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## OUR THREE-PRONGED STRATEGY 

## Optimize Real Estate 

In 2012, we faced the situation of 22% of North American traditional stores having negative four-wall contribution. We developed a multi-dimensional approach which included expanded plans to close stores, primarily in multi-store markets in which we could transfer a portion of sales to other stores in the same markets, while also aggressively renegotiating the rent structures of our stores. To elevate our store experience, we introduced a new design that added key technological elements which are highly relevant to today’s generation of kids. We also selectively downsized the square footage of key stores. 

## RESULTS 

By the end of the year, over 90% of North American stores were profitable and, reversing a multi-year decline, our store productivity improved with sales per square foot increasing by 9% to $381. Consolidated net retail sales decreased by 0.4% with 28 fewer stores. 

## North America Sales per Square Foot in Dollars 

<img src='content_image/265776.jpg'>

## Consolidated Net Retail Sales in Millions 

<img src='content_image/265778.jpg'>

## Reset Consumer Value Equation 

During the economic downturn, we had tactically increased discounts and price promotions as a means to bring traffic to our stores. In 2012, optimization models showed that the highest ROI’s were associated with brand building programs that focused on our experience and new product offerings. Therefore, in 2013, we set in motion a plan to reset the consumer value equation, use discounts more strategically and to elevate and integrate marketing across all consumer touch points with a focus on enhancing our brand. 

## RESULTS 

During the year, discounts in North America decreased by 30% while comparable store sales increased by 5.7%. Organic growth in the base business drove 70% of the comparable stores sales improvement with the balance due to real estate optimization activities. 

- 30 % discounts versus prior year 

70 % of North America comparable store sales improvement from organic growth. 

+ 5 .7 % North America consolidated comparable store sales 

## Rationalize Expenses 

While our topline sales have stabilized over recent years, we faced the need to reduce our expense structure and expand retail gross margin in order to return to profitability. On the selling, general and administrative (SG&A) expense side, we renegotiated agreements with our vendors and suppliers, adjusted store labor models to more closely align with overall traffic patterns and reduced expenses as we closed stores. To improve retail gross margin, we strategically modified our pricing structure, began the process to value engineer our product design and initiated an end-to-end review of our supply chain. 

## RESULTS 

For fiscal year 2013, we reduced SG&A (excluding management transition, store closing and asset impairment expenses) as a percent of total revenues by 170 bps to 41.0% and increased retail gross margin as a percent of net retail sales by 220 bps to 41.1%. 

## SG&A Expenses as a Percentage of Total Revenues* 

<img src='content_image/265777.jpg'>

* Excluding management transition, store closing and asset impairment expenses 

## Retail Gross Margin as a Percentage of Net Retail Sales 

<img src='content_image/265779.jpg'>

