Ladies and gentlemen, thank you for standing by, and welcome to The Children’s Place Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. This call is being recorded. If you object to our recording of this call, please disconnect at this time. All participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Anthony Attardo, Director of Investor Relations, to begin.

Good morning, and welcome to The Children’s Place Conference Call. On the call today are Jane Elfers, President and Chief Executive Officer; and Mike Scarpa, Chief Operating Officer and Chief Financial Officer. The Children’s Place issued press releases yesterday morning and copies of the releases and presentation materials for today’s call have been posted on the Investor Relations section of the Company’s website. After the speakers’ remarks, there will be a question-and-answer session. [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 in 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 risk and uncertainties that could cause actual results to differ materially. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof. After the prepared remarks, we will open the call up to your questions. We ask that each of you limit yourself to one question, so that everyone will have an opportunity. And with that, I’d like to turn the call over to Jane Elfers.

Thank you, Anthony, and good morning, everybody. 2018 was the foundational year of our three-year plan with accelerated digital investments laying the groundwork for operating leverage in the out years. After we provided our original guidance in March, significant strategic competitive opportunities arose that led us to the decision to sacrifice margin in the near-term in order to strengthen our long-term position. We shared with you our strategy to compete aggressively against key competitors with a focus on long-term market share gains. We believe that the recent bankruptcy announcements and accelerated store closings once again provide validation that our forward-looking strategy was on the mark. Although the results from 2018 will extend the timeline to achieve our objectives initially targeted for 2020, the strategic steps we took in 2018, increase our brands’ longer-term potential earnings and facilitates the path to get there. Now let’s discuss the recently announced agreement to purchase the IP Assets of Gymboree and Crazy 8. Our winning bid at the auction for the Gymboree Assets provides us with another catalyst for a transformative growth for the Children’s Place and value creation for our shareholders. Acquiring the Gymboree Assets will give us the opportunity to exercise greater control over our ability to capture a larger portion of the estimated $600 million of market share left behind by the total liquidation of Gymboree and Crazy 8. We believe this acquisition will provide us with the path to revitalize the Gymboree brand across channels, including e-commerce, TCP stores, wholesale and international. The Gymboree customer base is intensely loyal to the brand. They are passionate about the highly curated, elevated, head to toe product that is Gymboree’s core DNA and she has made it known how much she misses that legacy Gymboree product due to the recent merchandising changes. As…

Thank you, Jane, and good morning, everyone. Following a discussion on the agreement to acquire the Gymboree Assets, I will provide an update on our fourth quarter financials and our outlook for 2019. First, let’s discuss the transaction. We are excited about the Gymboree transaction, and the opportunity this provides us to drive accelerated growth and value creation. As detailed in the press release, we have agreed to acquire, as part of an auction held in connection with Gymboree’s bankruptcy proceedings, the Gymboree and Crazy 8 intellectual property, and related assets for $76 million in cash. The acquisition is being funded by cash-on-hand and borrowings under our revolving credit facility. The acquisition will not disrupt our share repurchased or dividend plans. I’d like to provide some additional context regarding the financial implications of the deal. The acquisition of the Gymboree and Crazy 8 IP databases will provide us with the opportunity to more than double our previously targeted market share opportunity by leveraging TCP’s digital and physical infrastructure. We anticipate the incremental sales will flow through at attractive incremental margins and drive earnings accretion and cash generation beginning in 2020. The acquisition of the Gymboree assets will also enhance the flexibility we have with our fleet optimization program. As Jane previously mentioned, the acquisition process provided us with a detailed analysis of Gymboree’s real estate portfolio. The analysis presented us with additional insights on how to maximize the productivity and profitability over our existing locations in co-located centers and gave us a clear view into potential new centers that may offer upside potential. We are already leveraging our deep relationship with the mall landlords and executing a plan, which allows us to pursue an additional 25 TCP locations over the next 24 months to take advantage of the void left…

Thanks, Mike. As 2018 concludes, we’re reminded of the durability of our business model and the strength of our longstanding strategic growth plan. We’re reminded that our model withstands intense competitive pressures, as others in the space cannot. We’re reminded how we remain firmly on offense as others struggle to make the investments necessary to compete in a rapidly evolving omni-channel world. 2018 was a transformational year for our company and for those that choose to look beyond the near-term, there are now even more reasons to be excited about the years ahead. I’d like to close the call by highlighting a few of them. Our product is superior and resonates with millennial moms to what has been a very difficult period for kids retail. Worse have been down every year since 2008 with 2017 seems births at their lowest levels in 30 years, yet we’ve managed to grow market share and post comps in the mid-single-digit over the last few years. We discussed the investments we’ve made in digital personalization and the benefits we anticipate to derive from those investments. The bulk of the heavy lifting from the digital transformation is behind us and we’re excited about the opportunities that lay ahead. In 2019, we anticipate seeing the benefits take hold from the digital personalization investments that we’ve made today. We’ve shared our outlook for a decline in AUC in 2019. This allows us a meaningful and unique competitive advantage to help drive profitability. And in addition, we expect to drive margin benefits through market share gains, our fleet optimization strategy and ongoing expense management. Our cash return story, which is built upon a strong balance sheet that has returned over $1 billion to investors, since its inception is anticipated to be another meaningful driver in 2019. We have a time tested management team that has proven itself over the long-term in a difficult space as we continue to deliver for our shareholders. And lastly, the announcement of our acquisition of Gymboree’s assets is the latest chapter in a very compelling story and we couldn’t be more excited about our future. At this point, we’ll open the call to your question.

[Operator Instructions] Our first question comes from line of Dana Telsey of Telsey Advisory Group.

Good morning, everyone. As you think about the past two accretions from Gymboree in 2020, any guidepost that we should be watching for? And then, is there anything structural that you look at different towards accomplishing that 12% operating margin over time. Thank you.

So Dana as I said in my prepared remarks 2018 presented significant opportunity for additional long-term market share, and we definitely took advantage of that. As a result, we expect our timeline to achieve our 2020 goals of 12 EPS and 12 operating margin will be extended. While we’re seeing rising costs associated with freight and labor, the majority of the fundamentals that we had modeled within those ranges remain in place, and we think that the acquisition of Gymboree actually enhances the opportunities. Again, just based on the disruption that took place in 2018 and the resulting impact, we just see these timelines being extended. We don’t see anything structurally that’s impacting that.

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

Good morning. So congrats on the acquisition of those assets your single biggest competitor. I think it really does set the groundwork for material market share recapture. So I want to stay on that theme, Jane. And if you can help us with this notion of the $600 million, how much of that is actually going to be in Gymboree opportunity? And then the manner in which you’re doing it. It sounds like you’re not going to keep the stores, so we’re not going to worry so much about sort of store deleverage. Are you bringing that Gymboree brand in-house, and therefore, it becomes marginal transactions through your own fixed cost infrastructure and is that the part portion that’s leading to the – that accretion in 2020? And then for Mike also staying on the same theme, when you get to that mid-30% in 2020 digital penetration, what does the TCP store base look like? And I just want to confirm that you will not have standalone Gymboree stores, you’ll have an online presence of Gymboree and then you’ll have the Gymboree brand within the TCP infrastructure? Thanks very much.

Sure. Thanks, Adrienne. When you look at the opportunity, Gymboree was only a few years ago over $1 billion brand, most recently through January full year 2018, their sales were approximately $650 million. Of that $650 million, $460 million of it was Gymboree in the balance of Crazy 8. When you think about what we’re planning to do, we’re focused on the Gymboree brand, we are not planning as you mentioned, we are not planning to open any freestanding Gymboree stores. We think that this is a multi-channel play, we see number one opportunity online on e-commerce. And so we will be working on developing a Gymboree website. We are looking to brand this product in early 2020, and we’re looking to have some component of the Gymboree product in a subset of our stores. As we mentioned on the call, we had gone ahead and develop some Toddler product to address the boy that we saw in July when Gymboree rebranded that product is coming in soon. So that will give – it’s under the TCP label, obviously not the Gymboree label. That product is Toddler only and that would give us an opportunity to really work through the product and make sure that the quality, the look, the styling is how we wanted. And then as we said we will brand it with a Gymboree label in early 2020. As far as international opportunities, we’ll be looking at those with Gymboree franchise partners and with our franchise partners. And then, certainly hope there was discussion we’re having internally.

So from a overall fleet perspective, we still – we’re having basically a thousand lease events over the next three years, which continues to provide us with great flexibility. We’ve closed 42 locations in 2018 and 211 toward our goal is 300 by the end of 2020. We sit today with 972 stores, we plan on closing 40 to 45 in 2019 and additional call it 45 in 2020 to get us to that 300 goal. I did mention that the acquisition process provided us with, but we think is a good opportunity is to potentially open some additional stores. We have a shortlist of 40 stores that we’re investigating and think that we will be opening about 25 stores over the next two years. Will be TCP stores, but we think that there is great opportunity to take advantage of the void in the market, where Gymboree has lost. So basically, we think in by 2020 we will end up with roughly 900 stores in the fleet.

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

Good morning, and thanks for taking my question. Thanks for all the details very helpful. I guess, just a follow-up on Adrienne’s question as curious if you have any thoughts around how big you think the Gymboree business could be and then also, as a lot of your competitors probably go after that market share, I guess, how do you come back may be in the additional promotional pressure, if anyone of them decide to get promotional to gain that share? Thanks.

Thanks. I think as far as the labels are concerned. There are not a lot of labels left in Children’s specialty retailing. Over the past several years, we’ve seen so many of them go out of business not being able to compete. To be in this business, there is not a lot of loyalty for the customer, and so you really need to be able to compete and not a lot of people can do that. So when you look at the fact that we’ve now acquired two of the most recognizable names in kids specialty. I think that puts us in a different position than the competition. As far as the Crazy 8 label is concerned, Crazy 8 was developed by Gymboree to compete against Children’s Place and it was important to us to retire that label so that that would not be resurrected as a competitor. As far as Gymboree is concerned, we said there is a $460 million of volume out there. There is only that Gymboree and Crazy 8, as of 2018 as we said had gotten down to combined $650 million. Of that $650 million, there’s only $230 million in total toddler plus baby out there for the opportunity. And most of that is mall-based. So we’re really the last specialty competitor left in the mall at those price points. So I think that you can pretty much assume that a lot of that share is going to come to us and now obviously, owning the IP and being able to brand Gymboree within the mall and online, I think that that’s a major opportunity. So I really don’t see a competitor coming out and certainly a mall-based competitor, because I don’t know who that would be fighting for that share. So we feel pretty comfortable with the acquisition.

Your next question comes from the line of Jim Chartier of Monness, Crespi, Hardt.

Hi, good morning. It sounds like from a category perspective, with Gymboree shrink the toddler it’s a good fit. Just curious on a few other areas. How do Gymboree’s e-commerce capabilities compare to yours and what percentage of sales the Gymboree get from e-commerce, what the private label credit card penetration might have been? And then you highlighted your AUC advantage. How do you expect the Gymboree price value equation to benefit from your sourcing expertise? Thanks.

Thank you. The Gymboree e-commerce business I think was around $100 million as of 2018. At Hay Day, it was $150 million. So I can’t really speak to the details of it, but I would think that it was not nearly growing at the percentages that a lot of other retailers were growing over the last few years on e-comm. So I’m not sure they are able to make the investments. We’ve certainly made a lot of investments around digital particularly in 2018. So we feel confident that we’re in a much better position to be able to bring those customers into our digital ecosystem now that we have that customer list and I think that based on what we’ve done and all the work we’ve done in our website, we should be in a good position when we launch in 2020 to be able to add a tab on our website to be able to really reach out and communicate in a good efficient way with that Gymboree customer base. As far as AUC is concerned, sourcing is a strength of ours. Our Head of Sourcing has already been in conversations as far as how we’re going to pull that together from an AUC perspective. Obviously, the Gymboree AUC is the higher AUC, which is the same as the product that we’re bringing in that we mentioned that’s coming, the toddler product that’s coming in May. We’ve put a picture of it in our investor deck. Those AUCs will be higher, I would say, anywhere between 20% and 30% higher as will the AURs. And so that’s really what that customer wants. There is a very different astatic, if you will, to the Gymboree brand than there is in any other brands and I had mentioned earlier that being…

Our next question comes from the line of Paul Lejuez of Citi.

Hey, guys. Thanks. You guys have had to compete against Gymboree closings in the past. I understand this time is different in terms of the number of store closings, but in many ways it’s still center-by-center, store-by-store, so I’m curious what’s different this time in terms of how your stores are behaving relative to what you’ve seen historically. Thanks.

I think it’s really the compressed time period is the best answer we could give you. Like we said, we were in uncharted territory. We’ve obviously never come up against something like this. You’re talking 800 stores where we compete in over 70% of the locations. So you’re looking at almost 600 doors where basically across the street from us. We’ve got a competitor with a lot of the same type of classification, liquidating in a 90-day period and what is now with 60-day period. We’ve also got the competitive pressures of the later Easter. We’ve got the competitive pressures of what happened in February with significantly delayed tax refunds and we’ve also got the pressure of the web. So when you look on their website, the Crazy 8 website is now closed as of last week, but the Gymboree website is significantly promotional, and I assume will continue to be. They are still receiving goods into their stores, we’re obviously watching them very closely. And we’re still seeing them receive goods in there as well as spring goods. So it is a very compressed, very unusual time for us. As we said, we think it’ll be disruptive, but we’re very much looking forward to the back half of the year when we feel that we’re going to have a lot of tailwinds.

Our final question will come from the line of Marni Shapiro of The Retail Tracker.

Hey, guys. I’m looking forward to see what you guys do with Gymboree. I agree with you, I think there is an opportunity to bring the brand back. It’s been a lot of talk about Gymboree, there’s another competitor in the market that’s also gone out in the segment that’s smaller, but one that’s been growing for you, which is Payless. So at the same time, could you talk a little bit about that opportunity as well or is that just so secondary to you. And then everything else I’ll follow-up with offline?

Sure. I don’t think it’s secondary. They do about 35% of their business in kids, and I think it’s really what we spoke about on the conference call in my prepared remarks when I said, it’s not just about Gymboree, and Crazy 8 closing. There are so many competitors out there and we see this as years to come as an annuity and Payless is just another example of the store who closed – of a company who closed I think over 2,000 doors. We’ve been going after the footwear business for years, and we think that that’s an opportunity for us as well.

Thank you for joining us today. If you have further questions, please call Investor Relations at 201-453-6693. You may now disconnect your lines and have a wonderful day.