Friday morning, Children's Place Retail Stores, Inc. (PLCE), a specialty retailer of children's merchandise, revealed the execution of a letter agreement with a Walt Disney Co. (DIS) subsidiary to settle certain disputes regarding the material breach of its long-term license agreement to operate Disney Store retail chain in North America. Children's Place said that the letter agreement modifies and supplements the license deal between the companies, and ends their months long discussions that were ongoing. Under the new deal, Disney can demand a payment of $18 million, if Children's Place breaches any of the provisions of the letter agreement for three or more occasions.
According to Children's Place, the letter agreement, among other things, includes the remodeling of 234 existing Disney Stores into a new store prototype being developed by the company, by the end of fiscal 2011. The first nine remodels will be completed during the second half of fiscal 2007. Of them, two stores will bear the Mickey format.
By the end of fiscal 2008, Children's Place has to remodel at least 67 additional Disney Stores, of which 33 will be Mickey'' stores. The company has also agreed to reshape additional 53, 70 and 35 Disney Stores during fiscal 2009, 2010 and 2011, respectively. Further, by the end of fiscal 2008, Children's Place will open at least 18 new Disney Stores in the new store prototype.
In addition, the terms of the letter agreement call for a maintenance refresh'' program, which will be completed by Children's Place in about 165 Disney Stores, including the flagship store located on Michigan Avenue in Chicago, before June 30, 2008.
On May 22, Children's Place said that its discussions with Disney over the licensing dispute were nearing a conclusion. The company also said then that it would spend $175 million to renovate or upgrade a substantial number of Disney Stores over the next five years, beginning immediately. Secaucus, New Jersey-based Children's Place today said that the company's Board has committed the $175 million capital to fund the remodel and refresh programs.
Further, Children's Place and Disney have agreed to make certain other amendments to the provisions of the license agreement. These modifications include the elimination of extended royalty abatement for some of Disney Stores that were identified as non-core stores'' in the license agreement and a reduction in restrictions on Disney's ability to grant direct merchandising licenses to other specialty retail store chains. The amendment also comprises the potential implementation of a differentiated merchandise plan for Disney Stores and the modification of the license agreement provisions that would apply to a potential wind-down of the Disney Store business following any termination of the license agreement.
If Children's Place fully abides by the terms of the letter agreement, Disney will desist from exercising any rights or remedies that it would have based on the existing breaches of the license deal that are identified in the letter agreement. Disney also holds the right to terminate this forbearance and the letter agreement, in case of the violation of any of the provisions of the letter agreement. Then, Disney would be free to exercise any or all of its rights and remedies under the license agreement, including the termination of Children's Place's license to operate Disney Stores.
If Children's Place violates any of the provisions of the letter agreement for five or more times, Disney has the right to terminate the license agreement, without any right on the part of the company to defend, counterclaim, protest or cure. Additionally, Disney continues to hold all its other rights and remedies under the license agreement with respect to any other breaches that may occur.
Children's Place, which owns and operates 876 Children's Place stores and 328 Disney Stores in the U.S., yesterday reported a 4% increase in May comparable store sales, which led to a 13% rise in monthly net sales. The company's May net sales were $127.6 million, compared to $112.7 million last year.
Total sales for the Children's Place brand rose 16% in May to $91.9 million from $79.6 million a year ago. Disney Stores recorded an 8% increase in May sales to $35.8 million from $33.1 million last year. While the Children's Place brand recorded 6% increase in comparable store sales, Disney stores posted a 1% rise.
On May 22, Children's Place announced preliminary first-quarter results, reporting net income of $13.1 million, which included nearly $2.5 million pre-tax expenses. Excluding costs associated with a probe into stock option grants, the company's preliminary net income would have been $14.7 million. Children's Place's consolidated net sales for the quarter increased 12% to $478.86 million from $426.5 million in the same quarter of last year.
PLCE is trading down by $0.02 or 0.04% at $54.43, on a volume of 477,541 shares. DIS is trading up $0.0199 or 0.06% at $34.28, on a volume of 3.04 million shares.
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