Robert Vill - Group Vice President, Finance Jane T. Elfers - President, Chief Executive Officer & Director Michael Scarpa - Chief Operating Officer and Chief Financial Officer Anurup Pruthi - Chief Financial Officer & Senior Vice President.

Lorraine Maikis Hutchinson - Bank of America Merrill Lynch Betty Chen - Mizuho Securities USA, Inc. Dorothy Senghas Lakner - Topeka Capital Markets Susan K. Anderson - FBR Capital Markets & Co. Anna Andreeva - Oppenheimer & Co., Inc. (Broker) Dana L. Telsey - Telsey Advisory Group LLC Marni Shapiro - The Retail Tracker LLC Jay Sole - Morgan Stanley & Co.

LLC Rick B. Patel - Stephens, Inc. Stephanie Schiller Wissink - Piper Jaffray & Co (Broker) Adrienne Yih-Tennant - Janney Montgomery Scott LLC.

Good morning, and welcome to The Children's Place Fourth Quarter and the Fiscal Year 2014 Conference Call. At this point, I would like to pass the call to Bob Vill, Group Vice President of Finance at The Children's Place..

Thank you for joining us this morning. Before we begin the discussion of our earnings, I will read a statement from the Chairman of our Board of Directors, Norman Matthews. Yesterday, we received a letter from Barington Capital and Macellum Advisors outlining their views on the company.

The board and management team of The Children's Place appreciate constructive input from all of the company's shareholders on ways to enhance value for investors. We will review and evaluate the letter. After we have completed our review and evaluation, we will be in a position to respond.

Let me state very clearly, that our CEO, Jane Elfers has the board's full and unequivocal support and confidence. The board firmly believes that Jane has done an excellent job and is the right leader for our company. I will now turn the call over to the operator..

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 the participants that any forward-looking statements made today are subject to the Safe Harbor statements 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 the events or circumstances after the date hereof. After the prepared remarks, we will open the call to questions. We ask that each of you limit yourself to one question so that everyone will have an opportunity.

I will now turn the call over to Jane Elfers..

expand our fleet rationalization plan, accelerate new customer acquisition tools ahead of the important holiday season, further leverage SG&A, accelerate progress on inventory management in the first half of the year in advance of our new systems, and minimize the risk to our Canadian business.

Importantly, we have $39 million remaining on our 2014 share buyback authorization, and we authorized another $100 million in January. This provides us with the flexibility to significantly increase our share repurchases compared to last year.

We're excited about the long-term potential of our brand and we look forward to another transformative year for The Children's Place. Now, I'll turn it over to Mike..

Thank you, Jane, and good morning, everyone. In the fourth quarter, we delivered adjusted earnings per share of $0.94, $0.01 above the high-end of our guidance range on a positive sales comp of 3.7%. Details for the fourth quarter are as follows. Net sales were $479 million.

The comparison to the fourth quarter of 2013 was negatively impacted by foreign exchange of $5 million. Comparable retail sales increased 3.7% compared to a negative 4.3% comp last year. The positive 3.7% comp for the quarter was a result of an increase in transactions and average transaction value.

E-commerce accounted for 16% of net sales in the quarter, compared to 15% last year. Adjusted gross margin rate for the quarter declined 120 basis points versus last year to 34.3%, within our guidance range of down 70 basis points to 130 basis points, as the promotional environment played out as expected.

This decrease was primarily driven by a low-single digit decrease in AUR and a low-single digit increase in AUC compared to last year. Adjusted SG&A leveraged 30 basis points to 25.1% of sales.

Overall SG&A expense increased $1.3 million, driven by a $3 million increase in training and cutover costs associated with our transformation efforts and a $3 million increase in incentive compensation, partially offset by reductions in store and other corporate expenses.

We recorded a non-GAAP charge of $8.1 million this quarter, the majority of which was related to impairment charges associated with our store rationalization program, along with severance costs associated with corporate restructuring. Adjusted operating income deleveraged 70 basis points to 6% of sales.

Adjusted income per share was $0.94 compared to adjusted earnings per share of $0.96 last year. The comparison to the fourth quarter of 2013 was negatively impacted by $0.02 due to foreign exchange. Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $225 million compared to $236 million last year.

We ended the year with no outstanding balance on our revolver. During fiscal 2014, the company generated a $161 million in operating cash flow, while investing $72 million in CapEx and returning $86 million to our shareholders in the form of stock buybacks and dividends.

Balance sheet inventory at the end of the quarter was down $25 million versus last year or 7.7% better than our guidance of a mid-single digit decrease. Carryover inventory was down 21% versus last year.

We are very pleased with these results and we'll continue to tightly manage inventory levels prior to the launch of our inventory planning and allocation tools in the back half of this year. Now, for an update on our transformation initiatives, Fleet Optimization.

We have discussed with you in the past our plans to close 125 underperforming stores through 2016.

Based on the modeling we have just completed, which incorporated our customer segmentation results and our understanding of shopping habits at the store level, we now believe that we can close a total of 200 stores through 2017, including the 76 stores we closed in 2013 and 2014.

We continue to see sales transfer rate in excess of 20% to nearby stores or to e-commerce as a result of these store closures. We continue to be encouraged with the results of our strategy of focusing our efforts on executing this optimization program and dramatically slowing down new store openings. Channel Expansion.

On the international front, we opened 5 stores in the fourth quarter and ended the year with 72 international franchise stores. We expect to open 30 international stores in 2015, including our first stores in India.

We are making the necessary investments in technology with the goal to accelerate the international growth, not only through bricks-and-mortar stores but through international e-commerce as well. In our wholesale business, we shipped product to eight accounts in the fourth quarter.

As in our international business, we are investing in technology to enable us to communicate more effectively with our partners. We believe that as we further develop our relationships with our partners and realize these technology enhancements, we will grow this business significantly over time. Systems Transformation Initiatives.

Our management team is very focused on deploying the new inventory management tools. In addition, we are working on improving our digital capabilities that will create a seamless retail experience for our customer.

Our assortment planning tool leverages historic data by storing SKU to optimize our overall buys and better match breadth of assortment with depth of inventory. We piloted this tool with our Summer 2015 buying outlets and followed that by rolling this tool out to our U.S. and Canada Place stores for back-to-school 2015.

Having just completed our fall buy, we continue to see a significant reduction in overall unit purchases. Our new allocation module is an analytical tool that drives initial store allocation using data and algorithms to forecast demand by store.

Based on initial sales results, it flows back to stores in the appropriate quantity, maximizing margin opportunity. We are on track to begin working with this system for the back-to-school of 2015 season.

In addition to our assortment planning and allocation tools, work will be initiated in the third quarter of this year on a company-wide Markdown Optimization System. The continued development of our digital capabilities will be critical to our success. Our digital efforts are focused on customer acquisition, customer retention and customer engagement.

Now, I'll turn it over to Anurup to take you through the first quarter and full-year 2015 guidance..

Thank you, Mike. Good morning, everyone. Before I provide details on our 2015 guidance, I just want to comment on how optimistic I am about the prospects here at The Children's Place.

After a little more than three months with the company, it is clear to me that our management team has a tremendous opportunity to drive significant earnings growth and shareholder value. I look forward to meeting more of you in the coming months to update you on our progress. Now for the guidance.

We are providing fiscal 2015 adjusted EPS guidance in the range of $3.15 to $3.30, inclusive of a $0.15 negative EPS impact for the full-year due to FX assuming the currency exchange rates remain consistent with today's rates for the balance of the year. We expect comparable retail sales for the year to be flat to up 1%.

We expect gross margin to increase by 20 basis points to 50 basis points compared to 2014. We expect SG&A to be down 20 basis points compared to last year. We expect depreciation for the full-year 2015 to be in the range of $63 million to $65 million. This is approximately an $0.11 negative impact in EPS compared to 2014.

This increase in depreciation in 2015 was anticipated and reflects the increased investment in technology that we have been making and continue to make. This guidance excludes unusual costs or events that are reported in our non-GAAP adjustments. Additional guidance for fiscal 2015. We expect our tax rate to be approximately 33% for the year.

We are forecasting another year of strong cash from operations in 2015. We are guiding capital expenditures to be in the range of $75 million to $80 million for the year. We plan to open 5 to 8 stores and close 25 to 30 stores in 2015. First quarter guidance.

We project first quarter adjusted EPS to be in the range of $0.60 to $0.65 compared to $0.68 in the first quarter of 2014, incorporating the outlook that Jane described earlier. This guidance range assumes that currency exchange rates would negatively impact adjusted EPS by approximately $0.01 in the first quarter.

Our first quarter guidance assumes that comparable retail sales will be flat to down 2%. We expect gross margin to be in the range of down 20 basis points to up 10 basis points compared to last year. We expect SG&A as a percentage of sales to be flat to up 20 basis points compared to last year.

Our first quarter guidance assumes that depreciation for the first quarter will be approximately $15 million. This is approximately a $0.03 negative impact on EPS compared to 2014. We're guiding inventory to be down low-single digits at the end of the first quarter compared to last year. At this point, we'll open the call to your questions..

The floor is now open for your questions. Your first question comes from Lorraine Hutchinson of Bank of America..

Thank you. Good morning. Just wanted to follow-up on the commentary around cash flow.

Do you expect the free cash flow to accelerate in 2015 versus 2014? And with that, should we expect a higher level of share buybacks?.

We indicated that we expect another very strong year of cash flow in 2015. Our models indicate that it will be higher than what we achieved in 2014. As such with our strategy of capital allocation between CapEx and share buyback, you could assume that we'll be in the market opportunistically and potentially you can expect higher buybacks..

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

Oh, thank you. Good morning. Congrats on a nice quarter in a tough environment..

Thanks..

I was wondering if you can talk a little bit more about (23:09) store closures. It sounds like you continued to see nice sales recapture.

Are you seeing them buy any differently, for example, higher transaction values or frequency? And then can you also remind us, how many stores do you still have up for lease expiration over the next few years and perhaps there might be some opportunity to further maximize the fleet rationalization? Thanks..

So, as I mentioned on our last earning call, we've been working with our external consultants to marry the customer segmentation work we've been doing with the real estate rationalization program, and we said that we'd be providing an update on this optimization program on this call.

As such, we announced this morning that we're now closing approximately 200 stores through 2017, up from the 125 that we closed through 2016 (24:10). Just want to note though that this includes 76 stores that we closed in 2013 and 2014.

We're very pleased what we're seeing from a transfer rate, it continues to be in excess of the 20% that we originally modeled and it's all very encouraging to us and feel that this optimization program over time will add in excess of 100 basis points in margin improvement.

From a closure perspective, obviously, we have leases coming due past the 2017 mark, which will give us the opportunity to close additional doors as leases come due.

At the same time, as we look at what we're closing in terms of the 200 stores, the majority of them are mall-based and they have opening dates that range from pretty much 2000 to 2009 that represents the majority of what we're closing.

As we look at those stores that were opened during that timeframe, we see that they were oversized, were much more expensive to build out. So hence carry more depreciation charges and that really had rent deals that disadvantaged us..

Your next question comes from Dorothy Lakner of Topeka Capital..

Thanks. Good morning everyone. I wonder if you could just update us on the outlet store business. What's happening there versus the core stores, and how you're feeling about margin improvement continuing in that business in 2015 and beyond? Thanks..

Well, in the fourth quarter, we've really had a solid sales and margin performance in the outlets. We've seen sequential improvements in traffic during the year, and now had two consecutive positive comp quarters.

With the launch of SAP, we have a much more broad array of pricing tools and the ability to offer more robust and compelling promotions which served us well. We also piloted our pricing tools within this channel and saw excellent results. So we've been able to really tighten the margin differential between outlet in Place.

At the beginning of the year, we were at 270 basis points differential and we've cut into that nicely at the end of 2014..

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

Good morning. Congrats on a good quarter in a tough environment. I remember last quarter you talked about just kind of clearing some old merchandise to get ready for the new systems that's here. And I think it was going to continue into fourth quarter. I was wondering if that was a big impact on the gross margin this quarter.

And then also now going forward, you feel like you're in a good position or should we see more of that in the first quarter? Thanks..

Well, we started our accelerated liquidation of inventory in the third quarter as we spoke about and we continued to do that through the fourth quarter of this year. Really pleased with our inventory positions, down almost 8%, which was below our guidance of mid-single digit. It's in excellent shape.

We've reduced our liability inventories ahead of the new systems coming onboard in the second half. And as Jane indicated, the inventory which we consider a liability was down over 20% to where we were a year ago. So we'll continue to push our inventory levels. Our goals are obviously to improve turn.

We've seen with the new systems that we're implementing that we've considerably cut back on our buys for both back-to-school and for fall..

Your next question comes from Anna Andreeva of Oppenheimer..

Great. Thanks so much and congrats on a strong end to the year. Question to Jane.

You talked about the warm weather regions outperforming, I guess, curious, are you seeing improvement in some of the colder regions with better weather lately? And trying to understand, was The Children's Place not affected by the ports, maybe talk about isn't this an opportunity to take share now with competitors seeing delays? We're just trying to understand how much of delays is being embedded in 1Q guidance?.

Sure. Thanks. As far as the weather is concerned, we started off the quarter strong. And then, as I'd mentioned mid-month, we saw a pretty big change in the traffic in sales patterns with the cold and the storms that have hit.

Certainly, what is embedded in our guidance for the rest of the quarter is the assumption that we will start to return to more normalized weather, which we've just begun to see in the last couple of days. It's a little too early to predict. But, as I said, we're assuming that, the weather will not be as onerous as it's been since mid-February.

Regarding the port strike, I can't say enough about our logistics team and the foresight they had and how they've managed inventory throughout this entire year. We've been ahead of this, and have not seen any disruption, not only to the current quarter, but we did not see any disruption in the third quarter or fourth quarter as well.

As we had mentioned, I think on several calls why we had significant in-transits versus LY (29:52), because we were ahead of that situation making sure that our goods would hit on time. We agree with you that on pre-Easter there is probably an advantage here as upcoming are two of the biggest weeks of the quarter that we'll see pre-Easter.

What we're concerned about and what we've heard most of our competition say is that their receipts are delayed up to five weeks, six weeks and in some cases more weeks than that. And so, what we're concerned about is that we're going to see these missed time (30:30) floorsets start to hit the post-Easter into April and May.

And then what that is going to potentially due to the promotional environment later in the quarter and into the beginning of the second, so that's really what we're trying to follow..

Your next question comes from Dana Telsey of Telsey Advisory..

Good morning, everyone. Just wanted to catch-up a little bit on the outlets. How are the outlets doing compared to the regular stores? And obviously, there was improvement in Canada this quarter going from being down 3.8% to certainly being down 1.5%.

What did you see in Canada? And then on the product side, baby, newborn, how did those progress? Thank you..

Sure. Thanks, Dana. On the product side for the quarter, we had very consistent performance. We saw positive comps in newborn, positive comps in the baby, positive comps in big, positive comps in accessory, and the only area where we saw negative comps was in shoes driven by boots.

The incremental performance in Q4 versus Q3 in Canada I believe is the lot of the same reasons that we saw that performance improved in the U.S. We had a much more seasonable quarter weather wise. We had a nice balance of wear now product deliver later in the quarter, which was well received by the customer.

And we also put a focus on gift giving over the holiday time period not only in the stores but also through our marketing. And I think the customer responded well to that. So I think we saw some of the same things in Canada, merchandise-wise, that we saw in the U.S..

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

Hey, guys, the stores look fantastic. I'm hoping for some warm weather for you..

Oh, thanks..

I just wanted to follow up on the port conversation.

Does your guidance assume then that this is really a first quarter issue or are you carrying this also into the second quarter? And when things start to normalize, should you be able to, using your technology in the inventory systems that you've been putting in place and are putting in place, to start to pull back or change or even raise prices promotionally go forward and into the back half of the year.

Is that part of the plan?.

Well, as we look at the port situation, we definitely think it's going to impact the back half of the first quarter, and obviously we think that it could trickle over into the second quarter also.

As we look at our systems implementations, we had mentioned back on the previous call and on this call that we're seeing our buys be more controlled, and we're seeing units down in the high single-digit range overall and in U.S. Place actually even a little higher.

So we believe that we've the opportunity to really, when we look at AURs, expect those AURs to be higher than where they were a year ago..

Your next question comes from Jay Sole of Morgan Stanley..

Hi, good morning. Jane, could you share with us some more detail about your new customer acquisition strategy. Is this something where you're going to be using new digital techniques or more traditional marketing? Anything you could share with us would be great.

And then, Mike, could you tell us a little bit about the wholesale opportunity, where you see that headed this year?.

Sure, thanks, Jay. On the acquisition strategy, we've done – we're focused on acquisition retention and customer engagement. And as we mentioned on a couple of the last calls, we've been really focused working with our outside partner on customer segmentation.

And now that we've finished our segmentation work during the last quarter, we're focused on working with our email service providers to work on a retention strategy that has more personalization components involved in it, which we're starting to see some nice traction on.

On the acquisition front, the things that I spoke about on the call, those tools we were able to advance through some systems work that we did and those are really focused in store on capturing email addresses.

We were not able to use some of the more sophisticated tools that other people have been using for quite some time but we'll be able to have those tools live in our store during the back-to-school period, which should help us with acquisition during that peak traffic period and then sales into the Q4 period..

And, Jay, from a wholesale perspective we're pretty pleased with the progress we're making there, albeit still relatively a small business. We added four accounts in the back half of 2015. So we're shipping to eight accounts currently.

And we think that those accounts will serve as pretty, pretty good building blocks as we move forward to grow this business over time.

Where we're really focusing in 2015 from a wholesale perspective is really investing in systems capabilities to allow us to better communicate with our partners, things such as EDI capabilities, which we currently don't have, and really looking to automate some of the processes that we have, processes that from a sales order flow, from sourcing and logistics through the invoicing processes, a lot of those things are manual and it's important that we automate those.

And I'll just remind everyone that both the wholesale and the international business are accretive to our overall operating margin and as they continue to grow up, will have a nice impact on our bottom-line and in our margins..

Your next question comes from Rick Patel of Stephens Incorporated..

Thanks. Good morning, everyone.

Can you provide some more color on the incremental 124 store closures that will happen from now through 2017? What's the average sales per store and how many of these aren't profitable? And then, secondly Jane, can you frame your merchandising strategy for this year, which categories or classifications are you most excited about? And then on the flip side, what do you think needs the most work? Thanks..

From a merchandising strategy, I think that we are going to continue to work on the newborn and baby business as we have been. We've seen some nice performance over the last couple of quarters with those businesses stabilizing.

So I would say the merchandise strategy would revolve around making sure that those businesses continue to grow particularly as we hope to see a modest uptick in the birth rate trends as we go forward. As far as the rest of the merchandising strategy, I really wouldn't share too much of that for competitive reasons..

And regarding the additional 124 closures, from a sales perspective, they average less than $1 million per store, and square footage is roughly in that, call it, $600,000 range. So they are not our most productive doors obviously and they average a little under $200 of sales per square foot.

So you can imagine what the profitabilities are on those stores..

Your next question comes from Stephanie Wissink of Piper Jaffray..

Hi. Good morning, everyone. Just two quick follow-up questions. Mike, for you on the sequence of the store closures, should we think about those evenly spread over the next few years? And then, Jane, just with respect to merchandise margin, how should we think about that as a component of your gross margin guidance for the year? Thank you..

Anurup had mentioned that we would be closing between 25 and 30 stores in 2015 and for 2016 will be in that 35 store closure range with the residual in 2017..

We have time for one for question. Your final question comes from Adrienne Yih of Janney Capital Markets..

Good morning and let me add my congratulations on the positive comp in the fourth quarter, nice progress. Mike, my question for you is on the markdown optimization tool.

What percent of product sales will it ultimately touch? And does it just impact the timing and depth of when you take clearance, when you take markdowns on the clearance or will it also change like the entire promotional process including front of store, how you do headline promotion, basically in other words, what's the process today and how does MDO change that? Thank you..

Well, it's going to affect the latter in terms of what you spoke about....

Okay..

It's all about from an initial pricing strategy all the way through the initial sell-throughs and then on a week-by-week basis dictates the overall promotional markdown cadence that we will take.

Obviously, we're helping ourselves before that markdown optimization tool is put into place by really looking tightly through our assortment planning tools, getting what we think right now is appropriate levels of inventory purchases and when we begin to implement our allocation tool in the back half ahead of this markdown optimization by getting these goods in the right stores at the right time and being able to flow back inventory based on initial sales..

Thank you for joining us today. If you have further questions, please call us at 201-453-7351..