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Executives

Michael D. Casey - Chairman and Chief Executive Officer

Analysts

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Carter's, Inc. (CRI) 2013 Consumer & Retail Conference March 12, 2013 9:20 AM ET

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Thanks, everybody, for coming to Carter's presentation. We're very pleased to have Mike Casey, the Chairman and CEO of Carter's, here with us today, as well as Sean McHugh from IR. And I'm going to turn it over to Mike for some -- a brief overview and then we'll go right into Q&A.

Michael D. Casey

Good. Thanks, Robbie. I appreciate Robbie Ohmes being with us this morning. Robbie followed us from the IPO 10 years ago. We were celebrating our 10th year as a public company this year. Those who followed Robbie's advice 10 years ago have done well with their investment in Carter's.

So as you may know, Carter's is the largest branded market of young children's apparel in the United States. We own 2 of the best known brands in young children's apparel, Carter's and OshKosh B'Gosh. Carter's represents about 80% of our business and OshKosh the balance, two very complementary brands. I've been with the company, Carter's, 20 years. We have bought OshKosh B'Gosh about 7 years ago, and we love having both brands because they serve the needs of a consumer from birth to about an 8- or 9-year-old child. The sweet spot of Carter's is baby. It's known as a baby brand, even though it extends up to about a 5- or 6-year-old child, so the sweet spot is the newborn to a 2-year-old child. The sweet spot of OshKosh B'Gosh is a preschooler, a toddler, so we got 2 good complementary brands.

We own the largest share of the $21 billion young children's apparel market, that's newborn to size 7. We own nearly 17% share of that market, nearly twice the share of our nearest competitor. OshKosh owns about 3% share of the market. Carter's owns about 14% share of the market. And we've been gaining share in recent years, even though the market hasn't grown much during the recession, understandably so. The number of births, in 2007, record level of births, about 4.3 million babies born in 2007 just before the recession hit. Number of births last year was about 3.9 million births. We don't really worry too much about the increase or decrease, we view it as about 4 million new babies being born every year, 4 million new reasons to come out and shop with us. The biggest drop in the number of births were to teenage moms, so no objection to that. The older moms, actually number of births to older moms, more established moms, moms who are well into their career, comparable to, if not a bit better than it was in 2007.

We have the broadest distribution of young children's apparel in the market. We do business with all of the major retailers, Macy's, Kohl's, Penney's, Walmart, Target, Costco, Sam's. We're in about 18,000 doors in the United States, nobody has that reach in young children's apparel. The wholesale component of our business is about 45% of our sales, very good business, very profitable business, long relationships with these retailers, some relationships go back a better part of 100 years.

The retail component of our business, direct to the consumers, the balance -- 45% is wholesale, working through others, best retailers in the business. And then, the balance is through our own stores. We have about 600 of our own stores, about, in round numbers, 400 Carter's stores, about 200 OshKosh stores. Most of those stores are in outlet centers. That's where the history of the company -- 20 years ago when I joined the company, we had a big wholesale business. It was probably 90% or more of our business and we had some outlet stores.

And over 10 years ago, we started taking the same outlet model closer to the consumer and the same footprint, same product offerings, same pricing, same timing of delivery, everything was the same but for location, we started opening up stores in strip center locations with success. So Carter's today, we've got a little over 230 of those, we've got a little over 20 OshKosh stores outside the outlet centers and the profits are good. So it's the way forward.

We have a growing eCommerce business, we were probably the last company in the world to go online, just was never a burning platform for our business, so we started doing business online about 2.5 years ago and it's been enormously successful for us. First year, and I guess it was 2010, we did some portion of $20 million. For 2011, they gave me a plan that we think we can double the business, do $40 million, but they did about $70 million online, and last year we did about $140 million online. And this year, it will be closer to $200 million, so -- and in the earnings call a couple of weeks ago, I briefed the investors that year-to-date, that the eCommerce business for both brands, both Carter's and OshKosh, we're comping up about 60% year-to-date.

So the eCommerce business, this is the way Mom's shopping, it's convenient, she knows our brand, she knows the quality of the brand, she knows the value of the brand, she just needs the next size up, that's the beauty of our business.

Good economies, bad economies. People, thankfully, are still having children, spending money on their kids and that -- those first 7 years of life the child's going through a new wardrobe every 3 months or so and there's a reason to come out and shop with us. So eCommerce has been a nice business, nice growth business, high-margin business for us, it's a co-branded website, so if you go on carters.com, up will pop Carter's and you also have the ability to go right over to OshKosh B'Gosh, get the very best product that you need for your young children and there's 1 convenient checkout.

And then we have a well-established but I would say an underdeveloped international business. Last year, international contributed about 10% of our sales and about 17% of our profits, so it's not like we're starting from scratch, it's actually a pretty good business. We bought a nice company up in Canada a couple of years ago. It was our largest international licensee. They had opened up co-branded stores. They had asked us a number of years ago, we'd love to open up a Carter's OshKosh store, and we said we don't have Carter's OshKosh stores, we have Carter stores and we have OshKosh stores. They said we think this is a model that would work well in the Canadian market, and we said, well, if you're going to make the investment, we're happy to collect the royalty on those sales. And they did such a beautiful job with that, when we saw it, I guess a couple of years ago now, we liked the business so much, we bought it, and today, they've got about a little over 40 co-branded stores, they plan to open about 20 stores a year for the next 5 years. They also had their legacy retail format called Bonnie Togs. And my guess is they've got about 30 Bonnie Togs stores and we're starting to convert those Bonnie Togs stores to Carter's OshKosh stores, and we'll do that over the next 5 years, we're not in a rush to do that.

So it's a nice business. It was about $150 million in sales last year, very good margin, earned nearly $30 million, about 20% operating margin and that business with some reasonable door growth assumptions, we think we could double that business over the next 5 years.

And we announced a couple of weeks ago that we've looked at the next largest licensee after we bought the largest one in Canada, we said who's the next largest licensee? It happened to be a company in Japan. And Japan's the third-largest market for young children's apparel in the world, about an $8 billion market compared to a $2 billion market in Canada. So we said, that's a market worth being in, and when we looked at the business, the licensee, I would not say that licensee was as strong of a business as we saw up in Canada. They were doing some portion of $20 million in sales but we said, it's a foot in the door. It's not a big foot, it's more like a toe, it's a small entry into that market but it's a market we want to be in long-term, so we hired a first-class management team. Starting last year, they helped us do the diligence and then we completed the transaction just recently.

It's largely a retail business. I've seen our stores, the stores need some work. We just opened up 2 stores this past week in better distribution, this department store called Hankyu, you could look it up online. But a really good-looking department store and we opened up 2 beautiful shops within that department store just this past week, Carter's and OshKosh B'Gosh. So with every quarterly call, I'll give you a sense for how we think we're doing there. So it's -- every point of market share in Japan is worth some portion of $80 million and what today is a $20 million business, we think could be a $80 million to $100 million business over time, again, at a high margin.

The product is coming -- substantially all of our product comes from Asia. And years ago, when we ran the international business, product would go from Asia, to California, to Stockbridge, Georgia, and back out to Asia again, it made no sense. So today, we've opened up offices in Hong Kong, we've got third-party logistics providers in Japan, in Hong Kong, so the product can go from Asia to Asia and then to our Asia retail locations. So that's a new component of our business and we're pretty excited about it.

The major focus we have in international is 3 big markets: Canada, shared that with you, Japan and China. So China's the second largest, second only to the United States, second largest market for young children's apparel in the world, it's about a $14.5 billion market and what we're hopeful is that we can replicate the success we had in Canada where you find a really good local partner in China who knows the market -- we know very little about China, find a really good retailer of young children's apparel in China and then with our merchandising expertise, with our supply chain capabilities, form a good relationship and start to realize some portion of that $14.5 billion market over time.

Long track record of growth. This last year was our 24th consecutive year of sales growth. This is not a hot and cold company. Again, there's some portion of 4 million babies being born every year. We own the young children's apparel market, Carter's is top of mind for a mom coming to shop for first wardrobe for her new baby and then we strengthen that relationship over those first 7 years of life.

Over the past 10 years, as a public company, again, anybody who invested in the IPO years ago has done really well. Our average annual sales over the past 10 years have been some portion of about 15%, profits have grown a bit better than that. Even during the recession. It's been a tough time for most retailers but the kids space has been a good place to be in. This is a very affordable purchase. Our brands are known for great value. Our average price point for both Carter's and OshKosh per unit is about $8.50, it's a real deal. If you look at the beauty of the product offering, and I think that's why we've done well. I remember when the recession hit, one of our largest customers, one of the largest retailers in the country, was thanking us for our performance and I asked her why do you think we're doing so well? Why do you think in the miserable retail environment, why do you think we're doing so well? And she said, in uncertain times, which we had over the past 4 years, in uncertain times, people migrate to the brands that they trust and that's what a lot of times people equate Carter's that's the brand I trust. So during the recession, I think our sales in 2008 were about $1.4 billion, last year they were $2.4 billion, so we've grown about $1 billion in sales over the past 4 years so we hope to grow the business some portion of about $1 billion over the next 4 or 5 years, and we've got a lot of ways to grow. 10 years ago, we were a 2-dimensional business, we had a wholesale business, and we had outlet stores. Today, we have multiple brands, multiple distribution channels, new ways to grow in terms of extending the reach of the brand through our own retail stores, e-commerce, these international markets.

Our vision for the company is to be the world's favorite brands in young children's apparel. We own the market in the United States, we've had great success in the United States, beautiful multichannel model, wholesale, retail, e-commerce, and we hope to replicate that same model outside the United States.

So I'm going to break there, other than to say, I gave some outlook for 2013, we had a terrific year in 2012. Our best performance ever in terms of sales and profitability. We're expecting a good year this year and at the end of April I can give you a good update on how the year's evolving but the outlook that we shared on our most recent earnings call, we hope to grow the sales some portion of 8% to 10% this year and that's kind of what we're trying to do with our company. We're trying to grow the sales 8% to 10% a year over a period of time. If you look at our track record over the past 5 years, which hasn't exactly been a robust market to grow in, we've done really, really well. If you look over the past 10 years, if you look at over the past 20 years, we've done well as a company because of the wonderful brands that we own and the talented people that we have down in Atlanta, Georgia helping us grow the business. That's one thing I would encourage you to do, if you have an opportunity, come through Atlanta. Come through Atlanta, it's an easy place to get to from New York, love to have you come through our offices, love to show you some of the big investments that we're making in the business to enable growth, good growth for years to come. The big 4, we'll probably spend more this year than we've ever spent at something other than an acquisition, right? So the 4 big things that I announced recently are focused around bringing our Connecticut operations to Atlanta, Georgia. With the success of e-commerce, which is based in Atlanta, and the success of our retail operations, which were based in Connecticut, felt as though there were 2 good groups of people driving our direct-to-consumer business, who should be working side-by-side, not a thousand miles apart. So we're going to make a big investment bringing our Connecticut operations to Atlanta, Georgia. We'll move everybody into a new headquarters because we've outgrown space in Connecticut, we've outgrown our space in our offices now in Atlanta, Georgia. So that will be a big investment for us. We also invested in 1 million-square-foot distribution center, multichannel distribution center, just north of Atlanta. It helped us achieve the growth that we had in e-commerce last year. So we were -- when we launched e-commerce, it was largely an outsourced model, particularly for fulfillment and with the success that we saw online, we said, we won't be able to achieve the growth that we think is possible without bringing it in-house. So this time last year, we were working hard to find a facility where we could bring e-commerce in-house and then start to support our other channels of distribution more efficiently, so we've got a very impressive new distribution center that we'll invest in this year, heavily in this year, so that by this time next year, we're supporting not only e-commerce but retail and wholesale from that new facility.

We talked about the investment in Japan, we'll make -- continue to support that growth, the infrastructure of that new business in Japan. And then big investments in IT. So you put the consolidation of offices, the new multichannel DC, Japan and IT, which impacts, enables all these things that we're sharing with you this morning. It's probably some portion of a couple of hundred million dollars of CapEx, which is double what we would typically spend, but I view that as kind of a one-off investment. That won't be the rate of investment that will be necessary to support our growth initiatives, but that's -- fortunately we have the resources to do it. We have a very strong balance sheet. I think we ended the year last year with about $400 million in the bank and probably one of the largest questions we get as a management team, is what are you going to do with all that cash and at least, we have a good plan for about half of it this year. So with that, I'm going to take a break and I will open up the meeting to your questions.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Mike, I'll start with the first question, a lot of retailers reported January and February, same-store sales, they've been seeing some choppy trends here and there. Can you maybe just give us a sense of what you think is going on with the consumer right now? You touch a lot of channels through your distribution and like you said, 18,000 doors.

Michael D. Casey

The beauty of our business, we do have insight into what every major retailer is doing in young kids apparel. And again, the beauty of our business, all of us may put off with this beautiful spring weather we've been having so far, nor'easters. We have snow. We had snow flurries in Atlanta, Georgia a couple of weekends ago, not a good time to be kicking off little league baseball when the snow flurries in Atlanta. So, yes, when I was preparing for our earnings call a few weeks ago, I read the reports. We have a delay in tax returns and higher gas prices and the nor'easters, all the storms and then, and so I looked at it all, I said, for us, it was weather. For us, if you think about our business, if you got snowstorms, Mom's not thinking about T-shirts and shorts in a big way. At least in our business, if you have any threat of weather, Mom's not going to jump into the car with her kids and drive out to one of our stores. That said, online business was through the roof. So both brands, this was through the end of February, we're comping up about 60%. What I shared with investors a couple of weeks ago is we had a very good January and February was not so good. So we were running both -- negative comps for both brands.

The beauty of our business, Easter will come, we will celebrate Easter sometime at the end of March. They will have the -- people come out and try to get -- buy the new spring outfits. Warm weather will come. In my 20 years, when warm weather comes, business goes through the roof. And then when we go from summer to fall, business goes through the roof because you need to come out and buy a new wardrobe for your kids and it's a very affordable purchase. So I wouldn't want to be in the adult apparel business because that, you can defer, getting your new spring outfit. But for your kids, you're more inclined to go out and shop. So we're -- outlook for business is good, we have the benefit of having 2 months in, so we gave our outlook for our first quarter, we took that into consideration. We're expecting slightly positive comps for Carter's and negative comps for OshKosh because there's other things that we're doing with OshKosh. We're focused more on improving its profitability and less so on trying to comp against some things we did last year. But our outlook for the market generally is good. I'm often asked, what do you think about the promotional environment? It's every bit as promotional as it was a year ago, and I think the messaging has gotten much more aggressive in the windows, you will see a lot of windows, $1.99 and up, in our space, and so you go in, you'll see one fixture that's got socks for $1.99. I'd like to think we don't do much of that and -- but the messaging has been aggressive. I think the consumer generally is -- wants to be optimistic. You wish the headlines were -- you wish there was a little bit more positive news coming out of Washington but near term, I think that will still be a little choppy. Again, the beauty of our business is, people are still having children, thankfully, spending money on their kids, good economies, bad economies. The outlook for our business is good, and I do think that when the warmer weather comes, you have more seasonal weather, I think generally, that will be good, generally, for the retail space. I sense some optimism with our customers. So I spend a lot of time with our top customers, had one of the largest retailers in the business coming through our stores yesterday, see how we're doing with OshKosh, what we're doing with our latest store models. And I'd say, the tone I sense is generally positive, I think people wish the weather was better. I'm sure you know this by now, but this probably feels like spring, to me this feels like spring. Last year's happened to be gorgeous weather and the year before that happened to be miserable weather, so you can't follow that. You just got to have a sense for what's possible within the year, and for our business, at least, we have a good outlook for growth this year.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

And on the competition side, like you mentioned, I've been covering you for about 10 years. There have been periods in the past, maybe 1 period in particular, where, on your wholesale business, the competitive threat can be the launch of a new private label brand like Kohl's did with -- was it Jumping Bean or Jellybean or...?

Michael D. Casey

Jumping Bean. Yes.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Jumping Bean. What's the, as you look out the -- any Jumping Beans coming your way?

Michael D. Casey

I would say, not that I know of. It's funny, I'm recalling, so I think that has to go back, 6 years ago now, Robbie gave me a heads-up, "Hey, just so you know, I'm going to ask you about this Jellybean business, right? There's some new launch at Kohl's." And I wasn't aware of it, so I asked our head of sales at the time, I said, what's the skinny with Kohl's and their new private label, and they said, don't worry about it, it's this brand called Jellybeans. They didn't even have the brand name right. So Kohl's did a beautiful job, Jumping Beans is a beautiful brand. Every major retailer invested in private label, exclusive brands and I actually think they've done a beautiful job with it. So, JCPenney has Okie-Dokie, if you went in, beautiful presentation of Okie-Dokie. If you go to Target, Circo, if you go to Walmart, Faded Glory, so everybody invested in their own private label brands. How has it impacted our business? I think we've done really well. Because Mom comes in, she's got a choice, right? Everybody knows somebody having a baby, they go in -- you go in to shop, you're bringing a gift to the hospital or to the shower and you go shopping and you've got choices. You could buy Faded Glory, Circo, Jumping Beans, you have a lot of choices, or you could pay a buck or 2 more and you get Carter's or OshKosh B'Gosh. I think the batting average has been good. Private label's done well, they have seen good growth over the past 5-plus years, but our growth has been better. We've gained share during the market. And about, the last check I saw, about 20% of the market is made up of labels you have never heard of. Small, niche players, they're in, they're out. And both private label and Carter's as a company, have taken share from some of these smaller players because during the recession, if you were a marginal business, if you were just a fly-by-nighter, you're gone. You're gone. I mean, only the very best companies have survived during the tough retail periods. So I don't worry about private label, they're very good competitors and, but I think by and large, national brands, think about your own shopping. There's, you have a lot of choices when you go shopping for apparel. But by and large, we own the 2 best known brands in the kids space and the consumers have supported the brands in a huge way, particularly during the last 4 or 5 years.

Unknown Analyst

You clearly have a lot of brand equity with the decision-maker, which is the mom or the dad, in your 2 brands. Where would the natural brand extension start to have less power as the kid makes more of a choice? And would you ever want to take your brand or invent a new brand to take it to that level, is it tween, where you -- where the girl or the little boy is saying, "I don't want to do that," but the mom is still in charge? Or do you have enough on your plate right now with the...?

Michael D. Casey

Yes, good question. I think there's a lot of money to be made, even though we own the largest share in the market, again, our focus is a newborn to about a 7-year-old child, this is when a mom's dressing the child like a child, wholesome dressing, that's what our brands are known for. When I walk by some of the others that skew older, I'm glad I'm not in that business, right? That's -- we do use the phrase "birth to bus" on a regular basis, because that's where we want to focus. Once the child gets on the school bus he's looking at what all the older kids are wearing on the school bus and that's a different game, right? That's -- I walk by some of these things and I say, I'm glad my daughter doesn't dress like that. I wouldn't want to be in that business, so even though we own largest share, 17%, it's only 17%. I'd like to believe over the next 5 years, our share could go closer to 20% of the market and so we have no plans to extend into the tween market. That said, that said, OshKosh goes 0 to 12, right, which has been a good business. That age range -- my youngest child, I've got 6 children, the youngest is 10 and he still wears OshKosh, not because I work here but because it's got a good level of fashion for a 10-year-old child. And even within Carter's, we've had requests, sleepwear for Carter's extends to size 12 but we're selective. The level of design for Carter's has come way up and so, we have moms coming in saying, "I love that dress but don't you have something that extends up to an older child?" So selectively, we're pursuing some opportunities where we could extend the age range and where it makes sense. But I think there's plenty of business to be done still in that young age segment and so I don't think we need another concept in the foreseeable future. There's always plenty of things being shopped in terms of older children and we look at it and we say, I think there's a lot more money to be made with sticking to the core, which is the younger child. Yes, sir?

Unknown Analyst

So I wanted to return and ask a little bit more about the competitive environment. I thought it was very helpful, your comments on private label. Switching to the specialty competitors, which are obviously a smaller part of the market, we've seen a lot of difficulties there over the last 12 to 18 months. I wanted to get a sense for how to interpret that. I mean, is that somewhat of a hidden drag on your business if it were to improve? Is that a tailwind for you, or is it actually a consequence of the share gains that you've shown and we should want to see that continue because it's a sign of your success? Just how should we read that as it relates to...

Michael D. Casey

This is just an opinion. I don't spend a lot of time thinking about some of these specialty players. But suffice to say, there's been a lot of management changes. Anytime you've got management changes, you've got new strategies, sometimes new strategies work, sometimes they don't. I think the beauty of our business is, yes, we've had consistency in leadership for many years. I'm in my 20th year, a lot of people that support me every day have been with the company a better part of 10 years. The beauty of our business, you never get it right. So even as good as our business is, we sit back and say, could have done a lot of things better. So the color, we could've done a better job on that color, that design, but when you have consistency and talent, at multiple levels, right? You can say now we would know what we have to do. So spring performance has been good, I don't think we've ever been better. So I was in the stores, both brands, yesterday walking one of the major retailers through our stores, I don't think we've ever looked better, but even you look at certain things, say, I think we could do a better job. So I think specialty has gone through a lot of changes in leadership and trying new ideas, but you're always going to have some near-term disruption when you have that. And I think the other thing that speaks more to our strength is we've got a very clear brand point of view. If you ask a mom -- probably not if I ask you, but if I ask a mom, if I ask a young mom, and you say Carter's, she has a certain image of what that brand means, if you ask OshKosh B'Gosh. So we devote a lot of time making sure there's a consistency in the brand point of view. We used to talk about one of our competitors in the specialty space, their point of view would range from Mary Poppins to urban guerilla from 1 year to the next. If you don't have a consistent brand point of view that's restrengthening every year, you're going to have inconsistency in performance. And that's the thing I love about our company, this is not a hot-cold company, we've had consistency for many years. Again, last year, 24th consecutive year of sales growth, long track record of good performance and profitability, so I think it's more of the nature of our business. Again, going to [indiscernible] question, I wouldn't want to be in that older girls market. That taste level changes from season to season, year to year. The higher level of fashion, the higher level of risk. If you walk into one of our stores, you'd say a good level of fashion, but we're not trying to pick the next look for Hannah Montana or Justin Bieber, that's not our business. It's these young children, wholesome, preschoolers, by and large, so I think that's what speaks to our strength. These are good companies that, I'm thinking of the same companies, these are good companies, they're good brands and I'm sure they'll sort out their strategies over time, but I think if you look over years, you'd see, you don't have to do much other than look at the stock charts. You look at some of these people you are referring to, stock chart looks like that, if you at look at Carter's, it looks more like this. So I think it's just consistency and management consistency and execution. Question in the back here? Oh, right here. Okay.

Unknown Analyst

Just on the wholesale business. So you guys have increased your distribution points and you've also taken share with your customers and done a good job executing. So from here, where we are, given that you're penetrated with all the major retailers, how do you think about the go-forward growth prospects of that business?

Michael D. Casey

Are you talking about the wholesale side of the business?

Unknown Analyst

The wholesale side of the business.

Michael D. Casey

I tell you, I think there's plenty of room for growth with wholesale. I think over time, your growth is somewhat limited by the growth that they're planning, but these are all publicly traded companies, these are the big players. Nobody, none of these retailers are at this meeting today saying that's all we got, no more growth. They're all coming here articulating their growth plans and so, our growth, on average, if you went over a very long period of time, our growth has been at least equal to their growth, if not a bit better. I'd like to -- I'll say at least equal to, but my guess is it's been better. And the beauty of our business, we're a traffic driver for these retailers. So Mom's looking for a reason to get out of the house, the child's growing through another set of PJs or jeans and so there's a need to get out to shop. So if you walked into any major retailer in the United States, you'd see a dominant presence on the floor of Carter's, principally. And to some extent OshKosh B'Gosh. And so, our outlook for that part of the business is good. Again, our growth objectives of our company are to grow some portion of 8% to 10% a year and if I had to break that down, my guess is the wholesale component of our business will grow some portion of 3% to 5% a year, because that's what they're growing. So over time, I think the growth, I think our batting average, if you go back over a long period of time our growth has been better than that but I think for the way we model it is we would say that it's safe to model it at a more conservative level, 3% or 5%. Our retail business, just again, we've got a fraction of the stores that our competitors have. If you've been in our stores, I think it's a beautiful execution of the brand. I think it's the best place -- I'm biased, but I think it's the best place to shop for a newborn to 7-year-old child. Major retailers that have invited to come through our stores, I think they would agree that we do a good job presenting both brands, and that business will probably grow some portion of 10% a year, modest comp assumptions, and the balance from new door growth. And then if you look at eCommerce, given where its stage of development, it's growing like a weed and that business will probably grow some portion of 20% or more. And then international, with today is some portion of 10% of our sales, my guess is, given the initiatives that we have, focusing on those top 3 markets, Canada, Japan and China, that business will hopefully post closer to 20% a year. So you blend all that, it's probably, I think it gives us some comfort that we think 8% to 10% growth a year for the foreseeable future is possible. And again, to your point, it all depends on execution and our batting average has been pretty good on execution. Yes, sir?

Unknown Analyst

Just curious if you've assessed the impact of JCPenney's massive share donation the last 12 to 18 months, and I'm curious if you see that at this point as a tailwind or a headwind?

Michael D. Casey

Well, I referenced it on the call a couple of weeks ago with the fourth quarter earnings call. Our business with Penney's has been good. And the relationship, I don't think, has ever been better. So even though they've had some impact on the business with their new strategies, Mom has still been able to find Carter's at JCPenney, so our business there has been good. I think it's been a net -- if I had to say, I'd say it's been a net positive for our company. I can't speak for any other company, but I think what they've been doing, I think it's been a net positive for our company. If you looked at the branding that they did for Carter's, the marketing, a couple of Sundays ago, I think it was extremely well done. Big double-page spread promoting the Carter's brand, beautiful photography, very clear price point, so we're rooting for them, they're an important customer of ours. We walked our shop, the Carter's shop, with Ron Johnson and Liz Sweeney just before the holidays and it's been extremely well done, so they take great pride in doing a good job representing our brand so for that reason and others, I'm rooting for them. I think it's been a net positive for us. Yes, sir?

Unknown Analyst

[indiscernible]

Michael D. Casey

Do you need a microphone, so that -- I'll come right back to you next.

Unknown Analyst

Can you just talk about your margin outlook for the next 3 to 5 years as you talk about that sales algorithm and as you look at the different divisions?

Michael D. Casey

So here's what we expect. The business is changing and just the dynamics of more of your business, a higher rate of growth going direct to the consumer, we expect that the gross margin will continue to improve, but SG&A will also increase relative to sales, that's just the nature of the business. Wholesale is a beautiful model, right? It's just an absolutely beautiful model, if you look at our segment profitability, it's been a good business for us. You're not investing in stores, you're investing in fixturing within the stores, so it's got a fairly modest overhead structure. Retail is different. And but retail has a considerably higher gross margin. So here's the way I think about the business. In 2010, we had a record operating margin of about 14%, that's top quartile for our space and we're proud of that. Yet even in 2010, as we kind of sat back, a lot of the questions from some of you and others were, is that as good as it can be? Is that, have you peaked, is it...? And there's no part of our conversations back in Atlanta, Georgia where we say, well, that's all there is, it's 14%, we've been in business for 150 years and we finally hit the 14%. There are a lot of things in our business that did not go well, so 14% was not our best performance. Then cotton happened. And our operating margins slipped from 14% to less than 10%, which we didn't like at all. Last year, it was about 11.5%. All these numbers I'm giving you are on an adjusted basis, excluding plant closures and some other things but principally plant closures. And so our goal as a company over the next 5 years is to work our way back to that 14% operating margin, a lot of times pushback [indiscernible] get there quicker. Hope we do, but for purposes of modeling, if we work our way back with 8% to 10% top line growth and work our way back to a 14% operating margin, I believe that would provide good returns for our shareholders, so that's our goal. And when I think of our business today relative to 2010, 2010, we didn't even have an e-commerce business, or not much of an e-commerce business. We didn't have much focus on the international business. We didn't own Canada, which happens to be a very high-margin retail business. Keep in mind, the product costs us the same, right? Whether we ship it to wholesale or sell it directly to the consumer, you make a lot more money when you sell it directly to the consumer. That's why we're leaning forward more on the direct-to-consumer strategy and those initiatives are working. So what today is -- last year was about 11.5% operating margin, we hope we moved it closer to 12% this year and over time, we work it back to 14%. Yes sir?

Unknown Analyst

It's not a huge question, it's just I'm seeing Hanna Andersson as taking a lot of mind share in certain kids' shopping drawers. Where do they fit in like the longer-term scheme of things? Have you seen other niche players come in? Is this a higher-end area that you're not as directly competitive with, or how do you see them in the context of more direct selling, catalog-based stuff and them having a pretty good brand recognition in certain circles?

Michael D. Casey

Yes, Hanna Andersson, terrific brand, very high ticket relative to ours. Their average price point is probably double ours. And what our experience has been over the time, the higher you go on that ticket, the less business you do. So our model is to be super competitive on price, provide the consumer a great value. I've been with the company a long time, but even when I go to the product line review meetings when we're preparing a season, I'm like, what's the price point on that? And they'll say $9.99, I'm like it seems awfully low but then they tell me the margin on it, I say okay, so that's a killer. So we try to find the sweet spot in pricing, the killer price point and that's why we've got a $2.5 billion business, that's growing some portion of 8% to 10% a year. Hanna is -- my understanding, is a fraction of that, right? So Hanna's a great brand, it's high ticket, it's largely an e-commerce business, beautiful catalog, beautiful photography, beautiful outfits, so I've had high regard for Hanna, but it's a very small business relative to what we've built. And so, as I shared with you earlier, the near term, I don't envision us having to go into the older age segment. They also, Hanna also has a women's business, which I have zero interest in. I wouldn't want to be in the women's business. But it's a great kids brand. Sure is.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

We have time for 1 last question if there is one. Okay.

Michael D. Casey

Go here. Yes, sir?

Unknown Analyst

So I think you downplayed a bit the role of demographics in your earlier presentation, which makes sense; you've done really well in a tough demographic environment. Could it be a tailwind for you going forward as births recover, or how should we think about that?

Michael D. Casey

Here's the way -- I focused on the things I can control. I have 6 kids, I did my share. If the number of births increase, it should be good for our business. I did a chart once, and Sean helped me with it. Over a 20-year period of time, births kind of going like this, peaked in 2007, our sales have gone like this. So, if more babies are born, should be good for business, if the number of births don't, we'll figure out a way to achieve our growth objectives. There's this fellow right down in front here, you had a quick question. So we have 1 minute to go.

Unknown Analyst

Just a quick question going back to that 14% margin target. I guess if you were to look at the OshKosh brand, is that predicated on getting margins back there or can we do that on the Carter's brand alone to get back to 14%?

Michael D. Casey

Yes, good question. So OshKosh is a terrific brand and they got particularly hard-hit with the cotton crisis. So we were earning about $30 million from OshKosh in 2010 before cotton happened, about an 8% operating margin, so I'd say it's pretty good for our space, not Carter's, but nothing is Carter's. And so, the operating margin largely got wiped out with cotton. We showed good progress with profitably last year. My vision for OshKosh, what today, last year was a $430 million business, with reasonable growth assumptions, grows to a $600 million business over the next 5 years and we get back to some portion of a 10% to 12% operating margin, which is more than what we earned in 2010, of 8%. In 2010, we didn't have this rich eCommerce business, which is very high margin. We didn't have Canada, which is a very rich margin, and they're selling OshKosh B'Gosh. And we didn't have this focus, we didn't have direct sourcing operations in Hong Kong, which we have now, so all those things together give me a comfort level that achieving an 8% to 10% operating margin is possible for OshKosh. Thanks for joining us. I appreciate your time this morning.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Thanks, Mike.

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