By department, hard lines achieved a positive, mid-single digit comparable store sales, while soft lines comparable store sales in the negative, low-single digits due to softness in boy''s apparel, reflecting last year''s strength in Cars.
- Media comparable store sales, while not material to results, were negative due to last year''s DVD release of High School Musical.
- Back-to-school, turning to fall, guests have responded favorably to new studio collection. Other strong categories include home decor, particularly new canvas artwork and stationary, kids'' graphic tees, girl''s fashion and denim where backpack program has been challenging.
- On July 10th, the company soft launched on schedule new e-commerce initiative in alliance with Disney Shopping. Initial customer feedback has been positive, and it is on track to offer full online assortment in time for the holiday season.
- Fall Two stage set arrived in stores, and features famous Role Play and Halloween costumes. The company has expanded infant plush costume offerings this year versus last year, and for the first time, is offering adult sizes in select stores.
- The company launched a new tween offering in 70 top stores, coinciding with Disney Channel''s August 17th premier of High School Musical II. Assortment spans room décor, accessories, apparel and stationary and features Disney Channel''s hugely popular High School Musical and Hannah Montana franchises. The company will roll out tween chain-wide during the holiday season with a broader, more comprehensive assortment.
Year-to-Date Financial Highlights
- The company has opened 22 Children''s Place stores and closed five.
- As of August 4th, 2007, the company operated a total of 1,211 stores, comprised of 883 Children''s Place stores and approximately 4.1 million square feet and 328 Disney Stores and approximately 1.5 million square feet.
Third Quarter 2007 Outlook
- Earnings are expected to be 94 cents per share to $1.02 per share.
- The company expects Children''s Place brand to end the third quarter with inventory per square foot up in the mid-teens. At Disney Store, the company expects to end the third quarter with inventory per square foot up in the high 20s or mid-to-high teens excluding e-commerce.
The company opened 16 Children''s Place stores and closed one.
- Consolidated net sales increased 10% to $903.2 million compared to $822.1 million last year. Sales were comprised of $646.5 million from The Children''s Place brand, a 9% increase over last year, and $256.7 million from Disney Store, an 11% increase over last year.
- Due to the 53rd week in fiscal 2006, comparable store sales are compared to the twenty-six week period ended August 5, 2006. On that basis, consolidated comparable store sales increased 2%. The Children''s Place brand''s comparable store sales increased 1% on top of last year''s 12% increase. Disney Store''s comparable store sales increased 3% compared to last year''s 16% increase.
- Preliminary net loss was $14 million.
- The company incurred approximately $3.4 million, pre-tax, in professional fees associated with the company''s stock option investigation.
- Preliminary shares outstanding are estimated at approximately 29 million.
Fourth Quarter 2007 Outlook
Earnings are estimated at $1.79 to $1.86 per share.
Fiscal 2007 Outlook
- The company lowered outlook for 2007 in view of the sales and margin trends it has experienced at both brands through the first half.
- Second half guidance implies that SG&A as a percent of sales will be approximately flat to last year as the company will continue to accrue long-term equity compensation at about 50% and are focused on reducing nonessential and discretionary spending.
- Gross margin as a percent of sales is expected to decrease, reflecting the markdowns associated with planned promotions the company expects to roll out in the back half of this year.
- The company anticipates a tax rate of approximately 37% for the year, and year end share count is estimated at 30.5 million shares.
- The company expects to end this year with cash of approximately $160 million to $170 million, which assumes equipment financing of $30 million. This estimate, of course, is based on ability to meet most recent guidance. The company had no long-term debt this year or last year at the end of the quarter.
- The company has reduced expected capital spend from $230 million to approximately $200 million, primarily reflecting a slower buildout of new corporate headquarters and reductions in IT and store-level spending.
- While the company remains cautiously optimistic regarding the second half, it believes it is best to take a conservative view for the remainder of the year.
- The company anticipates reported earnings per share of $2.25 to $2.40. Full-year projection includes $3.4 million incurred year-to-date for stock option investigation expenses.
- The company is excited about the DVD releases for the second half, which include the 40th anniversary platinum addition of Walt Disney, The Jungle Book, Meet the Robinsons, Ratatouille and Pirates of the Caribbean-Dead Man''s Chest.
- DVDs, while not a hybrid margin business, are great traffic drivers. The company looks forward to theatrical release of the Walt Disney Pictures'' Enchanted, featuring Giselle, a new concept from Disney.
- The company announced that it is in discussion with Disney on modifying some of the deadlines to remodel and refresh the chain in 2007 and 2008. In return for this, the company is discussing to lift some of the restrictions of the license agreement that are important to Disney.
Key questions from the second quarter earnings call conducted by The Children''s Place Retail Stores, Inc.on August 23, 2007.
Kimberly Greenberger (Citigroup): Could you talk about the disclosure in the press release about Disney''s ability to grant direct licenses to other specialty retailers and what is the amendment to the agreement versus the June agreement?
Ezra Dabah: We are working closely together. Our relationship to date has been one of a good relationship that is based on what is right for our business and their business. We signed a letter agreement in June and we bounded ourselves to certain deadlines, especially as it relates to 2007 remodels and refreshes. Unfortunately, in view of these deadlines, we were not able to meet, mostly because of circumstances beyond our control. Disney, understanding that, basically gave us waivers and at the same time. So far the waivers were regard to immaterial delays in what we were supposed to do. What they are asking us is to release some of the constraints that we had on them as to their ability to direct to retail license and Specialty retail. They have asked us to do that in the area of adult merchandise. One that is not so relevant to our business and we believe that to the extent that they can increase their adult offering, it is going to be good to our business. They wanted some flexibility regarding their New York store, which is not important to us and important to them, so in view of our good relationship we work together or we need on our end and what we need on their end. We have an understanding that we look forward to document quickly.
Kimberly Greenberger (Citigroup): Could you comment on the violation of internal controls and compliance by two executives internally?
Susan Riley: We had two violations of our policies and procedures on the part of senior executives. One was not an executive officer or a named executive officer and the other was. The violation on the part of the named executive officer was relatively small, although, given there is a heightened sensitivity to our control environment right now given what happened with stock options. The internal control violation or policy violation on the part of the executive who is not a named executive officer is more serious and can be characterized as a serious lapse of judgment. There will be remedial actions. We expect there to be remedial actions that will be taken by our board, but we do expect the executives to remain in place.
Kimberly Greenberger (Citigroup): On the filings, is the only delay in the ability to get those filings updated, the disclosures on the Disney discussion, or is there something else there?
Susan Riley: We feel we need to reach resolution with the Walt Disney Company before we file. The evaluation of our internal control framework has also resulted in the delay in filing. We are committed to August 31, but there maybe some delays to that date.
Kimberly Greenberger (Citigroup): Could you give an update on work-in-progress at Disney and any color on gross margin performance at any of your divisions?
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