Brian Tunick (J.P. Morgan): Do you have a new CapEx number?
Blair Lambert: We have not planned on anything new. We are still going to be around 60.
John Zolidis (Buckingham Research): Could you talk about the Crazy 8 and what you think the ultimate longer-term potential is for that store base if it is successful?
Blair Lambert: Basically what we said on that we are reaching a much broader demographic, it should be a much larger customer base and if we do this thing right and it works it should be bigger than Gymboree. We should have more stores than Gymboree and that is what we have said and we continue to feel good about that.
John Zolidis (Buckingham Research): You have talked about the costing and having purchased most of the goods for the balance of the year. At some point do you expect upward pressure on cost coming out of China and where you source your goods?
Blair Lambert: There is already upward pressure, particularly in China. We have to constantly look at ways to offset that. We are looking at new sourcing opportunities. We have reduced the amount that we have in China already and looking at new countries and fortunately we are at the front end of opportunities of getting into new countries so yes there is pressure there. We move slowly when we look at going into new countries and factories because of our quality standards and our social accountability expectations but that is real. We are experiencing that.
John Zolidis (Buckingham Research): If you had to guess how this is most likely to play out in terms of your income statement if there is increase in costs that you could no longer offset through the maneuvers you have already been utilizing would you try to pass those costs on to your customer?
Blair Lambert: We are thinking about 2009 and 2010 as well. The good news is for 2009 we have several strategies already that we feel great about that continue to give us long-term growth in earnings and margin growth. If you think about Gymboree where it is getting closer to that more modest cost of goods reductions and might even be plateauing when you start to get out to 2009. You have that offset by the fact you have Crazy 8, Janie and Jack and outlet which are all growing businesses, larger store counts, larger contribution to the total pie and at the same time they are significantly reducing their cost of goods just with the sheer order sizes growing. So that offsets it to some degree. In addition to the strategies we will be sharing with you at the end of the year about what we are doing in 2008 to offset it. We still feel good about the growth in 2009. At this point we are still feeling good about our pricing strategy and we do not have any plans to make any major changes to pricing. We are always looking at pricing to make sure we are competitive in the marketplace and making sure we are managing our margins but at this point we do not have a major pricing strategy to pass on costs.
Linda Tsai (MKM Partners LLC): What do you think are some of the differences or similarities between the Gymboree outlets and Crazy 8 customers?
Matthew McCauley: The fact that most moms are shopping the malls they are hitting everybody who is in the mall; Gymboree, Children’s Place, Gap, Baby Gap, Crazy 8. The similarities are that they want value. They want cute clothes. They want it to be age appropriate. So those are our core strengths. We feel like we have that in terms of similarity. The biggest thing is there is a big differentiation in the customer. The similarities are that everybody wants high end, they want great quality and they want cute clothes in an age appropriate, wholesome style. The differentiation is for the vast majority a big differentiation in household income, price is much more sensitive to price in the Crazy 8 customer and those things are obviously what we have anticipated. It is also early and we are seeing that these customers are, as we mentioned earlier with Crazy 8, they are Target customers. They are Old Navy customers. They are Children’s Place customers. Whereas the Gymboree customer is brand sensitive, brand conscious, high quality and they want clothes that are going to last forever and they can hand down from generation to generation.
Linda Tsai (MKM Partners LLC): With the average unit retail is there a number you are targeting for Crazy 8?
Matthew McCauley: Around 25% to 30% off of Gymboree is roughly what it is.
Linda Tsai (MKM Partners LLC): Are you seeing any increased price sensitivity as it relates to Janie and Jack customers?
Matthew McCauley: We are not. That customer seems to be less price sensitive and even with these times has been resilient so we have not seen it yet.
Janet Kloppenberg (JJK Research): Is the loss for Crazy 8 in the first and second quarter greater than expected but going to be lower than expected in the back half to come out the same?
Matthew McCauley: In the first quarter it is more than what we expected. What we have anticipated in the second. It will get better in the back half which is our expectation because we have not changed the total year. So yes that is how I would think about it. It is a relatively small number we are talking about. $3.15 earnings for the year. We are talking about8 to 9 cents for the year and yes could there be another penny here or there up or down? Absolutely. There are a lot of unknowns in a new business like this and we will see how it plays out but directionally I think we are in the right area.
Janet Kloppenberg (JJK Research): You talked about opening more Crazy 8’s this year than expected. What takes your growth rate up to this year and can you maintain that growth rate for this year or open more Crazy 8’s next year?
Matthew McCauley: We have always said that we will continue to evaluate and asses it and if things continue to go the way that we want to we would want to keep that growth rate up if not accelerate it. At this point we feel good with close to 40 store count to be able to size the opportunity, assess the types of markets we need to be in, the size of stores and those things.
Blair Lambert: We are just going from 100 stores to 105 so it is not a huge jump in the total and you are not going to be open for the full year so we only have a few months so it is an incremental lift in the total square footage, not a huge difference. It is more functions of opportunities come up, they look good, we have the right location in the mall, we have the right economics on the deal and we just do not see a reason to pass on good opportunities.
Janet Kloppenberg (JJK Research): You talked about some cost opportunities in shipping and store operations, etc. Did those opportunities decelerate as the year goes along or can they be as beneficial as you go through the remainder of this year?
Matthew McCauley: They can be as beneficial as we go through the remainder of the year. Some of them started last year and as you go through it you start to learn more and learn what you can expand on and what things are working and what are not. You can expect that through the rest of the year.
Blair Lambert: When you look at a couple of things that we leveraged on year-over-year, things we traditionally had de-leveraged with marketing and we are efficient from that standpoint. We also mentioned store compensation as an area where we are leveraging. That is another initiative we talked about in terms of expense opportunity. We are starting to see some of that flow through the numbers in the leverage so we are happy about how it is going.
Janet Kloppenberg (JJK Research): Did outlet remain the brand or the business that has the highest store contribution or over time can Crazy 8 move up to that level?
Matthew McCauley: Outlet definitely has the highest and there are a lot of things contributing to that. A lot of the occupancy costs there make it much easier for us to have the higher four walls. It has a high percent at rev because of the everyday low price which will be similar to Crazy 8. More of the occupancy will make it more challenging. We have aggressive and high expectations for four walls in all of our concepts. There is not a huge spread now between Gymboree, retail and the outlet business because of our margins in Gymboree retail. The goal is to get it close. Whether or not it can eclipse the outlets I am not sure that could happen but we could get it close.
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