Good morning and welcome to The Children’s Place Fourth Quarter and Fiscal Year End 2016 Conference Call. I will now turn the call over to Mr. Bob Vill, Group Vice President, Finance. [Operator Instructions].

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 website.

Before we begin, I would like to remind participants that any forward-looking statements made today are subject to the Safe Harbor statement found in this morning’s press release as well as in the company’s SEC filings. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially.

The company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date hereof.

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..

inventory management and digital transformation. Let’s start with inventory management. First, our assortment planning tool. Utilization of this tool continues to drive unit reduction. Our focus is on sell-through and the significant opportunity that exists to cut the tail by further reducing unit receipts.

We expect our second half units to be down mid single-digits compared to last year. Second, size and pack. We saw a significant opportunity to increase sales and margin through size and pack optimizations by focusing on the size of the pack and the quantity of each size within a pack.

Taking into account historical retail data, store count, size selling, receipt units and margin goals, we began the process of optimizing our pre-packs in 2016. Third, order planning and forecasting.

We launched a new order planning and forecasting tool in Q3 of 2016 positively impacting our back-to-school 2017 season, replacing our antiquated, manual-based system that historically resulted in significantly miss sales and stranded inventory. Now, let’s move on to digital transformation.

Based on published reports, digital influence in children’s apparel is growing at a faster pace than in other categories. Because of this, delivering an engaging, seamless brand experience is critical. We know that our omni-channel customers spend significantly more than our single-channel customers.

We see mobile as the cornerstone of our digital strategy. And when designing and developing our digital experience, our starting point is to optimize the mobile experience.

Although we are only at the beginning stages of enhancing our digital capabilities, we made important progress in 2016 by leveraging the investment that was made in 2015 when we implemented DOM, our distributed order management system. DOM enables a seamless view of our inventory, facilitating cross-channel growth.

We piloted our first omni-channel initiative, ROPIS, or reserve online pick up in store in 100 stores across 3 states in the third quarter of 2016. To-date, we have seen positive adoption by our customers and excellent execution by our field teams.

Customer engagement in ROPIS is building and we are seeing upsized transactions as customers add additional items in-store to their original online order. Currently, we are experiencing a 3-to-1 attachment rate to the units being reserved online for transactions that include an attachment.

We also made great progress in 2016 in our efforts to enhance customer engagement and retention. We successfully re-launched our loyalty program in conjunction with our new private label credit card program.

By enhancing the value proposition of both of these growth levers, we have a significant opportunity to increase our customer acquisition and retention numbers. Our loyalty members and private label credit card holders represent our most loyal customer segment, exhibiting a greater visit frequency and average spend.

We have already seen a notable increase in the penetration of both our loyalty and private label credit card programs. And in just the first 4 months, we have opened over 239,000 new accounts, representing approximately a 20% increase in private label credit card holders.

Alternate channels of distribution, several years ago, we formulated a strategy that was based on growth through alternate channels of distribution. Our strategy was not reliant on any North American brick-and-mortar growth. In fact, our strategy was based on reducing store count in North America. Clearly, we made the correct choice.

Our e-commerce wholesale and international channels are accretive to our earnings and continue to build enabled by our ongoing technology enhancements. In our wholesale business, we launched our replenishment program with Amazon in Q3 of 2016 and we are seeing impressive increases as this program continues to build.

This replenishment program is a very important part of our relationship with Amazon and it is incremental to the fashion wholesale business that we launched with them in 2015. We have launched our Tmall in China in October of 2016, ahead of our original schedule and we are encouraged by the long-term opportunity for our brand in China.

In our other international markets, we opened 48 new points of distribution in 2016 and we now have 150 points of distribution in 17 countries. These include stores, shop-in-shop and e-commerce websites operated by our partners. Fleet optimization, we closed 34 stores in 2016 and have closed 142 stores since we announced this initiative.

2016 was a spectacular year for The Children’s Place, as evidenced by our 2016 record operating income and record EPS. As I have said before, there is no mystery as to why The Children’s Place is outperforming the retail industry.

It is due to a combination of our carefully considered and well executed strategic growth initiatives and our best-in-class leadership team. Our forward-looking strategic growth initiatives were put in place years ago with the clear understanding of the headwinds facing the retail industry due to the significant consumer shift in channel preference.

The success of our strategy relies on numerous self-help initiatives with a foundation of best-in-class design, sourcing and merchandising capabilities. Our talented, long tenured leadership team is one of our biggest competitive advantages. They have consistently delivered on and executed against our well-defined initiatives. So now let’s move on.

The Children’s Place has significant opportunity ahead, so let’s review our priorities for 2017. Product, we will continue to deliver superior product to our customers. Another major competitive advantage is our direct sourcing model. We determined years ago that a fully direct sourcing model would deliver the best value to our shareholders.

Our well diversified sourcing strategy is diligently managed by our experienced sourcing team and as a result, our apparel AUC for the first nine months of 2017 remains favorable, trending down low single-digits.

Business transformation through technology, inventory management, 2017 will be a very exciting year for our company in terms of the many inventory management tools that we will have coming online.

By the end of 2017, we plan to have significantly increased the number of, as well as the effectiveness of the tools available for us to further de-risk our inventory and increase our profitability.

First, our assortment planning tool, as we have further refined this tool, we have uncovered significant opportunity to be more strategic with respect to the timing of unit flows into our DC. Starting with holiday 2017, we expect to reduce our initial flow of receipts by 22% versus last year.

Second, tiering, we are expanding our number of store tiers as we continue to uncover opportunities to further de-risk our inventory. Tiering allows us to be more proactive around GMROI in our lower volume stores by reducing the inventory in these lower volume stores, while still producing sales and gross margin expansion.

For back-to-school ‘17, the combination of tiering and our assortment planning tool has reduced the total number of SKUs we will carry by 10%, while reducing all door SKUs by 20%. Third, our size and pack rollout, we have launched our size and pack initiative in Q3 2016, impacting 15% of our summer 2017 receipts.

This will impact 50% of all receipts for back-to-school 2017 and 100% of our receipts by holiday 2017. So far, we have achieved a 13% reduction in average pack size. Over time, this initiative will result in significantly less transit inventory and increased inventory productivity. And fourth, order planning and forecasting.

The new order planning and forecasting tool that I mentioned earlier launched in Q3 of last year and impacted 100% of our basics delivery for our key 2017 back-to-school period.

This new tool helps us uncover numerous out-of-stock issues in key colors, sizes and washes, resulting in significant missed sales opportunities during back-to-school last year.

Fortunately, we were able to address these deficiencies in time for back-to-school 2017 by purchasing an additional 3 million units of basics that will help us capture this missed opportunity during our peak back-to-school 2017 selling period.

The timing of these basic shipments will impact our Q1 ending inventory level with our current inventory at the end of Q1 projected to be up high single-digits. Digital transformation, research suggest that e-commerce will generate the majority of sales and profit growth for the overall apparel industry over the next 10 years.

With e-commerce penetration projected to reach approximately 40% of total softline sales in the next 10 years, investment in digital is a baseline requirement for any retailer. Our e-commerce penetration is already close to 20%.

But the important work we are doing on our mobile experience, combined with our younger tech savvy customer, we believe we will continue to realize outsized growth in our digital channel.

I believe our most important strategic initiative in 2017 and beyond is that our digital transformation effort with the goal of the best-in-class customer personalization.

We are focused on three concurrent work streams with respect to digital transformation in 2017 that will lead us to our ultimate goal of best-in-class personalization; omni-channel initiative, architectural upgrade and customer segmentation efforts.

First, omni-channel initiative, customer engagement in our Reserve Online, Pick Up In Store program is building and we are seeing upsized transactions as customers add additional items in-store to their original online order.

It is imperative that we offer our customer the convenience to browse and shop in any channel she chooses and these are foundational capabilities. Our next omni-channel capability, Buy Online Pick Up In Store, is scheduled to be launched in Q2 of 2017.

We will also begin to pilot our connected store initiatives in the third quarter of 2017, which will open up new avenues for our associates to further engage with our customers in the back half of 2017.

Second, architectural upgrade, in concert with our outside consultants, we are laying the foundation for a new platform architecture that better equips us to meet our customers’ needs and expectations. We will migrate to this new architecture using a phased approach during 2017, allowing for multiple systems releases.

And third, customer segmentation, in partnership with our outside consultants, our segmentation efforts continue to be focused on a deep understanding of our customers and their shopping patterns.

Through detailed analysis of their interactions with us, we will develop a segment based customer contact strategy to optimize marketing investment and activate growth and share of wallet.

In addition, we have started to build a robust data infrastructure and advanced analytics organization, which we will leverage to better understand and predict our customer’s behavior. Combined, these initiatives will enable our ultimate goal of personalizing each of our customer interactions to maximize each customer’s potential lifetime value.

Alternate channels of distribution, we expect healthy growth in our business with Amazon in 2017 as we continue to expand that relationship in both our traditional wholesale and replenishment businesses. We also expect healthy growth in our brick-and-mortar wholesale business with the off-price and club channels.

In our international franchise business, we expect another year of strong growth. This has led to open 35 to 40 new points of distribution in 2017. And we are focused on growing our recently launched Tmall business in China as we build brand awareness in that market. Fleet optimization.

We have some new information to share with you with respect to our fleet optimization strategy. As you know, our current fleet optimization initiative calls for the closure of 200 stores between 2013 and 2017. Today, we are announcing that we are expanding our expected store closures by another 100 doors and extending the timeframe to 2020.

This will bring our total expected store closures to 300 doors by 2020. However, based on the progress and pace of our digital transformation efforts, this store closure number could increase. Mike will expand on this important initiative during his prepared remarks. Now, let’s move on to Q1 and our 2017 outlook.

Looking ahead to full year 2017, we are projecting EPS of $6.05 to $6.20, an 11% to 14% increase compared to 2016. We are projected adjusted operating margin of 9.0% to 9.2% for full year 2017 versus 8.5% last year. This full year guidance is not inclusive of the change in accounting rules for share-based compensation that takes effect in 2017.

This new accounting rule will add another $0.45 to our full year guidance range, making our total full year 2017 guidance range inclusive of the change in accounting to $6.50 to $6.65, a 20% to 22% increase versus last year. Anurup will provide further detail in his prepared remarks.

Moving on to Q1, while we do not like to share comp mid-quarter, there is so much noise out there around delayed tax refunds, we felt that was important to provide some color. The delay in tax refunds versus last year had a significant negative impact on our sales and traffic trends for the first three weeks of February.

However, once the refund checks were received in week 4 of February, we saw an immediate reversal in traffic and sales trends. Quarter-to-date, we are comping positive. Looking forward into the quarter, we will see a shift in sales out of March and into April based on the later Easter this year. This shift is incorporated into our guidance.

For Q1, we are projecting EPS in the range of $1.45 to $1.55 per share, an increase of 10% to 17% versus last year.

This Q1 guidance is not inclusive of the change in accounting rules for share-based compensation, which will add another $0.08 to our Q1 guidance range making our total Q1 guidance range inclusive of the change in accounting $1.53 to $1.63, a 16% to 23% increase versus last year.

With respect to capital allocation, we announced today, a 100% increase in our quarterly dividend. This significant dividend increase brings our annual yield more in line with that of our specialty peers.

In addition, our Board authorized a new $250 million stock buyback authorization as we expect to continue our practice of consistently rewarding our shareholders. In closing, we are clearly confident in our ability to continue to deliver on our growth initiatives and in our best-in-class management team.

We are looking forward to delivering another outstanding year for our shareholders. Now I will turn it over to Mike..

Thank you, Jane. Based on our digitally savvy mobile mom and more importantly, our strong connection to our NexGen customers, we anticipated several years ago that our digital sales would grow at a very rapid pace. Since then, we have seen a significant sales shift from our brick-and-mortar channels to our digital channels.

Currently, 22% of our customers are either omni-channel or e-commerce only transactors, representing 32% of our net sales. These are significant percentages, but much more opportunity remains in terms of what we believe our digital channels will represent to our total sales in the not-so-distant future.

We know that our digital customers spend significantly more than our non-digital customers. And our e-commerce channel is our fastest growing, highest margin business, representing almost 20% of our total sales in 2016.

So, it is imperative that we continue to focus on delivering a more seamless customer experience in order to sustain the brand’s momentum. When we first launched our fleet optimization program, our priority was to close unprofitable stores and because of this focus, we now have only a few unprofitable stores remaining in our portfolio.

In light of our significant digital opportunity, we have broadened our fleet optimization initiative to focus on optimizing total enterprise profitability. It is important to understand that at its core, our fleet optimization initiative is about optimizing our customer reach and our profitability in an omni-channel world.

Since our fleet optimization initiative was announced in 2013, we have closed 142 stores. Today, we are extending our store optimization program from a target of 200 closures by the end of 2017 to a minimum of 300 closures by 2020.

Our fleet rationalization initiative will ultimately result in a decrease in total fleet square footage of over 100 million – 1 million, excuse me, square feet, or 20% between 2013 and 2020. We undertook a multi-step process to maximize our fleet optimization initiative. First, we had to achieve the maximum possible flexibility in our leases.

This has required us to be extremely agile and proactive in managing our store fleet and our real estate team has done an outstanding job in achieving this objective. Our average lease term is now less than 3 years and 80% of our store fleet will have a lease action in the next 4 years.

The second step in our process was to develop a total fleet optimization model. Over the past few years, we have developed a very sophisticated, disciplined process to assess the optimal strategy for each of our stores in our fleet. We assessed all relevant KPIs, including sales, traffic, margin, and four-wall profitability trends.

We look at opportunities to reduce occupancy and evaluate our store team talent.

We also assessed the center itself, the center of location and proximity to other centers, center of productivity, traffic trends and overall occupancy rates, along with the quality of the other tenants in the center, focusing on ones that are closing stores or those that are in a precarious financial position as it relates to upcoming debt maturities.

Last, we have to run each store through the fleet optimization model. We developed sophisticated modeling to help us assess sales transfer potential for each of our locations.

Before we make the decision to close an existing store, we utilize our predictive sales transfer model to forecast the level of sales that would transfer to our other bricks-and-mortar stores and digital channels based on existing customer shopping patterns.

The predictive incremental sales transfer has been modeled into the stores and e-commerce P&Ls and we calculate the associated profit flow through. This enables us to determine which scenario delivers the most profit to the company.

We initially targeted 100 basis points of our operating margin expansion from our original fleet optimization initiative, but now based on the significant progress we have made on our lease terms, combined with our new target number of 300 store closures, we now expect 200 basis points of operating margin expansion from this initiative.

Now, I will turn it over to Anurup..

Thank you, Mike. Good morning, everyone. In the fourth quarter, we delivered adjusted diluted earnings per share of $1.88 compared to $1.19 per diluted share in the fourth quarter last year significantly above the high-end of our guidance range.

There was no impact on adjusted net income per diluted share in the quarter from currency exchange rate fluctuations. Details for the fourth quarter are as follows; net sales increased 4.5% to $520.8 million, comparable retail sales increased 6.9% on top of a positive 6.7% comp in the fourth quarter of 2015.

Adjusted gross margin for the quarter leveraged 50 basis points versus last year to 36.1%. We benefited from a strong merchandise margin increase and higher AUR with fixed cost leverage resulting from the strong comparable retail sales.

Strong product acceptance and our new inventory management tools have now generated eight consecutive quarters of increases in merchandise margin and AUR. Adjusted SG&A leveraged 220 basis points compared to last year to 23.3%.

The leverage was primarily due to decreases in-store and incentive compensation expenses and the impact of the higher comparable retail sales. Depreciation was $16.8 million for the quarter. Adjusted operating income leveraged 290 basis points to 9.6% of net sales. Our adjusted tax rate for the quarter was 30.7% compared to 27.9% in fiscal 2015.

Moving on to the balance sheet, our cash and short-term investments have ended the quarter with $243 million compared to $228 million last year. We ended the quarter with $15 million outstanding on our revolver. We had no revolver borrowings at year end 2015.

Balance sheet inventory, inventory at the end of the quarter was up 6.5% due to the timing of floor sets and in-transit inventory, in line with our guidance. We generated $199 million in cash flow from operating activities in fiscal 2016 compared to $183 million last year, a 9% increase.

We have returned $166 million to shareholders through share repurchases and dividends in 2016 compared to $131 million in 2015. 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 guidance.

This guidance excludes certain costs or events that are set forth in our non-GAAP adjustments included in this morning’s press release. Full year 2017 guidance, we are projecting fiscal 2017 EPS guidance in the range of $6.50 to $6.65 per share compared to fiscal 2016 adjusted EPS of $5.43.

This guidance is inclusive of an estimated $0.45 benefit resulting from new accounting rules for the income tax impact on share based compensation. The $0.45 benefit is a result of depreciation in our stock price over the past few years.

We expect the new rules to provide a tax rate benefit in the first half of 2017 based on the timing of share based compensation vesting. We expect comparable retail sales for the year to increase low single-digits. We expect adjusted gross margin to leverage 40 basis points to 50 basis points.

We expect adjusted SG&A as a percentage of net sales to be flat to leverage 20 basis points. Our full year guidance assumes that depreciation will be approximately $69 million. We project adjusted operating margin to be in the range of 9% to 9.2%, an increase of 50 basis points to 70 basis points compared to 2016.

We expect our adjusted tax rate to be approximately 29% 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.

We expect the impact on adjusted EPS in 2017 resulting from the 53rd week to be immaterial. 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.

First quarter guidance, we are projecting first quarter income per diluted share in the range of $1.53 to $1.63 compared to Q1 2016 adjusted EPS of $1.32. This guidance is inclusive of an estimated $0.08 benefit resulting from the new accounting rules related to share based compensation.

We expect that comparable retail sales will increase low single-digits. We expect adjusted gross margin to leverage 30 basis points to 50 basis points. We expect adjusted SG&A as a percentage of net sales to be flat to leverage 10 basis points. Our first quarter guidance assumes that depreciation will be approximately $17 million.

We project adjusted operating margin to leverage 30 basis points to 60 basis points. We are guiding inventory to be up high single-digits at the end of the first quarter compared to last year due to increases in basics inventory that Jane mentioned earlier and the timing of receipts. At this point, we will open the call to your questions..

[Operator Instructions] Your first question comes from the line of Susan Anderson with FBR Capital Markets..

Another very nice quarter, good job.

I was going to maybe drill down a little more on gross margin going forward, I guess maybe if you could talk about kind of the puts and takes of the drivers again it sounds like AUC will be favorable, do you still expect some AUR and then also occupancy and is one going to be a bigger driver than the other? And then maybe if you could you just also touch on the promotional environment, I know it’s always pretty tough out there, we have been hearing from some other retailers that it’s king of gotten worse just given the weaker mall traffic, people has been promoting more kind of drive traffic back into the store? Thanks..

Sure, I will start with the promotional environment. I think if you look at our two consecutive years of positive comps, margin expansion and our AUR increases, I think from The Children’s Place perspective, we are in an increasingly strong position.

With respect to product acceptance and inventory management, we have a very well-controlled promotional cadence and have for the last several quarters. And I think significantly important is that this is all in the face of negative traffic trends, as you mentioned.

If you look back at our Q4 promotions, I think they were orderly and well planned, but I think what we are seeing from some of our competitions, which I mentioned in my prepared remarks is really what become chronic product issues and chronic product misses and they seem to consistently lead them to pull down estimates and take incrementally deeper discounts year-over-year.

I think that as I look back at what happened to us over the past may be four to six quarters, it just appears that even though they continue to take those markdowns and become more promotional, with the improvements that we have made in our product and the improvements that we have made in our inventory management and particularly in our ability to allocate so much better than we used to be able to, it appears that their promotional activity is having less and less of an impact in our business.

I think our business just continues to strengthen each quarter and the customers really searching out our product. So it’s just I think a little bit of an interesting twist on what’s really happening. I think we are becoming, I wouldn’t say immune, but we are really in a much a stronger position when they go promotional on products..

It’s Anurup, Susan. I would just – on your gross margin question, I would start with operating margin. And as you know, our guidance for 2017 is a 9% to a 9.2% operating margin, about 260 basis points to 280 basis points increase from just 2 years ago. So we have made tremendous progress and are very gratified by our results.

And as you have seen, we ended the year with a 4.9 comp and Q4 with a very strong comp of 6.9 on top of the 6.7 last year. As far as the outlook for gross margin goes into ‘17, we do see full year 2017 continuing to benefit from AUR, very strong product acceptance.

And as Jane mentioned in her prepared remarks, AUC continues to be a tailwind for The Children’s Place. Thanks in part to our diversified country sourcing strategy and experience of our sourcing teams. So we believe those fundamentals will continue to drive our gross margin forward.

And our guidance is obviously, net of planned dilution from our channel expansion initiatives..

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

Good morning. I was hoping you could maybe talk a little bit more about some of the comp metrics that you saw during fourth quarter, at least qualitatively, I think you had mentioned previously your traffic was down, but actually saw a sequential improvement over the holiday period, which is very contrary to some of the other retailers out there.

And then I guess also if you could remind us what your current recapture rate is for the stores that you have closed to-date and if my math is correct, it sounds like you are going to see – you are seeing about one-third higher margin accretion per store closure than your previous outlook?.

Yes. Stephen, it’s Anurup, I will take the first part. So in Q4, it is – we did see an improvement in our store traffic trends versus Q3 and year-to-date through Q3. All of our key retail selling metrics were positive. We comped positive in every month of the quarter. So very, very pleased with our overall performance consistently throughout the quarter.

And as you know, we have – it resulted in a very strong comp of 6.9%. And Mike will take the second part..

From a recapture perspective on the stores that were closed and we continue to see in excess of 20% recapture rates, so it’s continuing to be a very objective program for us..

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

Thanks for taking my questions.

I just wanted to dig a little bit in to SG&A some more, in terms of the fourth quarter, it was a nice surprise to see where it ends up, could you just elaborate on the puts and takes there and also as you think next year, what’s really driving the expense control that you have been seeing and is there any kind of lumpiness that we should be thinking about quarter-to-quarter? Thanks..

Yes. Kelly, from an overall SG&A perspective, in terms of Q4, primarily driven by lower store and incentive compensation expenses versus last year, which we have documented in the past. Obviously, the very strong comp of 6.9% also helped in terms of leveraging SG&A.

And I think just overall, our disciplined expense control and we continue to make investments in our transformation initiatives. And surely, part of the culture here in TCP and in terms of driving efficiencies and continued SG&A management. As we look into 2017, as you would tell from our guidance, we continue to expect strong control over SG&A.

We obviously have a significant transformation roadmap to achieve in the areas of inventory, customer marketing and digital that Jane spelled out. So in spite of all of that, we do continue to expect to manage SG&A in a very controlled manner..

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

Congratulations on a great execution in a tough environment..

Thank you..

Hi Jane.

I was wondering if you can talk a little bit more about the wholesale opportunity, it seems like obviously you pointed out Amazon, the relationship with Amazon has grown and remains very important, I think the last time we spoke, you mentioned the program has expanded to may be about 300 styles, not sure if that’s correct or where we are today and where do you see may be the future opportunity there, along with some of your other wholesale partners, off-price and discounters.

And then my second question was regarding the ROPIS attachment rate, very impressive, I think three to one is what you mentioned, how – I guess how should you think about – how should we think about the opportunity to kind of increase that penetration and what do you see them sort of picking up once they are sort of in the store, just curious about that? Thanks..

So from a wholesale perspective Betty, obviously we are pleased with the progress that we have made in this channel of distribution, although it’s still relatively a small business. We have a lot of confidence that the product that we offer to our partners and the economics that we offer will continue to drive growth in this channel.

We have had to make significant technology investments over the last 2 years to be in a position where we can begin to effectively interact with our partners and grow these businesses. And we are pretty much complete with what we need to do from that perspective.

With Amazon, we have expanded the replenishment program from what was about 300 SKUs in July and were over 2,400 SKUs at year end. And all this in addition to the fashion wholesale business that we continue to do with them.

And we are pretty pleased with the overall performance and in 2016 we actually achieved platinum vendor status with them, so pretty happy with that.

From a club and off-price brick-and-mortar channel perspective, we continue to grow those businesses by adding additional categories and by adding depth in the categories that these customers have already bought. And just to remind you that wholesale is accretive to the overall operating margin.

So as this business continues to grow, we will see operating margin expansion..

And as far as ROPIS is concerned, we are, as you said, really excited about what that attachment rate is and what it can be. From what the customer is buying, we are not seeing anything different than what we are seeing from our normal customer. So our key categories are pretty much in line with what they are picking up when they come in..

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

Good morning. Let me add my congratulations on the fourth quarter, but as well as on the current quarter..

Thank you..

You’re welcome. Jane, I want to ask you about the size 16 extension, you talked about, I think you decided potentially $50 million opportunity, I was wondering is that in all the stores, fully rolled out, how are you educating the customers that it is now available and over what time period could that happen.

Mike, on the operating margin, you are quickly moving to your 10% milestone, what’s the kind of the next milestone for the OM.

And then quickly for Anurup, the markdown optimization, what is the – it seem like it was to be rolled out more aggressively in the fourth quarter, I am wondering if some of that benefit kind of rolled forward into fiscal ‘17 and if you can talk about the kind of longer term impact of MDO? Thank you very much..

Sure. Okay. On size 16, what we did was we had that on e-comm in 2015 and it was smashing success, so we had the confidence to roll it out in 2016, fall of 2016 and we have rolled it out to all our brick-and-mortar doors, so it exists in every brick-and-mortar door we have the U.S., as well as Canada.

And it’s in every style we carry in big boy and big girl. The way we educated the customer is that we have in-store signing and we also have signing on the outside of our stores that love our place a little longer.

And then we also started to tease in on e-comm as soon as it was on, but to tease that it would be in the stores starting a month or so before we did it. We also have, you can see in our website, we just fill it out.

And we also have from our customer segmentation efforts, we know which customers buy 14 and only buy 14, so we are in the process of reaching out to those customers who are in danger of dropping off because they can no longer think that they have the size and reach out to those specific customers to get them to understand we still have size 16..

From an operating margin perspective, we have guided this morning at 9% to 9.2%. As Anurup mentioned, that’s 260 basis points to 280 basis point increase from just 2 years ago. So we are quite pleased with the progress overall. And we have called the 10% operating margin a milestone now as opposed to a goal.

So obviously, we think that there is opportunities to go above 10%, but at this point we are not ready to put a timeframe on it..

As far as MDO goes, Adrienne, when we – we have always had a very carefully sequenced and prioritized rollout of our inventory management tools. It really made sense for us to implement MDO once order planning and forecasting size and pack, tiering along with our core tools of assortment planning and allocation and replenishment were in place.

So when we look at it from a sequencing perspective, it’s pretty exciting in the sense that the MDO isn’t even turned on, yet we are piloting it for sure, but it’s not turned on yet. But it made much more sense to sequence it accordingly. And we will spell out that the timing as we get near to eventually launching MDO..

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

Good morning everyone, congratulations. I was wondering if you could talk about a few things. First, what inning are we in on these IT upgrades and the impact on the operating margin for the company, in other words, could you get us much in ‘18 and ‘19 as you are getting – as you got in ‘16 and you are getting in ‘17? I am not sure where we are there.

Also Mike, we are hearing a lot from other companies that the digital channel is growing faster than expected, but that it’s putting some logistical expense pressures on the companies that perhaps didn’t expect this level of e-comm growth. So perhaps you could talk about the operating margin outlook there.

I know its premium to the brick-and-mortar, but is that level of margin diminishing? Just two more quick questions, just why Canada flattened out and what the outlook is there? And given the new systems in place, why you would expect inventory to be up high single-digits at the end of the first quarter.

I know it’s an investment in basics, but I would have thought given all of the improvements that you have put in place that you could have flowed those on a more timely basis? Thank you..

Jan, it’s Anurup. I will take the last one first. As far as Q1 inventory goes, as you referred to, it’s about our order planning and forecasting tool highlighting to us opportunity in terms of recouping lost sales for the back-to-school period.

I would tell you that the overall picture is that our unit buys are going to be down low single-digits for the first half of the year and our unit buys for the second half of the year are projected to be down mid single-digits. So, we are not – inventory is in excellent condition, but this was an opportunity for us to get back into lost sales.

Also please bear in mind, we have long lead times in terms of where the product is sourced from, some of it is in Asia, some of it is from Africa, so significant lead times which have to be played into this as well. But overall, inventories are down low single in the first half, down mid single in the second half..

And Janet, I will tell you on Canada, we had a flat comp. We are up against a 13% comp in Q4 of 2015.

But when I look back in hindsight, Canada I think part of the issue was that they are probably worth 2 to 3 points of comp was when we pulled back the outerwear business in the United States, which was the appropriate move for the United States and worked very well for us during Q4.

I think we probably shouldn’t have done it to the same degree that we did it in Canada and I think we lost some pretty significant volume in Q4 in outerwear, so we will adjust that in Q4 of next year..

And from an IT initiatives perspective in our transformation, we still consider that we are in the early innings.

When you look at the fact that our assortment planning tool and replenishment and allocation tool just started with back-to-school in 2015 it was phased in and we have these – all these new initiatives that will take place in 2017 around flow of inventory, tiering, size and pack and the order planning and forecasting and then the fact that MDO is not even rolled out yet.

We are still in the early innings when it comes to inventory management. And from a digital perspective, we are just starting to put in new architecture and capabilities and beginning that customer journey, so still early innings.

When we look at your question around the pressure on logistics cost as e-commerce continues to grow, obviously we see from a pure dollar perspective that continuing to increase in our P&L. That is somewhat offset from a gross margin perspective by us continuing to implement our store fleet optimization program.

So, those two things go hand-in-hand, hence the fact that we announced today that we will be closing a minimum of 300 doors as we see the consumer shift toward that e-commerce and omni-channel world.

And as we continue to shut doors, obviously from an SG&A perspective, we should see the benefit on that line as we continue to reduce our store expenses as it relates to payroll, etcetera..

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

Hey, everybody. Congratulations. The stores look fantastic. So, I have two quick extended size questions. The first is you have online and a little bit in stores – I want to call it real bra, but a little bralette and the panty business.

I am curious as the girls size up a little bit, is there an opportunity to build that a little bit online and take a little of that business from the others that are doing it? And also the footwear online has been pretty spectacular, is there an opportunity to extend some of the sizes in footwear, maybe even just one size up to capture a little bit more there as well?.

Thanks, Marni. We don’t like to talk about product a lot for competitive reasons, but I would tell you on both of your callouts, right on as usual, just stay tuned..

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

Great. Thanks so much. Good morning, guys and let me add my congrats as well..

Thank you..

I guess a couple of questions. Jane, maybe remind us about your market share currently in kids and baby space and where was it when you began this transformation? And just curious, some of the department stores and mass channel players are now growing their own private label lines, including in kids.

Just any updated thoughts on that? And then secondly regarding the 3 million units in basics for back-to-school, any specific categories we should think of? Is this across all age groups? Just trying to quantify this incremental opportunity for 3Q? Thanks so much..

Yes, sure. Well, when we launched our order planning and forecasting tool, we found, as I said in my prepared remarks, really some jaw-dropping opportunity in sizes and washes and colors that we missed during back-to-school. The order planning and forecasting tool accounts for every basic SKU we have in the company.

So, it goes all the way from newborn up to big kids and it also covers where we have basics and accessories like underwear and things like that. So, it does cover every single style.

I will tell you that what we found, which would be probably intuitive was that a lot of the missing opportunity was in the big kids sizes, because we are speaking about the back-to-school time period.

And a lot of it was in bottoms which you would imagine denims across washes and colors and sizes, but certainly, sizes skewed to the larger sizes, kind of commensurate with the back-to-school time period. And then we also saw things and tops, uniform pieces and things like that. So that would be the bulk of what we are seeing.

But the tool like we said, it’s automated it actualizes every single month and we are really looking forward to continuing to have a much better view into our basics inventories as we continue to ‘17 into holiday. As far as our market share, our market share was in the mid to high 5s when I started. Our market share is still in the high 5s.

There has been a tremendous amount of new entrants into the space, the tremendous amount of digital competition and as well you know significantly less work sense for 2008.

So, our ability to grow our market share since I have come on in light of all the new entrants and the fact that we don’t have a growing number of customers, I think really speaks to the transformation efforts and how successful we have been in that..

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

Good morning. Thanks for taking my questions. First, Mike it sounds like you have had some good growth in the private label credit card since that was reintroduced.

Has the 20% growth been a steady build over the last 4 months and do you expect to continue growing? And then on the loyalty program, what kind of growth have you seen in loyalty members since the new program was introduced? And can you remind us what the average spend for private label and loyalty members are versus the average? And then for Anurup, on the stock-based compensation accounting change, the benefit you guys have talked about seems a little bit higher than what other people have discussed.

Is that 29% tax rate a good number to use going forward or is the benefit in ‘17 greater than you might expect going forward? Thanks..

So, from a loyalty perspective, Jim, we currently have about little over 8 million members, something about 4% over last year, represents approximately 60% on the overall base of our customers and about 74% of our trackable customers spend. And the on the average, they spend 2x more than non-loyalty members.

Just for 4Q, because we started the program in mid-October, our customer penetration is up about 400 basis points from last year and the sales associated with loyalty, it’s up about 500 basis points for last year, so pretty good progress there.

And from a private label credit card perspective, the old penetration was roughly at 11%, well below an industry benchmark, which were putting at north of 20%. And we are happy so far with what we have seen in the fourth quarter, customer penetration was up over 300 basis points, over 14% of sales and the sales themselves were up 400 basis points.

So, good news there. And then as Jane mentioned, almost 240,000 new accounts in the first 3.5 months that we have had this program in place, up 20%, so all positives and we look forward to a pretty good ‘17 with both those programs..

Jim, regarding the new accounting standard, the $0.45 that we talked about in our guidance this morning is might be little higher than what you have heard elsewhere, but that’s primarily probably due to the significant increase in our stock price over the last few years.

I would just point out from a modeling perspective we expect this impact to be primarily in the first half of 2017 and we talked about $0.08 impact in Q1. So, the balance would be primarily in Q2 and the 29% tax rate that we guided to includes the benefit of this new accounting standard..

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