The Children's Place, Inc. (PLCE) Q1 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to The Children’s Place First Quarter 2017 Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I will turn the conference over to Mr. Bob Vill, Group Vice President, Finance.

Thank you for joining us this morning. With me here today are Jane Elfers, President and Chief Executive Officer; Mike Scarpa, Chief Operating Officer; and Anurup Pruthi, Chief Financial Officer. A copy of our press release can be found on our Web site. 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 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. In addition, to find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning’s earnings release and to our SEC filings that can be found on our Investor Relations site. 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, Bob, and good morning, everybody. We continued to deliver outstanding operating results in the first quarter. We delivered adjusted diluted EPS of $1.95, a 48% increase versus last year and $0.32 above the high end of our guidance. Comparable retail sales, operating margins and earnings per share were significantly above both last year and the high end of our guidance range. We ended the quarter with a positive 6.1% comp, our highest Q1 comp in over a decade on top of a positive 5.1% comp in Q1 of last year. Further separating us from the pack, we generated positive comps in our brick and mortar channel for the sixth consecutive quarter and our traffic continued to improve sequentially from Q4. Our inventories are in great shape as we enter Q2, up 2.8%. Before I move on to strategy, I want to briefly comment on some outside reporting that has become a common place in our sector. I am referring to credit card data and other one-off reporting. For example, we received calls from several of our analysts on April 18 regarding the report that was issued from M Science, a firm we had never heard of. M Science reported that we were in jeopardy of missing our consensus net sales and comp for the quarter as they estimated we would only deliver 416 million in net sales and a flat to 1% comp. As you saw this morning, we delivered 437 million in net sales and a 6.1% comp just 12 days later when the quarter ended. We wonder if the M stands for Mistaken. Moving on to strategy. We continued to make significant progress on our key strategic growth initiatives; superior product, business transformation through technology, alternative channels of distribution and fleet optimization. As we look to the future, developing and implementing a best-in-class personalized customer contact strategy is our single biggest opportunity. Given the ongoing shift to digital commerce, our core customer who’s a digitally savvy, mobile millennial Mom, our consistently strong operating results and the changes in competitor dynamics, we have made the decision to significant accelerate the development and implementation of this initiative. We believe this represents a $200 million sales opportunity over time for our brand. We announced this morning that Pam Wallack has joined us in the newly created position of President Global Product reporting directly to me. Pam is one of the most talented childrenswear executives in the country and her decision to join our team is a major coup for The Children’s Place. Pam will take on direct responsibility for global design, merchandizing, sourcing and production. With Pam’s arrival, I can now devote significantly more time and focus to delivering the benefits that are best-in-class, personalized customer contact strategy provides to our shareholders. Let me highlight the key elements of our personalized customer contact strategy. We are in the process of building an agile, modern, digital marketing organization with the goal of delivering a strategic, robust, dynamic personalized customer contact strategy. This initiative will drive increased acquisition, retention, engagement and share of wallet resulting in meaningful increases in incremental sales and profitability. Our marketing organization consists of three teams working seamlessly to deliver our customer contact strategy; our customer insights team, our customer strategy team and our digital delivery team. First, our customer insights team. Customer insights come from the work we are doing on customer segmentation and customer analytics. Our customer segmentation efforts are helping us to better understand our customers and their shopping behaviors across all of our channels, which is setting the stage for our personalized customer contact strategy. Working with our outside partners, we are well on our way to having a 360 degree view of how, where and when our customers shop and engage with us across all of our channels. This information, coupled with deep customer analytics, will enable us to anticipate our mom’s needs and deliver on those needs through a tailored, best-in-class marketing experience across all of our digital touch points. Second, our customer strategy team. We’re in the process of setting up a cross-functional testing and execution insights lab staffed by several of our external partners working in collaboration with our in-house customer insights team. Our lab will allow us to drive new innovations and instill a rapid test and learn culture within our organization. This testing process built upon the rich insights we have already gleaned from our customer segmentation and analytics work, as well as the learning from our highly successful private label credit card and loyalty program launches. The findings from our insights lab combined with the acceleration of new systems and processes will provide a launching pad for us to develop, deliver and continuously refine our dynamic personalization strategy. And third, our digital delivery team; omni-channel initiatives. Building upon our first omni-channel initiative, ROPIS, we plan to launch BOPIS for buy online, pick up in store later this quarter. In addition to the operational benefits omni-channel capabilities provide, they are also foundational to our personalized customer contact strategy by meeting the needs of how, where and when our customers want to shop. Following BOPIS, we will move quickly to the used cases and benefits associated with the additional omni capabilities of ship from store and save a sale. Digital architecture upgrades. Our digital experience is key to our personalized customer contact strategy, particularly when you consider who are core customer is. Our customer is a retailer’s dream. She is millennial mobile mom. She’s a digital native who is highly adaptive of and engaged with technology and expects us to provide an easy to navigate modern digital experience. To help meet her expectations, we are planning to launch through five releases significantly upgraded and enhanced digital capabilities throughout the remainder of 2017. The releases are sequenced to provide improvements to optimize the checkout process, provide easier access to accounts and awards information and to provide improved product information and personalized recommendation. Following these five releases, the foundation will be in place to add increasingly more personalized capabilities starting in 2018. Importantly, we will be delivering a significantly improved mobile app experience in the third quarter. Our new app will be the foundation of our mobile first strategy and provide the ability to rapidly add advanced functionality post launch. Personalized customer contact is our top priority and I’m excited to focus more of my time on accelerating its significant benefit. These are exciting times for our company and we look forward to delivering another outstanding year for our shareholders. Now, I’ll turn it over to Mike.

Thank you, Jane. This morning I will provide an update on our other strategic pillars; inventory management, alternate channels of distribution and fleet optimization. Inventory management. As you know, we launched our inventory management tools for the back-to-school 2015 season. We continue to see improved results from these systems as we refine our learnings. The first tool we implemented was our assortment planning tool. This tool has enabled us to continue to increase sell-through rates and drive down receipt units. We are projecting receipt units in the second half of 2017 to be down mid-single digits compared to last year. As we further refined our usage of this tool, we identify the significant opportunity to align the timing of unit flows into our DC more closely with store needs. In the holiday 2017 buy, we’ve reduced the penetration of our initial flow of fashion receipts by 12% versus last year. Allocation and replenishment. We continue to refine the science and algorithms of this tool which has contributed to enhancing our inventory productivity. We are further working to revise the analytics to normalize demand for stores with gross margin rates that fall below targeted levels. This will improve the quality of the underlying demand and will direct inventory to the most profitable sales opportunity. Tiering. We continue to use store tiers as a lever to further de-risk our inventory. Tiering allows us to be more proactive around GMROI in our lower volume stores by reducing assortment breadth in overall inventory levels while still producing sales and gross margin expansion. For holiday 2017, the combination of tiering and our APT tool has reduced the number of all door SKUs to 52% of the assortment from 59% last year, representing our efforts to vary assortments by tier and optimize profitability. Size and pack. We saw a significant opportunity to increase sales and margin through size and pack. Optimization focusing on the size of the pack and the quantity of each size within a pack has led to a 14% reduction versus last year and the average pack size for holiday of 2017. Fewer units in a pack will result in significantly less stranded inventory and increased inventory productivity. Order planning and forecasting. We continue to use our new order planning and forecasting tool to drive our monthly basic reordering process. By considering the sales forecast and inventory position by size, we are more effectively able to place future reorders to maintain our in-stock rates in the store and in the DC, while also decreasing overall inventory levels. With this capability, we are projecting increased inventory productivity and basics for the year with a significant improved sales-to-stock ratio. Moving on to alternate channels of distribution. Our wholesale and international franchised businesses continue to build momentum. In our wholesale channel, we continue to see strong growth in our businesses with Amazon, as well as our off-price customers. We launched our replenishment program with Amazon in the third quarter of 2016 and we are now offering nearly 3,000 SKUs as part of this program. This replenishment program is incremental to the fashion wholesale business that we launched with them in 2015. We achieved platinum vendor status with Amazon in 2016, a testament to the strength of our relationship. Together with Amazon, our focus in 2017 is on driving customer store product on their site by leveraging new marketing programs. We expect Amazon to be the biggest growth driver in our wholesale business over the next few years. We also expect healthy growth in our off-price business by focusing on new product strategies; exclusive product, sets and multipacks and new categories. In our international franchise markets, we opened six new points of distribution in the first quarter and now have 156 points of distribution in 18 countries. These include stores, shop-in-shops and ecommerce Web sites operated by our partners. Looking ahead, we believe we have the opportunity to establish over 300 points of distribution by the end of 2020. We expect to accomplish this through growth with existing partners as well as expansion into new geographic regions with new partners. In addition, we are focused on growing our recently launched business in China as we build brand awareness in that market. Fleet optimization. Our fleet optimization program continues to generate significant financial benefit. We closed seven stores in the first quarter and have closed 149 stores since we announced this initiative. On the last call, we indicated that we are expanded our expected store closures to 300 doors by 2020. Key elements of this strategy have been one, a sale’s transfer rate in excess of 20%; two, our ability to successfully negotiate rent reductions for a significant percentage of our expiring leases; and three, lease flexibility with the majority of the lease renewals being one to two-year deals ultimately reducing our average lease term to less than three years. This fleet optimization program will ultimately result in a decrease in total fleet square footage of over 1 million square feet or 20% along with an expansion in operating margin of 200 basis points. Now, I will turn it over to Anurup.

Thank you, Mike. Good morning, everyone. In the first quarter, we delivered adjusted EPS of $1.95 compared to $1.32 last year and a high end of our guidance of $1.63, a $0.32 beat versus the high end of our guidance. The $1.95 in adjusted EPS included a $0.19 tax benefit while our high end guidance of $1.63 assumed only a $0.08 tax benefit resulting in $0.11 of incremental tax benefit from the new accounting rules due a higher share price. The balance of the $0.32 beat or $0.21 was due to our strong operating performance. Details for the first quarter are as follows. Net sales increased 4.1% to $437 million. Comparable retail sales increased 6.1%, our highest first quarter comp in over a decade on top of a positive 5.1% comp in the first quarter of 2016. We generated a positive comp in our brick and mortar channel for the sixth consecutive quarter and we continued to see a significant increase in the penetration of our ecommerce sales. U.S. comp sales increased 6.8%. Canada comp sales decreased 1.4%. Our merchandize margin rate increased for the ninth consecutive quarter. Adjusted gross margin for the quarter deleveraged 20 basis points versus last year to 39.2%. The penetration of our ecommerce business increased significantly in the quarter, which drove a higher comp, operating profit, operating margin rate and earnings per share. However, this penetration resulted in a slightly lower adjusted gross margin rate compared to last year. Adjusted SG&A leveraged 160 basis points compared to last year to 24.5%. The leverage was primarily due to decreased store expenses and lower credit card fees and the positive impact of the strong comparable sales. Depreciation was $15.7 million for the quarter. Adjusted operating income was 48.4 million leveraging 170 basis points to 11.1% of net sales. Our adjusted tax rate for the quarter was 25.7% compared to 34.2% in the first quarter of 2016, inclusive of the impact from the new accounting rules for the income tax impact on share-based compensation. Moving on to the balance sheet. Our cash and short-term investments at the end of the quarter were $231 million compared to $234 million last year. We ended the quarter with 27 million outstanding on our revolver compared to 25 million last year. Balance sheet inventory. Inventory at the end of the quarter was up 2.8%, well below our guidance of a high single digit increase, reflecting the impact of our 6.1% comp sales increase. We generated $29 million in cash flow from operating activities in the first quarter compared to $28 million in the first quarter last year. We repurchased $33 million in stock inclusive of shares repurchased and surrendered to cover tax withholdings associated with the vesting of equity awards and paid $7 million in dividends in the first quarter of 2017. Our strong cash flow and liquidity profile 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 Q2 and full year guidance. This guidance excludes certain costs or events that are set forth in our non-GAAP adjustments included in this morning’s press release. For Q2, we are guiding to adjusted EPS in the range of $0.70 to $0.75 inclusive of a $0.70 tax benefit due to the new accounting rules compared to an adjusted loss per share of $0.01 last year. The total tax benefit for the full year is $0.89, $0.19 from Q1 plus $0.70 in Q2. Moving on to full year guidance. For the full year 2017, we are increasing our adjusted EPS guidance to $7.10 to $7.20 per share compared to our previous guidance of $6.50 to $6.65, an increase of $0.55 at the high end of our range. This compares to $5.43 in full year 2016. Our new full year guidance of $7.10 to $7.20 includes the $0.89 tax benefit while the original guidance only included a $0.45 benefit, resulting in an incremental tax benefit for the full year of $0.44. In summary, we raised our full year guidance by $0.55; $0.44 due to the impact on taxes from the new accounting rules and $0.11 coming from the $0.21 operating margin beat in Q1. We are reinvesting the remaining $0.10 operating margin beat into our accelerated digital transformation. Let me provide you with details of our Q2 and full year guidance. For the full year 2017, we expect comparable retail sales for the year to increase approximately 3%. We expect total net sales for the year to be in the range of 1.825 billion to 1.835 billion, inclusive of the impact of the 53rd week. We expect adjusted gross margin to leverage 20 to 40 basis points. We expect adjusted SG&A to leverage 20 to 30 basis points. Our full year guidance assumes that depreciation will be approximately $66 million to $68 million. We project adjusted operating margin to be in the range of 9.1% to 9.3%, an increase of 60 to 80 basis points compared to 2016. We expect our adjusted tax rate to be approximately 23% for the year, inclusive of the impact of the new accounting rules for share-based compensation. We expect apparel AUC to be down low single digits for the year compared to 2016. We continue to forecast another year of strong cash from operations in 2017. Our CapEx is expected to be approximately $60 million for the year. We expect to open two stores and close approximately 40 stores in 2017. Second quarter guidance. We expect that comparable retail sales will increase low single digits. We expect adjusted gross margin to be flat to leverage 20 basis points as a percentage of net sales. We expect adjusted SG&A to be flat to leverage 20 basis points as a percentage of net sales. Our second quarter guidance assumes that depreciation with be approximately $16 million. We project adjusted operating margin as a percentage of net sales to be flat to leverage 40 basis points. Our inventories continue to be in excellent shape. We are guiding inventory to increase mid to high single digits at the end of the second quarter compared to last year, due to the timing of receipts. As Mike indicated earlier, we expect unit receipts to be down mid single digits in the second half. At this point, we’ll open the call to your questions.

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

Hi. Can you hear me?

Yes, we hear you, Jay.

Hi. Sorry. So my question is, Jane, on the new hire. Bringing someone into such a senior level to be at a global role, does that – what does it say about what’s changed over the last quarter about what you see is the potential for the brand on a global basis? I know there’s a lot of data points given about the number of points of distribution internationally. But as you see it going forward both on a wholesale and retail basis, can you just tell us what’s changed over the last three months?

Yes, I think when you look back and when Jennifer Groves, our Head of Design made the decision to join The Children’s Place, I made the decision to take on the Chief Merchant role. And the reason I did that is because I was pretty sure that the combination of Jen and myself would be an unbeatable one. And I think when you look at how strong our comps have been over the last couple of years, I think I can confidently say that I made the right decision. However, when the opportunity to bring Pam on came up, that is an outstanding coup for The Children’s Place. Pam is an extremely strong childrenswear executive with an outstanding track record. Pam worked with Jen when Pam was the President of Gap Kids & Baby; Jen was the Head of Design for Gap Kids & Baby. And in my opinion, those two were the ones who put Gap Kids & Baby on the map. When you look at the rest of Pam’s background, she’s been successful at several large kids companies. She’s been at Disney, she’s been at Babies “R” Us and Kids “R” Us and like I said where she was President of Gap Kids & Baby. The other thing about Pam; not only has she worked with Jen, she’s worked with most of our design team. She has worked with directly several members of our senior leadership team and a lot of our key operational executives. For instance, she’s known Mike for years. She knows our Head of HR. She knows our Head of Stores. So it’s going to be somewhat of a homecoming around here with Pam coming on and I think also hitting the ground running from day one. We couldn’t be more excited to get someone with Pam’s pedigree. And the timing is right for me to move off of the Chief Merchant role and to move on to customer personalization. We see customer personalization as a starting point of a $200 million opportunity. And as far as timing, we’re targeting having this initiative fully up and running by the end of fiscal '18, so we can realize the full benefit in 2019. And now that we have Pam onboard, I’m going to move and put the same focus on customer personalization that I did on merchandizing.

Your next question comes from the line of Stephen Albert with Bank of America.

Good morning. I wanted to touch upon the gross margin line a little bit. I guess could you parse out what the merchandize margin expansion trajectory looked like versus prior quarters? I guess the optics obviously saw a little bit of decel on that line. Is it mostly just pressure from the shift to ecommerce and incremental shipping expense and you get the flow through on the SG&A line?

Yes, Steve, it’s Anurup. I think we obviously saw outsized penetration of ecomm sales as a percentage of our total retail sales in the quarter. However, I think as you’ve mentioned in your question, we leveraged operating margin, and I will draw your focus there first, by 170 basis points versus last year, up about 450 basis points versus just two years ago. So ecomm penetration drives the overall comp, it drives the overall operating margin, it drives the overall operating rate and ultimately EPS. So from our perspective, ecomm is a very profitable model, a high basket size, low return rate, outstanding value proposition to mom, continue to make this a very, very – very much a core part of our operating model going forward. Jane spent a lot of time this morning explaining in detail the significance of our personalized customer contact strategy. As I mentioned, it’s very profitable. It drives a big share of the overall comp and overall operating model going forward. So as ecomm from a penetration perspective if it continues to outperform and outsize as a percentage of total retail, there might be a geography shift in our P&L. So you might see slightly lower rate of gross margin expansion but you would see lower SG&A as a result of ecomm penetration. So from an overall perspective, I think we are very, very pleased with our progress not just in ecomm but in the total business. And also to mention that we’ve had now six quarters of brick and mortar comp increases just another testament to the successful execution of the all-round strategy.

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

Very nice quarter. I was wondering if maybe you could talk about the decreased store expenses in the quarter that really helps SG&A, is this mainly the lower rent that you guys are talking about or are there other things that you’re becoming more efficient within the stores. And then just really quick on the new customer contact strategy, it sounds like you’re going to be working with some external partners on this. So I was just curious, are these consultants that will help you implement new digital technology or how should we think about this? Thank you.

Susan, I’ll take the expense piece first. I think as you’ve seen from an overall SG&A perspective, we leveraged 160 basis points for the quarter. Most of this is primarily driven from a dollar’s perspective by reduction in store expenses and our credit card fees. As we mentioned in prior calls, we re-launched our private label credit card program in Q4 last year and it’s off to a really successful start; penetration of private label credit card fees somewhere in the neighborhood of a 400 basis point increase in penetration that helps drive those credit card fees down. And in addition, our store team continues to do an outstanding job in controlling the controlables. The culture at TCP continues to drive initiatives around the expense efficiency. And also to mention that the very, very strong comp also drove a significant part of the overall SG&A leverage in the quarter. As we look forward, I think it would be fair to say that you could expect SG&A strong management to be very much part of sort of what we do here while we continue to invest in all of our transformation initiatives.

And on the second part, while we continue to build our own in-house expertise in systems and in marketing obviously as we’ve done with this whole transformation as to bring in the right partners from an outside perspective to help and guide us through these very technical programs and transformation, so no different in the digital world.

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

Good morning. I have to congratulate you on just stellar performance in what is just such – historically such a tough environment, so the whole team congrats.

Thanks, Adrienne.

You’re welcome. Jane, I want to get deeper into kind of the investments that you’re making. Can you talk about the amount of sort of data or history that you have on your millennial shopper? What type of data you’re using and how that kind of results in this loyalty of lifetime value of the customer? And then Mike or Anurup, can you actually give us the penetration of ecomm? Is it closer to 20% or 25%? Where should that go over time? And I want to make sure that we’re modeling the gross margin impact correctly. Can you give us any color on the differential – the basis point differential gross margin ecomm to brick and mortar? Thank you very much.

Sure. Well, I’ll try to take the first part of it. We have a huge runway ahead of us with respect to our digital transformation and our personalized customer contact. And I think we can start with our basic belief is that digital technology as a core competency is what’s going to separate the long-term winners. So as I said in my prepared remarks, we’ve got a retailer’s dream as our core customer. She’s the millennial mobile mom and she’s like I said a digital native. On top of having her as our core customer, we also have the luxury of having a pipeline into our future Gen Z customer which also gives us a natural advantage when it comes to technology as we look ahead. So we’re at the beginning stages of the digital transformation. As I said, we see this as a $200 million opportunity as the starting point. And moving my focus over there with Pam’s arrival, I really think we can get this up and running by the end of '18, so we can realize the full benefit of '19. And when you think about it, we think about it in four buckets. So let me just kind of highlight those four buckets for you and each one of the buckets has substantial incremental sales and profitability associated with it. The first one is really the digital platform. So we’re looking for a modern robust digital platform so we can engage with our core customer, that millennial mobile mom. And so we’ve got rollout scheduled this year that includes like foundational features and functionality like optimized checkouts, search, access to account, rewards, streamline sign-up for our private label credit card and our My Place Rewards program and starting on more improved product recommendations. As I mentioned in my prepared remarks, importantly about this is that it also includes the launch of our new mobile app which is scheduled to release in the third quarter. This is really important for us because that’s going to set the foundation for more advanced personalization as we get into 2018. The second bucket and this is – all these buckets are big but this is where we think the biggest bucket of opportunity is, is through greater conversion and that’s really where the predictive analytics and the personalized marketing comes in when we’re working with our outsized partners on segmentation and analytics. This is where that really kicks in and it sets up our personalized customer contact strategy. So once we got the contact strategy in place and we are able to put in the corresponding technology, if you will, to enable dynamic and triggered marketing, we can start communicating with our customer through things we can’t do now; things like triggered emails, more personalized recommendations based on behavioral history, targeted personalized promotions. We will be able to personalize offers at POS, personalize offers through digital display, things like that. So the foundation of that work, the customer segmentation and the analytics, is really that test and learn culture that I mentioned and it’s really the insights lab that we’re developing in conjunction with our outside partners and our insight internal team. So we’ll constantly iterate and learn from that lab. The third bucket of the four is really growing the penetration of private label credit and the loyalty program. This we’ve seen from our research and our analysis that we’ve gotten so far will significantly increase the lifetime value of our customers if we can move them up into rewards and then move them up into the private label credit card. Our early segmentation and analytics work show a very strong ROI in this initiative and the insights lab is going to best help us better understand how to accelerate that opportunity around private label and rewards. And then the last of the four buckets is really omni-channel capabilities. We only have one capability so far, ROPIS. So we’ve got a lot of ground to make up and we’re going to be launching BOPIS in Q2 this quarter and then we’re going to move quickly after BOPIS to used cases with things like ship from store and save a sale. And based on who our core customer is, our millennial mobile mom, we need to advance these omni capabilities quickly and it’s also one of the key foundations to our personalized customer contact strategy and our mom demands these omni-channel capabilities and we intend to provide them to her.

Adrienne, on the question around ecomm and margins, I would just say that ecomm and the growth of ecomm is very much part of our strategic operating margin expansion plan. It grew to almost 20% of total retail sales in 2016. We very much look at the business as a consolidated, especially after everything Jane articulated about where our customer is and how much of a roadmap we have ahead of us in terms of digital convergence. So we very much look at this as an omni, a business between ecomm and brick and mortar. But if you look at our guidance today of 9.3% operating margin versus 5.6% in 2014, that very much incorporates the journey of ecomm penetration. As I mentioned before, our ecomm business is a very profitable business for us. We offer an outstanding value proposition to mom. And also – I would just also go back to the fact that we had launched our fleet optimization program many years ago with the full intent and foresight of seeing digital convergence and that also helps in terms of managing and driving profitability in the future. And finally, we also see huge potential in our omni business because it’s roughly 25% of our customer base and 42% of our sales. So some of our most profitable customers are omni customers and that’s why we’re really excited about what everything Jane articulated today.

Your next question comes from the line of Kelly Halsor with Buckingham.

Jane, I was just wondering if we get into a little bit of the competition of your store base, could you just remind us of how many of your stores are off-mall? And then on that same topic, just an update on the discussions you’re having with your landlords given the environment, has that – any of those conversations evolved particularly with the brick and mortar traffic certainly remaining pretty challenging here? And then just secondly, I just have a housekeeping. Based on my math at least it looks like the 53rd week would be about an incremental 20 million or so in sales in the fourth quarter and I was just wondering if there is any sort of profitability implications if you could just shed some light on that please? Thanks.

Kelly, from a real estate portfolio perspective, we have about 60 – a little over 60% of our stores in malls; roughly about 13% are outlets and the remaining call it 25 to 27 are basically in Lifestyle Strip centers. As we go through our fleet optimization program, obviously we’ve seen really good results from it. We’ve closed almost a little over 150 doors at this point in time with 150 to go. We’ve reduced our square footage by 0.5 million square feet so far in this program. And as I mentioned in my prepared remarks, some of the key success factors to drive this 200 basis point operating margin expansion is successful renegotiations that we’re having with the landlord community. So obviously they’re feeling pressure. As we look at our program, obviously our competitors are under some pressure. There’s some financial stability issues with some of them. So the landlord community has been very receptive in terms of what we’ve been able to do.

Kelly, as far as the 53rd week goes, it’s really no material impact from an EPS perspective. It’s a small week in terms of overall volume. We don’t really go into more specifics than that.

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

Good morning, everyone, and congratulations on a wonderful quarter. A couple of questions. The gross margin guidance for the second quarter has also increased year-over-year and given that deleverage due to the ecomm penetration, I’m just wondering what factors would change between 1Q and 2Q there? Also, Jane, if you could talk a little bit about AUR opportunity? I know that some of the basic programs had enjoyed nice – it looked like improvement in AUR year-over-year in the first quarter, but maybe you could discuss the opportunity there? And lastly, just on Canada, it seems like it’s getting better from the fourth quarter to the first quarter. Is that just isolated to certain markets undergoing some economic turbulence? Thank you.

Janet, on Canada, I’ll take the last piece first. Canada was up against some very, very strong comps from last year, but overall I will say we’re very pleased with the progress and profitability in that market. It remains very stable for us. Our teams do an outstanding job in terms of store execution and I think we’re just pretty pleased with continuing to solidify our share up in Canada. As far as second quarter guidance goes, we are guiding gross margin flat to a leverage of 20 basis points. This does include in this guidance very good growth in ecommerce. What we did point out to in Q1 is we obviously had a very outsized performance in ecomm, which again might result in a lower gross margin rate. But at the end of the day, the most important metric is it continues and will continue to drive operating margin. So we have factored ecommerce penetration gross into our Q2. We do forecast merchandize margin to increase for the 10th consecutive quarter in the second quarter. The inventory management tools, extremely strong and continued product acceptance and AUR increase are part of what we’ve guided to in Q2 as well.

Janet, just to point out. Obviously Q2 is basically – last year, it was a breakeven quarter for us and we’re projecting about the same to a little better than that. It is the lowest sales volume for us on a quarterly basis during the year. So not a lot of leverage that we can put on the fixed expenses that the company has.

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

Hi, guys. Congratulations on the quarter, on Pam, on the assortment.

Thank you.

I’m kind of curious a little bit about Amazon. The product that you are selling to them, is it designed separately from what you’re doing? Because it looks like the fashion product is different than what you have on your site. And then the follow up to that is, if it’s all made for Amazon if they cancel something or doesn’t sell, how does that process work on the backend as you grow this business? I’m guessing until now, it hasn’t been a problem. But as you grow the business, what’s the exit on I guess excess inventory or cancelled inventory or any of that?

Marni, it is the same product. We don’t do “exclusives” per se. We have a big replenishment program with Amazon that we’ve discussed on a couple of calls. But what you may be seeing is that the product that they do buy, a lot of times what they do is bundle it. So they’ll do things like set two-pack, three-pack, five-pack, six-pack, so it may appear different than our assortment would look online. But that’s probably what you’re seeing there.

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

Great. Thanks so much. Good morning. And let me add my congrats as well.

Thank you.

I guess a couple of questions. Was hoping you guys could talk about what kind of trends you saw in the outlet channel and if there was any variability in performance across the A, the B and the C malls? And secondly, May sounds choppy for the industry I think thus far. Maybe talk about the trends you’re seeing so far this month? And I guess within that, Jane, maybe the latest thoughts on the competitive set, maybe remind us your overlap with the Jamboree banners? Thanks.

Sure. On the outlet one, we don’t really comment on that. We don’t break it out. But I will tell you that the traffic in outlet is worse than the traffic in the Place stores, so that is lagging and did lag a bit in Q1. As far as trends, we don’t like to talk about them in the mid-quarter. I will tell you we are positive in comping but I don’t want to get too ahead of myself, because we’re only two weeks into the quarter. And then as far as the promotional environment is concerned, I think just in general on a macro level, I think all signs we could fairly say are going to point to an increased promotional activity in Q2. We’ve heard all the same negative Q1 reports and future outlooks that you’ve heard over the last couple of weeks, which usually leads to heightened inventory levels and higher levels of promotions going forward. I think when you look at us, six consecutive quarters of positive comps, six consecutive quarters of positive brick and mortar comps which really makes us an outlier and nine consecutive quarters of merchandize margin improvement. So I think we’re in a strong position with respect to product acceptance and inventory management even in the midst of negative brick and mortar traffic trend. When you look at our promotions from Q1, they were orderly, they were well planned. Anurup covered it with the penetration of ecommerce but I think as we mentioned on the last call, we continue to see some of our mall-based kids competition experiencing chronic product issues and heightened promotional activity. With regard to the Jamboree situation, we’re certainly monitoring that closely. Obviously, we’ve heard the same reports you had heard and the potential for a major Jamboree crazy liquidation beginning in the second quarter, our inventories are obviously positioned very well ending the quarter and we’re ready to compete should the need arise.

From an overall overlap, we’ve identified about 800 locations we’re co-located. We look back at some of their closures in malls where we also had a presence in 2014, there was roughly a dozen or so closures where there was an overlap. And good news there is we saw anywhere from a 10% to 15% sale lift where we’re co-located in that mall. So as we look at the average volume, it was close to $150,000. So there’s been a lot of numbers bandied about in the press on potential closures and we’re watching it closely and obviously this could be a big opportunity for us.

Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

Hi, everyone. Good morning and congratulations. So very exciting about the hiring of Pam Wallack. How do you look at her impact on elevating the assortment or any adjustments that you’re looking at, Jane, in order to continue to enhance the products with her on board? Thank you.

Thanks, Dana. As I said, she is one of the most talented childrenswear executives in the country and she knows Jennifer very well having worked with her for many years and she knows most of our design team. So I think having Pam 100% focused on product not only from a design aspect but merchandizing and sourcing and production. She also has, which I hadn’t mentioned, an extremely deep sourcing and production background which is not my background. My background’s much more in merchandizing. So I think the combination of her deep background in merchandizing, overseeing design and understanding sourcing and production inside and out is really going to help bring us to the next level. I think that her 360 degree view of product, working directly with those teams and being able to spend 100% of her time on that, we’re certainly going to surface new opportunities and continue to finesse and fine-tune our product. I think as I had said earlier on another question, I think our product is in a great place. I think we’ve shown consistent results but certainly the ability with her onboard now to take it to a whole new level is what’s so exciting about this announcement this morning.

Our final question comes from the line of Kate McShane with Citi Research.

Hi. Thank you for taking my question. With regards to the personalized customer strategy, I just wondered if there was an incremental cost for pursuing this. And of the three teams, where do you think there is the most opportunity from the work that you’ve done so far?

I’ll leave the cost to Anurup, but I will tell you on the three teams, there’s not one that’s more important than the next. They all need to work seamlessly together in order to deliver. So from the insights, you get the segmentation and the analytics work which provides you with the data point in order to then move to the customer strategy and the customer strategy includes things like trigger-based emails, personalized recommendations, things like that. But then you need the digital delivery team in order to deliver that to your customer. So they really all need to work in conjunction to deliver the personalized customer contact strategy.

And on the cost piece, as I mentioned a little earlier in my prepared remarks, we are reinvesting about $0.10 of our operating outperformance in Q1 into the balance of the year in order to accelerate some of this transformation. And in addition to that, as you’ve seen over the last couple of years, we’ve taken about $60 million out of our overall SG&A base. We continue to drive efficiencies in our store base, from a fleet optimization perspective, new levers that we have recently are of such successful programs such as our private label credit card program. So we will continue at The Children’s Place continue to drive SG&A while we invest in the future and the digital roadmap as well.

At this time, there are no further questions. I will turn it back to the presenters for closing or additional comments.

Thank you for joining us today. Any questions, you can call me. This is Bob Vill at 201-453-6693. Thanks, everybody, and have a great day.

This concludes today’s conference call. You may now disconnect.