Good morning and welcome to the Children’s Place Second Quarter 2016 conference call. 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 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, for defined 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 your questions so that everyone will have an opportunity. I will now turn the call over to Ms. Jane Elfers.

Thank you, Crystal, and good morning everyone. We delivered another outstanding quarter. Based on these results and the consistently positive customer response to our merchandise assortment, we are raising our guidance for the full year. We continue to demonstrate our ability to deliver on our transformation strategy, which includes superior products, business transformation through technology, global growth through alternate channels of distribution, and store fleet optimization despite the challenging retail environment and the continued weakness in store traffic. These strategic initiatives are led by a best-in-class management team and supported by a foundation of operational excellence. For Q2, adjusted operating income was slightly positive, a $9 million increase compared to last year’s second quarter, resulting in an adjusted loss per diluted share of negative $0.01 compared to negative $0.33 in the second quarter of 2015. We delivered a comp retail sales increase of 2.4%. We had positive comps in all channels. U.S. comp sales increased 2.3%, Canada comp sales increased 3.2%. We’ve leveraged our adjusted gross margin by 200 basis points from Q2 to 33.4% compared to 31.4% in 2015. We leveraged our adjusted SG&A by 50 basis points in Q2 to 29.1% compared to 29.6% in 2015. We increased our adjusted operating margin by 240 basis points in Q2 compared to 2015, and our inventories entering Q3 are in excellent shape. We ended the quarter with total inventory down 5.6%, and that’s on top of a 7.4% reduction in inventory for the second quarter of 2015. We continued to return a significant amount of capital to shareholders. Prudent cash flow management and our strong balance sheet have allowed us to consistently reward shareholders. We returned $86 million to shareholders year-to-date through the repurchase of over 1 million shares and dividend payments, and since 2009 we have returned over $710 million to our investors through share repurchases and dividends. Turning toward the current state, customer response to our back-to-school assortment has been strong. We have cycled through all the tax-free events, except Connecticut. We are pleased with our results and want to commend our field organization for their outstanding execution of these very important events. We are not going to get into specifics regarding product, category, or division selling, but what we will say is that all of our key back-to-school categories across all of our channels are performing well. As far as the current promotional environment is concerned, we are in a very promotional sector inside of a very promotional retail environment. We expect the environment to continue to be promotional due to a number of factors, including a target consumer who is under pressure, weak traffic, and inventory build-ups with respect to some of our competition. Our strategy is to continue to become a proficient global omni-channel operator and to compete and win with superior product and strong inventory management. As you can see by our results, we think it’s a winning strategy. Now I’ll turn it over to Mike.

Thank you, Jane, and good morning everyone. We continue to make substantial progress on implementing our transformation road map and are very encouraged with the results thus far. We have a significant runway ahead of us, an opportunity to continue to deliver improved operating results. Here is a brief update on each of our major transformation initiatives. Inventory management - as you saw in today’s release, strong product acceptance along with our inventory management initiatives are driving merchandise margin expansion and inventory productivity gains. We are planning to go live with Phase 1 of our size and pack optimization tool in the third quarter with the summer of 2017 buy. This tool will optimize the size curve and pack sizes for initial and flow orders to our stores, further strengthening our capabilities and driving inventory productivity and allocation efficiency. We continue to execute toward a Q4 pilot of our order planning and forecasting tool, which will influence select categories for the back-to-school 2017 season. This tool will automate and enhance the precision of our basic inventory reorders. We plan to fully deploy this tool in the first half of 2017. We began piloting markdown optimization analytics during the quarter. We are encouraged by the pricing recommendations generated thus far. We plan to continue this pilot through the third quarter before determining next steps. Digital capabilities - our 2016 digital initiatives remain on track. These initiatives are part of a comprehensive digital transformation road map that is focused on enhancing our ecommerce architecture and omni-channel capabilities. We launched improvements to enhance our mobile site at the end of the quarter, significantly improving checkout and search capabilities. We are experiencing higher traffic and improved conversion rates on mobile as we continue to strengthen our capabilities as part of the digital road map.…

Thank you, Mike. Good morning everyone. In the second quarter, we delivered an adjusted loss per diluted share of $0.01 compared to a loss of $0.33 per diluted share in the second quarter last year. The comparison to the second quarter of 2015 was negatively impacted by $0.02 due to foreign exchange. Details for the second quarter are as follows. Net sales increased 1.4% to $371.4 million. Comparable retail sales increased 2.4% compared to a negative 3.5% comp in the second quarter of 2015, exceeding our guidance of a 1% to 2% comp sales increase. Adjusted gross margin for the quarter leveraged 200 basis points versus last year to 33.4% compared to our guidance of an increase of 130 to 180 basis points. We benefited from a strong merchandise margin increase, higher AUR and lower AUC, with fixed cost leverage resulting from the comp. Strong product acceptance and our new inventory management tools have now generated six consecutive quarters of increases in merchandise margin and AUR. Adjusted SG&A leveraged 50 basis points compared to last year to 29.1% compared to our guidance of 70 to 80 basis points in de-leverage. The leverage was in part a result of the higher comp sales and decreases in store and administrative expenses, which were partially offset by increased incentive compensation expenses. Depreciation was $15.9 million for the quarter and de-leveraged 10 basis points, reflecting increased depreciation associated with certain transformation-related systems. Adjusted operating income leveraged 240 basis points compared to our guidance of leverage of 20 to 80 basis points. Moving on to the balance sheet, our cash and short-term investments at the end of the quarter were $246 million compared to $205 million last year. We ended the quarter with $44 million outstanding on our revolver compared to $30 million last year.…

[Operator instructions] Your first question comes from the line of Anna Andreeva with Oppenheimer.

Hey, thanks so much. Good morning guys, and congrats, great quarter. I guess my first question is looking at the implied fourth quarter guide, I think at the low end assumes about $0.10 of upside to current consensus. I guess Jane, can you talk about how you think about opportunities for holiday? You mentioned obviously the tough backdrop for value kid’s space. How do you think about opportunities, whether by channel or product category? Thanks.

Well, I think if you look at our guidance, as you’re mentioning, I think there’s many areas of concern that we were considering today, starting with the consumer who is under pressure, consistently weak mall traffic, depressed sales, and somewhat bloated inventories at some of our competitors, which I think all adds up to taking a disciplined approach to the back half of the year. As you might have seen, we raised our guidance from $4.17 to $4.27 to $4.60 to $4.70, so I think you can safely say we’re confident in the back half of the year but at the same time, I think discipline with respect to realities of the environment.

Your next question comes from the line of Jay Sole with Morgan Stanley.

Great, thank you. The inventory, the progress on reducing the amount of inventory dollars, obviously seven straight quarters of declines year-over-year has been very noticeable. My question is, do you have a goal for inventory days, thinking out beyond just next quarter? In the past, inventory days were 75 to 80, but at the end of 2015 it was still 90 days. So can you talk about maybe where you see inventory going and how that relates to your kind of double-digit operating margin goal?

Jay, it’s Anurup. We’ve entered Q3 with our inventories in really excellent shape. We have now had seven quarters of inventory reductions in a row. Inventory was down 5.6% at the end of Q2, which is on top of a negative 7.4% decrease a year ago. Clearly strong product acceptance and our recent inventory management tools are clearly driving inventory productivity, allocation efficiency, and we’re seeing a lot more productivity from overall inventory management. As we look forward, our view is that we do see our unit buys being down low single digits as we step into 2017. We see them down about 7% for the 2016 buys. Our focus is really about continuing to drive productivity, maintaining a healthy delta between our overall comp sales and our inventory numbers, and I think we have now seen seven quarters of that being done successfully.

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

Good morning, and let me add my congratulations. Very nicely done in a tough environment.

Thank you.

You’re welcome. Jane, if you can talk about--if you can give any color on the comp progression during the quarter, and how much of back-to-school do you have behind you? I know there used to be like a post back-to-school, a second pop, and lately we just haven’t been seeing that, so how much of the back-to-school is completed? And then Mike, can you discuss a little bit more the replenishment program that happened in 2Q with your major e-tailer, and how much larger that gets? It sounded like there was an acceleration for the third quarter. Anurup, one for you as well. On the unit buys, down low-single digit in units, which would imply if AUC is down greater in dollars. How long can that kind of AUC, how long does that flow into 2017? Thank you very much.

Sure, okay. I’ll start with the back-to-school question. The way I think about back-to-school is I think about it as pretty much a seven-week season, so four weeks of August, the last two weeks of July, and pretty much the first week of September into Labor Day. For us at Children’s Place, it’s all about the kids and select accessory categories. We really don’t spend a lot of time on the toddler business or the baby business during those seven weeks. We really put our full attention behind the big kids and some of the accessory businesses that work for back-to-school, and we put a huge focus on the tax-free events. As I mentioned in my prepared remarks, we’re through all our tax-free events. Maryland is still going on this week, but we have enough information to know how that’s going to turn out, and Connecticut is next week, so we are extremely pleased with how those events turned out and, as we said, with our field execution of them. We will still see builds in the east coast in the next couple weeks because as you track when certain states and regions go back to school, the northeast, the area around here is the area that goes back last, so their peak is still ahead of them; and then post Labor Day, as we said, it really starts to shift much more from those key category businesses to more of a fashion into the mix, and certainly baby and toddler become more important in the beginning of September. So we’re feeling pretty good about where we are right now.

With the systems works that we’ve undertook in ’15 and completed in ’16, we’re now in a position that we can begin to scale some of the alternate channels of distribution. So we took on this replenishment pilot with this major e-tailer and completed the pilot in the second quarter, and it will roll out through the end of the year, which we believe will enable us to scale this business over time. Roughly 20% of the styles that we plan to roll out were used in the pilot, so we have a pretty long runway ahead of us as we go through the end of the year. We’ve sourced these items out of the existing assortment that we have specifically for this replenishment program and have geared our warehouse to be in a position to turn around these automated EDI orders on a weekly basis in a 72-hour window, so we’re ready to go for it.

As far as AUCs go, we’ve seen the positive impact of AUCs since the second half of 2015, with apparel AUCs down low single digits, and this low single digits is obviously net of the investments we continue to make in our number one strategy, which is product. At this point in time, based upon our future unit buys being down single, we still see AUCs at this point in time as a tailwind going into ’17. There has been a recent blip up in cotton prices, but our global sourcing teams with country migration strategies in place, we believe we should be able to offset that as we look at the early part of ’17 at this point in time. So I think in summary, we see unit buys down low-single digits and AUCs continuing to be down low-single digits at this point in time.

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

Good morning everyone. Congratulations. A couple of quick questions. Jane, I was just wondering, I know you won’t talk about categories or anything, but if you could maybe talk a little bit about wear now strategies this fall versus last fall, and perhaps any other merchandising strategies that you’ve put in place to capitalize on the back-to-school opportunity. I think the assortments have much more wear now year-over-year, and maybe you could talk a little bit about that or other strategies. For Mike, I was wondering with all the system implementations if you really thought the gross margins could grow. I think historically, peak gross margins have reached 40%. I’m wondering how soon--you know, if you can get there and how soon. For Anurup, it feels like your SG&A leverage point is now and the comp is a little bit above your guidance at 2.4%, the leverage was significantly better than expected. Perhaps you could talk a little bit about that. Thanks so much.

Sure. Well on the product, as we said for back-to-school, you know, for the back-to-school period, that work is behind us now. We’re really focused on big kids and we’re focused on select accessory categories. That seven weeks of business is all about those key categories, so from a wear now point of view, that wouldn’t really affect those key categories. Those categories are the categories they are. The fashion quotient that happens in the big kids’ part of the business for back-to-school is really in the girl’s side of the business, not in the boy’s side of the business. When you look at the girl’s fashion that we do have on the floor, I think it looks terrific. It’s certainly doing very well, and I think that we’ve spent a lot of time over the past couple, several years really focusing more and more each season into wear now, so there really is no difference or not strategy change there. I think the product does speak to the weather, and I think that’s part of the reason why it’s successful.

Janet, we’ve had our assortment planning system and allocation and replenishment system in effect for about 12 months now, and you can see the impact that it’s had so far on our margin expansion and inventory productivity. We talked about delivering three more tools to inventory management over the short time frame - order planning and forecasting, size and pack, and markdown optimization, which we believe will continue to help drive the results, but at this point we’re not quantifying specific gross margin targets.

Janet, on SG&A, the over-performance on guidance was a result of the increased comp - about 40 BPs was due to that. We had a net cost control of about $3 million, and this is--it’s really a testament to the management team because we have several initiatives in the stores and corporate areas in our efficiency and marketing and so on, and all of this is why we continue to invest in our transformation strategies.

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

Hi, good morning. Congrats on a really good quarter, you guys. So a couple questions for Jane. Maybe if you could just update us on baby. I know everyone is focused on back-to-school right now, but maybe just kind of your thoughts around how it’s been performing and then if you still expect that mix to maybe grow over time. Then also as we look out to winter this season, I know last year you were very conservative on outerwear. How are you thinking about it this winter, especially as you become more--you’re doing more wear now product out there? Then one last one on the operating margin goal. It looks like you guys are obviously quickly on your way there to double digit, and I think you guys had called out 10% historically. Just given the success you’ve had so far with your initiatives, any thoughts around maybe getting there sooner, or even maybe getting above that goal longer term? Thanks.

Sure. From a toddler point of view, as we said on the call today, we don’t put a lot of time into toddler during the back-to-school time period; however, as we mentioned, we’ve comped positive in all channels, so I would tell you the toddler business is alive and well. It will become more important when we get into September when people start to do their baby sales and their toddler sales. As far as the comment on outerwear, we were very conservative with outerwear last year, which put is in good stead since it was so warm. I will tell you that we were even more conservative in outerwear this year than we were last year, even though we don’t feel that the weather will be as warm. I think it’s a win-win situation - if we get seasonal weather, which we expect that we will, we will make more money; and if we don’t, we’ll be protected on the downside. I’ll turn the other part of it over to Anurup.

Yes, as far as our--you know, we have stated our long-term objective of getting to double-digit operating margin goal. Obviously we are very pleased with the progress to date. Today, we talked about full-year guidance that gets us in a range of 7.7% to 7.8%, which is an 80 basis point expansion in ’15, projected to 130 to 140 further expansion in 2016. We are going to be spelling out our 2017 guidance in about six months, so I would just suggest to stay tuned and we’ll talk about it more at that point in time.

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

Thank you, good morning. Congratulations on a great quarter. I was wondering maybe if you can start off by talking a little bit about the fleet optimization. It looks like everything is on track. I think historically, Mike, you’ve talked about some good transfers to either nearby stores or the online channel. Just curious whether you’re still seeing, I think, roughly 20% or exceeding those thresholds, and any changes in the transfer customers’ behaviors. Then my second question is for Anurup. I’m sorry if I missed it, but could you walk us through some of the comp drivers for the second quarter comp upside and whether we think those are some of the drivers in the back half? Then my last question is for Jane. When you talked about the environment still being promotional out there, are you seeing any difference in terms of maybe the type of competition that’s a little bit more in trouble with inventory build-up, whether it’s specialty versus discounters or department stores, and any variances in regional patterns? Thanks.

Yes, I think on that promotional question, I think just--there’s been a lot of people that have reported second quarter and certainly given guidance into the back half of the year, which overall seems pretty downbeat from the rest of the retailers. I think when you look at us, we really are an outlier, not only in the outstanding quarter we delivered but also how we’re looking at the back half of the year. So I think there is a lot of people out there, ranging from specialty to department stores, that are in need of de-risking their inventory levels based on a sluggish second quarter and downbeat second half. I think that’s really what we’re seeing. We’re also seeing continued share gains in the pure play internet-only retail guys, who I’m sure you can imagine who that is, so I think that a lot of our competition are ceding market share to the big online players, so the need to continue to move their inventories down is causing the promotional environment to stay high.

As far as Q2 and the quarter in summary, obviously we had very strong results in Q2, positive comp in all channels and significant gross margin expansion. Our key selling retail metrics were all positive, excluding traffic of course, so we’ve now had six quarters of AUR and merch margin expansion, six quarters of operating margin leverage, and seven quarters of inventory reduction, which I mentioned earlier. Our balance sheet is in excellent shape - cash and short-term investments were $246 million versus $205 million the previous year, and we generated $70 million in cash from ops compared to $45 million last year, and returned approximately $86 million to shareholders through stock buybacks and dividends. When we look at specifically the key levers for the back half of the year, I think number one it continues to be strong product acceptance. That’s the number one strategy at TCP, and we’ve seen really strong results. Certainly we are seeing the benefits of our transformation efforts going back to when we talked about it having the effect in the second half of 2015 forward, and those all result in AUR expansion, merch margin expansion, and we expect that to continue into the back half of the year.

From a store rationalization perspective, we’re pretty much where we are based on the conversation we had with you folks last time. We’re still targeting 200 doors to close through ’17. We’ve closed 115 through the second quarter, on pace to close 30 this year. Continuing to see transfer rates in excess of 20%, and with that 20% transfer rate we still see the opportunity for 100 basis points of margin improvement. The good news is we’re also leveraging occupancy as we close our underperformers and work with the landlord community on economics around existing leases. Other good news is that we’ve brought down the overall length of our leases, so plenty of lease actions coming up over the next three years. In fact, we’ll have over 250 lease actions in 2017, so pretty confident around the 200 store closings and opportunities for ’18 and ’19 as another 200-plus come up in each of those years.

Your next question comes from the line of Steph Wissink with Piper Jaffray.

Thank you, good morning everyone. I’ll add my congratulations as well. Jane, a question for you. You guys have been navigating a declining traffic environment for a number of years, and you’ve been doing it quite well. I’m just curious if there’s been any easing in the rate of decline or any patterns that you’re starting to see around key event weekends or trip consolidation that might help as you start rolling out some of your forecasting modules in the back half of this year. Then just one housekeeping item on your loyalty program. I’m just curious if you can give us an update on the size or the percentage of sales that that represents today.

Okay, so from a traffic perspective, it’s been pretty consistent quarter after quarter, so it’s been down. What we have seen is obviously some of the outlet malls affected a little more than our regular malls as traffic for tourism has been down, so we’ve seen a little worse traffic in our outlets than we have compared to our specialty stores. From a loyalty perspective, we’re about 7.9 million members with active 12-month purchases, which is up about 3% over where we were a year ago. It represents about 50% of our customer base and about 70% of our trackable consumer spend, and the good news is on the average, they are spending anywhere--about 2.3 times more than the non-loyalty members. As we indicated, we are migrating to a new loyalty program and a new PLCC provider in the third quarter, so we think that gives us opportunity as we move forward.

Your next question comes from the line of Richard Jaffe with Stifel.

Following on with the traffic, seeing you’re gaining sales and doing it with a little bit less foot traffic, could you go into the conversion and some of the metrics around conversion and average unit retail and units per transaction? Thank you.

Well as we’ve said, we’ve seen average unit retails up for the last six quarters, and obviously conversion has been positive as we’ve seen traffic go down, so that’s been fairly consistent also. Then, we’ve also seen our units per transaction up, so all in all it’s a bigger basket every purchase.

Just to add to that, if you look at all of our inventory management initiatives, starting with assortment planning, allocation and replenishment, and the 2016 tools that Mike alluded to in his opening remarks are all about driving inventory productivity, allocation efficiency, and that just is fundamental in continuing to drive positive retail metrics in a tough traffic environment.

Your next question comes from the line of Lorraine Hutchinson with Bank of America Merrill Lynch.

Hi, this is Stephen Albert in for Lorraine. Just a couple questions. Number one, hoping you could provide maybe a little bit more math around the sales opportunity with the large e-tailer from where you stand now - I know you’re ramping up in the back half, maybe in terms of sales or even just depth of assortment or SKUs. Then secondly, I know you mentioned on the last call that the kids market is not growing, and you clearly have three straight quarters of positive comps. Who would you say that you’re taking the most share from? Where is your biggest opportunity moving forward? Thank you.

So from a major e-tailer perspective, we’re not going to talk about volume.

I think we know where we’re taking share from, but we’re not going to name the competitors that we’re taking share from. I think you can see from their earnings reports, you could probably figure it out.

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

Congratulations everybody. Amazing quarter, and fall looks fantastic so far.

Thanks Marni.

Just a couple of follow-ups on things. If you can update us at all on the shoes. You talked a little bit about accessories and back-to-school stuff. The shoes looked particularly strong, so if you could touch on that. Then I’ve noticed online two things - extended sizes seems to be moving--there’s more extended sizes, and I’m curious if this is helping you to keep your customers longer, is it bringing in new customers, or is it really to address different sizes in this generation? I’ve noticed that you have--in the past, I might have seen down puffers in the store on August 17, and I’m not seeing that today but you have a beautiful assortment online, including that amazing patched hooded olive green jacket. Has the ability to really drive the online business changed the way you’re thinking about shipping to stores?

Any more questions?

That’s it.

All right. We’ll start with the first one on shoes. Shoes is not a huge business during back-to-school. It really starts to kick in in September, and that’s really led by the boot business. We do have some early reads on our fashion boots - they’re strong, but we’ll have more information on that as we really get into the September and October period, as well as the dressy shoes that go back to our dressy assortments, which also really hit in September - the ballets and things like that. So that’s when that business really starts to go. As far as extended sizes are concerned, you’re seeing extended sizes online, and we continue to push that category. We see that as incremental volume as we’re able to keep kinds in our brand longer, and stay tuned for more information on that as it relates to the stores. We’ll have some information for you on our next call to share, which is pretty exciting. Then as far as the down puffer conversation, we will have our down coats and our down puffers in full force, starting with our 8/30 delivery in September, but what we found online is almost in every category, we have a much earlier shopper online, so we’ll start to see snowsuits and snow pants, which you can also find online right now with us. Coats, boots, those classifications is a much earlier online shopper, so we set those assortments up 30 days before we set them up in the stores because we know our mom wants to take advantage of that.

Our final question comes from the line of Dana Telsey with Telsey Advisory Group.

Hi everyone. Can you talk a little bit about your wholesale business and how that’s developing? What do you think the opportunities are for that in terms of percentage of total sales and the impact on margins going forward? Thank you.

So in wholesale, like I said, we’re making pretty significant progress but it’s still relatively small. Our major focus has been to get our systems up and running that we can continue to gain scale in 2016, and obviously with the replenishment pilot that we’ve talked about, we think that’s a good start. We’re not at this point going to quantify what we think the opportunity is, but we’ll remind everybody that it’s very accretive to our operating margin.

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