Planning, Allocation and IT, Amy Hauk, SVP General Merchandise Manager for Disney Store, and Jill Kronenberg, SVP General Merchandise Manager for The Children’s Place brand.

Today Chuck will provide, sorry, will review key priorities for the company, as well as near term focus areas. Sue will cover our preliminary financials. Neal will review The Children’s Place business. And Tara will discuss Disney Store.

Before we begin I’d like to remind participants that any forward-looking remarks made today are subject to the safe harbour statement found in this morning’s press release.

After our prepared remarks we’ll be able to take your questions. Given the volume of the company’s reporting results this morning we ask that, in the interest of time, you limit yourself to one question so that we can speak with as many participants as possible.

With that out of the way I’ll now turn the call over to Chuck. Chuck, please go ahead.

Chuck Crovitz

Good morning, everyone. Thank you for joining us. I’m very pleased to be with you today. It goes without saying that the third quarter was challenging on a variety of levels and clearly we are disappointed with the overall results. Our performance primarily reflects lower than planned top line results and significant margin pressure as we work through our high inventory levels. That said, I can say with confidence that despite these near term pressures the underlying business is strong and I believe there’s tremendous long-term opportunity for the company.

Even though I’ve only spent a short time in my current role, I am impressed with the strength and potential of both The Children’s Place and Disney Store brands, as well as the level of commitment and passion from our associates. This team is committed to working together to turn around the business and to maximize the long-term potential of the company. Everyone has pulled together and is working towards this common goal and I am confident that this will yield tangible results.

As previously discussed, my two highest priorities were, number one, conducting the full review of the company’s financial reports and working with our independent auditors to become current in our financial reporting. And number two, conducting an assessment of the operations and identify actions that the company can take quickly in order to improve results and better position the business for the long term.

Turning first to priority number one, getting current with our financial filings, we’ve made progress in completing our outstanding SEC financial reports. Because of the ongoing delay we’ve requested an additional extension from NASDAQ, which has been granted until January 9^th of 2008. I can assure you that the entire team is working diligently to become current with our SEC filings and NASDAQ listing requirements within this time frame. As we’ve said previously, we have not found any material financial miss-statements during this process.

Turning now to priority number two, assessing the operations and identifying near term actions to improve the business, we are conducting a deep dive into the business. We are analyzing the operations and have listened to management and our associates. Through this process we’re identifying what we view as the company’s key strengths, weaknesses and opportunities, and we have put together a short list of key areas. We will talk about these initiatives in more detail as the quarters progressed, but we’ve narrowed down the areas where we need a critical focus in order to turn around the business and improve our operating and financial position.

In the near term we will, number one, take a more conservative investment strategy as it pertains to our inventory buys. Given our lead times we will be able to partially affect the summer ’08 buys, however this effort will fully impact next back-to-school season.

Number two, reduce the number of new store openings in 2008 and reduce our level of capital spending, which Sue will get into in more detail.

And number three, identify ways to reduce our expense structure through streamlining operations, driving process improvements, and generating efficiencies. We need to ensure that our cost structure appropriately reflects our value positioning in the market.

I’m confident that these critical areas will better position the company for the long term and we look forward to updating you on these initiatives in the future.

Before I close I want to tell you how pleased I am with the strong team that we have here across both brands. Over the past couple of months I have met so many talented, knowledgeable, and committed people at every level across the company and they are determined to make improvements that we need to regain our growth, which gives me great confidence in the future.

Furthermore, I’m delighted to report that we’ve recently filled a number of key senior positions. They each bring very relevant experience and we are proud of the fact that we’re attracting this calibre of talent to our business. As previously announced, Pat Gray has been hired as the general counsel, Rich Paradise , as we announced this morning, has been hired as the SVP of Finance and will become our CF. And Melissa Bowden has joined us as the VP of Real Estate. Like us, they all see the potential here and we look forward to the many contributions they will make to the company.

In addition, as you know, the board of directors has formed a committee and retained the search firm Herbert Mines to conduct an executive search for a permanent CEO and that process is under way.

Before I turn the call over to Sue let me reiterate that the company has a very bright future and we are committed to keeping the company on a path of sustainable growth and profitability. With that I’ll turn it over to Sue for a detailed review of the financials.

Susan Riley

Thank you, Chuck, and good morning, everyone. Before I begin a discussion of our third quarter results I want to remind everyone that these results are preliminary and may be subject to adjustments. Due to our previously announced restatement, we are not providing full comparative financial results and we are only providing selected balance sheet data. For ease of comparison, any references made today to last year’s numbers are as reported in last year’s third quarter press release and are likely to change as a result of the restatement and the impact of the decision to reverse the majority of our long term equity compensation accrual into 2006. As such, any comparisons to last year as made today are likely to change. Therefore, we are providing preliminary net income results today.

Preliminary net income for the third quarter was $11.8 million compared to net income of $38 million last year. On a preliminary per-share basis we earned $0.40 versus earnings per share of $1.26 last year. This year’s net income and earnings per share results include approximately $2.3 million pre-tax or $0.05 per share in previously disclosed investigation fees and $4 million pre-tax or $0.09 a share in severance expense. Last year’s net income and earnings per share results include approximately $3.7 million pre-tax or $0.08 per share in stock option investigation related expenses.

On a segment basis, The Children’s Place recorded a third quarter operating profit of $46.4 million versus an operating profit of $78.5 million last year. The Disney Store’s operating loss was $1.3 million compared to a $10.4 million operating profit last year. And shared services reported an operating loss of $25.5 million, a 9% improvement compared to $27.9 million last year primarily reflecting lower bonus, equity compensation, and legal expense versus last year.

Consolidated net sales for the third quarter increased 7% to $587.4 million from $550.4 million last year. Third quarter sales were comprised of $429.4 million from The Children’s Place brand, an 8% increase over last year, and $158 million from Disney Store, a 3% increase over last year.

Consolidated comparable store sales increased 1% for the quarter reflecting a 4% increase in comparable store sales transactions partially offset by a 3% decrease in average transaction size.

The Children’s Place brands comparable store sales increase 1% on top of a 15% increase last year. Substantial unit sales increases were partially offset by significant AUR decreases in the third quarter, particularly at The Children’s Place. Comparable store sales for Disney Store were flat compared to last year’s 11% increase.

Consolidated gross profit dollars decreased 6% to $225.6 million. Consolidated gross margin decreased approximately $530 basis points to 38.4% primarily driven by significantly higher mark downs at those brands, as well as increased distribution costs.

Selling general and administrative expense as a percentage of sales was 31.4%, which represents approximately 180 basis points of D leverage last year.

AS I mentioned, SG&A both this year and last year includes previously disclosed investigation fees and this year we had the added impact of severance expense related to our former CEO. Excluding these items from both periods, SG&A was 30.3% in this year’s third quarter compared to 28.9% last year, representing approximately 140 basis points of D leverage versus last year. The D leverage primarily reflects store payroll, Disney E-com expense that we did not have last year, and increased supplies expense as we sold more units during the quarter this year than we did last year. Partially offsetting the D leverage was lower bonus accrual and lower long-term equity compensation expense this year versus last year.

During the third quarter we incurred $947,000 asset impairment charge reflecting five underperforming Children’s Place stores. Depreciation and amortization expense as a percentage to sales was 3.5%, which represents approximately 50 basis points of D leverage, reflecting our increased store base, our new distribution center, and accelerated depreciation of our Mickey stores.

Operating profit for the third quarter was $19.6 million compared to an operating profit of $61 million last year. Our effective tax rate was 37% in the third quarter versus 38.4% last year. The lower tax rate is due to the mix of where we are generating earnings between higher and lower tax jurisdictions.

Moving on to the balance sheet, we ended the third quarter with cash and short-term investments of $111.2 million compared to $147.3 million last year. Cash changed primarily as a result of our currently being in a loss position versus an income position last year, higher capital spending, and our inventory bills. In addition, last year benefitted from approximately $27 million in proceeds from stock option exercises.

We had $108.9 million of borrowings on our credit facility at quarter end compared to zero borrowings last year. Currently, most of our cash reserves are outside of the United States. We had no long term debt this year or last year.

At this time we are currently projecting to end the year with approximately $135 million in cash and $65 million in borrowing. Our cash outlook is approximately $30 million below our prior guidance and reflects the shortfall in earnings and our not having yet completed our equipment financing.

Moving down the balance sheet, total consolidated inventory at cost was at 30% or 22% on a square foot basis. At The Children’s Place inventory at cost was up 23% on a square foot basis above our previous guidance due to higher merchandise in transit. Importantly, Children’s Place carry over inventory per square foot as a percentage to total is comparable to last year at approximately 3%.

Disney Store inventory at cost was also up 24% on square foot basis, below our previous guidance, reflecting lower inventory in transit. Excluding Disney Store E-com, inventory per square foot was up 12%, also below our previous guidance. Disney Store’s carry over inventory per square foot as a percentage to total was 6% versus 4% last year.

Looking ahead, assuming sales and markdown trends experienced in the third quarter continue into the fourth quarter, we expect The Children’s Place brand to end the year with inventory per square foot up in the low teens. At Disney Store we expect to end the fourth quarter with inventory per square foot up in the low to mid-teens or mid to high single digits excluding E-commerce.

During the third quarter we opened 25 Children’s Place stores and closed one. Year to date we have opened 47 Children’s Place stores and closed six. As of November 3^rd, 2007, we operated a total of 1,235 stores comprised of 907 Children’s Place stores in approximately 4.3 million square feet and 328 Disney Stores in approximately 1.5 million square feet.

As you may recall, our original store opening plan called for 20 new Disney Stores in 2007. In an effort to focus on quality we have slowed the rate of these new store openings. At this time we expect to open approximately 15 new Disney Stores in fiscal 2007 with the other five moving into fiscal 2008. This will not impact our commitment for new store openings under the refurbishment amendment. At this time we plan to close approximately 10 Disney Stores at the end of the year, as planned. We remain on track to open 60 new Children’s Place stores this year.

For fiscal 2007 we continue to anticipate capital spending to be approximately $200 million. As Chuck mentioned in his remarks, we are committed to lowering our level of capital spending and to reducing store growth next year. Our preliminary 2008 capital spending budget is estimated at $150 million, down approximately 25 percent from 2007. Approximately 85% of our 2008 capex budget is dedicated to store projects, even though we anticipate opening approximately half the number of new stores compared to 2007.

More specifically, we plan to open about 30 new Children’s Place stores and remodel 17, and to open approximately 15 Disney Stores and remodel up to 65. It is worth noting that we have budgeted for more Disney Store remodels than we are contractually obligated to complete in our 2008 capex plans for added assurance that we meet our obligations under the refurbishment agreement.

Additional store related spending reflects miscellaneous projects across both brands and our Disney Store refresh initiative. The remaining 15% of next year’s capital spending budget reflects information technology projects and the build out of our new headquarters, and other spending.

Thanks, and now I’ll turn the call over to Neal.

Neal Goldberg

Thanks, Sue. Today I’ll briefly review the third quarter, the initial response to holiday, and discuss go-forward strategic initiatives. Our third quarter results reflect disappointing response to our fall assortment and increased inventory position, both of which required us to take substantial markdowns to move through the units. Further compounding our challenges were the unseasonably warm weather and the current macroeconomic environment.

In October, however, we began to experience some positive initial response to our holiday assortment, particularly as the weather turned colder. We believe our holiday assortments are differentiated from fall in several key aspects.

First, the colour palette, particularly on the girls’ side, is drier and more cheerful. We’ve always stood for colour and it’s one of our key brand attributes.

Second, focus. We are deeper and narrower than we’ve been all year, which we believe is evident when you walk in the store today.

Third, our value pricing is sharper than it’s been in a long time, which we believe will service particularly well in this current environment. In addition, we will offer more newness post Black Friday than last year with our great gifts floor sets in stores the week of November 26^th.

Customers have responded favourably to key items like graphics, thermals, and sweaters across the store. Our holiday two floor set arrived in stores last week, similar to last year, and features our famous glacier fleece and rugby sweater programs.

As we look at our holiday assortments and our go-forward business we are going back to our roots. First, making sure we deliver a better balance across our good, better, and best merchandise pyramid. We believe our investments in these categories are skewed more appropriately with a bigger presence in good than we’ve had over the last several seasons.

Second, and as I mentioned previously, colourful coordinated outfitting is what our customers always come to expect from us and what has always differentiated us from the competition.

Third, offering our customers a strong value proposition, we are able to deliver through our sourcing expertise, very importantly ensuring our continued, relentless commitment to quality. We believe early progress is evident in our holiday floor sets, where we will become more pronounced as the seasons go forward given our long lead times. Beyond merchandise planning, as Chuck mentioned, other opportunities to improve the business include buying our inventory more conservatively, as well as simplifying the business. For example, reducing assortment variations across store types.

In closing, while the year has been challenging, we believe we have identified the issues, are seeing some signs of initial progress, and are making the necessary strategic changes from a merchandise pricing and planning standpoint. I want to wrap up by saying how proud I am of our team at The Children’s Place. Everyone is pulling together and working very strongly, and I’m so pleased to see how committed everyone is to improving upon every aspect of the business.

Thanks, and I’ll now turn the call over to Tara.

Tara Poseley

Thank you, Neal, and good morning, everyone. The third quarter was challenging for Disney Store. Several issues impacted our results. First and foremost, our store count. At the time we planned the quarter, about a year ago, we planned to have 344 stores in operation during the third quarter as opposed to the 323 stores that were actually opened for business on average during the quarter. On a 300-plus store chain this makes an impact on the business, not only from a top line perspective, but from a gross margin and expense standpoint as well.

Other issues for the quarter included decreased mall traffic, which we are dependent on given that our real estate portfolio is nearly 100% mall-based. While our 1% traffic decline was not as steep as the 3% national mall traffic decline of the third quarter, this negatively affected our results. Partially offsetting our traffic decline was a 40 basis point increase in conversion for the quarter, which as we’ve said in the past is a key strategic initiative for us.

Next, hindsight being 20/20, while our plan was to launch Tweens as a catch in our top 70 stores, we should have been more aggressive at the outset given the immense popularity of Hannah Montana and High School Musical. We also experienced some late toy deliveries in the quarter.

And finally, we faced the difficulty of having to comp the success of last year’s October platinum DVD release of The Little Mermaid, which drove significant traffic in sales.

Partially offsetting these challenges was incremental sales volume generated through the launch of our E-commerce business, which just completed its first full quarter of operation. As a reminder, third quarter was a soft launch with the majority of our categories now available for the fourth quarter.

On the plus side, as we look at the quarter we were pleased with the response to our big ideas. Namely Role Play was a great success for us this year. We comped positively both a sales and margin perspective. In addition, as I mentioned, the launch of Tween was a great win and we went live chain wide with an even broader assortment for the first week of November. The 70 stores in which we initially launched our Tween offering posted a 60 basis point comp improvement during the quarter compared to the total chain, so we know its bringing incremental sales to the stores. An initial response to our holiday assortment has been encouraging.

During the quarter we introduced our new Disney Store prototype in Houston, Texas, at the Willowbrook Mall. Two additional remodels re-opened last Friday, both in California, and our first new store opens today. Initial response to the new store design has been positive from both a guest reaction and a business standpoint.

Turning to the holiday season, we will once again offer a unique assortment of innovative and elevated toys and other great gift ideas for the whole family. We have exciting promotional strategies planned for the entire holiday season, as well as traffic drivers like the DVD release of High School Musical 2 and Pirates of the Caribbean: Dead Man’s Chest. We also look forward to the theatrical release of Walt Disney Pictures Enchanted featuring Giselle, a new princess from Disney. Giselle inspired merchandise has been in stores for two weeks now and early response has been encouraging.

Before I wrap up I’d like to echo Chuck and Neal’s comments about our great team. I’m honoured to work with such a talented and creative team across the entire organization and we are steadfastly working towards driving the business forward. In closing, we look forward to the opportunities that lie ahead of us. In 2008 we will offer our guests more Disney Channel inspired merchandise, and we’re also excited about all the new content Disney has to offer.

Thanks, and I’ll now turn the call over to Chuck to wrap up.

Chuck Crovitz

Thanks, Tara. Operator, we’d now like to open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Zolidis from Buckingham Research. Your line is now open.

John Zolidis – Buckingham Research

Hi, good morning. Hi. Chuck, this is a question for you. I was wondering if you could talk a little bit more about the more conservative inventory planning that you’re doing for next year. I know you said that it will not impact really until the summer with the full impact being back to school, but can you give us some idea of where you think the inventory should be relative to where they are right now?

And then on a second question, you know, with lower levels of capex taking down inventory which should yield a working capital benefit, what is your opinion on share repurchase? It’s been a topic of conversation on many calls in the past and with some changes in the company’s emphasis on growth in the near term would like to know what you think about share repurchase as a use of shareholders cash.

And then lastly, Sue Riley, can you just give us what the accelerated depreciation number was and how much that impacted the D&A. Thank you.

Chuck Crovitz

Okay. You know, in terms of the inventory position I think if we start to look at that, we’re looking, and I’m probably on The Children’s Place side down the single digit down from where we have been in the past. I think on the Disney side we’re probably looking at about mid-teens down from where we were last year. So that, I hope, kind of dimension wise is where we’re seeing the inventory come down.

John Zolidis – Buckingham Research

That’s on a per square foot basis?

Chuck Crovitz

I think that’s, yeah, that’s probably a per square foot basis.

And then your second question about the share repurchase, right now, I think as we previously announced, we’re, the board is engaged in a strategic review of alternatives and I’m sure that will be one of many alternatives to consider. That process is just beginning right now, so it’s premature to make any comments about how that comes out.

And I think, Sue, I’ll let you answer the last question on depreciation.

Susan Riley

John, to answer your question, the impact of the accelerated depreciation in the quarter was just under $1 million and it’s about just under $4 million year to date.

John Zolidis – Buckingham Research

Four million year to date?

Susan Riley

Yeah. And just under $1 million in the quarter.

John Zolidis – Buckingham Research

Should we expect additional accelerated depreciation before the end of the year?

Susan Riley

Yes.

John Zolidis – Buckingham Research

Okay. Thank you very much.

Susan Riley

Thanks, John.

Operator

Our next question comes from Kimberly Greenberger with Citi. Your line is now open.

Kimberly Greenberger – Citigroup

Great. Thank you. Good morning. Neal, I was hoping you could just give us a little bit more colour on the initial response to holiday that you’re seeing. Is it that the markdowns are running less deep than they were throughout the third quarter, particularly the August-September time frame? Or are you seeing actual increase in traffic? Could you just help us understand this positive initial response that you’re seeing? And if you’re willing to comment on November month to date sales that would be helpful as well. Thanks.

Neal Goldberg

You know, clearly we’ve always said the weather is a factor in our business and the cooler weather, as I said, has helped us. We think that many of the priorities, focuses that we’ve spoken about are much more evident in our holiday flow than they have been in fall. So you’re seeing the focus, you’re seeing colour, and you’re seeing our value much more clearer. And I think that’s what’s helping our business right now. Clearly the weather’s a factor and we’ve got a lot of business to look forward to over the next many weeks to come in the holiday season.

Kimberly Greenberger – Citigroup

Thanks, Neal. Could I just ask a follow up with Tara? Tara, I know that Disney had a really terrific fourth quarter last year. The Cars DVD release was helpful, the Pirates DVD release was helpful. Could you just help us understand how you look at the various media traffic drivers this year and the way that they compare to last year?

Tara Poseley

That’s right. Hi, Kimberly, how are you? I think we’re excited about, obviously we know that DVD releases drive traffic into the store. You heard my opening comment, you’re not having the release of Ariel this year compared to last year and just having Jungle Book really affected our traffic and affected the business in October. But we’re excited about fourth quarter this year. We don’t have Cars, but we do, as I said in my opening remarks, have a DVD release of Pirates of the Caribbean: Dead Man’s Chest.

We also, the famous High School Musical DVD release, which we are excited about as well.

We’re going to have a full range of Tween in all of our stores in fourth quarter.

And then Enchanted, which is the new Walt Disney release for the fourth quarter and Giselle is our new princess, and we are so excited. All of us have seen the movie here and it’s absolutely terrific. We’re looking forward to that launching today, actually, and have been quite pleased with the response to the Enchanted merchandise that’s set two weeks early in our stores as we usually do and it’s been great to see that the customer is responding to that having not even seen the movie yet. So that’s really how we’re thinking about the quarter.

Kimberly Greenberger – Citigroup

Great. Thank you. And good luck during the holiday.

Tara Poseley

Thank you.

Operator

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

Janet Kloppenberg – JJK Research

Hi. It’s Janet. How are you guys.

Susan Riley

Hi, Janet.

Janet Kloppenberg – JJK Research

First of all, so, I got on a few minutes late. Did you give guidance for the fourth quarter? You had given it earlier in the season. I didn’t know if you had updated it today.

Susan Riley

No, we didn’t give guidance for the quarter, Janet. We stated in our October 9^th press release that we weren’t going to be giving guidance, so we’re not giving guidance at this time.

Janet Kloppenberg – JJK Research

Okay. And will you give us guidance during the quarter or do you think, I mean, I know you can’t file until you have a deadline now of January 9^th, so could we look for some update at that point, Sue?

Susan Riley

At this point we’re not giving guidance and that’s all I can really say about our stance on guidance at this point. We do hope to file our financial statements well before that January 9^th.

Janet Kloppenberg – JJK Research

Okay. Thank you. And Chuck, when you said that inventories would be up, I think, or Sue said up mid-teens coming out of the fourth quarter and that they’d be, the inventory positions would be better going into back to school, could you elaborate on your outlook then for inventories in the first half? It sounds like they may continue to run at higher than expected levels.

Richard Flaks

Janet, this is Richard. I can maybe answer that.

Janet Kloppenberg – JJK Research

Hi, Richard. How are you?

Richard Flaks

Good. And you?

Janet Kloppenberg – JJK Research

Good, thanks.

Richard Flaks

So on the TCP side we’re projecting inventory at the end of fourth quarter to be up in the low teens. One of the strategy we hindsighted last year was we went into February-March with the changing weather and the wind now we wanted more holiday product appropriately priced going into the first quarter, and that’s what we are still sticking to. One of the things we did do is that we bought more holiday expecting to carry more into the first quarter. We already did cut back our receipts for spring. And in fact, the spring receipts were cut back relative to last year to offset the increase in holiday.

Janet Kloppenberg – JJK Research

Wait, Richard. I’m confused. Are you suggesting that you’re having holiday ’07 product in the stores in February and March of ’08?

Richard Flaks

At markdown, that’s correct. Remember, we have a big outlet division and we still do a big chunk of our business on clearance inventory during that time period. And it’s just a mix thing. It’s how clean and how full price we want to be in February versus last year.

Janet Kloppenberg – JJK Research

I would think that was just a residual effect of you having the level of inventories you have right now. Do you really want me to think that you deliberately planned your inventories to be in this shape in February and March?

Richard Flaks

You can go back to see what we’ve said over the last year and you’ll see we said it a long time ago that this was our plan.

Janet Kloppenberg – JJK Research

Okay. So go on. You’re spring receipts are now down versus last year. Is that what you’re saying?

Richard Flaks

Yes. And then we were able to impact summer. Not to the levels that we want to go forward, but we made some impact on summer and we’ll be able to fully impact back to school with our new conservative strategy because we haven’t placed back to school yet.

Susan Riley

And Janet, that’s a function of the lead, it’s purely a function of our lead times.

Janet Kloppenberg – JJK Research

Right. That’s what I was trying to get at for spring, Sue. So on the spring receipts, spring product, what is the investment look like versus spring ’07.

Richard Flaks

It’s slightly lower than spring of ’07.

Susan Riley

But not markedly so. And we also, Janet, I can just say one more thing and then we’re going to have t move on.

Janet Kloppenberg – JJK Research

Yes. Thank you.

Susan Riley

We also want to reiterate that we expect very little carry over as we move from season to season. So as we look at our inventories now and we look at the fall that we’re carrying into holiday, certainly in The Children’s Place stores, under 5%.

Janet Kloppenberg – JJK Research

And Sue, would you say that the markdown for that product, that fall product, has been absorbed in these numbers released today?

Susan Riley

Yes.

Richard Flaks

Yes.

Janet Kloppenberg – JJK Research

Okay. Many thanks. And lots of luck, you guys.

Susan Riley

Thanks, Janet.

Janet Kloppenberg – JJK Research

Thank you.

Tara Poseley

Janet, you wanted a Disney, I mean, we’ll just comment.

Janet Kloppenberg – JJK Research

Yes, I would love to talk, I would love to hear Tara. I just feel like I’m getting cut off. But anyway.

Tara Poseley

No, no. No worries, Janet.

Janet Kloppenberg – JJK Research

Okay.

Tara Poseley

Disney, we’re going to be down at the end of, or at the end of the fourth quarter our inventory without E-com per square foot at cost is going to be up 6% to last year. If you roll E-com into that, we’ll be up 12%. And then as you go into spring and summer, we actually were able to affect our inventory levels, and so spring is going to be down, our receipts for spring are going to be down in the high single digits. And then as you move into summer we’re going to be in the low double digit decreases to last year in our inventory levels.

Janet Kloppenberg – JJK Research

Okay. Great. And Tara?

Tara Poseley

M-hm?

Janet Kloppenberg – JJK Research

Could you just comment a little bit about if you had it to do over again what perhaps you could have done to make the assortments more compelling at Disney if anything? Thanks.

Tara Poseley

Yeah. And I think I’ll, Amy’s here, too, so she’s starting to perk up because she loves to comment on the inventory.

Amy Hauk

Yes.

Tara Poseley

Maybe I’ll just turn that over to Amy and let her take that one.

Amy Hauk

Janet, just quickly, it really comes down to one thing when I hindsight the business, we should have had Tween in all stores. And we chased into the product, we got it into all stores for November, and we are really excited. We’ve been working on building a whole strategy around Disney Channel which touches our guests 365 days a year 24 hours a day, and we’re really seeing phenomenal response in the Tween category as well as the Playhouse Disney Block. So we’re really looking forward to building product and assortment around that that we can count on day in and day out to drive our business. And that’s how the guest is really touching Disney. So those are really the two things that I’m looking to exploit or maximize go forward.

Janet Kloppenberg – JJK Research

Okay. Lots of luck.

Susan Riley

We have to move on. We’ve only got 20 minutes left and we’ve got to take some other calls.

Operator

Our next question comes from John Morris with Wachovia. Your line is now open.

John Morris – Wachovia

Hey. Thanks. Question for Chuck, I think. Chuck, you’ve now since we’ve had a chance to review the remodels at Disney, the new prototypes and the division’s been through, as I’m sure you’re well aware, a number of iterations. I’m wondering if you can give us a little bit of your take, and certainly Tara as well, obviously, on your thought about how the latest in the align of the generation looks to you and your initial comments and take. I mean, I’m particularly curious to know what your thoughts are and whether or not you think we need to look at maybe even another generation. Thanks.

Chuck Crovitz

Yeah, no, I’ve looked at this format, the first one in Willowbrook that we opened several weeks ago. And actually, Tara and I spent with her team all of yesterday in the stores looking at all the formats. I have to say that I think the new format that we’ve got is just a beautiful store. And we’re getting great guest response from it. We’re getting the expected early pops on that store. And we’ll have to give it a little bit more time to see how it all settles out. I think the initial takes could not be more positive. And we just feel great about that new store. I think we finally landed on the format that’s going to carry us a long time into the future. Tara, I don’t know if you have anything to add.

Tara Poseley

No. I mean, I just echo what Chuck has said. John, I was down in Willowbrook, I’ve been in San Anita yesterday. Northridge, which is another store here in California, I’ve been spending a lot of time in the stores. And just standing there and watching and observing the guests coming into our stores and hearing them awestruck over all of the different elements and hearing comments like, oh, Disney Store is back. Those type of things are just exhilarating for me. As well as just our team here.

Many people who hadn’t seen the new store opening who are on the design team, you know, our character artists, the folks, a lot of people who’ve been with Disney for a long time who work here in this building and hearing them and their comments and how excited they are about the store. It’s just been, for me, because it’s been such a big project that, you know, it was one of the first big projects I had to work on coming in here into the brand, it’s just exciting to see this kind of response. And you know, as Chuck referenced, we’re getting great response both from our guests as well as from a business perspective.

So we’re very hopeful, but remaining cautious. We’ve got some pent up demand in some of these stores because they had been closed for a little while, but we’re really cautiously optimistic about how these stores are going to perform.

John Morris – Wachovia

All right. Thanks. And also I want to wish all the best to Heather in particular. Thank you.

Operator

Our next question comes from Dana Telsey from Telsey Advisors.

Dana Telsey – Telsey Advisory Group

Good morning, everyone. Hi. I just wanted to direct this to Chuck for a second. Given your experience in volatile businesses that undergo change, how’s the merchandise and product issues and just the business processes at place similar or dissimilar to what you experienced at The Gap? And just for all of you, what are you doing to stabilize the troops internally in this period of change and also recruit externally for holes that you need? Thank you.

Chuck Crovitz

Yeah, I think that The Children’s Place, if I look at it compared to Gap, certainly it’s a smaller organization, but like The Gap it has a lot of the same issues in terms of a really fast growing business that sometimes goes a little faster than the infrastructure and the support systems. So I think there’s a great opportunity there. I think the organization is really hungry to look at modernizing its process and make sure it can support the level of growth that the brands are capable of delivering.

I think in my comments about getting more efficiencies and really focusing on our cost structure, the way we’re looking at that inside is, we’re not trying to reduce costs for the sake of reducing costs, but we’ll use this as an opportunity to look at our processes in great detail and to improve the processes. And through that I think naturally will come a lot of efficiencies. So I think that’s an exciting thing that the company’s ready for and I think it will yield great benefits over the long term. It’s just sort of a stage of evolution.

The other question about stabilizing our troops, we’re in these times of change, the most important thing we think is just to have open and consistent and constant communication, which is what we’re doing. So we have some kind of message that goes out to the troops every week and we’re going to continue that.

And the other thing that we’ve done is to really look at our retention and compensation programs. We’re always really concerned about retaining our talent. We’ve got a great team here and we don’t want to lose it. So we are putting together a, what we hope is a compelling yet very competitive set of programs that will help us retain our key talent at all levels in the organization. So we feel good about that.

And in terms of external recruits, I think I mentioned that I think we’ve been quite pleased with the level and calibre of talent that we’re able to recruit in the business. We have quite a few holes in our management ranks, but I think we’ve filled probably 60% or 70% of them at this point. So I think we’re making really great progress and we have people lined up on the other ones. So we’re looking forward to getting back to having a full team of really high calibre people.

Dana Telsey – Telsey Advisory Group

Thank you. Best of luck.

Susan Riley

Thanks, Dana.

Operator

Our next question comes from Paula Kalandiak from Broadpoint Capital. Your line is now open.

Paula Kalandiak – Broadpoint Capital

Thank you. Good morning.

Susan Riley

Hi, Paula.

Paula Kalandiak – Broadpoint Capital

Hi. Question for Neal. I don’t think that there was any mention of the footwear departments. I was just wondering if we could get an update on how those are doing.

Neal Goldberg

Sure. As we said when we launched footwear this summer that we were going to take an attitude of really learning a lot from it and that’s why we made sure our expectations were measured. We started rolling out to stores in July. We’re currently in 48 stores. And we’re learning a lot. We’ve done a lot of consumer insight work. Some surprises, some challenges, but a lot of learnings. Enably, we still believe that children wear shoes and there’s an opportunity for that force in the future. And we’re just going to keep on learning and we’ll continue to do some roll out. But over the next year we’ll slow down a little bit and we’ll take those learnings and hopefully turn those into what will be great action plans to really ramp up down the road.

Paula Kalandiak – Broadpoint Capital

Okay. Great. Thanks, and good luck.

Susan Riley

Thank you.

Operator

Our next question comes from Jodi Love with CIBC World Markets. Your line is now open.

Jodi Love – CIBC World Markets

Thank you. Hi, good morning.

Susan Riley

Hi, Jodi.

Jodi Love – CIBC World Markets

Sue, I know you’re not giving guidance for the fourth quarter, but directionally perhaps on a gross margin or even an SG&A perspective I was wondering if you could give us some clarity there.

And Chuck, I know it’s early, but if you could perhaps give a bit more detail about the key area of expense reduction that you alluded to that you plan on targeting. Perhaps the potential magnitude of what they could amount to over time and/or some of the areas that you are planning to target for improvement. Thanks so much.

Susan Riley

Yeah, hi, Jodi. I’ll start with the guidance question. I know it’s hard for you all with us not giving guidance. What we did say when we said that we weren’t going to give guidance any longer is that we do expect the current trend in sales and markdowns to continue through the end of this, certainly through the end of the fourth quarter. So for your modelling purposes I would basically assume a continuation of the trends that we’ve seen in our business unless we tell you otherwise. And of course we will continue to report our monthly sales. So you’ll be able to gauge how well you think we’re doing as we report the monthly sales and comparable store sales.

Chuck, do you want to take the question on expense management?

Chuck Crovitz

Yeah. I think we’re very early on in this process and we’re just now getting going on it, but I think that our primary focus is on the general administrative expense area, both at our shared services operation as well as within the brands. Again, I just want to add that what we’re looking for here is process improvement and driving efficiencies with maybe targeted applications of small IT assistance and really a much more focused on process. I think that will both help the company in terms of its operations and ability to grow, as well as yielding great cost reductions for us. But that’s the primary focus here would be the general administrative expense areas.

Jodi Love – CIBC World Markets

Okay. Great. Thanks so much. Happy Thanksgiving. And good luck, Heather.

Heather Anthony

Thanks, Jodi.

Susan Riley

Thanks, Jodi.

Heather Anthony

I’m doing my part to create more customers.

Operator

Our next question comes from Margaret Whitfield with Sterne Agee. Please go ahead.

Margaret Whitfield – Sterne Agee

Good morning, everyone. Question on toys. Toys have been in the news. A lot of consumers cutting back on toys made in China. I wondered, Tara, what you’re seeing and what you have in the offing for the Disney Stores in that category in Q4.

Tara Poseley

Amy and I always love to tag team our product questions, so, Amy, please jump in. But we’re not seeing, you know, as we’re getting our toys launched for the holiday season we’re seeing really positive response. We’ve had some late deliveries, which has hurt us a little bit as we’re moving into Black Friday, but we’re doing everything we can to get those goods out of the DCs and into our stores. But we’re not seeing the resistance to toys. We’re actually seeing nice growth in that area. But one of the things that we definitely did for this holiday season is we focused pretty dramatically on Role Play as well and tried to think of other gift ideas beyond just the toy category and really send that message in our store that it’s not, you don’t just have to give a gift of a toy to a child. That we’ve got a lot of other great opportunities with our Role Play and some of the Role Play accessories. So again, initial guest response has been positive. And I don’t know if you want to add anything?

Amy Hauk

No. I think you were direct and to the point with that.

Tara Poseley

Okay. Yeah.

Amy Hauk

And Black Friday.

Tara Poseley

Black Friday. It’s all about Black Friday.

Margaret Whitfield – Sterne Agee

Yeah. Could you comment on Black Friday, both Neal and Tara, in terms of what we might see if we visit the stores? Did I hear correctly that, Neal, a gift assortment will be in stores not this weekend, but next week?

Neal Goldberg

Yes. We talked about our great gift floor set which sets the stores November 26. We feel, you know, we visited one of our stores, we always set up a store prior, and we were very excited that our, we’re very, very focused. We have our normal door busters. We think we’ve strengthened those and we think throughout the weekend, we just don’t look at Black Friday obviously as the one day. It’s spread across from Wednesday, Friday, Saturday, and Sunday. And we feel good about what we’re offering the customer.

Margaret Whitfield – Sterne Agee

Could you elaborate what kind of key items will drive your business for the holiday season? Last year you lacked, you said, good key items.

Neal Goldberg

What we said last year is we lacked some key items and some depth, but our stores are set up now. Please feel free to, we’d love you to visit.

Margaret Whitfield – Sterne Agee

Okay. Tara?

Tara Poseley

Just, Margaret, on the Disney side we’re very excited about Black Friday and we’ve worked, we’ve been actually working on the strategy for over 10 months for what Black Friday and the rest of December is going to look like. We have one-day only special pricing, early bird, as well as weekend only pricing, and a lot of contingency plans in place as we read the business. Every day look at the competition and react accordingly. And what’s going to drive our business is princess. And that’s a key growth initiative this Q4.

Margaret Whitfield – Sterne Agee

Okay. Great. Good luck to everyone, including Heather.

Heather Anthony

Thanks, Margaret.

Operator

Our next question comes from Brian Tunick with JP Morgan. Your line is open.

Anna Andreeva – JP Morgan

Hi. Good morning. It’s Anna for Brian.

Susan Riley

Hi, Anna.

Anna Andreeva – JP Morgan

Hi. How are you?

Susan Riley

Good.

Anna Andreeva – JP Morgan

My first question is on Disney remodels for next year. You guys have done a couple so far this quarter. Could you perhaps give us some colour on just how we should think about some of the top line disruptions from those remodels next year? You have quite a number. I think it’s 50 remodels you have to do in ’08.

Tara Poseley

Yeah, I mean, we’re going to have, as you’ve heard from Sue’s remarks, we’ve got 15 new stores, which obviously is not disruptive to the chain. But we’ve got 55 remodels planned, 59 are contractual. And we have just spent a lot of time very carefully planning out as stores are going dark and other stores are coming back on. As you can imagine, there’s a lot of planning and logistics behind that, but I feel like we took it a little slower this year to make sure that we were getting all the kinks worked out and making sure that we’re getting process and procedures in place that as we move into next year we can really hit the ground running and make sure that we execute with perfect, which we all want.

Anna Andreeva – JP Morgan

Sure, sure. Should we expect at least a bulk of these remodels to take place in the first half of the year?

Tara Poseley

That would, it’s going to be throughout the year, but of course we’re always trying to get the bulk of them done in the first half of the year so we’re getting them done before third and fourth quarter, which are, you know, our prime time of year and, as you heard in my opening remarks, that definitely hurt our business not having those 20 stores open in third quarter this year. So we’re doing every effort to make sure we’re getting those done in the first half of the year.

Anna Andreeva – JP Morgan

Okay. That’s great. And on the Disney refresh there’s also first half skewed. And those of course are less disruptive. You guys don’t have to shut down the stores, if I’m not mistaken.

Tara Poseley

Exactly. And those we work on at night and basically the stores are able to stay open during that process.

Anna Andreeva – JP Morgan

Okay. Okay. So that’s great. And on the Disney side also, just as we think about the holiday, how should we think about the AURs? You had some nice AUR increases last year.

Amy Hauk

We actually –

Tara Poseley

This is Amy talking.

Amy Hauk

Yeah, this is Amy speaking, Anna. We do have an increase in AUR and that’s driven off of missed opportunity in business and some of our big and bulky and larger items where we saw opportunity increase penetration and drive incremental sales.

Anna Andreeva – JP Morgan

Okay. Okay. That’s great. And also, just as you look at the next year in terms of the movie release schedule. Of course, Disney is such a movie release levered type of business, how would you compare just the quality of the excitement of the schedule versus this year.

Amy Hauk

I’m very excited. This is Amy again. First of all, I already mentioned that we’ll be going after Disney Channel and that’s a huge growth initiative for us in 2008. We’ve been working very closely with the Walt Disney Company and with Disney Channel to maximize that through Playhouse Disney Block and between opportunities and properties. In addition, we have 101 Dalmatians versus Peter Pan. We feel good about that. We have Wall-E, which is based on a robot, versus Ratatouille from Disney/Pixar. And then this year for the platinum release we have Sleeping Beauty versus Jungle Book. We also have a Fairies direct-to-DVD release, as well as High School Musical 3.

Tara Poseley

Theatrical.

Amy Hauk

Theatrical. So we are –

Tara Poseley

It’s an outstanding year.

Amy Hauk

Yeah. It’s an outstanding year. And as always, I mean, Disney takes opportunity and maximizes it, as well as the Giselle DVD release in spring of next year, as well. So we are very excited about the schedule for 2008.

Anna Andreeva – JP Morgan

Oh, that’s great. Well, congratulations, guys, and good luck for the holidays.

Susan Riley

Thank you.

Operator

Our next question comes from Linda Tsai with MKM Partners. Please go ahead.

Linda Tsai – MKM Partners

Hi. With 15% of next year’s capex going towards IT investments are there any investments or reconsideration of current processes that could help you reduce your lead times?

And then just one follow up. I know you’re not giving guidance, but could you give us a sense of what the tax rate is going to be like going forward?

Susan Riley

Yeah. Let me just clarify. The 15% was for information technology and other corporate projects. So it’s not just IT related. But yeah, you’re absolutely right on. We want to leverage our IT expense in order to drive process improvement, which we as a company recognize that we really need. And that should over the long haul drive our SG&A costs down. And further, we should be using IT to a greater extent to reduce our lead time. So that’s all part of what we’re looking at going forward.

With regard to the tax rate, it was lower this quarter than what we thought it would be at 37%. And that’s primarily just because the earnings were lower than what we thought. We’ve had a mix of earnings, more earnings coming in in jurisdictions that have lower tax rates. I’m still expecting going forward that we’ll be at about the 38%, 38.2% tax rate.

Linda Tsai – MKM Partners

Great. Thank you. Good luck.

Susan Riley

Thanks.

Operator

Our next question comes from Rob Wilson with Tiburon Research. Please go ahead.

Rob Wilson – Tiburon Research Group

Yes. Thanks for taking my call. Could you maybe give us some idea of what you’re doing for marketing in Q4 given that you’re quite dependent on marketing and may be what your plans might be entering 2008 regarding marketing?

Chuck Crovitz

I’ll take this for The Children’s Place. Marketing is fairly similar levels to last year. We are very reliant, you know, one of the things we’ve worked on is making sure, again, our focus on our marketing is very clear to the consumer getting the value across. Next year, with our growing mailing list, we will continue the same thing we’ve been basically doing with very strong magalot (sic) presence, continual magazine presence to get our value message out there and our fashion quality message out there. So no real material changes that we’re looking at right now going forward and/or during this holiday period.

Tara Poseley

So for the Disney side I’ll go ahead and answer. Our actual, we do have an incremental drop-the-holiday gift guide, which is an incremental three quarters of a million that we’ll be dropping the first week of December to highlight great gifts for holiday giving. Otherwise, our initial magalot, which we dropped at the beginning of this month, is flat to last year.

Chuck Crovitz

(inaudible)

Tara Poseley

Yeah, go forward next year we’re looking at a marketing spend that’s flat to this year as a percent to sales.

Rob Wilson – Tiburon Research Group

Do I have that right? The Children’s Place brand also flat to next year to this year?

Chuck Crovitz

We’re still vetting it out, but fairly consistent with what we’ve been doing in the last couple of years, yes.

Susan Riley

And that’s not on dollar basis. Okay?

Rob Wilson – Tiburon Research Group

Okay. And one other question. Chuck, why not less than $150 million in capex next year as you enter your time there at Children’s Place? Why don’t you take more time to figure out what the potential store counts should be and maybe lower that capex number next year?

Chuck Crovitz

Yeah, Rob, I think that we really tried to get our capex down significantly. The issue is we’ve got a lot of stores that are already in the pipeline. So our approach on that is then to deal with the ones we have in the pipeline and if there are wonderful opportunities, you know, sort of once in a lifetime opportunities in these key locations, we’re obviously not going to pass those up. Otherwise we are, you know, we are pursuing a path of just stop, take a breath, make sure we understand where the business is going before we start, and ramp back up our store growth plans. So I think we’re in essence doing what you’re saying.

Susan Riley

The other thing, Rob, I just say is bear in mind we have a contractual obligation to remodel the Disney Stores and we’ve built a little bit of cushion because of the ramifications of the licence agreement and the amendment thereof, we’ve built some cushion in to that in terms of we’re planning to remodel more stores than we’re contractually obligated to do next year to ensure that we meet the obligations.

Rob Wilson – Tiburon Research Group

Well, Sue, would you say that some of those openings next year are just relocations of older stores?

Susan Riley

Some of them are, yes. But some of them are in fact, you know, complete remodels of the Mickey Stores that we had referred to, we had talked about in the past.

Rob Wilson – Tiburon Research Group

Okay. Well, thank you.

Susan Riley

Okay. Thanks, Rob.

Operator

It appears at this time we have no further questions in cue.

Chuck Crovitz

Well, thanks, everyone, for joining us today and for your interest in the company. Wish you all a great Thanksgiving and a great holiday season, and I’m sure we’ll see many of you out in the malls this Friday.

Heather Anthony

Thanks, everyone. Bye.

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