The Children's Place, Inc. (PLCE) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to The Children's Place Third Quarter 2015 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 of these forward-looking statements to reflect the events or circumstances after the date hereof. After the prepared remarks, we will open the call to questions. We ask that each of you limit yourself to one question, so that everyone will have an opportunity. I will now turn the call over to Jane Elfers.

Thank you, Laurie, and good morning everyone. Significantly warmer weather across most of the United States negatively impacted comparable retail sales in Q3. However, we were able to offset top line weakness with strong merchandise margins and disciplined operational execution. We delivered adjusted earnings per share of $1.93 in the third quarter which compares to our guidance range of $1.90 to $1.96, and adjusted EPS of $1.82 in the third quarter of 2014. Comparable retail sales decreased 3% in the quarter. US comp sales decreased 3.7%, Canada comp sales increased 2.4%. Importantly, our inventories entering Q4 are in excellent shape. We ended the third quarter with total inventory down 4.4% despite negative comparable sales. We returned $22 million to shareholders in the quarter through the repurchase of approximately 330,000 shares and dividend payments. We also announced today that our board has authorized a quarterly dividend and a new $250 million share repurchase reflecting our company's commitment to return excess capital to our shareholders. This new authorization reflects our confidence in our ability to execute our growth strategies and provides us with the flexibility to continue to return capital to shareholders at a significant rate as part of our overall capital allocation strategy. Now let's move on to the fourth quarter. Comparable retail sales are running positive 4.5% quarter-to-date, representing approximately 50% of our planned sales volume for the fourth quarter. These quarter-to-date results are being driven by increases in key selling metrics despite continued weakness in traffic. Moving on to guidance. For the fourth quarter, we expect to deliver adjusted EPS in the range of $0.93 to $1.03, inclusive of $0.03 negative impact from foreign exchange, compared to adjusted EPS of $0.94 in the fourth quarter of 2014. And we are reaffirming our fiscal 2015 adjusted EPS guidance range of $3.35 to $3.45, inclusive of a negative $0.14 impact from foreign exchange. In summary, we believe the benefits we are realizing from our multi-pronged transformation strategy, compelling products, a talented leadership team, improved process, successful expansion into the wholesale and international channel, and significant investment in new digital assortment planning, inventory allocation, and replenishment tools are enabling us to perform in a very difficult retail environment. Now I will turn it over to Mike.

Thank you, Jane. And good morning, everyone. We have made significant progress to date on our transformation initiatives. Today, I will provide an update on our inventory management and digital initiatives along with our fleet optimization program and channel expansion strategy. Inventory management initiatives. As anticipated, we are seeing our inventory management initiatives take hold. We expanded our merchandise margin and increased our AUR for the third quarter in a row, despite the promotional retail environment. We continue to refine our learnings from our assortment planning tool to optimize our overall buys and better match breadth of assortment with depth of inventory. For the first half of 2016, we are reducing our overall unit buy in the 7% range. We continue to increase our proficiency with our allocation and replenishment tool. Improved in stock, service level and sell through metrics in our stores are driving inventory productivity. We are allocating product closer to need, increasing our allocation frequency and lowering our average units allocated per cycle. We have made enhancements to our order planning and forecasting business process for replenishment, which will allow us to bring down the levels of replenishment inventory and associated safety stock without negatively impacting store in-stock or service levels. We also kicked off our markdown optimization initiative during the third quarter and plan to go live with Phase I in the second half of 2016. Digital capabilities. The continued development of our digital capabilities will be critical to our on omni-channel strategy, and as we seek continued increases in traffic to our e-commerce websites, these capabilities become even more important. Here is an update. Number one, customer acquisition. Along with continued enhancements to improve our organic search rankings, we launched e-receipts in June and have captured over 800,000 new emails in our database. Two, customer retention. Our work on the strategic segmentation of our customers in the migration to a new email service provider enabled us to build audiences based on unique customer characteristics and to run dynamic lifecycle email campaigns that are triggered by individual behaviors. Three, customer engagement. We continue to enhance our loyalty program to significantly improve customer ease of online account creation and access the points and rewards. This has resulted in increases in the number of customers who engage with us digitally, driving incremental transactions and higher annual spend from these customers. We also recently launched a Wishlist feature that allows customers to save and access product list across any device which they can share with friends and family through social media and email, providing great opportunities for future re-targeting and personalization. In just five weeks, customers have created over 65,000 Wishlists. And finally number four, cross channel fulfillment. We implemented a new distributed order management system in the third quarter which will enable us to begin to unlock cross channel fulfillment capabilities in the first half of 2016 beginning with reserve online pickup in store. Fleet optimization. We remain on track to close a total of 200 stores through 2017, including the 76 stores we closed in 2013 and 2014 along with the 16 stores we have closed in the first three quarters of 2015. We are on track to close an additional 14 stores in the fourth quarter bringing the total number of closed stores under our fleet optimization program to 106. In those markets where we have closed stores, we are continuing to see the neighboring stores, along with our e-commerce business become more productive from both a comp sales and profitability perspective, furthering our commitment to executing this optimization program, while dramatically slowing down new store openings. Channel expansion. We are confident about the long-term 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 recently announced the signing of a new franchise agreement with El Palacio de Hierro to open 35 free-standing stores in shop in shops in Mexico over time, demonstrating our continued commitment to growing our international business. Along with the franchise agreement signed with Arvind in August to open stores and shop in shops in India we now have six international partners operating in 13 countries. We ended the third quarter with 90 franchise stores and are planning to end the year with over 100 franchised stores. We continue to make significant progress in the third quarter on the investments in technology that will enable us to accelerate our channel expansion through our international wholesale and e-commerce channels beginning with the summer 2016 season. Now, I'll turn it over to Anurup, who will take you through the third quarter results, then he will review fourth quarter and full-year 2015 guidance.

Thank you, Mike. Good morning, everyone. In the third quarter we delivered adjusted income per diluted share of $1.93 compared to $1.82 per diluted share in the third quarter last year. The comparison to the third quarter of 2014 was negatively impacted by $0.08 due to foreign exchange. On a constant currency basis, adjusted earnings per diluted share were $2.01, a 10.4% increase, compared to the third quarter of 2014. Details for the third quarter are as follows. Net sales were $456 million. The comparison to the third quarter 2014 was negatively impacted by foreign exchange of $9.9 million. On a constant currency basis, net sales were $466 million, a 4.4% decrease compared to net sales of $487 million in the third quarter of 2014. Comparable retail sales decreased 3% compared to our guidance of an increase of approximately 1% and a positive 0.2% comp last year. E-commerce accounted for 18% of net sales in the quarter, compared to 16% last year. Adjusted gross margin for the quarter leveraged 60 basis points versus last year to 39.6% compared to our guidance of an increase of 40 to 60 basis points. We benefited from a strong merchandise margin increase and a higher AUR, which was partially offset by fixed cost deleverage resulting from the negative comp. Adjusted SG&A leveraged 60 basis points compared to last year to 23% compared to our guidance of 10 to 30 basis points in leverage, driven by reductions in store expenses and incentive compensation expenses. Depreciation was $16.1 million for the quarter and deleveraged 40 basis points, reflecting increased depreciation associated with certain transformation related systems. Adjusted operating income leveraged 80 basis points to 13.1% of sales compared to our guidance of leverage of 10 to 40 basis points. Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $219 million compare to $210 million last year. We ended the quarter with $34 million outstanding on our revolver compared to $90 million last year. Balance sheet inventory. Inventory at the end of the quarter was down $15 million versus last year or 4.4%, in line with our guidance of a mid-single digit decrease. Carryover inventory was in line with our expectations and we expect it to continue to run at normalized levels going forward, as a result of our new inventory management tools. We are pleased with these results and we will continue to tightly manager our inventory levels. We generated $85 million in cash flow from operating activities year-to-date, compared to $69 million last year, a 24% increase. During the quarter, we also amended our ABL credit facility to upsize it from $200 million to $250 million, provide us with better terms and extend the maturity date to September 2020. A strong cash flow and upsized ABL 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. Fourth quarter guidance. We project fourth-quarter adjusted EPS to be in the range of $0.93 per share to $1.03 per share. This guidance range assumes the currency exchange rates will negatively impact adjusted EPS by approximately $0.03 in the fourth quarter. On a constant currency basis, adjusted EPS is projected to be $0.96 to $1.06 per share compared to $0.94 per share in the fourth quarter of 2014. Our fourth quarter guidance assumes the comparable retail sales will increase low single digits. We expect adjusted gross margin to leverage 20 to 40 basis points compared to last year. We expect adjusted SG&A to leverage 20 to 60 basis points compared to last year. Our fourth quarter guidance assumes the depreciation will be approximately $17 million, deleveraging 30 to 40 basis points compared to last year. We project adjusted operating margin to leverage 10 to 60 basis points compared to last year. We are guiding inventory to be down mid-single digits at the end of the fourth quarter compared to last year. Now onto full year 2015 guidance. We are reaffirming our fiscal 2015 adjusted EPS guidance to be in the range of $3.35 to $3.45 per share. This is inclusive of a $0.14 negative EPS impact for the full year due to FX. Assuming the currency exchange rates remain consistent with today's rates for the balance of the year. On a constant currency basis, adjusted EPS is projected to be $3.49 to $3.59 per share compared to $3.05 per share in fiscal 2014. We expect comparable retail sales for the year to be slightly negative compared to last year. We expect adjusted gross margin to leverage 60 to 70 basis points compared to 2014. We expect adjusted SG&A to leverage 20 to 40 basis points compared to last year. We expect depreciation for the full year 2015 to be approximately $63 million. We project adjusted operating margin to leverage 60 to 80 basis points, compared to 2014. This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments. Additional guidance for fiscal 2015. We expect our tax rate to be a proximately 34% for the year. We expect apparel AUC to be down low single digits in the fourth quarter compared to last year. We continue to forecast another year of strong cash from operations in 2015. Our CapEx is expected to be approximately $55 million to $60 million for the year. We plan to open four stores and close approximately 30 stores in 2015. At this point, we'll open the call to your question.

[Operator Instructions] Your first question comes from the line of Adrienne Yih of Wolfe Research.

Good morning guys. Really tremendous performance in a really tough environment. I'm surprised that the traffic hasn't caught up with you. But congratulations, good job. Jane, my first question, actually for either Mike or Jane, can you talk about the notion of cutting off the tail? Because it's really impressive that the merchandise margins were up so much in the third quarter and the shift in what it seems like, it looks like you're doing more liquidation online if that's correct and using that more as the clearance channel, keeping the stores nice and tight and not building up a lot of clearance inventory in the stores. And how that's helping move the whole margin mix off of those fourth markdown and perhaps giving you a little bit more flexibility on the first markdown? And then AUC, if you could talk about AUC going into actually for the third quarter and then going forward into the fourth quarter and into 2016 [ph] Thank you very much.

Hey, Adrienne, it's Jane. No, that's not happening at all what you said about the e-comm channel and the stores channel. They have completely separate pools of inventory at this point, and each one is responsible for liquidating their own merchandise. We've seen as we said merchandise margins are up, AURs are up, ADS is up, UPT is up, conversion is up. The only metric that is down is really traffic. So we've been able through our new inventory allocation replenishment tool to really manage inventory better starting back in the third quarter and carrying into the fourth quarter. So I'm hoping that answers your question.

And from an assortment planning perspective using the tool, we've talked about the fact that we're buying less units for a given season. We saw back-to-school fall down about high-single-digit units. Holiday and spring being down in the mid-single-digit units, and as I indicated for the first half of 2016, we expect units to be down around in the 7% range. Obviously that helps us drive AURs as we have less markdown that's on the floor. From an AUC perspective, we saw the apparel AUCs again were down in the low-single-digit range. We would expect the same in the fourth quarter. And as we look toward in the first half of 2016, we would see apparel AUCs down in the low-to-mid single-digit range with improved pricing as we move on through the first six months of the year.

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

Yes, thanks and good morning everyone and congrats on getting through such a tough quarter with very solid results. I just wondered if we could get some detail on the increase in merchandise margin and AUR in the quarter. What you might be expecting in the fourth quarter? And then just generally what you're expecting in terms of systems benefits as we move into 2016 and beyond, particularly any detail on the new markdown optimization system? Thanks.

Dorothy its Anurup. I'll try and take those one at the time. In terms of the third quarter, when we guided on the last call, we were running a low-single-digit positive comp at that time. As the quarter progressed we saw traffic trends decline sequentially, resulting in a negative comp for the quarter. However, our AUR and merch margins both increased which is our third consecutive increase in those metrics. We entered Q3 with inventories in excellent shape and our allocation and replenishment tools went live for the back-to-school season and allows us to continue to manage inventories even more effectively. The balance sheet ended the quarter with inventories down 4.4% as you know and our cash and short term investments are $290 million and only $34 million outstanding on our revolver. So overall from a third-quarter perspective, clean inventories, benefit of our new allocation replenishment tools, clean assortments really helped us in terms of driving both our AUR and our merch margins positively. In terms of fourth quarter, we're off to a solid start quarter to date. All our key retail selling metrics are up, strong product acceptance, and this is in spite of continued decline in traffic. As I mentioned just now, we continue to make significant strides on inventory management and well managed inventories also mean less markdowns available. We have a significant part of the quarter ahead of us and we're also conscious of a warmer December being forecasted across much of the US. From a macro perspective, the promotional and traffic environment is still challenged and we believe the consumer continues to be pressured. So that's in summary how we've guided driving our fourth quarter outlook.

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

I was wondering if you can give us a little bit more color around merchandise margin, how much that was up year-over-year in the third quarter and where we are in terms of historical average? And kind of related to that, how did the outlet channel merchandise margin progress in the quarter versus retail? I think the goal had been for the two to be at par with each other? And then my last question if I could squeeze in is Canada posted a nice comp. Can you talk about what's going on, what the team has done to improve the business? Thanks.

Yes, if I could perhaps take the last one first. In terms of Canada we've obviously managed the business very tightly. The weather in Canada has been more seasonable than the US, and we believe the tight management of our inventories along with the deployment of our tools now has certainly helped the business over there along with the seasonable weather. In terms of Q3 margins as we mentioned, the key for us has been the continued deployment of our inventory tools. We're replenishing closer to need. We're replenishing inventory more frequently. We enter the quarter and we will continue to enter each quarter clean in terms of carryover inventory. So, I think that has been part and parcel of driving the results. And in terms of outlet, we don't comment separately on our outlet business, though it would be fair to say that difficult trends in Q3 have improved significantly over the last few weeks and that applies really to all of our channels. And conversion has also improved nicely.

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

Hi, good morning. Congrats on a really nice quarter in a tough environment. I was wondering if you could talk about SG&A. It looks like maybe it levered a little bit more than you expected. What's driving this better expense leverage and then how much more room do you think you have to pull back there as we go through 2016? And then if you could talk a little bit on the wholesale business and how it's trending versus your expectations. And I think now that you have a systems in place will this allow you to accelerate it next year? Thanks.

Yes. I mean, I would say at the outset the ability to continue to deliver on SG&A leverage is a testament to the management team's focus and ability to continue to drive SG&A leverage. We leveraged SG&A as you know by 60 bps in the third quarter, primarily driven by reductions in store payroll and incentive comp. And we've reduced SG&A now by $45 million in the last two years. We are forecasting another $20 million of SG&A reduction this year bringing it to $65 million in total. We certainly expect SG&A leverage to continue to contribute to operating margin expansion over time and for 2015 we are guiding that SG&A will leverage 20 to 40 bps. And it's going to be our continued focus as we learn from and learn from the deployment of our new tools its effect on our traditional structure and resource deployment and continue to drive all of our corporate in-store expenses forward.

From a wholesale perspective we're making pretty significant progress with the wholesale business, though it is relatively still small. We have the confidence that as we continue to work with our accounts and implement the technology that we talked about in the past that the wholesale business would grow significantly over time. We made some major technology investments in Q2 and Q3 which we hope we can begin to start to scale that business for summer 2016.

Your next question comes from the line of Anna Andreeva of Oppenheimer. Anna, your line is open. Please state your question?

Operator, you can take the next question.

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

Good morning everyone and congratulations on the healthy results. Jane, I was wondering if you could talk about the catalyst that drove the change in business plan from the third quarter to the fourth quitter, particularly in the light of the fact that weather trends have continued to work against you. And perhaps talk a little bit about the inventory levels in outerwear and sweaters and if they are where you want them to be? And Mike, I was hoping you could talk about the influence that the growing wholesale business may have on the operating income - on the operating margin rate going forward? Thank you.

Thanks, Janet. I'll take the first part of that question. I think there's multi answers to that question. But if you look at what happened on the comp and the top line for third quarter, we got progressively worse as the quarter progressed, as the weather got progressively worse throughout the United States. When you look at where our stores are the only real bright spots in the third quarter were Canada who had seasonable weather and the West who had very cool weather performed very, very well for us in the third quarter. Other than those two regions consistently across all our geographies we had pressure in the third quarter on the top line due to weather. When you look at what's happening quarter-to-date, we started off the quarter with very difficult traffic as we had in the third quarter, but traffic has gotten significantly better over the past couple of weeks. As far as the weather, when you think about the Northeast where we all experience that every day, yes it has been very warm and it was a very unseasonable November and has been a very unseasonable December and is projected to get even more unseasonable between now and Christmas. However, there are several other regions of the country that quarter to date have experienced winter weather. So we've seen the snowstorms in the plains, we've seen the snowstorms in Chicago, we've seen the weather in the Southwest. So we have had several pockets throughout the country that are experiencing relatively seasonable weather which has also helped us with the trend. To answer your question about what the catalyst was, I think when you look at our design team and you look at our product, as we had mentioned on previous calls this is Jennifer's first full quarter of product delivery, our assortments, our holiday assortment from a design perspective are being extremely well conceived by our consumer. And I think as far as the merchandising strategies that complement the design strategies they are working very well as well. We own a lot more of the right categories and a lot less of what we internally refer to as the Jeopardy categories. If you go into our stores you will see even though the weather has been warm in Q3 and in some pockets into Q4 you will see very controlled inventories in cold weather products. You'll see very controlled inventories in outerwear and you'll see very controlled inventories in boots. So in those categories that have the ability to trip a retailer up when the weather is not on their side they have been very well managed. In addition, the categories that are more wear now have more receipts behind them. Obviously we've spoken extensively about the allocation replenishment tools. They are finally in place and for the first time in the company's history we're on a level playing field as far as that's concerned with their competition. And then I would be remiss if I did not mention the field has really come together with extremely strong execution, particularly during these key holiday selling periods, as well as delivering very strong conversion numbers. So I think it's really a combination of a lot of things coming together. And as we have said consistently for a long period of time now that we would start to see results in the back half of '15 and it is the back half of '15 and we're seeing them.

From both a wholesale and international perspective both businesses are accretive nicely to our operating margins. Gross margins are dilutive to our total, but due to the lean SG&A structure we're able to be accretive over on the operating margins. And as we mentioned in the release this morning, we're pleased that we've opened up the Mexico market in our international business and that's on top of opening up India back in August. So pleased with the progress we're making on international.

Your next question comes from the line of Anna Andreeva of Oppenheimer.

Hi, great, good morning guys. Can you hear me now?

Yes.

Great. Apologies for earlier. Just a clarification on the quarter-to-date trend being up 4.5%, representing 50% of your 4Q sales volume. Is that the historical volume at this point in the quarter or should we think you're running ahead of plan at this stage? Should we think order-to-date comps are positive in US and Canada and what kind of a margin is attached to that comp? Your inventory is obviously in very good shape coming in. And then to Jane, just bigger picture, any surprises you're seeing out there with competitive set whether on the mall or off? Thanks so much.

I'll take the last part of that first. I think from a competitive set, I think that several of our competitors are over inventoried coming out of Q3 and I think that they will continue to put pressure on the sector in Q4. Weak traffic continues as we mentioned and I think that's here to stay for a while. I think in this space, it's a difficult space, the kid space and I think it's absolutely critical. In order to compete and to win you need superior product obviously number one. And inventory management capabilities from a margin point of view are critical. And as I said I think some of our competitors have too much inventory.

Anna, its Anurup. We're not going to comment specifically on margins quarter-to-date. In terms of the 50%, approximately 50% for the quarter, that is based upon historical trends and I would just refer to our guidance in terms of looking at our plan for the quarter in a nutshell.

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

Thank you, good morning everyone. Given your early success in markets outside of North America, any updated thoughts on the potential to take a more direct approach to international and perhaps take some of these businesses in-house? And then can you also provide some context as to how much international franchisees contributed to sales and operating profit so far this year? We're trying to understand how material this side of the business is right now? Thank you.

So from a thought process of bringing international in-house at this point we continue to sign new franchise partners where they have the expertise and they are given market space. So at this point we're not planning on doing that. From an overall perspective as you know we don't really disclose the volumes and the profitabilities of our international franchise business. It's rolled up into our international segment which you'll see in the Q and the Ks that we publish.

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

Hi, good morning. Nice quarter. I had two questions. One high level maybe for you Jane. Just at a high level, do you expect - do you think that you have enough self-help opportunity to be able to sustainably grow, call it EBIT or EPS in a flat to negative comp environment? That's one. And then two, this past quarter it looks like from our observations you ran some pretty meaningful increases a full percentage off the entire store promos yet your merch margins and gross margins were up. So if you could help us understand how that happened and if that's a sustainable strategy? Thanks.

Yes. I'll I give the first part of that to Mike and Anurup can take the second part. So we keep hearing from you guys about how our promotes are up year-over-year, deeper year-over-year. They are really not as is evidenced by the merch margin being up and the AUR being up I think for the third quarter in a row. As we had mentioned ADS is up, UPT is up. So all those metrics are up. So I'm not really sure where that is coming from. But suffice it to say that the promos are not deeper.

We've talked about continued expansion of our operating margin. And as we look at this obviously we're pleased with the response to the product from our new design team which is obviously has to be a given for us to grow our operating margin. But as we look at our systems transformation around our inventory management tools and all the digital work we're doing I think there's plenty of self-help there. We'll be halfway through our store real estate portfolio optimization when we end the year. So there's more work to get down there. And then obviously as we talk about the expansion of alternative channels of distribution, particularly in our wholesale and international, we continue to make progress there. So we think there's plenty of opportunity for self-help in this environment.

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

Hey guys, congrats. The stores really look fantastic. I was curious, I know back-to-school seems a really a long time ago. But if you could just talk a little bit about how your sales were doing back-to-school? Did you see good sell-throughs of classic items like backpacks and uniform which I know is historically a big deal for you guys? And then if you can talk about the fashion component of it, because it seemed in stores I was in the fashion was turning very, very quickly and how should we think about that mix go forward?

Marni, thank you. The new product from Jennifer that came in really started in September and that's really when the fashion deliveries if you will start for us. When you look at the components of our July and our August for the most part as you mentioned were heavily into key items and basics. So we're heavily into the denim business, backpack business, uniform business and graphic business. So from the time that product hit, our fashion product hit in September it did very, very well. What we saw in Q3 is exactly what you would expect in terms of categories that pulled us down in light of the unseasonable weather. We had high double-digit negatives in outerwear, in jackets, in micro fleece, in cold weather accessories. But the good news is as I had mentioned before we bought significantly less of what we call Jeopardy categories. So even with the weather not being in our favor we are going to be able to manage those categories and manage them profitably.

Your next question comes from the line of Steph Wissink of Piper Jaffray.

Hi, this is actually Lauren Wolf [ph] calling in for Steph. We have a couple of questions for you guys. Could you talk a little bit more about your current promotional environment just given the holiday season and what you all are doing to stay competitive on that side? And then in terms of the costing model, are you seeing any changes in cotton or labor costs for 2016?

Hi, it’s Anurup. I'll take the second one first. In terms of AUCs, what we see is continued benefit from cotton, continued efforts of our sourcing teams across the globe and the results of recent currency devaluations. We believe, therefore, we have AUC tailwinds in our favor. We look for low single digit decreases in AUC in the early part of next year and then skew towards mid single digit decreases in the towards the second quarter.

And then from a promotional point of view as we had said earlier in the call a couple of times, we think that is an intensely promotional environment. It will continue to be so. We have some promotional strategies for Q4 versus last year which we believe will help us drive incremental traffic both pre-and post-Christmas.

We have time for one more question. It comes from Jay Sole of Morgan Stanley.

Hi, good morning. I want to follow up on the wholesale business commentary. We see some Children's Place product on Amazon, which is interesting. And I wonder is that part of the wholesale strategy? And does that imply that there is not only a brick-and-mortar component, but also kind of a wholesale dotcom component and does that even open up an opportunity for maybe global wholesale if you could do a wholesale dotcom strategy? And then I have one more after that.

Well, it is definitely part of our strategy to be working with Amazon. And all the technology work that we've been doing over the last couple of quarters is not only to enable what we're doing from a wholesale and international business, but also from a global e-commerce perspective. As we mentioned before we're actually also working with Hopscotch in India through Arvind to distribute our products from a global perspective in India. So, yes, e-commerce is definitely part of what we're thinking about, not only bricks and mortar when we talk about wholesale in international.