The Children's Place, Inc. (PLCE) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to The Children’s Place Fourth Quarter and Fiscal Year 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 to these forward-looking statements to reflect 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. During our Q2 2014 earnings call, we stated that our company-wide multi-pronged transformation strategy would begin to deliver results in the back half of 2015. So let’s recap how we are doing against that commitment. For Q4, we delivered adjusted earnings per share growth of 27% to $1.19 per share compared to last year’s fourth quarter. This exceeded our updated guidance range of $1.05 to $1.12. On a constant currency basis, adjusted earnings per diluted share grew 30% to $1.22 compared to 2014. We delivered our strongest comp in eight in years in Q4 with comparable retail sales up 6.7% on top of a 3.7% comp increase in the fourth quarter of 2014. U.S. comp sales increased 6%, Canada comp sales increased 13.1% and importantly we also delivered a positive comp in both our U.S. and Canada brick-and-mortar channel. We increased our adjusted operating margin by 70 basis points in Q4 to 6.7% compared to 6% in 2014. We've returned $41 million to shareholders in the fourth quarter through the repurchase of approximately 676,000 shares in dividend payment. Our inventories entering Q1 are in excellent shape. We ended the quarter with total inventory down 9.7% and that’s on top of a 7.7% reduction in inventory for the fourth quarter of 2014. For the full-year 2015, we delivered a superior merchandise assortment, disciplined expense management and strong inventory control, which resulted in five consecutive quarters of year-over-year decreases in inventory and four consecutive quarters of increases in AUR and gross margin. We increased our adjusted gross margin by 90 basis points in 2014. We leverage SG&A by 10 basis points versus 2014. We increased our adjusted operating margin by 80 basis points to 6.4% compared to 5.6% in fiscal 2014 and we returned over $131 million to our shareholders through the repurchase of nearly two million shares and dividend payment. Now let’s review in more detail the significant progress we’ve made and the key milestones we’ve achieved with respect to our strategic growth plan. Operational excellence is the foundation for everything we do. Operational excellence support our four strategic pillars which are superior products, business transformation through technology, growth through alternate channels of distribution and fleet optimization. Talent is the halo that ultimately defines our success. So let’s start there. Our management team is the reason for our success. Over the past five-years, we have built a best-in-class management team and those of you who have followed us for the past several years have seen firsthand, the extensive talent upgrade that had taken place throughout our company. This world-class management team is a significant competitive advantage for the Children’s Place and it is their commitment to deliver on our long standing strategic growth plan that sets them apart. It is so rare in retailing to effective a successful turnaround, particularly of this magnitude and this team deserves all the credit. Moving on to the four strategic pillars of our growth strategy, let’s start with number one superior products. Over the past 18-months, we have significantly upgrades our design talent. This talented team has been focused on consistent product execution across all division and more frequent fashion deliveries to maintain currency of inventory flows. For competitive reasons I’m not going to get into specific about our products or category performance, but when you shop the kid’s space, we believe our assortment speaks for themselves. Moving on to pillar number two, business transformation through technology. As most of you know when I joined TCP in 2010, the systems had not been addressed or upgraded in more than two decades. We were willfully behind the competition and the task of replacing every major system in the company, while also effecting a company-wide transformation was a big challenge. However, our team has done a remarkable job modernizing our systems over the past three-years. We have made significant investments in our system and have delivered all of our major implementations on-schedule and on-budget. In 2015, we implemented a state-of-the-art inventory allocation and replenishment tool for back-to-school 2015, which has enabled us to significantly improve our inventory management capability. We began implementation on a mark-down optimization tool for the plan to go live in the second half of this year. We implemented sophisticated technologies to further enable our omni-channel capabilities allowing us to focus on customer segmentation to increase acquisition retention and engagement. We implemented a new distributed order management system in Q3, which will enable us to begin to unlock cross-channel fulfillment capabilities in the second half of 2016. We enhanced our digital capabilities including organic search and dynamic lifecycle e-mail campaigns triggered by individual behavior and we launched e-receipts in June, which enabled additional customer contact opportunity adding 1.2 million new e-mails to our database. Although 2015 marks the end of the third quarter of our five-year systems implementation plan, we are only at the beginning of a long runway of improved operating results enabled by the enhanced technologies. Our third pillar is growth through alternate channels of distribution. Our wholesale and international businesses have continued to expand since they were launch in 2012 and the investments we have made in technology will enable us to scale both the international and wholesale businesses. We now have six international franchise partners operating in 16 countries with 102 points of distribution and expect to add 40 points of distribution in 2016. We have been a success in every market we have entered with our franchise partner and this gives us confidence that there is a tremendous amount of white space globally for our unique brand. Our international team has also been making preparation to enter E-Tailing in China, focusing on building the right partnership, while putting the operational building blocks in place. We now have large technologically sophisticated detailing and brick-and-mortar wholesale customers, who are poised to grow with us in 2016 and beyond. And our fourth pillar is our fleet optimization initiative. We began our fleet optimization initiative in 2013 and initially targeted 100 store closures from 2013 to 2016. At the beginning of 2015 based on the continuing work with our external partners on customer segmentation and shopping patterns, we increased the store closure target to 200 stores through 2017. We are maintaining our targeted level of store closures at 200 for the periods from 2013 to 2017. Our fleet optimization initiatives should ultimately results in operating margin accretion in excess of 100 basis points. As we mentioned earlier, operational excellence is the foundation for all that we do. Our SG&A management has been spectacular, we’ve done an outstanding job on SG&A management reducing adjusted SG&A by $55 million or 180 basis points over the past three-years and we are committed to further leveraging SG&A in 2016. Our ability to continue to leverage SG&A while making the critical investments required for our company-wide transformation speaks to the strength and focus of our management team and we’ve returned a significant amount of capital to shareholders. Prudent cash flow management and our strong balance sheet have allowed us to consistently reward shareholder. Since 2009, we have returned approximately $624 million to our investors through share repurchases and dividends. Our share repurchases over the last three-years as a percentage of our market capitalization totaled 19%. In fiscal 2014, we instituted a dividend for the first time in our history. In the first fiscal quarter of 2015, we increased the dividend by over 13% and today we announced that we increased the quarterly dividend by an additional 33 1/3% to $0.20 per share, a total increase of 51% over two-years. At the end of fiscal 2015, approximately $271 million remains available for future share repurchases under our existing share repurchase programs. So when you look at the commitments we made to our shareholders back in 2014, better transformation strategy would start to deliver results in the back half of 2015, I think it’s safe to say, we delivered. Now let’s move on to 2016. For fiscal 2016, we are providing initial adjusted EPS guidance in the range of $4 to $4.10 inclusive of a negative $0.16 impact from foreign exchange compared to adjusted EPS of $3.60 in fiscal 2016. For Q1, we are providing initial adjusted EPS guidance in the range of $1 to $1.6 inclusive of a negative $0.03 impact from foreign exchange compared to adjusted EPS of $0.83 in the first quarter of 2015. While we still have a significant portion of the quarter ahead of us, we’re off to a terrific start with comp store sales running positive 9.7% quarter-to-date. Now, I’ll turn it over to Mike.

Thank you, Jane and good morning, everyone. We have made substantial progress on implementing our transformation roadmap. We are very encouraged with the results thus far. We have a significant runway ahead of us an opportunity to continue to deliver improved operating results. We are just beginning to build out our digital platform and deliver against this initiatives. Meanwhile, we continue to enhance our learnings and build additional capabilities in our inventory management tools, which went live successfully during the back-to-school 2016 season. Finally, we will complete the build out of our technology capabilities to scale alternate channels of distribution. Here is an update on each of our major transformation initiatives. Inventory management, as anticipated, we are seen the benefits from our inventory management initiatives. 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, our overall unit buy decreased high single-digits and as we are finalizing our second half buys, we also see unit buy down in the high single-digit range. Our new allocation and replenishment system allows us to allocate product closer to need, increasing our allocation frequency and lowering our average units per allocation. Allocation frequency on our fashion product is up over 60%, while our average units per allocation is down over 50%. This is providing us with additional inventory flow back into stores based on actual store selling results. This inventory productivity capability has been a driver of the comp sales and margin results we announced today. In the second quarter, we will begin implantation of an enhanced order planning and forecasting tool, which will automate and enable greater precision and timeliness on the reordering of our basics, allowing us to optimize the levels of replenishment inventory. We are scheduled to go live in Q4 in time to influence our basic inventory position for the back-to-school 2017 season. Mark-down optimization will drive the profitable and on-time liquidation of our seasonal inventory. We are piloting this initiative in the second quarter and plan to go live with Phase I in the second half of 2016. We are also planning to implement a size and tax optimization tool, which will generate accurate size scales and optimal pat types further optimizing inventory at the skew level by store. We are targeting implementation of this tool to impact the summer 2017 buy. Digital capabilities. The continued development of our digital capabilities will be critical to our on omni-channel strategy, these capabilities will give us the opportunity to capitalize on our digitally savvy customers. Here is a review of our 2016 digital initiatives. One, we see an opportunity to significantly improve our mobile capabilities. We are moving into the second phase of our mobile first digital transformation, prioritizing enhancement to browse navigate, search and check out. Two, we will pilot our first omni-channel initiative in the second half of 2016. Our omni-channel initiatives will facilitate cross-channel traffic and create the potential to drive additional sales. And three the redesign of our loyalty program and migration to a new private label credit card provider will be happening in the fourth quarter of 2016. We are working now to create a program that drives participation across the entire membership with differentiated rewards and engaging experiences for our loyal members. The new program will be easy, seamless, personalized and most importantly digital. Fleet optimization. Our store fleet optimization initiative continues to drive positive results. The 12-month sales transfer rate on the stores we have closed continues to be in excess of 20%. We are maintaining our targeted level of store closures at 200 in the period from 2013 to 2017, including the 108 stores closed in fiscal 2013 through 2015. We continue to evaluate our stores and their level of profitability as we assess the impact of a number of factors. One, our new inventory management tools and their impact on merchandise margins. Two, our developing omni-channel capabilities and the advantage of leveraging an extensive existing store network. Three, our overall transfer rate and four, our ongoing lease renegotiations. Channel expansion. We are confident about the long-term growth and profit potential associated with our expansion into alternate channels of distribution as we further develop our relationships with our international and wholesale partners. We continue to make significant progress in the fourth quarter on the investments and technology that will enable us to accelerate our channel expansion through our international wholesale and E-Commerce channels. In our wholesale business, we are working collaboratively with a major E-Tailing customer to set up a replenishment program, which will enable us to add significant scale to this business. We are also encouraged by the opportunity in our international business. Our international franchise partners opened 11 points of distribution in the fourth quarter and we ended the year with 102 international franchise points of distribution in 16 countries. As Jane mentioned, we expect to add another 40 points of distribution in 2015 and during the year, we will look to lay the foundation for entry into China through E-Commerce. In summary, 2016 will be the fourth year of our five-year systems transformation plan and we expect the benefits from our strategic initiatives to enable us to make continued progress toward our 10% adjusted operating margin target. Now, I’ll turn it over to Anurup.

Thank you Mike and good morning everyone. In the fourth quarter, we delivered adjusted income per diluted share of $1.19 compared to $0.94 per diluted share in the fourth quarter last year, a 27% increase. The comparison to the fourth quarter of 2014 was negatively impacted by $0.03 due to foreign exchange. On a constant currency basis, adjusted earnings per diluted share were $1.22, a 30% increase, compared to the fourth quarter of 2014. Details for the fourth quarter are as follows. Net sales were $498.5 million. The comparison to the fourth quarter of 2014 was negatively impacted by foreign exchange of $8.8 million. On a constant currency basis, net sales were $507.3 million, a 5.9% increase compared to net sales of $479.2 million in the fourth quarter of 2014. Comparable retail sales increased 6.7% on top of a positive 3.7% increase in the fourth quarter of 2014, compared to our updated guidance of an increase in the range of 6% to 7%. Adjusted gross margin for the quarter leveraged 130 basis points versus last year to 35.6%. We benefited from a strong merchandise margin increase, a higher AUR and fixed cost deleverage resulting from the positive comp. Adjusted SG&A deleveraged 40 basis points compared to last year to 25.5%, driven by increased incentive compensation expenses, which were partially offset by decreased store expenses. Depreciation was $16.9 million for the quarter and deleveraged 20 basis points, reflecting increased depreciation associated with certain transformation related systems. Adjusted operating income leveraged 70 basis points to 6.7% of sales compared to our guidance of leverage of 10 to 60 basis points. For the year, our comparable retail sales increased 0.4% with our E-Commerce business expanding to over 17% as a percentage of net sales. Adjusted gross margin expanded 90 basis points, adjusted SG&A leveraged 10 basis points and adjusted operating income leveraged 80 basis points. Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $228 million compared to $225 million last year. We ended the quarter with no outstanding balance on our revolver. Balance sheet inventory; Inventory at the end of the quarter was down 9.7% compared to our guidance of a mid single-digit decrease. This is on top of a 7.7% decrease in the fourth quarter of 2014. We are pleased with these results and we will continue to tightly manage our inventory levels. We generated $183 million in cash flow from operating activities in fiscal 2015, compared to $161 million last year, a 13% increase. Our strong cash flow and liquidity profile provides us with a financial flexibility to continue to fund our strategic initiatives and return capital to shareholders. Now let me take you through our guidance. First quarter guidance; we are providing initial first-quarter adjusted EPS guidance in the range of $1 per share to $1.06 per share. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.03 in the first quarter. On a constant currency basis, adjusted EPS is projected to be $1.03 to $1.09 per share compared to $0.83 per share in the first quarter of 2015. Our first quarter guidance assumes that comparable retail sales will increase mid single-digits. We are off to a strong start quarter-to-date and our comp guidance for the quarter reflects the impacts of an earlier Easter compared to last year, warmer weather in the quarter-to-date period as well as the shift of certain promotional events to earlier in the quarter compared to last year. We expect adjusted gross margin to leverage 70 to 90 basis points compared to last year. We expect adjusted SG&A to leverage 50 to 60 basis points compared to last year. Our first quarter guidance assumes that depreciation will be approximately $16.5 million, deleveraging 40 to 50 basis points compared to last year. We project adjusted operating margin to leverage 90 to 110 basis points compared to last year. We are guiding inventory to be down high single-digits at the end of the first quarter compared to last year. Now on to full-year 2016 guidance; we are providing initial fiscal 2016 adjusted EPS guidance in the range of $4 to $4.10 per share. This guidance range assumes that currency exchange rates will negatively impact adjusted EPS by approximately $0.16 for the full-year. On a constant currency basis, adjusted EPS is projected to be $4.16 to $4.26 per share compared to $3.60 per share in fiscal 2015. We expect comparable retail sales for the year to increase low single-digits compared to last year. We expect adjusted gross margin to leverage 80 to 90 basis points compared to last year. We expect adjusted SG&A to leverage 10 basis points compared to last year, including the impact of a restructuring we executed in the fourth quarter to further streamline our business. We expect depreciation for the full-year 2016 to be approximately $69 million. We project adjusted operating margin to leverage 50 to 60 basis points, compared to 2015. This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments. Additional guidance for fiscal 2016; we expect our adjusted tax rate to be approximately 35% for the year. We expect apparel AUC to be down low single-digits for the year compared to 2015. We continue to forecast another year of strong cash from operations in 2016. Our CapEx is expected to be approximately $50 million to $60 million for the year. We plan to open seven stores and close approximately 35 stores in 2016. At this point, we'll open the call to your questions.

[Operator Instructions] Your first question comes from the line of Jay Sole of Morgan Stanley.

Hi good morning. A few questions, just first on the guidance, can you talk about you mentioned the comp guidance for the full-year, can you talk about the total company guidance for sales? Will it be kind of above the same-store sales number or it would be below? How are you thinking about that item just to start off?

Jay its Anurup. Overall from a total perspective, there is a spread of about 3.3 million of total sales - on comp sales. So from an overall perspective that's how I would model it. As we've talked about, we have reflected a low single-digits comp for the year. Our plan is also based upon margin and AUR expansion. Superior product and execution is our first tenant and certainly we expect continued benefits from transformation initiatives.

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

Good morning. Thanks so much for taking my question and congrats on a very nice quarter. I was wondering if you could may be give us an update on your longer term operating margin goal. I think you guys had talked about getting to double-digit overtime and it looks like you are well on your way there. So maybe if you could talk about kind of the path to get there, the timing and the drivers? Is it going to be a lot of the new systems and obviously really good product? Maybe if you could just update us there? Thanks.

Sure Susan. Good morning, this is Mike. We’re pleased with the progress that we’ve made to-date, obviously 80 basis points improvement in operating margin in 2015 and then guidance of 2015 to 2016, which will get us from what we have 5%, 6% up to about 7% toward our goal of 10%. Obviously, the key is to this margin expansion number one is all about products that had focused on putting the right product into the channels is key to all of this. And then we can from there go into systems transformation, real estate rationalization and then expansion of the alternative channels of distribution. So systems you know we outlined on the call today that we continue to make progress with our inventory management systems, APT assortment planning tool and our allocation replenishment went live and for back-to-school in 2015 and as we go through 2016 and into 2017, we’ll add mark-down optimization, order planning and forecasting for our replenishment side of the business and then size impact optimization, which will generate accurate size scales and optimal pack types for the summer of 2017 buy. From a digital perspective, we are really focused on mobile capability enhancements around browse, navigate, search and check out. We’ve done a fairly good job with customer acquisitions where we received, as Jane mentioned 1.2 million new names since June. And we are looking obviously at retention and then customer engagement through the new loyalty and new PLCC program and then obviously omni-channel strategy we are piloting in 2016. So maintaining our store real estate portfolio at 200, which we think underperforming doors that will close through 2017 will add roughly 100 basis points of margin and obviously wholesale and international which are growing nicely and are small, but are overall accretive to the company’s operating margin.

Yes. Susan, its Anurup. I would just add the mid-point of our guidance for next year, if you compare to 2015 that includes $0.18 of increased depreciation, $0.16 of FX. So from a long-term perspective, as our CapEx now reflects the low depreciation, I think it’s important to note those facts, along with the fact that Mike mentioned our 2015 results of where we expanded operating income and certainly our guidance for 2016.

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

Thank you. Good morning, everyone. Congratulations on great effort, a wonderful quarter and year. I was wondering if you can talk a little bit about the alternate channels of sales opportunity. Now that I guess remind us if you can sort of what is the sales penetration wholesale and international and we recall that they are higher margin and accretive to the overall business? And now that the system is in place, how can we think about the growth in 2016 or going forward? And then related to that with laying the foundation for China, any additional color you can give us there and when we can expect that sales contributions to kick in? Thanks.

So Betty obviously we are pleased with the growth and the progress we’ve made in both are international and wholesale businesses. During the fourth quarter, we made significant progress on our investments in technology, fully automating key processes, supporting sales orders inventory receipts and deliveries. We have also develop EDI capabilities that will greatly enhance our interaction with our customers. As we look out through 2016 obviously from a wholesale perspective, I mentioned we’re focused on setting up some replenishment programs with major E-Tailer. When we look at international, our focus in 2016 is really on growing our existing partners in laying that foundation that we talked about in China. The fact that the technology is now in place, we’re able to add 40 new points of distribution and international and then with the wholesale side really start to push on some of these accounts and drive the overall businesses.

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

Thanks and good morning everyone, congrats on a great quarter and finish to the year. Wondered if you talk a little bit about the drivers of comp, obviously AUR is a big part of that but I just wondered if you could kind of go through the components of AUR traffic conversion et cetera. And then looking at the guidance for the first quarter of comp, obviously you are running very, very strong now and you have mentioned I think a shift in a promotional event that might be impacting that as well as the earlier Easter, but just wondered how we should think about the progression of comps throughout the quarter? Thanks.

Dorothy, on the first part of the question or the second part I should say, besides we have seen an outstanding customer response to our merchandise, which is great. Obviously we saw it in Q4 and we’re seeing into Q1. Some of the things that are driving comp early in the quarter is the earlier Easter shifted up a week. We're certainly seeing warmer weather versus last year which is also helping and as Anurup had mentioned there are some promotional shifts. So those things together are accelerating comps earlier in the quarter and we expect that post Easter we will experience some comp deceleration and that is why our guidance assumes a mid single-digit comp which we think is realistic. The other thing I think you should note which is pretty impressive that's going on right now is that as we mentioned that we are certainly seeing favorable weather in the East compared to last year; last year you might remember we had some storms and some store closures. So we are obviously trending better in our East Coast stores, but I think what is so impressive is that every single channel of our business is positive comping right now. So U.S. Place stores, U.S. Outlet stores, Canada brick and mortar stores and of course our ecommerce channel, all are positive comping quarter-to-date and not only is every channel positive comping, but every single region that we trade-in is positive comping. So it's not just the East where we are experiencing more favorable weather, it's the West Coast, the South West, the Mid West, the South East and every single region in Canada as well. So there isn’t one region in all the North America that isn't positive comping and within those channels and regions every single division is positive comping. So Big Girls, Big Boys, Toddler Girl, Toddler Boy, New Born all of accessories and all of shoes. So every channel, every region, every division; all positive quarter-to-date in spite of some as we have talked about persistently negative traffic trends. So it's nice to say.

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

Great, good morning and congrats to the entire team. I guess I had two gross margin related questions, first your inventory per square foot, much below last year levels, but I think still well above historic levels. Is there a target that you guys think about either from inventory per square foot or churns type of a metrics? And then secondly, just wanted to follow-up, how much occupancy leverage did you get on that very strong comp in the fourth quarter? Maybe remind us, what is your occupancy hurdle rate, has that changed at all versus history? Thanks.

Anna its Anurup. On the occupancy side, positive comp does give us leverage on the occupancy number. We haven't and we don't break that out specifically, but obviously a very positive comp has helped in terms of leveraging overall occupancy. In terms of inventory per foot we were down 7% as of year-end, we are very pleased with that number. We are on our internal plans and as far as the outlook goes we will continue to drive inventory productivity as appose to an absolute number as we look forward. And as our tools deploy and we learn from the current systems and what Mike alluded to, we have mark-down optimization, size impact optimization, basic order planning and forecasting to come and so we'll update you as we make progress on those tools as well.

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

Good morning everyone and congratulations. Jane I was wondering if you could address the strength in the outlet channel, is that related to more made-for-factory product or other promotional strategies you may have in place there? I was also wondering if you could give us your outlook for promotional activity here in the first quarter. Do you think that because of the strength of the merchandizing execution be able to rain that in year-over-year? Maybe you could give us a overview of what's happening on the competitive front in terms of pricing. And just lastly on cotton pricing, I was wondering if the impact for the full-year would be even or if you would gain some incremental margin opportunity as the year unfolded? Thanks so much.

Sure. Okay, where to start, lots of questions. On the promotional strategy, we are certainly more restrained in our promotional strategy, we talked about that a lot during Q4 and we continue to be restrained in Q1, which is adding to the consecutive quarters of higher AURs and higher gross margin. We own a lot less clearance and we're driving new product at a much higher AUR, so we feel good about where our promotional activity has been for the past several quarters. as far as outlet merchandizing is concerned Jennifer, our Head of Design certainly has her stamp on that product as we go forward, I think we're learning a lot through her and her design team, and I think that we're putting some things in to the outlet channel that are much more similar to what we have in our Place channel and that's really resonating with our customer. On the competitive front, I think that we've heard that some of the competitors are still struggling under the weight of their excess winter inventories from Q4 that potentially during the month of February they had to work their way through. We did not have that issues at the Children's Place, so we were able to experience a very, very strong February, not only through comps, but also through AUR and through margin. So I would say that we have a little bit of a different situation than a lot of our competition based on the strength of our merchandise and then I will turn it back over to Anurup to talk about cotton.

As far as cotton goes, as we’ve talked about in the previous calls as well, we expect AUCs to be a general tailwind for The Children’s Place. At this point in time, as we placed our buys to back-to-school and we get ready for holidays, we expect AUCs to be low single-digits, but it is a general tailwind, we will continue to strategically invest in our number one initiative, which is product and that is where we stand at the moment.

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

Good morning, its Chad on for Taposh. I wanted to ask on the wholesale business, it seems like you are having continued success there and obviously expanding it. Can you help us better understand the margin accretion, is it a product of higher product margins than your retail business or is it less overhead or is it a combination of both? Thanks.

Regarding the overall margin, our wholesale gross margins are dilutive to the overall Children’s Place gross margin, but the business is nicely accretive on the operating line due to the lean SG&A structure supporting the business and the fact that we can leverage the existing mass of the company.

Your next question comes from the line of Adrienne Yih of Wolfe Research.

Good morning, congratulations on a great quarter. Jane my first question is just follow-on from Janet’s and it’s really about the competitive landscape. Can you talk about some of the historical specialty players, like Gymboree, the pressure that they are under and whether you are seeing nay positive impact from that? And then, Mike I rarely ever have to ask your inventory is so clean. Units down high single-digit, AUC down low single-digit, so I’m assuming the dollar buy is down more so in the high single-digits. So is the productivity coming from better terms and allocation, so best and highest use of each unit of product? If you can help us out how you continue to strengthen positive comps based on the mathematical metrics there. Thank you so much.

Thanks Adrienne. On the competitive question, we are not going to discuss specific to competitors, but what I will tell you, we spent a lot of time looking at our market share and with the many, many entrants that come into the kids space, be they brick-and-mortar entrants or pure play digital entrants. We’ve been able to maintain/gain market share consistently since I have been at The Children’s Place. So that share is obviously coming from somewhere and I think when you look at our assortment, we really have strength through the fourth quarter certainly and into the first quarter and we believe certainly through the rest of 2015 and beyond with the design and merchandising teams we have here now. It really is a competitive advantage of ours and if you look at the team that we established at The Children’s Place and you look at the depth of the talent particularly on the design side. We are really killing it as far as merchandise and they really deserve all the credits. So I think that we’re just going to continue to focus on The Children’s Place continue to focus on what we can control and continue to focus on what we do best which is put out great product. And now for the first time in our history that we’re in a level of playing field with the competition as far as systems, I think that combination of systems and superior design and superior merchandising coupled with the field of execution which has been absolutely superb, the field is doing a great job. I think really everything is kind of coming together, as we said on the call, really all the work the team has done on the strategy we are really starting to see the results.

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

Hi guys, congratulations on a great year, great quarter, the stores look fantastic. So I wanted to touch on China a little bit more. I guess what is the competitive landscape like in China for American brands? As I understand it they don’t trust their own brands for their children. So I’m curious what your perspective is on that. And will you launch directly your own site or would you consider going on to T-Mall or something like that or both in conjunction? And I guess finally, have you thought about as you launch into China the social media push and play as it’s very important there?

We are very early stages in terms of our entrance into China and the goal for 2016 is really to begin to lay that foundation. So we are working through all the legal and regulatory requirements, working through picking the right partners in terms of distribution and logistics, site maintenance. We’re working through right now inventory management around merchandising and pricing strategies, sourcing strategy. So early days yet overall, obviously it’s a pretty fragmented market, it’s a huge market, but highly fragmented and our sense is that our brand can compete very well there as it has in the rest of the international markets that we have been involved with. So I just ask you to stay tuned and we will have more information as we move forward.

Your next question comes Dana Telsey of Telsey Advisory Group.

Good morning everyone and congratulations. As you think about merchandise margins and the higher AUR, going forward what are the buckets to drive those higher and where do you think it could get to from where you are now? Thank you very much.

Dana, I think as you probably noted, we are very pleased with merchandise margin expansion now four quarters in a row, AUR expansion of four quarters in a row, a 130 bps margin expansion in Q4 and we've guided significant expansion in Q1 and for the year. I think that number it starts with product acceptance, I think we are very encouraged by the results to-date which Jane has also alluded to, pretty consistent cross-channels, geographies and categories. Secondly, we've implemented our assortment planning tool and allocation systems in back-to-school last year after a small pilots. So we have a runway ahead of us in terms of using those tools further this year, the learnings, the process and we have additional significant enhancements to come such as mark-down optimization, size and path optimization, basic order planning and forecasting. So we believe there is a significant runway ahead as far as margins go.

And those inventory management tools are obviously helping us overall with that fact that our inventories were down almost 10% heading into Q1. I mentioned on the call that our assortment planning tool, we're looking at purchasing from the unit perspective, negative high single-digits and units and obviously Anurup has talked about the fact that our AUCs in apparel will be lower. So obviously well that is adding toward lower inventory and the fact that our allocation frequency, our fashion product is up over 60% and allocations per cycle is actually down units 50% giving us the opportunity to make our inventory much more productive. We've figured from a go-forward perspective that that will continue and improve within the tools that we're actually implementing in 2016 and 2017.

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

Thanks and I'll add my congrats on the solid execution. Question on the roll out of mark-down optimization. Can you just provide some granularity on how many stores this will be piloted in the second quarter before it's fully rolled out in the back half. And also it is safe to assume that we'll start seeing the meaningful benefits in the back half the gross margins or will this take time to ramp up and be more of a 2017 event? Thank you.

As we pilot mark-down optimization we're actually going to start with our E-Com business and then we'll move forward with a small grouping of U.S. stores. So we'll expect some impact in the back half of 2016 but the major impact will be from a gross margin expansion perspective, it'll happen in 2017.

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

Thanks good morning everyone, and congratulations as well. Just a couple of housekeeping, I think you mentioned your E-Commerce business was over 17%. If you could just talk about the plans for the growth in that channel. And then also Jane, I think you talked about 1 million or so e-mail sign-ups. If you could just update us on your CRM program size and what that may represent as a percentage of sales? Thank you.

Hi its Anurup. First on the E-Com question, E-Com and our digital growth strategy is an integral part of The Children's Place further operating plans. However, we are not going to breakout E-Commerce separately going forward. We believe from an investor perspective and from a business perspective, given all of our omni-channel development that a consolidated view of the company is the best guide to our results and to our guidance. So that's as far as E-Com growth. As far as how the CRM activity goes and Mike might jump in after this is, as you know we have done various foundational work in 2015 such as a distributed order management system, launching of e-receipts and we have a significant roadmap ahead in 2016, building our mobile capabilities, enhancing all of our private label credit card and loyalty programs. So there is a lot more to come and piloting cross-channel fulfillment. So a lot is on the plate for 2016 and beyond as far digital goes. So that is where I would leave it at this point.

Your final question comes from the line of Richard Jaffe of Stifel.

Thanks very much guys and I guess two follow-ons. One is the benefits many retailers are seeing regarding average unit costs falling in China, not only cotton, but transportation, labor and the strong dollar. I'm wondering if you could give us some help in terms of quantifying that in 2016 or getting a handle on that metric. And then, if you could talk a little bit more about the wholesale opportunity as you build better systems and as you talked about gearing up. How big or how important do you see wholesale becoming? Obviously I would love to know your partners, but if you can't share that with us just give us a sense of size or change year-over-year in 2016 that would be very helpful? Thank you.

Richard on AUC, it continues to be a tailwind for the Children's Place, cotton, currency, our sourcing mix, work of our sourcing offices across the globe, certainly creates that tailwind for us, it does allow us to continue to strategically invest in our number one initiative which is product. So as we look at 2016, we are planning AUC to continue to be a tailwind and low single-digits at this point in time.

And from both the wholesale and international perspective, we've been talking all along about the systems work that we needed to do to begin to expand these businesses beginning in 2016. So we're planning some aggressive growth in 2016. At this point, we're not prepared to provide any more information on that but just note that it will be a pretty aggressive growth plan.

Thank you for joining us today. If you have further questions please call Bob Vill at 201-453-6693.