Children’s Place Earnings Call INSIGHTS: Gross Margins, Inventory Strategy
On Thursday, Children’s Place Retail Stores, Inc. (NASDAQ:PLCE) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Rick Patel – Bank of America Merrill Lynch: Just a question on gross margins. It looks like you’re guiding up 20 to 40 bps for the year, but I think your expectations for that were a bit higher at the end of the first quarter. Can you just walk us through what’s changed in those assumptions?
John Taylor – VP, Finance: Yeah, Rick, this is John. We’ve updated our model slightly as we enter the third quarter and at the beginning of the year we had guided to $3.10 to $3.30 with leverage slightly higher on gross margin and slightly more deleveraged in SG&A. We’ve been able to manage through the first six months effectively, our gross margin de-levered 190 basis points in Q2, which was better than what we expected, but as we look at the back half of the season, we wanted to make sure that we’re very prudent in the way we guide for the third quarter based on the potential incremental units that could be in the channel. We’re guiding for flat AURs. We’ve tightened up our SG&A model and our guidance for the full year is right where we expected it to be at this time of the year.
Rick Patel – Bank of America Merrill Lynch: Then, can you give us an update on the made-for-outlet strategy, what sort of impact did changes in made-for-outlet have on margins in the second quarter and what are your expectations for that piece of the business in the back half?
John Taylor – VP, Finance: Yes, made-for-outlet strategy continues to perform well for us. As we enter the back-to-school season, made-for-outlet is north of 50% of the total assortment. The outlet business margins have strengthened over the last 12 months. We’re 500 basis points lower right now than our full price business, which is much, much better obviously than where we started. We were very pleased with the way the outlet business performed in the second half of Q2 and into the back-to-school season. We are very pleased with the performance of our outlet transformation and we feel good about the fact that we’re going to end the year with as much as 85% made-for-outlet assortment in the outlet channel.
Kimberly Greenberger – Morgan Stanley: I was intrigued by your inventory strategy here for the back half. I’m wondering if you can – I just wanted to confirm first that in the third quarter you expect to end the quarter flat to up slightly on a per foot basis. Can you talk about your receipt plan during the quarter and also during the fourth quarter and would you be hoping that that could support positive comp store sales?
Jane Elfers – President and CEO: Yes, you are correct. They were looking for flat to slightly positive end dollars at the end of third quarter. What we did is, we went after more units in the big kid’s division, from our point of view a positive comp sales trend based on higher retails alone is not sustainable, particularly as input cost decline. We expected AUR to flatten out and it did and that’s why we’re excited to see the increase in transactions in the UPT as we kind of view that as key to the turnaround. And we expect to continue to see that into third quarter.
Kimberly Greenberger – Morgan Stanley: Then I know you have been investing in SG&A, and I’m wondering when you lap those increased SG&A expenses such that you’ll be able to start leveraging your SG&A on a low single-digit comp.
John Taylor – VP, Finance: Kimberly, this is John. There’s been a lot of work in the organization over the last two years to sort of transform this business. We fully expect over time that a positive low single-digit comp sales will generate leverage on SG&A. Our SG&A guidance this year has slight deleverage; it’s primarily driven by variable compensation in the fourth quarter, but we have had modest deleverage. We had 40 basis points of deleverage in Q2. Our costs were up 6%. When you look at our total cost structure, including cost in our gross margin, we did leverage in the quarter, but on an SG&A basis we had a slight deleverage in Q2. We expect that modest deleverage to continue into Q3, but over time it’s our full expectation that with the positive low single-digit comps, we can leverage SG&A.