Good morning, and welcome to The Children's Place's Second Quarter 2018 Earnings Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; Mike Scarpa, Chief Operating Officer; and Anurup Pruthi, Chief Financial Officer. The Children's Place issued a second quarter 2018 earnings press release earlier this morning, and a copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the company's website. [Operator Instructions]. 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 the company's SEC filings, including the Risk Factors section of the company's annual report on Form 10-K for its most recent fiscal year. 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 for 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 the Investor Relations site. After the prepared remarks, we will open the call to questions. [Operator Instructions]. And now I would like to turn the call over to Jane Elfers.

Thank you, Christy, and good morning, everybody. After reviewing our Q2 results, I will review our progress on our strategic self-help growth initiatives. I will also highlight where we see additional opportunities to accelerate market share gains within our competitive set and how we intend to use our unique positioning within the kids market to leverage these opportunities over the next few years. So let's start with Q2. We set the bar very high for Q2 and we beat it. As we discussed in detail on our Q1 call, we were severely impacted by adverse weather in Q1, with 12 out of the 13 weeks of the quarter experiencing some type of adverse weather conditions across our major markets. However, we were confident that once the weather stabilized, we would realize the pent-up demand for our spring and summer product in the second quarter. For Q2, we delivered positive comp sales of 13.2%, our highest ever quarterly comp, and EPS of $0.70, $0.09 above the high end of our guidance range. We delivered positive comps every month in the second quarter. We delivered positive brick-and-mortar comps every month in the second quarter. We delivered positive digital comps every month in the second quarter. Our digital business was outstanding in Q2. We delivered a 41% increase as we continued to outmaneuver the competition and gain share in this important channel. We delivered a positive 14.2% comp in the U.S., and we delivered a positive 4.2% comp in Canada. Our key metrics ADS, UPT, conversion, ADS, transactions and, most importantly, traffic were all positive for the second quarter. I'll spend some more time on our brick-and-mortar traffic results later in my remarks, as they were truly extraordinary. I know everyone is curious as to how we performed during the critical back-to-school period,…

Thank you Jane, and good morning, everyone. In the second quarter, we generated adjusted EPS of $0.70 compared to $0.86 last year. This compares to our guidance of $0.51 to $0.61 per share. Details for the second quarter are as follows: net sales increased by $75.1 million, or 20.1%, to $448.7 million during the second quarter 2018 from $373.6 million during the second quarter 2017. This increase was primarily driven by a positive comparable retail sales increase of 13.2%, approximately $22 million resulting from the calendar shift related to the 53rd week in fiscal 2017 and approximately $5 million due to the new revenue recognition rules. U.S. comp sales increased 14.2%. Canada comp sales increased 4.2%. Our key metrics were all positive, total ADS, UPT, transactions, conversion and, most importantly, store traffic. AUR was down slightly in the quarter. Adjusted gross margin leveraged 10 basis points to 34.5% of sales as a result of the fixed cost leverage based on the strong comp, the reclassification of certain items due to the new revenue recognition rules offset by lower merchandise margins, with continued increase in e-commerce penetration. E-commerce had very strong revenue growth of 41% in the quarter and continued its upward trajectory to represent a higher percent of our total net sales. For the quarter, e-commerce represented 26% of total net sales versus 22% last year. As you know, while e-commerce operates at a lower gross margin rate due to higher fulfillment costs, it is accretive to operating margin, and a significant increase in digital penetration is a key component of our 12% operating margin target by 2020. Adjusted SG&A leveraged 150 basis points to 27.3% due to the strong comp. SG&A was $122.5 million in the quarter compared to $107.6 million last year, including approximately $12 million incremental dollars…

[Operator Instructions]. And your first question is from Susan Anderson of B. Riley FBR.

I was wondering if you could maybe give a little bit more color on the gross margin in the quarter, the puts and takes there. How much of the e-comm shift continued to impact gross margin? And it sounds like there's a little bit lower e-comm margins, but then also I wanted to ask if e-comm operating margins are still better than the stores. And then after you've got past kind of that first quarter clearing from the bad weather, did you see merch margins go back to more normalized levels?

Yes, Susan, its Anurup. Adjusted gross margins leveraged 10 basis points in the quarter. This is, obviously, a result of fixed cost leverage base on a very strong comp, reclassification of certain items due to the new revenue recognition rules. This was offset by lower merchandise margins and continued increase in e-comm penetration, which was very strong in the quarter, as you would note. Especially in July, we achieved a mid-30s penetration driven by our back-to-school promotional strategy in e-comm, including our ownership in key categories. Now as you know, we don't guide to gross margin, Susan, but that being said, we would expect margins in the back half of the year to improve versus the levels we have achieved in the first half of the year and have a greater flow-through of fixed expense. Also, I would step back from gross margins for a second and talk about, in the quarter, we generated over $1 of incremental EPS between our operations, our share buyback and our tax planning and, obviously, this was offset by the accelerated investments of $0.52 and the impact of the income tax rules and excess stock comp of $0.65, but the $1.01 EPS accretive result was very, very strong in the quarter.

Your next question is from Adrienne Yih of Wolfe Research.

Jane, I'm going to start with a couple of sort of competition questions. So as you are seeing some of the evidence of the relaunch of product from Gymboree, are there any categories that you see in their stores that you think you can take advantage of and maybe add to the stores go forward? When do you think you will see sort of the impact of whether their initiatives launched in July work or don't work? And then if you can talk about some of the initiatives that you're doing at both Amazon and in the third-party channel, that would be great.

Sure. I'll take the first part, and then I'll put -- give Mike the Amazon part of it. As far as Gymboree is concerned, as we said in the opening remarks, we were really focused on taking the share from the closed stores, but our thinking has evolved. So we're really looking at those 600 stores that are co-located with Children's Place. A portion of them are Gymboree, and as far as taking advantage of opportunities there, they seem to have dramatically changed the product from what they are known for. And if you look at any of their social media channels, I think there is also an article in The Wall Street Journal about it the week they launched. It seems to be certainly some level of their customer not happy with what they've done. So Jennifer Groves, our Head of Design, has already designed into product that is more in keeping with what that core Gymboree customer is looking for, which is really that highly curated, optimistic, bright, colorful kind of mix and match toddler product, and we'll be putting that in the stores, the mall stores, not the outlet stores, but the mall stores where we compete directly with Gymboree starting next spring. So I think there's an opportunity for us to add a different level of toddler products that we would normally do to see if we can take some of that market share from the open stores. As far as Crazy 8 is concerned, I think that has been not the greatest success story for Gymboree. Certainly, they opened it probably with the assumption that they would cannibalize Children's Place sales, but I think really what they've ended up doing is cannibalizing themselves. And as we said, I think there's only about 275 of them left. I don't think that their financial profile or their sourcing strategy allows them to compete on key items as our strategy does, which we covered in depth on the opening remarks. So I anticipate not to be surprised to see more store closings from Crazy 8. They seem to try to keep competing on key items, and I don't think that over time that will be a winning strategy, and I don't think to date it has been either.

As far as the name Amazon goes, our business with Amazon continues to perform very well. Replenishment has been the big driver of sales, and we currently have over 6,000 SKUs in the program. We think that replenishment will be a significant growth vehicle for the business over the next couple of years, as we've recently launched our seasonal basics in fashion product as part of this replenishment program during the back-to-school season. It's been early stages so far in terms of the back-to-school season response, but it's been very positive on seasonal basics in fashion and has exceeded our expectations, and we've also seen a very significant increase in the demand for basics during this back-to-school period versus a year ago. In addition, from a marketing perspective, we're controlling our brand image on the site by launching a brand store, and we are participating in their launch of Prime Wardrobe. So all very positive Amazon at this point.

Your next question is from Janet Kloppenburg of JJK.

Jane and Anurup, maybe you could talk a little bit about any other pressures on selling margin in the second quarter. I know that the digital mix was the primary driver of the gross margin. But I'm just wondering, Jane, how you're thinking about market share pursuits? And then I'm very encouraged on the AUC outlook for the first half of next year. And given the cotton price increasing, I'm just -- increases that we're seeing, I'm wondering if you have just been able to negotiate better deals or if there were other factors influencing that outlook.

Sure. I'll take the AUC part of it. I think as we discussed, Janet, in the opening remarks, I think that we're just better at what we do than a lot of our competition. We've been focused on strategic sourcing for close to a decade now. And I think when you look at how we have been able to handle, I give a lot of credit to Greg Poole, who has been with us for a long time, and he and his team who run our strategic sourcing area. We've been at the forefront of vendor consolidation and country migration and that has really served us well over time and continues to serve us well as we move into the front half of 2019. We talked a little bit about China and how we've been reducing our reliance on China for several years and then certainly advantageous wise and really being ahead and having the vision as to how to place categories -- key categories by country, all that really works together to give us an AUC that is down in the front half of 2019, which I think makes us an outlier versus any of the other competition that I've heard.

Janet, as you've talked about on gross margins, obviously, e-comm -- e-comm's strong performance certainly had an impact on our gross margin mix, but when you step away from gross margins for a minute, I would reiterate, in our operations, we generated over $1 of incremental EPS versus last year between operating performance, the shares and tax planning. This is, obviously, offset by the accelerated investments in our transformation work and the impact of -- the income tax impact on excess share-based compensation. But I think, overall, when we look at the quarter, we deployed promotional strategies that were appropriate to win. And in the back half of the year, as I mentioned in the earlier question, we would expect gross margin levels to improve vis-à-vis the flow-through that -- on the fixed cost base that we saw in the first half.

Your next question is from Kate McShane with Citi.

Jane, with all of your comments focused on market share gains, it sounds like you have a lot of opportunity. I just wondered how pricing and promotions come into play within the strategy. Can we anticipate you offensively discounting more? Or if the other competitors continue to struggle, does this mean we can see prolonged discounting in the space?

Yes, I think that's a little bit of a complex question, but let me try to take pieces of it. I think when you look at what happened in the second quarter, we had very strong comps every month of the second quarter. May was absolutely spectacular, and margins were very strong. June was much more of a promotional month, as everyone was struggling to get rid of the hangover from a tough Q1 and also particularly in the kids market to set themselves up for the back-to-school deliveries in July. So we were not surprised by the strong business in May and June, as we had said on our Q1 call. We were pretty confident that we would see that pent-up demand realize itself in the second quarter, which we did. Really, I think, when you look at what happened in July, I think we had a lot of confidence in the preparation. We spent a lot of time getting ready for back-to-school, and we had a lot of confidence in our preparation. But I think we were even surprised at how spectacularly we did in the month of July with respect to back-to-school and, certainly, in the first two weeks of August. When you think about a mid-30s penetration in digital, that is a new record for us. And certainly, that business is extremely promotional in those last two weeks of July and the first two weeks of August, as we're going after big key categories like short-sleeve graphics, like uniform, like denim, like backpack. That's really what makes up the bulk of that business. So to see such an outsized performance in the month of July on digital as well as in the stores, I think that, that probably -- not probably, but that had an influence…

We do have time for one more question. Your final question will come from Marni Shapiro of Retail Tracker.

Back-to-school was fantastic. Can you just talk, Jane, a little bit about back-to-school for a minute? You guys had an outsized direct business, obviously. And could you just talk a little bit more in detail? Did you see a good split between pure buying online, shipping to home versus things like, I think, you call it ROPIS and BOPIS and all those kind of iterative elements of the direct business?

No, we really haven't seen any of those elements significantly impact our business. We have a very small BOPIS business right now. The business we do have has a nice attachment rate. But as far as omni-channel initiatives, BOPIS is small because we offered free shipping every day. And I think a lot of people use BOPIS as their free shipping tool because our competitors don't offer free shipping every day. So I think they're more reliant on that, and they use the hook of calling that free shipping. What is coming up for us in January is Buy Online, Ship to Store. I think that's when we'll have more opportunity there. When you look at our digital business, I think there's still a lot of runway as far as digital is concerned. And when you answer your question about back-to-school, where it came from, we had a mid-30s penetration in the month of July, highly driven by back-to-school, but our brick-and-mortar comps and our brick-and-mortar traffic in that period was also outstanding. So when you look at the two pieces of back-to-school, there is a basics piece and then there is fashion piece. The fashion part of back-to-school, particularly in the growth side of the business, has been absolutely outstanding. So to have those two pieces, basics and fashion, firing on all cylinders at the same time is really what is driving this outsized comp and really has given us spectacular results. Toddler is meaningless for us during this period, and we spend a tremendous amount of time and effort, making sure that our floors sets and our penetrations are really highly geared into big kids. And we have been -- as kind of getting back to a little bit what I mentioned in my opening remarks, we have been laser-focused on making sure that our big kids assortment resonate with the kid as well as the mom, and we've been very, very successful in size extension. So you can really see right now in the business everything we've been working on coming together beautifully, whether it's the digital transformation, whether it's the increase in the customer file, whether it's the basic product we bought into, whether it's the big kids fashion, how we setup the floors, and then I would be remiss if I didn't mention Kevin Low and his field team what they were able to accomplish during tax free. They were in every single market for the past six weeks making sure that we were completely and fully set, and we had an absolutely spectacular tax-free result, by far the best we've had since we've been here. So it's really a combination of everything coming together.

And this does conclude today's Q&A session. Thank you for joining us today. If you have further questions, please call Investor Relations at 201-453-6693. You may disconnect your lines at this time, and have a wonderful day.