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Executives

Mike Casey - Chief Executive Officer

Joe Pacifico - President

Jim Petty - President of Retail

Richard Westenberger - Chief Financial Officer

Analysts

Scott Krasik - CL King

Margaret Whitfield - Sterne Agee & Leach

Benjamin Rowbotham - Goldman Sachs

Jim Chartier - Monness, Crespi & Hardt

Omar Saad - Credit Suisse

Susan Sansbury - Miller Tabak

Tara Gary - RBC Capital Markets

John Curdy - Principle Global Investments

Carter’s Inc. (CRI) Q4 2008 Earnings Call February 25, 2009 8:30 AM ET

Operator

Welcome to Carter’s fourth quarter earnings conference call. On the call today are Mike Casey, Chief Executive Officer; Joe Pacifico, President; Jim Petty, President of Retail; and Richard Westenberger, Chief Financial Officer. After today’s prepared remarks we will take questions as time allows, if you have any follow-up questions after today’s call, please direct them to Eric Martin, Vice President of Investor Relations. Mr. Martin’s direct telephone number is 404-745-2889; again that number is 404-745-2889.

Carter’s issued its fourth quarter earnings press release yesterday after the market closed. The text of the release appears on Carter’s website at www.carters.com under the press release section. Additionally presentation materials for today’s earnings conference can be accessed on the company’s website by clicking on the Investor Relations tab and choosing conference calls and webcasts on the left side of the screen.

Before we begin, let me remind you that statements made on this conference call and in the company’s press release, other than those concerning historical information, should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company’s most recent Annual Report filed with the Securities and Exchange Commission.

Also on the call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company’s earnings release.

Now I’d like to turn the call over to Mr. Casey. Please go ahead sir.

Mike Casey

Thank you very much. Good morning everybody. Thanks for joining us for our fourth quarter update. We prepared a brief presentation for you, which is available on the website. Before we walk you through that presentation, I’d like to share some thoughts on our business with you.

Despite an unusually weak market in 2008, Carter’s achieved a record level of sales, nearly $1.5 billion, with growth of 6%. Over the past eight weeks we met with most of our top customers and they told us that Carter’s and OshKosh stood out as some of the best performing brands in their stores. I asked one of our customers why she thought we were doing do so well. She said she believed that in uncertain times, consumers are drawn to the brands they know stand for quality.

Overall consumer confidence levels are down, but our results suggest that consumer’s confidence in our brands is strong. We feel as though our products provide exceptional value to the consumer, and in this environment there is no question, consumers are looking for the best value for their money. Nearly 80% of the products sold in our stores are sold for less than $10; it’s a very affordable purchase.

In 2008, we took steps to strengthen the competitiveness of our products. We introduced an everyday value component of our playwear offering, to more effectively compete with the private label brands. In our wholesale segment, we invested in new fixtures to increase sales productivity and we strengthened our branding on the floor. We also invested in our retail segment to enable continued door growth and more efficient store operations.

We are making very good progress with OshKosh B’Gosh. Its performance in the fourth quarter was very good. Our challenge now is to be consistently good, season after season, building on what the consumer is responding to and editing out less productive skews, achieving the milestones for progress that we outlined for you last summer and we’re setting new goals for the next phase of the OshKosh turnaround.

In 2008, we achieved an unprecedented level of liquidity, through excellent inventory hedge and disciplines. We believe we have the flexibility to maintain a very healthy cash position, which is a real advantage in this economy.

There is no question 2009 will be a tough market for retailers. In 2008, most of our customers reported negative comps and many are projecting negative comps this year. To help them, we will continue to strengthen our product offerings and our brand presentation on the floor. We’ll also invest in our own store model to extend the reach of the Carter’s brand. We’ll use 2009 to further strengthen the OshKosh model, which should enable a good store roll out plan beginning in 2010.

I’m disappointed in some missed opportunities for better earnings in 2008. The impact of retail store bankruptcies last year on our business was unprecedented. The Mervyn’s, Gottschalks , Boscov’s and Goody’s store bankruptcies cost us about $0.08 a share, $0.03 from receivable write-offs and the balance from excess inventory charges caused by canceling their orders.

Looking beyond this current period of uncertainty, we have a strong long-term outlook. We own two of the best known brands in young children’s apparel, known by generations of Americans for great value. We have the largest share of a $24 billion market and our share of that market has been growing. We are the largest supplier of young children’s apparel to the largest retailers in the country, and the fundamentals of our business continue to be strong.

Despite the current economy, people will continue to have children. In 2007, the number of births in the United States was the highest in the past 50 years and we expect to outfit many of these children for at least the next five to six years. Wherever you’re shopping for young children’s apparel, you’ll likely see a Carter’s or an OshKosh brand, well presented on the floor.

At this time I’ll turn the call over to Richard Westenberger, our new CFO who will walk you through our results. Joe Pacifico and Jim Petty will then provide additional commentary on each of our business segments.

Richard Westenberger

Thanks Mike. Good morning everyone. It’s great to be here at Carter’s and I’m looking forward to working with everyone on the call. I’d like to begin on page three of the presentation, which is a recap of our fourth quarter sales performance.

We were pleased with our fourth quarter sales, which increased 7% over last year. Sales for the quarter were led by our Carter’s and OshKosh retail stores, which posted terrific comps in a tough retail environment. Jim will cover the drivers of this performance in a few minutes.

We saw a nice lift in mass channel sales for Target, largely driven by the timing of brand well shipment. Carter’s wholesale sales were basically flat for the quarter and as expected OshKosh wholesale sales were down in the quarter, and Joe will cover the wholesale and mass channel performance shortly.

The P&L for the fourth quarter is on page four. We saw a meaningful gross profit expansion, roughly double the growth rate of sales. The improvement in gross profit was driven by a higher mix of retail segment sales, which carry higher margins than the wholesale and mass channel segments, in addition to margin improvement in the OshKosh retail and wholesale segments and in mass channel.

SG&A was up $23 million to last year. Most of this increase was driven by higher retail store and administration expenses. Given the momentum of our retail stores, we feel very good about these investments. Prior year results also included the benefit from the reversal of some stock based compensation expense. On a reported basis, net income in the quarter was $27 million versus $29 million a year ago.

On the next page, we have a schedule to help with the comparability of our results. We didn’t have any adjusting items in this year’s fourth quarter, but last year included the item related to the reversal of stock based comp expense. Adjusting for this, a better comparison on operating income is $49 million this year versus $48 million last year. In terms of EPS, our adjusted EPS for the fourth quarter was $0.47 a share compared to $0.45 last year, an increase of 4.4%.

Full year sales are shown on page six. Similar to the fourth quarter, retail drove the overall increase in sales for the year, with strong comp store sales growth in both the Carter’s and OshKosh stores. We saw good performance across all product categories, baby, sleepwear and playwear. Sales of Just One Year to Target were up 16% for the year. We had good growth in all three product categories driven by new door growth, timing of product launches and the addition of new programs.

Despite the roughly $14 million in loss sales from bankrupt accounts, Carter’s wholesale sales increased 2% for the year. We were particularly encouraged by the performance of our fall and Holiday products, with very strong over-the-counter sales and improved margins.

OshKosh wholesale sales were down for the year inline with our expectations, given the product performance issues from last year. Here again, we are very encouraged by second half over-the-counter selling, which we believe will enable growth in this segment in 2009.

The next page shows our full year P&L. Gross profit for the year increased 6%, consistent with our growth in sales. In rate terms, gross profit increased about 30 basis points, mostly driven by improving margins in our retail stores and the higher mix of retail versus wholesale and mass channel sales. Offsetting this benefit were lower gross margins in the wholesale and mass channels.

SG&A increased 12% over the last year. Consistent with the fourth quarter, the full year increase in SG&A was driven by our retail store segments, both in the store and administration expenses. We opened 19 stores in 2007, mostly in the second half of the year, which were then opened for a full year in 2008. We continue to see a very good trend in productivity from our newer stores.

Also contributing to the increase in SG&A were higher provisions for incentive compensation and bad debt expense related to bankrupt retailers. Just to tick through a couple of other items on the page, interest expense declined $5 million reflecting lower interest rates versus last year. We also repurchased just over $2 million shares during the year for approximately $34 million.

Our reported operating income for 2008 was $136 million. We reported an operating loss in the prior year due to the OshKosh write-down and the adjustments required for comparability are detailed out on page eight. Once you make these adjustments, our operating income was down about $10 million versus last year, with adjusted earnings per share flat at $1.37.

Taking a look at our performance by business segment on page nine and picking out a couple of the more significant variances, in our Carter’s brand, the wholesale segment's operating income declined about $11 million. In part, loss sales from bankrupt accounts required higher liquidation of inventory purchased for those customers through the off price channel.

This business also experienced the bad debt expenses that I mentioned previously and a modestly higher level of markdown in margins to support our wholesale customers given the highly promotional environment.

As we discussed, we saw a step up in profit contributions from the Carter’s retail stores for the year. Profitability in the mass channel declined due to disappointing Child of Mine product performance, largely in the spring 2008 selling season.

Overall, OshKosh profitability was flat for the year, reflecting improved profitability in both the retail and mass channels. We believe we will continue to have margin expansion in the OshKosh segment given the meaningfully better trends in product performance achieved in the second half of 2008.

Turning to page ten; while we met our sales objective for the year, adjusted operating income declined about $10 million; this is obviously a disappointment. We are committed to improving the profitability of this business and we have a number of initiatives underway to address this.

As you know, the most significant component of our cost structure relates to product cost. We have a number of initiatives in this area beginning with focusing on reducing the complexity of our overall product development business and tightly managing our assortments.

Through global sourcing, we are taking advantage of emerging markets and lower cost geographies. And in the supply chain area, we’ve realized very good efficiencies to-date from using third party logistics providers and shifting more packaging and handling task to Asia versus performing those functions here in the States.

Beyond product costs we are also intensifying our efforts around reducing SG&A. We have taken some specific actions recently to protect the profitability in what is likely to be a challenging 2009. These actions include freezing wages and headcount across the organization. We’ve also suspended the company’s 401k matching contribution.

Most areas of discretionary spending and overhead functions are planned flat to down from 2008. Beyond this, we are in the process of conducting an assessment of the organization with a focus on identifying ways to become leaner and more efficient.

Overall, I believe Carter’s is a reasonably lean company and with that said, we clearly have opportunities to improve. We haven’t reached any conclusions yet, but it’s likely as we move through this process, we will incur some level of restructuring charges in 2009. We will give you an update on these activities on our next quarterly call.

On page 11; we finished the year with a very strong cash position of $162 million and record operating cash flow. Our operating cash flow was $184 million for the year, an increase of $132 million. This was the result of improved working capital management, particularly in better management of our inventory position.

We also funded significant investments in the business this year, spending $38 million in CapEx, which supported our retail stores, our fixturing initiatives to improve our brand and product presentation at wholesale, and the rollout of our new point of sale system at retail. As I mentioned previously, we repurchased 2.1 million shares for approximately $34 million, which represented about 4% of our shares outstanding. The average repurchase price was $15.82.

Overall, we feel extremely comfortable with our liquidity position. Our borrowing costs are low on our existing term loan. We’ve not used our revolver since October of 2007 and don’t anticipate a need to do so in the foreseeable future.

With that, I’ll turn the call over to Joe to cover the performance of our wholesale and mass channel businesses.

Joe Pacifico

Thanks, Richard. Good morning. I will cover our wholesale businesses and then turn it over to Jim, who will review the retail business with you. I’ll start by discussing our Carter’s wholesale business which is on page 12.

Sales were down 1% for the fourth quarter, but ended up plus 2% for the year. From a relative perspective, we feel it’s very good performance, considering we had an estimated $14 million in loss sales due to credit risk accounts.

Our over-the-counter performance in fall was very strong with our top customers. Sales were up 18% and they ended the season with 5% less inventory. The performance was achieved in a very challenging marketplace, in which our top accounts saw their total business being down double-digit comp. We feel our product performance was a direct result of our product and marketing strategies we implemented this year.

Improved product; we dedicated a lot of resources to increasing our design skills, increased value with a higher mix of opening price point products, a higher percentage of everyday low pricing in our mix and then the implementation of our newborn to 24 shops.

For 2009, we have planned our business conservatively in light of the external factors that we cannot control, such as cancellations, door closures and overall inventory reductions. We have however attempted to build these risks into our plan.

Looking at the year, we believe growth is possible and all of our current information supports this. First, we have good visibility into our order file. We now have our spring and fall orders in hand, which represent about 75% of our annual order file. Replenishment represents approximately the other 25% of our revenue. Our year-to-date replenishment bookings combined with our seasonal orders, suggest modest growth in wholesale.

Secondly and more importantly, we are carrying the same successful strategies from fall ‘08 into spring ’09 and thus we should have the same relative performance improvement. Very early into the season, but so far we are off to a good start for spring.

Third, we’re optimistic about the ‘09 performance, because we expect to have over 1,000 newborn to 24 shops in 2009, versus roughly only 500 that were opened in November and December last year.

As we shared with you on the last call, the shops pulled together our three product categories; baby, sleepwear and playwear in the newborn to 24 month size range, which offers the consumer a more compelling and convenient shopping experience. The shops also allow us to make a strong brand statement and control floor space. These shops are a good investment with a good return. Our performance thus far has been in line with our goals.

To frame all this up, children’s and specifically young children has been the best performing area of apparel. If you look at the results from our customer’s base, you’ll see that this area has been consistently outperforming their overall business. We have the most structured brands in the children’s space and our capacity to invest in product and presentation in most of our top doors is a significant competitive advantage that will drive our share gains in a tough market.

Based on product performance and our initiatives, we believe we will outperform the competition and are relatively optimistic about 2009, although we are certainly cognizant of the challenges in the marketplace.

Moving on to the mass channel on page 13, you can see that we had strong top line performance in the quarter of plus 16%, which exceeded our guidance of mid-single digit growth. The larger than expected increase was primarily due to earlier than planned spring product launches, which were driven by our strong fall seasonal over-the-counter performance.

Just One Year, our sub-brand to Target had a strong quarter, sales up 29%; all product categories were up double digits. Good fall over-the-counter performance led to early spring shipments in December, which combined with the launching of the brand wall in December this year, rather than January brought on the large increase.

For the year, we’ve had consistently good performance at Target. Even without the earlier demand for spring product and the new brand we launch, we would have been up over 10%. Both of our Target sub-brands Just One Year and Genuine Kids are performing well from a relative perspective.

In regards to Child of Mine, our sub-brand at Wal-Mart, consistent with our prior discussions with you, we are playing the business down in 2009. A component of the business, the brand wall has not performed well. We expect brand wall sales to decline $20 million in 2009.

We will also negatively be impacted by the timing in our seasonal hanging programs, the other component of our business. We are and have been working closely with Wal-Mart, have been told that both sides are committed to seeing the Child of Mine business grow. We are their largest baby and sleepwear brand. We believe there will be positive growth after the disappointing hit we are taking in 2009.

In total, we are expecting the mass channel to be down 15% in 2009. We are starting to see better performance in our over-the-counter selling for spring and believe by establishing a base in ’09, the initiatives we have in place, will put us in position to return to growth in sales and margin expansion beginning in 2010.

Turning to page 14, which is OshKosh wholesale. As planned, sales were down for the quarter and the year. The decline was due to customers placing orders, really based on our 2007 performance. 2008 has proven to be significantly stronger. From fall holiday ‘08 our over-the-counter selling was up strong double-digits. This led to a 15% improvement in sell through before permanent mark down and a strong improvement in the retailer’s margins.

Our focus in 2008 was on accomplishing these two key initiatives that we believe would drive future positive bookings and improve the brand's profitability. We accomplished both these objectives for spring and summer and now fall holiday.

We have been very pleased with the consumer’s responses to the brand. Our consumers seem to be clearly embracing the product and our new pricing strategies. This is evidenced by the over-the-counter selling result in wholesale, as well as much stronger selling in our own stores.

We are also building confidence with our customers who believe the OshKosh brand has a place on the floor and we are happy with the second half performance. This gives us optimism as we head into 2009. We expect to achieve positive sales growth this year, while improving profitability for us and for our accounts.

As Mike and I have both discussed before, the strength of our strategy is built on multiple strong brands competing in multiple channels. Our ability to manage in this economic downturn is strengthened by this strategy.

I’ll now turn the call over to Jim Petty for an overview of our retail business.

Jim Petty

Thanks, Joe. Now turning to pages 15 and 16, I will cover the retail results. As stated on the third call, Carter retail has momentum and strong customer acceptance for its product and value equation. Over the last year, we’ve improved both brands by focusing on product, inventory management, execution with a strong team and marketing effectiveness.

As it relates to the Carter’s brands, business remained strong for the fourth quarter. This is best indicated by fourth quarter comparable store sales increase of 4.1%; year-to-date comps increased 9%. The strength of the young children’s category and our turnaround efforts has resulted in eight straight quarters of comparable store sales increases.

Our fourth quarter comp was driven by increases in transactions and average price, with the customer responding well to all product categories. Year-to-date results are highlighted by positive comp performance in all product categories and gross margin improvement due to better inventory mix. Inventory on a per store basis at the end of the quarter was down 14% and we are well positioned as we enter into spring.

The first quarter of 2009 is off to a good start with positive comps and better margins and our confidence in the business continues. Due to the increasingly challenging economic environment, we anticipate modest growth in comparable store sales performance for the first quarter. We expect the performance to be accompanied by better gross margin performance and better managed inventories.

Moving on to OshKosh, the fourth quarter reflects continued improvement for the OshKosh retail business. This is highlighted by operating income increase of 25%, a comp store increase of 3.6% and significant gross margin improvement over the last year.

Comps and gross margin were driven primarily by the number of transactions as the customer responded well to all product categories, contributed the turnaround to correcting the inventory position in the first half, which led to positive comp store sales in Q3 and Q4.

We are seeing significant improvement in operating profit driven by better product and in-store execution. Inventory on a per door basis ended the quarter down 19%. Our inventory in the OshKosh stores is also well positioned as we enter into 2009. OshKosh is off to a good start and we are expecting modest level of sales growth as we continue to focus on gross margin improvement.

We are pleased with our fourth quarter results for both Carter’s and OshKosh and are entering 2009 with a firm foundation for growth. It is important to note that while both businesses have entered the quarter with momentum, March carries significantly more weight due to the volume associated with Easter and spring selling.

As I mentioned on past calls, I’ve had the pleasure of assembling a very strong retail team. 2009 will be the first full year of our collective impact on the business. We feel confident in our brands and the focused action plans we have in place for 2009.

I will now turn the call back over to Mike for additional comments on OshKosh.

Mike Casey

Thanks Jim. On page 17 we have the milestones we set to track our progress with OshKosh. In 2008, we began to see better product performance. We believe we’ve corrected the brand positioning and pricing issues that have impacted our results. In 2009, we expect to show better profitability in both the retail and wholesale segments.

In summary, we are committed to deliver better performance for our customers and shareholders in 2009. Growth is possible in 2009 and our incentives are tied to sales and earnings growth. I’m encouraged by our performance so far this year fairly, but our spring products are selling well over-the-counter and comps are positive for both brands.

As the year progresses, we’ll continue to provide clarity on our performance and opportunities for improvement. I do believe we have the brands, the business model and the resources to weather this storm.

That concludes our business overview and we’ll open up the call to your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) and for our first question we go to Scott Krasik with CL King.

Scott Krasik - CL King

Thanks. Hi guys, congratulations.

Mike Casey

Thank you.

Scott Krasik - CL King

First question is on Carter’s wholesale. I know you don’t like to talk a lot about what you are seeing ongoing, but you did say that spring is up quarter-to-date; what are you seeing there on the sell-throughs? What’s going on with the category? How are they viewing private-label at this point versus brands in terms of driving traffic? A lot of clarity there will be helpful.

Joe Pacifico

Okay, this is Joe. As we said, we are off to a good start for spring and we feel that trend should continue, but it’s really early. Again, the same strategies we employed for fall ‘08 roll into spring ‘09, so we expect to have a relatively good performance. A lot depends on the consumer, but we are off to a good start and feel our spring orders were positive, so we feel good about the business.

Mike Casey

I will tell you one other thing Scott I think that’s working for us; the inventory is cleaner than it has been in recent years. If you remember this time last year, most retailers were backed up with inventory. So, there was heavy discounting in the first quarter of last year to clear that inventory out and make room for new product. We don’t have that situation this year.

I think most of 2008, our retail customers were rolling inventory, collecting inventory levels; our largest customer I think they had quoted that by the end of their third quarter they had hoped their inventories year-over-year would be down about 15%. So, I actually think that has worked well for us and we are hopeful that provides us some better earnings opportunities in 2009.

Scott Krasik - CL King

Is the sales growth meaningful from the shop-and-shop installation; can you break that out?

Joe Pacifico

Yes, we modeled those shops that they have to deliver. A 5% sales growth would deliver about a 14% ROI. I mean we are achieving our plans, we are pleased with it. I think the customers are very pleased with it, so feedback from the customers has been terrific. If you were to stop in the stores today, where you’d see most of those shops are in Kohl’s and J.C. Penney and to some extent in Macy’s.

Scott Krasik - CL King

Right and then just private label in terms of driving traffic?

Joe Pacifico

They are always a good competitor, but I think what we’re most pleased about in fall and continuing in spring is that our growth is across all three product markets; baby, sleepwear and playwear. So, there is always going to be private label. We think we have the two brands that help private label.

Scott Krasik - CL King

Okay. Thanks, I’ll comeback later.

Joe Pacifico

Thank you.

Operator

And for our next question we go to Margaret Whitfield with Sterne Agee & Leach.

Margaret Whitfield - Sterne Agee & Leach

Good morning everyone. A question on the mass channel with the spike in shipments to Target in Q4, in terms of the brand wall as well as earlier shipments of spring; what does that imply for Q1 and first half? Will there be growth at Target? Also on the Child of Mine situation, if you could elaborate on some of the issues on the brand wall and on the hanging product, is it your own internal product issues? Is it competition? Thanks.

Joe Pacifico

As far as the earlier shipments, really what they are driven by is we had very strong fall over-the-counter performance. All the retailers have their shipments in December. So, when fall performs better, they are low on inventory, so they move up the spring deliveries to the beginning of the month versus probably falling in the last week of the month of the first week of January.

So, as far as the outlook for just one year, I think that their taking in spring earlier is a positive sign, but we’re pretty much planning that business flattish, really based on their total performance.

Margaret Whitfield - Sterne Agee & Leach

Flattish for their first half or for the year, Joe?

Joe Pacifico

I’d say for the year. I don’t want to get into too much in terms of the quarters, but I would assume just given the environment it’ll be flattish.

Margaret Whitfield - Sterne Agee & Leach

But then Wal-Mart must be down significant double digits if you are planning the whole business down 15?

Jim Petty

That as we explained, there’s two components of Wal-Mart. It’s the brand wall, which is where we are taking the hit. Really that was based on performance. It had a little bit of Wal-Mart's focus on putting more packaged goods, less apparel on the brand wall. The hanging was a timing price. So, there’s two components of that; one is timing, one is a hit we’ll take in 09, but we think we’ll turn that around in 2010.

Margaret Whitfield - Sterne Agee & Leach

What is the timing issue with the hanging product at Wal-Mart?

Jim Petty

What happens is the same thing I said to you about…

Margaret Whitfield - Sterne Agee & Leach

Same thing as what happened with Target?

Jim Petty

Right, good fall performance, so they pulled in a lot of the spring goods that could have fell in the first week of January. Lastly, they shipped them on December 5 and 10, so we put the shipment in ‘08 versus 2009. And then Wal-Mart is changing some of their strategies at the end of ’09. They are doing what they call split-out store sets and order flow. So, we’re kind of being conservative thinking we’re going to get hit in December ‘09 with the same thing moving into January of 2010.

Margaret Whitfield - Sterne Agee & Leach

Okay and for Joe. Any store openings planned for the retail segment this year?

Joe Pacifico

Yes, Margaret. We will open 20 stores in the first half of the year and if we can strike some great deals in the second half of the year, we’ll look at that as well.

Margaret Whitfield - Sterne Agee & Leach

And these are all Carter’s or are they OshKosh stores?

Joe Pacifico

Predominantly, Carter’s.

Margaret Whitfield - Sterne Agee & Leach

Okay, thank you.

Operator

We’ll go next to Benjamin Rowbotham with Goldman Sachs.

Benjamin Rowbotham - Goldman Sachs

Thanks. Following up on the last point with the door opening scheduled for next year, I was hoping you could take a few moments to talk about SG&A and potentially how you see that evolving over the year?

Mike Casey

I think that, overall we will be front loaded from a store opening perspective. We will open them in the first half of the year, so most of that impact will occur there and as you’ve seen in the fourth quarter of this past year, most of our store growth was in Q4 with 19 store openings.

Benjamin Rowbotham - Goldman Sachs

Right, so in the fourth quarter could you talk a little bit about what happened there with the $23 million lift?

Richard Westenberger

Yes, sir. This is Richard. The majority of that increase was really related to the ongoing growth in our retail stores. So, as we’ve continued to open new stores, Jim has also continued to build out his home office team and his field organization; that’s the lion’s share actually of the increase. We did have some increased costs related to some reorganization expenses, some stock based comp expenses, but by-and-large related to growth in our retail segment.

Benjamin Rowbotham - Goldman Sachs

Got it, and so as you look forward, is a mid single digit rate possible?

Richard Westenberger

Yes, for SG&A growth, yes.

Benjamin Rowbotham - Goldman Sachs

Perfect and then just any comments you might have on the increased floor service initiative that you guys put in place in the back half?

Joe Pacifico

Our commitment is really to try and service all the shop doors and we are pleased with the return so far. Again it’s early; we just finished Penny’s and by February 15, Kohls has been up for a few months. So, we’re pleased with the results so far.

Benjamin Rowbotham - Goldman Sachs

Perfect, thanks so much.

Joe Pacifico

You're welcome.

Operator

For our next question we go to Jim Chartier with Monness, Crespi & Hardt.

Jim Chartier - Monness, Crespi & Hardt

Good morning.

Joe Pacifico

Good morning.

Jim Chartier - Monness, Crespi & Hardt

Just following up on the last question, second half of this year that Carter’s retail operating margin declined on pretty strong same store sales. So, will we continue to see that in the first half of this year and when will we start to see some leverage on those comps?

Richard Westenberger

We will start to see some leverage. Again, as Richard mentioned we opened 19 stores in Q4, which is a expense low that is not compensated or offset by a large selling period. And in the first half of this year, in ‘09 we’ll open our 20 stores; that is something we’ll make happen, but that being said, yes we will see leverage.

Jim Chartier - Monness, Crespi & Hardt

In first half of the year?

Richard Westenberger

Yes.

Jim Chartier - Monness, Crespi & Hardt

Okay and then Mike, it sounds like you’re trying to avoid giving guidance for earnings, but can you just give us any perspective there?

Mike Casey

Growth is possible. I don't think it's the environment to be given specific ranges or specific numbers, but the models we have built support both in sales and earnings and in this environment, I’d say the growth in sales will be modest. In this environment, we’re going through a period of uncertainty, but when I look at some of the missed opportunities in earnings last year, I’m hopeful that gives us an opportunity to show better performance on the bottom line. So, that’s very much part of our focus.

Omar Saad - Credit Suisse

Okay and then, Jim can you talk about the effectiveness of the direct-to-consumer marketing and how you expect that to progress going into 2009?

Jim Petty

Yes, we’ve continued to see our active data base increase nicely. We’re up 67% by year end for the end of ‘08 and we experienced about 43% increase in our direct mail impressions and our email impressions were up significantly above that; all marketing responses were up about 39%. So, we continue to enrich the database and equally as important, improve the overall effectiveness of the collateral that we are distributing.

Omar Saad - Credit Suisse

Are you seeing a similar response from OshKosh customers as you get from Carter’s?

Jim Petty

Yes, overall yes.

Omar Saad - Credit Suisse

Then I noticed that you’re distributing some coupons at destination maternity; can you talk about what you are planning there?

Jim Petty

Yes, I don’t want to get too much in detail on this. This is a very early stage relationship that we have developed, but the coupons that we are distributing have had a relatively nice return or redemption rate. It’s a very early stage relationship, but we think that they are a potential partner to be aligned with.

Omar Saad - Credit Suisse

Thanks. Good luck in 2009.

Jim Petty

Thank you.

Operator

For our next question, we go to Susan Sansbury with Miller Tabak.

Susan Sansbury - Miller Tabak

Hi yes, thank you so much. The question is the use of this cash buildup. Can we discuss priorities in debt pay down versus share repurchases or acquisitions?

Richard Westenberger

Sure, I’d be happy to. Yes, I think at the moment we feel pretty good about having the extra liquidity on our balance sheet given the environment. The debt that we do have as an organization is extremely low cost and I think it’s also important to point out we’re pretty fully funding our growth initiative. So, we feel good about the level of investment that we’re putting back into the business.

I think, debt pay down is clearly an opportunity for us, which we’re going to continue to evaluate. That’s probably the first priority beyond investing in the business, followed by share repurchase and we’ll be prudent about it, but at the moment we feel good about having the cash on the balance sheet.

Susan Sansbury - Miller Tabak

Okay, thanks. Second question, when do you expect to be able to discuss some of these restructuring and/or cost saving initiatives that you alluded to earlier in the call?

Richard Westenberger

On our next quarterly call; we’re moving through the analysis now.

Susan Sansbury - Miller Tabak

Okay, great. Thanks very much.

Operator

We go next to Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Thanks, good morning.

Mike Casey

Good morning, Omar.

Omar Saad - Credit Suisse

There are some interesting things happening in your business. Sounds like, you are in a position where some of your orders are getting pulled forward, sell through seems pretty decent. Meanwhile, a lot of the other apparel suppliers out there, a lot of the same channels that you’re shipping into are seeing fairly a negative impact from retailer de-stocking.

I wanted to get your sense on how you feel inventories are out there at retail? Have you seen any retailer de-stocking in your category? Do you expect to see any as retail has become more focused on this in holding a shorter time out of inventory in their stores?

Mike Casey

Yes, we’re not seeing any impact on our business on de-stocking. The fourth quarter has been described as probably holiday shopping period in decades and we had good performance. I think it’s important to keep in mind the space that we’re competing in; the demographics are favorable, people are having children, we have more floor space in young children’s than any other brand.

I think it’s a very affordable purchase, it’s a less discretionary purchase and we have some strategies that are working for us. That was very much in part of our focus last year to strengthen our product offering. So that when you’re shopping for young children’s, which moms will continue to do, our brands will be the brands that stand out on the floor. So I think that’s working for us say.

Again, I was encouraged by the feedback from our customers that we helped them. We helped them in the fourth quarter with terrific over-the-counter performance that has continued into the first quarter. The crystal balls given the overall environment is cloudier than you’d like, but we’re going to focus on the things that we can control. We’re going to focus on products, making sure that we’re absolutely the best on the floor; we’re making some good investments in brand presentation.

I do feel as though over the past several years, we got tired looking on the floors, so we’re doing some very good things with our customers to freshen the branding and the other thing we can control is our cost structure. I think we’ve got very good initiatives around cost. I don’t think there’s any storage of cost reduction opportunities. In our focus for ‘09, we’ll be improving our performance particularly on the bottom line.

Omar Saad - Credit Suisse

It sounds like retailers are planning on taking down inventories in the baby and kids category.

Mike Casey

I think if you follow their announcements, generally they highlight kids as one of the better performing components of theirs. I think it’s largely because that’s where children are growing, especially in the age range that we’re competing in. Children are going through multiple wardrobes and so that is working for us.

Jim Petty

I think they are down relative to the sales performance, and everyone last year and this year, we built in increased term plans for all of our accounts, so that’s part of our plan. Really we’re driving our productivity in the same space. We’re increasing turns, so they’re just supporting sales, but it is a more conservative approach even in our area, but we are getting funding based on performance.

Mike Casey

The comment I made earlier, I think a good portion of the inventory being down is they are cleaner. They do not have the extent of prior season carryover goods that they had this time last year.

Omar Saad - Credit Suisse

Great, thank you. That’s really helpful.

Operator

(Operator Instructions) We’ll go next to Tara Gary with RBC Capital Markets.

Tara Gary - RBC Capital Markets

Good morning. Thanks for taking my call.

Mike Casey

Good morning.

Tara Gary - RBC Capital Markets

Could you provide some detail on your plans for reducing the complexity in the product development process?

Mike Casey

I think that opportunity is a much more say on the OshKosh side of the business than Carter’s. Carter’s is a pretty well oiled machine, but we continue to refine the process in OshKosh. As you know in recent years, we’ve been finding our way, earning our way back at wholesale, figuring out what the consumer is responding to, putting more emphasis on the things that are selling well and editing out the things that are not. So that’s very much a part of improving the productivity of the line.

Richard Westenberger

And secondly, OshKosh used to have four seasonal releases and we’re lined up wholesale now with Carter’s and OshKosh, to both have only two season a year. So, we’re getting some leverage there and that will help the complexity also.

Tara Gary - RBC Capital Markets

Okay, great and then one follow-up question on the shop-and-shop. I believe you said J.C. Penney’s, you finished there; how many do you have open now and then how many more do you expect to open this year?

Mike Casey

We’re over 500 with Kohls right now; we’re about 350 with J.C. Penney’s. I think we are close to about 16 to 20 with Macys, and we’re testing it with a couple of other accounts right now.

Tara Gary - RBC Capital Markets

Excellent. Thank you so much.

Mike Casey

You’re welcome.

Operator

With a follow-up question we return to Scott Krasik with CL King.

Scott Krasik - CL King

Thanks. Just wanted to clarify an earlier question; you thought it was reasonable that SG&A could be mid single digits on a dollar basis in 2009?

Mike Casey

The growth in SG&A would be contained to mid single digits or better, that’s our focus. I think what you were seeing in 2009 is a significant investment in our retail component of our business and you can see the type of growth that we’re getting because of that investment. I think you’ll start to see that normalize in 2009.

Scott Krasik - CL King

Okay and then we’re pretty tricky guys. Then you said sales growth will probably be modest in this environment and then short of pressures on gross margin, we’ve seen a little bit with the mix issues and the liquidating. I mean is that existing in 2009 as well or you think you can get something back there?

Mike Casey

I’d like to think there is an opportunity. There was a significant cost associated with the bankruptcies last year. So, suffice it to say we bought a meaningful amount of inventory for the retailers that went bankrupt last year, we had to move those goods out through the off price channel. Not unlike there, even our retail customer, we find ourselves with more inventories than we would prefer this time last year. So, the level of activity with off price retailers last year was more than we would like. We would like to think that’s an opportunity for us in 2009.

Scott Krasik - CL King

Okay. Thank you, guys.

Richard Westenberger

You’re welcome.

Operator

Also with a follow-up question, we return to Susan Sansbury with Miller Tabak.

Susan Sansbury - Miller Tabak

Hi, circling back to this SG&A question, this mid single digit increase; inherent in that assumption, did you make any assumptions about this cost saving initiative that is forthcoming, when you came up with this mid single digit estimate?

Mike Casey

Well, just to be clear here, what we suggested is could we manage to a mid single and we believe we can. So there will be opportunities that we’ll share with you on the next call in terms of how good we can be, in terms of managing the overhead of our business. We’ll be more specific on that on the next call.

Susan Sansbury - Miller Tabak

Okay, good. Now, I don’t know your business very well and frankly I got really confused about the explanation about what’s going on at Wal-Mart? I do know that Wal-Mart is consolidating a lot of their formal private label business under two labels; one being Danskin which and so, the question is, what implications does that infer for their branded children’s wear business and specifically your product category? And if you could amplify on what Joe was trying to say about what’s going on in Wal-Mart in the latter part of 2009, I really didn’t understand.

Mike Casey

Let us help you with that. We’ve had a terrific relationship; we’ve had very good performance with Wal-Mart for a number of different years. Over the past year, we’ve talked about the fact that we were not performing to our expectations or theirs on a component of the business we do with them, which we refer to as the brand wall.

On the brand wall you have both licensed products, products that we work with our licensees that are on the brand wall, there is also product that we ship to Wal-Mart in terms of apparel and other soft goods.

The part that we shipped to Wal-Mart on the brand wall wasn’t meeting the productivity expectations and that poor performance of the business will be cut back in 2009. It wasn’t meeting their expectations or ours. I’d also say the issues that they had on the brand wall, were not unique to Carter’s.

So, when you don’t perform, it’s reasonable to expect that you will be cut back and we will be. We’ve been working with Wal-Mart on what should go on the brand wall and they are shifting their emphasis more towards a gift strategy and we’ll help them with that, but at least near term that will not be as productive as what we’ve had in the past and we’re going to have to rebuild that component of the business.

To Joe’s point, the other component of the business is what we call hanging apparel and that product has been performing extremely well for us. With that said, one other component that is impacting us at Wal-Mart, given the environment they are emphasizing their entry level brands.

Danskin doesn’t have much of an impact on our business, but fur animals does. That’s their entry level price point brand. If you think of a good, better, best strategy, fur animals is the good and Child of Mine is the best. That’s where Wal-Mart wants it to be, that’s where that brand is, but more business is probably being done at that entry level price point just given the overall economy.

Wal-Mart’s view was as the economy improves, they hope that they hang on to many people who historically probably haven’t shopped at Wal-Mart and they hope that they’ll continue to shop with them and purchase more of the better brands.

So, the relationship there is good. We didn’t perform and when you don’t perform you get cut back. We have a new base that will grow off of. Our focus was to find the bottom, establish new base, but the Wal-Mart business will be a growth business for us going forward.

Operator

We’ll go next to John Curdy with Principle Global Investments.

John Curdy - Principle Global Investments

Good morning. Two questions; what does CapEx look like for fiscal ’09? And second where do you anticipate inventories on a per store basis in your own retail stores being at the end of this year, what are you planning to?

Richard Westenberger

John, on CapEx I’d anticipate that we are going to try and manage to a level no more than where we were this year. We’re trying to be appropriately prudent in our capital spending and your second question was relating to...

Jim Petty

Alright, John this is Jim. On a door-by-door basis, by the end of the year we expect Carter’s to be flat and OshKosh to be flat-to-slightly up, but modestly.

John Curdy - Principle Global Investments

Okay, thank you very much.

Richard Westenberger

You’re welcome.

Operator

With that ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Casey, I’ll turn the conference back over to you for any closing remarks.

Mike Casey

Okay, thank you very much. That concludes our remarks. We appreciate you joining us and we’ll update you again with our first quarter results at the end of April.

Operator

Again, ladies and gentlemen, this does conclude the Carter’s conference call. If you would like to listen to a replay of this call, it will be available beginning at 11:30 a.m. Eastern Time today through midnight Friday March 6.

The dial in number for the replay is 888-203-1112. Again that’s 888-203-1112 in the United States and Canada or at 719-457-0820; that’s 719-457-0820 from international locations. The confirmation code to access the replay is 3892814; that’s 3892814. Again that’s 888-203-1112 in the Continental United States and 719-457-0820 internationally. Again the confirmation code is 3892814.

We do appreciate your participation and you may disconnect at this time.

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Source: Carter’s Inc. Q4 2008 Earnings Call Transcript
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