Carters, Inc. Q2 2008 Earnings Call Transcript

| About: Carter's, Inc. (CRI)

Carter’s, Inc. (NYSE:CRI)

Q2 2008 Earnings Call

July 23, 2008 8:30 am ET


Frederick Rowan, II - Chairman of the Board & Chief Executive Officer

Joseph Pacifico - President

Michael Casey - Chief Financial Officer & Executive Vice President.

Eric Martin - Vice President of Investor Relations


Omar Saad - Credit Suisse

Brad Stephens - Morgan Keegan

Margaret Whitfield - Sterne, Agee

Ben Rockbottom - Goldman Sachs

Jim Chartier - Monness, Crespi & Hardt


Welcome to Carter's second quarter earnings conference call. On today’s call are Mike Casey, Chief Financial Officer; Joe Pacifico, President and Jim Petty, President of Retail Stores. 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 is 404-745-2889.

Carter’s issued its second quarter earnings release yesterday after the market closed. The text of the release appears on Carter’s website at 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 this call the company will reference various non-GAAP financial measurements. A reconciliation of those non-GAAP financial measurements to the GAAP financial measurements is provided in the company’s earnings release. We would also like to remind you that today’s call is being recorded and now I would like to turn the call over to Mr. Casey. Please go ahead sir.

Michael Casey

Thank you very much. Good morning everybody. Thanks for joining us on our call. What we like to do is walk you through our results in a new format this morning. We have presentation that we hope gives you better understanding of our results and more importantly the opportunities we have to improve our performance, particularly with respect to the OshKosh segment.

So, for those of you are joining us online we’ll start on page two. Our sales for the second quarter were better than we expected. We have growth in all but one business segment. Our sales were up 5% driven primarily by the strength of our Carter’s retail stores, which grew its comp stores sales over 17%.

We continue to see a very significant return from the investments made over the past year upgrading our retail team and strengthening our product offering. Overall I would say we’re weathering a very challenging retail environment. With respect to earnings, on our call in April we had expected our earnings in the quarter would be about breakeven to a small loss. On a GAAP basis, our earnings were $0.05 per share including charges related to Fed Rowan’s retirement.

On an adjusted basis excluding those charges earnings were $0.10 a share. I would say at least $0.06 of the $0.10 we’re reporting is due to earlier than planned shipments and the timing of spending. Given the uncertainty in the economy and the fact that the most important part of our year is still ahead of us, I’d say it’s pretty mature to assume the $0.10 we picked up in the second quarter is upside to our previous estimates for the year.

We’ve made good progress controlling the growth of our inventories. On our last call we had expected inventories could be up as much as 20% at the end of June. That projected increase reflected our decision to bring in goods early to avoid disruption from the threatened West Coast dock strike. By bringing the goods in early, we were able to ship more in the second quarter than we planned; as a result inventories grew only 8% at the end of June. You should expect mid-single digit growth in inventories for the balance of the year.

Our cash flow continues to be very good. This will enable us to continue to make investments in our business including repurchasing our shares. Our outlook for the year is consistent with the guidance we shared with you on our last call. So we don’t believe the consumer feels any better about spending their money in the second half of this year than they did in the first half of this year.

We are fortunate to be doing business in the young children’s apparel which we feel is a less discretionary purchase. We believed this gives us an advantage in this tough retail period. As you know we serve a broad range of consumers at multiple retailers and in multiple channels. Wherever you’re shopping for young child you’d likely see the Carter’s or an OshKosh brand well presented on the floor offering significant value to the consumer.

On page three, you have our leadership team and you can see to the far right the numbers of years each of us have invested in Carter’s. I’m very fortunate to have this depth in talent to support me. For most of the past 16 years this team has delivered exceptional results for its investors. It’s not been the case over the past couple of years due largely for the lack of progress with the OshKosh acquisition.

We’re committed to fixing what has eroded our shareholder value. Our executives have a substantial portion of their network tied into Carter’s performance. We’re heavily incentivised to turn this business around and we’re confident we will. Our near term focus is to strengthen our retail performance and to fix OshKosh.

On page four you have a snapshot of the growth and sales for each component of our business. We had growth in each business segment expect for Child of Mine, which Joe will discuss with you.

On page 5, you have our second quarter P&L. I think it is important for you to know that the second quarter is the lightest quarter in terms of sales and earnings contribution. It typically contributes about 20% of our annual sales and less than 10% of our annual operating income. Our gross profit margin in the quarter was comparable to last year. What we gained in better margins in our Carter stores we gave back in lower margins in our wholesale segment. I’ll walk you through the segment profitability in a few minutes.

As expected, SG&A grew at a rate faster than gross profit dollars. SG&A is up about $8 million which includes a $6 million increase in retail store and administrative expenses. I have highlighted the unusual charges in both periods which for 2008 reflect the charges related to Fred’s retirement. In 2007 those charges related to the OshKosh impairment and plant plungers. At the bottom of the page you have EPS on a GAAP and adjusted basis.

On page six, we reconcile the GAAP to adjusted earnings. In footnote A at the bottom of the page you have the components of the charges related to Fred’s retirement. On page seven we have our second quarter segment profitability. Carter’s operating margin decreased 70 basis points in the quarter. That decrease in our wholesale margin includes the impact of higher cancellations at the tail end of the spring season. Those cancellations resulted in higher provisions for excess inventory and higher discounts to sell the product.

Directionally our cancellation rate is typically a low single-digit percentage of bookings. It was a high single-digit for the spring season. As you know many retailers took steps to reduce their inventory commitment in the first half of this year. That had a negative impact on our results. The lower margin also includes higher provisions for bad debts.

At OasKosh the operating losses were higher in both segments. Over the past few months we were aggressively reducing our spring and prior period inventories, to get a cleaner mix of inventory going into the second half of the year. I would say that we’re in very good shape heading into the second half.

On page eight you have the cash flows for the first half of the year. We ended the quarter with a stronger than expected cash position. We generated $24 million in cash flow from operations with better earnings and lower growth in inventory. For the year we expect our excess cash flow will be about $30 million.

Then on page nine we have a summary of our share repurchase activity. We have $23 million remaining in our share repurchase program. We’ll resume purchasing shares when the window reopens for us this Friday.

I’ll turn the call over now to Jim Petty, he’ll review the retail results with you.

Jim Petty

Thanks Mike, good morning everyone. Our retail results are found on page 10. I just finished my first year of the business and I had the opportunity to build the strong accounted team.

Our key focus of returning the profitability of Carter’s retail has been accomplished. This is indicated by 17% comparable store sales performance by Carter’s retail during the second quarter and the fourth consecutive quarter of four wall operating margin improvements. This past year I’ve seen improvements in talent, in-store presentation, price clarity, value, equation, marketing, service levels and inventory management.

Our strong results during the second quarter were driven by comparable store sales performance in all product categories accompanied by better margins and positive performance in all key performance indicators including transactions, average transaction, units per transaction and average price.

Second quarter results indicates significant momentum and strong customer acceptance in the Carter’s retail business. The third quarter is off to a good start and our confidence in the business continues and although the economic environment continues to be increasingly challenging, we anticipate healthy comparable stores sales performance for Carter’s retail accompanied by strong margins and better managed inventories.

Turning to OshKosh, results can be found on page 11. As we shared with you on the last call, the focus at OshKosh retail as been to clear excess inventory levels and in turn set the base for a strong margin business; a deal of this has been accomplished. Before I elaborate on further actions we’re taking, let me share with you a couple of key points.

OshKosh is a robust business. Our average store does $1.1 million in sales. We have more than enough customers, transactions and units per transaction to support a very productive and profitable business. Therefore, our continued focus will be on product mix and margin.

Positive comparable store sales performance should follow, however our primary focus will be on improved margin and inventory management. In addition, we have improved our buying organization with the placement of a new GMM, who brings with him strong retail experience and seven years of playwear experience from Carter’s.

Also not unlike, what we’ve accomplished with the Carter’s business, we’re dramatically improving in-store presentation to include body forms, tables, fixtures, marketing collateral and signage. This should improve our overall in-store experience and provide for a more effective lifestyle presentation. Early reeds on fall performance are strong in both top-line and margin performance.

For the third quarter you should expect flat and slightly negative comparable store sales with improved gross margin quality and four-wall contribution. We expect second half operating profit to increase at least 15% as compared to last year. Now I’ll hand it over to Joe Pacifico.Joseph PacificoThanks Jim. Good morning. I will start with Carter’s wholesale which is on page 12. Carter’s wholesales sales were up 1% for the quarter and 3% for the half. I think the peak key take away is we did have lower average unit price in the second quarter, which is primarily due to increased discounts, which will result in higher cancellation.Looking forward to our fall-line one we believe we have a much more compelling product offering this year versus last year. Secondly, we are driving an everyday low pricing strategy that should provide price clarity and a stronger value message to the consumer and in turn increase the number of units sold before permanent market downs.Third, we have got more competitive with our pricing in certain product categories and those categories represent about 15% of the sales of our fall-line. I think it’s very important to note these strategies will have no meaningful effect on our product margins and fourth of all we’re planning to implement over 400 in-store shops.

While customers have responded to these initiatives and booked fall positively we have had to adjust our forecast downward to compensate for plan cancellations with our high credit risk accounts. Net results, we are projecting the second half and the year to finish flat to up low single-digit. We are currently selling in our spring ’09 line and we also are projecting growth of long single-digits. Page 13 shows our in-store shop. This shop pulls together our three product markets, baby sleepwear and playwear in the 0 to 24 month size range. The objective of the shops is one, to drive top-line growth; two, increase brand awareness and three, provide a convenient and compelling shopping environment for the mother. We’re also committing to service these shops with our retail merchandising organization. Our test results prove significantly better than the rest of the chain. We are expecting at least 10% to 15% sales lift on the $400 which should be in place prior to the holidays.

Please turn to page 14, Mass Channel Results. Consolidate sales for the quarter were down 14% and down 6% for the first half. In the mass channel we have two distinct set of results. At just one year our branded targets, very consistent and positive story. Good over the counter and a good sales performance. For the half, sales were up 12% and we project the year to be up low double-digits.

In regards to Child of Mine to Wal-Mart as we have discussed on the last call, product performance for this spring season which carried in for the second quarter was not good. Child of Mine was down 22% in the quarter and 16% for the half. We believe we have corrected these issues in our fall-line by strengthening product value. Early fall selling we’re corrective of these change, is off to a positive start. We project fall performance in Child of Mine to drive positive second half growth. We are projecting Child of Mine, down to mid single-digits for the year, because of the first half actual.

Turn to page 15 and in OshKosh; wholesale, their performance has not being good. Really our 2008 sales are a direct result of our product performance last year. In order to drive positive bookings going forward we really have to accomplish two things; one, to increase the product sell through percentages before far marked down and two, improve our retail customer’s natural margins.

We saw a good improvement of both of these areas with our spring/summer ’08 lines. The consumers responded very well to the product, was led to improved sell-through percentages. Our sell-through went to from 44% last year before the term to 55% this year. At the same time we also saw a significant improvement in retail natural margins over the prior year. Based on the positive year-to-date performance, which we believe we’ll continue with for the second half of this year we are expecting to see an increase in spring ’09 bookings.

And now I’ll turn it back to Mike.

Michael Casey

Okay, thanks Joe. On pages 16 and 17 we want to give you a sense for what we feel is the progress and potential of the OshKosh brand. On page 16 we’ve summarized the key milestones we see in the OshKosh turnaround. We are encouraged by the recent trends in the OshKosh retail segment, which represents about 80% of OshKosh’s sales. In the three years that we’ve owned OshKosh, we’ve had three different retail management teams; there is no question that level of turnover has hurt us.

A year ago, Jim Petty and his team begin executing a more disciplined approach to managing our retail operations. You have seen the better performance in Carters. We’re hopeful beginning in the second half of this year; we’ll deliver better results in our OshKosh stores.

As we’ve improved inventory management this year we’ve seen a better trend in comps and products margins. We expect the OshKosh retail metrics will improve sooner than the wholesale metrics. We control the floor in our stores. As we show progress in our own stores with OshKosh we believe better results will follow at wholesale.

As Joe discussed in the wholesale segment, the consumer is responding more positively to the OshKosh product. Our wholesale customer’s sell throughs and margins are improving. Achieving those two milestones is an important step in building confidence with our wholesale customers that OshKosh is a growth brand. We’ve planned to show better performance in OshKosh wholesale segment in the first half of the next year. Retail results are improving; we expect to show better profitability from that segment in the second half of this year.

On page 17, we’ve summarized what we believe are reasonable growth assumptions for OshKosh. Suffice it to say we’d be disappointed, if this is all we can achieve. Despite OshKosh’s, brand strength its performances is a fraction of what we’ve achieved at Carter’s.

In the retail segment, we believe it’s fair to assume that we can grow the number of stores by at least 10% a year on average over the next five years. That would bring the store account to 260 stores by 2013. By the end of this year, Carter’s will have approximately 250 stores. We currently do about $1.4 million in sales for each OshKosh’s store. In the opportunities presented we’ve tapered that to $1.2 million per store to give effect to the ramp up of new stores.

We believe it’s reasonable to assume that the retail operating margin could be at least 12%. Carter’s operating margin this year will be close to about 17.5%. At wholesale, the opportunities we’ve presented assume 10% annual growth in sales on average over the next five years that would bring sales to $120 million. Again we’ll be disappointed if we didn’t achieve that level of sales given Carter’s wholesale sales will be about $500 million this year. We believe there’s a meaningful upside potential to this assumption.

In the mass channel and international markets, we’ve assumed annual growth of 10% in royalty income. Collectively, these opportunities support over $60 million in operating income in 2013. As we firm up our 2009 plan later this year, we’ll give you more clarity on how much of this opportunity is possible next year.

And finally on page 18, our outlook for 2008, is consistent with what we shared with you on our last call. The second half growth will be more heavily weighted to fourth quarter, given the timing of fall orders. Third quarter sales are expected to be flat, with earnings down 20% to 25%. For the year, we expect low single digit growth in sales. Our earnings for the year are expected to be down 5% or more. If the current trends in our retail segment continue, earnings could be comparable from last year.

We expect to generate about $80 million in cash from operations. Inventories are expected to be up about 5% at the end of the year and we expect to invest about $50 million in CapEx largely in our retail segment.

That concludes our business overview. We hope it was helpful, and we’ll open up the call to your questions.

Question and Answer Session


(Operator Instructions) And for our first question we go to Omar Saad with Credit Suisse.

Omar Saad – Credit Suisse

A quick question Mike on just kind of a clerical question; did you say at the beginning of the call that $0.06 -- the quarter benefit is by $0.06 from earlier timing of shipments and expenses, I just want to make sure you clarify that?

Michael Casey

Absolutely, of the $0.10 I’d say probably $0.04 is due to better retail performance, better spending. I’d say the other $0.06 is largely due to the timing of shipments and timing of spending.

Omar Saad – Credit Suisse

So, I wanted ask you, if you look back at some of the comments from the last call, last quarter, you talked a lot of about, as a company talked about some of your strategic initiatives to lower pricing to retailer, raising retailer -- getting retailer margins going higher kind of in the phase of an inflationary kind of cost environments. So could you give us an update on those kinds of three dynamics where you stand on them, what inflation kind of impact you have been having and you expect it to have and whether you still want to continue to pursue that strategy?

Michael Casey

Going through the pricing I think we have clarified the object. Really it is to provide clarity and a stronger value message to the consumer and what you’re referring to was the pricing before the firm markdown. We probably caused a little confusion and that was interpreted for the whole season and that we are lowering wholesale prices accordingly. It’s really a change in more of the pricing strategy, the everyday pricing strategy consuming before firm markdown.

The second objective was really to increase, the customer and our margin. So, we really -- the strategy changed initial prices from high low to everyday low pricing on certain products, sell more prior to markdown and then reduce margin assistant at the end of the season. We based this on research we have done with stacks, but the bottom line is in the average wholesale prices probably went down about 4% and it was all attributed to one segment of the business which is about 15% of our revenue.

Our internal margins which is the playwear separates-- our internal margins we feel our new, there’s no impact to our total margins, so we are not lowering wholesale and lowering our internal margins.

Omar Saad – Credit Suisse

Okay any inflationary impacts on your cost structure?

Michael Casey

I would say Omar this year we’re in good shape. I would say spring we were seeing probably cost increases somewhere in the range of 1% to 2% and that wasn’t so significant that we couldn’t absorb it in our cost structure with some offsetting savings elsewhere in the business.

In terms of 2009 I think it’s well known that the expectation is possibly go up more than that. We expect that they will. We’ve been working with three and five and sharpening up our supply chain initiatives and other cost reduction opportunities we have in the company. So we believe today we have at least an equal amount of cost reduction opportunities to offset the cost input pressures and again as the year evolves, as we start to firm up our ’09 plan, we’ll give you more visibility on that.

I don’t think cost increase is anything new. The magnitude of those cost increases, I think is what has people concerned and fortunately we’ve got our heads up on it and we are on it. So, based on what we know in terms of the models we have for 2009 we feel that we’ll be able to offset any type of product costs increases.

Omar Saad – Credit Suisse

Okay and then can you clarify to those comment about some of your costumers, the quality, their credit and having to write-offs some receivables in the forward business?

Michael Casey

Sure, it’s been -- the report is you got a short list of retailers out there who are struggling with these -- went bankrupt that cost to some portion of a penny in the second quarter. You have got some others who I won’t mention by name, but that are on a short list that we’re concerned about, that are on credit hold and we have some exposures to them; we’ve worked that into our estimate. I would say as a company in the 15 years I’ve been here, we’ve never had this magnitude of bad-debt exposure, but we are on it and it’s adequately provide for and we worked it into our models, so I don’t expect that that’s going to be a meaningful impact of our earnings for the year.

Omar Saad – Credit Suisse

Okay, last quick question sorry; did you see the article in the U.S. today recently about kind of the new baby boom and the fact that’07 was the highest number of births in the U.S. since the 50’s or something like that, any comments around that?

Michael Casey

No, I think we -- listen we all think it’s good news, that’s a bright spark especially in our business and the birth rate has strong, the demographics, the overall demographic has been positive, people are spending more money on their children and that’s good for our business.

The beauty of our business, is unlike say years ago, but regardless of where you are in terms of income, if you’re strapped we’ve got terrific brands in Wal-Mart and Target. If you’re shopping at Kohl’s or Pennies we’ve got the great brands well presented. What’s interesting you see by the outlook results where the consumer is shopping? We’ve had very strong comps in Carter’s, the comps at OshKosh were better than we had expected.

So whereever you are shopping for young children, we are well presented. We don’t count on a strong birthrate to drive our numbers, but generally speaking the trend has been very positive in the birth rate.


For our next question we go to Brad Stephens with Morgan Keegan.

Brad Stephens - Morgan Keegan

Joe, couple of questions for you, to the goods that ship early I think it’s in the case of the retailers wanting the goods. Is this more on fashion goods or on replenishment goods and then is it fair to assume that that maybe the sell through levels have exceeded the selling and we’re now to a point that the flow is going to be more even going forward or will there be more de-stocking in your opinion?

Joseph Pacifico

To answer your question both of the big majority of what we shipped early was baby seasonal and baby starters. So that’s driving it and that also drives replenishment business in the second half of the year and that performance is off to a pretty good start. I’m not sure I understand for that level ….

Brad Stephens - Morgan Keegan

I just had a question if there asking for goods early, if we’re at a point that after retailers pulling back in inventories they’re now to probably the bottom of the cut backs?

Joseph Pacifico

Yes, I believe so. We shipped -- this June we’ve had the best shipping performances since I’ve been with Carter about getting our goods out the door and retailers revising bulk orders, its really been prettily amazing. We’ve thought maybe more difficult based on the environment; actually we had a great shipping performance on the Carter brand and all on time and we think it will be reflected in fall ’07.

Michael Casey

Perhaps to your point I think most retailers including Carter’s have gotten much more aggressive managing their inventories. Our first half, particularly the second quarter both in our own retail business and in wholesale, there was a very aggressive clean-up of spring and prior season inventories.

Generally speaking I think our retailers are clear with the inventory, have more conservative models in the second half of this year. We are seeing some movement of seasonal orders more to the right, we are seeing more of our full product shipping in the fourth quarter and that’s largely why the third quarter sales would be flat and the earnings will be down, because we are seeing more of that fall product moved into the light and we’re buy now wear now and simply be more conservative with the inventory models.

In terms of when do they really need fall products and they need it more at the tail end of September into October and November as opposed to July and August.

Brad Stephens - Morgan Keegan

Okay, the inventory levels, I think up 8% a lot better than what you had guided to, but I’m looking at your retail stores down pretty substantially; I guess that implies your wholesale inventories are up, so could you speak to and to that the shop-and-shops where we are at on the rollout of those and how does that impact your inventory levels?

Michael Casey

Okay, so I get to you’re point at our own retail stores both at Carter’s and OshKash. The inventory on a per-door basis is down about 10% year-over-year. So, again we’re very clean, we make sure that we didn’t carry a big mix of the spring product into the third quarter.

The increases largely what we’ve talked about in the last call, we’ve brought in about 18 days more inventory that we normally carry to get ahead of the threatened dock strike out on the West Coast. We want to make sure that there was no disruption in the flow of goods. That contract expired July 1. There has been some slowdown that hasn’t had any meaningful impact on our business because we’re carrying that extra inventory in our wholesale segment and time will tell.

I think if anything happens we will have more information in August but there is a strike and it’s shorter than a 18 day walkout, we’re in good shape. If it’s longer than that then we’ll have to access what impact if any it will have on our business. Yes, we’ll install over 400 shops probably late third quarter early fourth quarter and we’ll expect to see results over the holiday season.

Brad Stephens - Morgan Keegan

And then last question for Jim here; you said your comp positive 10 of the 13 weeks, was that at the beginning or at the end of the quarter and can you give us some more color on why you think your comp positive? I know you’ve talked a lot about getting sharper pricing in more basic items, is that what’s driving it?

Jim Patty

The price, the comping really has occurred in the OshKosh brand, I think is what you’re referring to?

Brad Stephens - Morgan Keegan


Jim Patty

It occurred really throughout the quarter. Our non-comps actually occurred in April week one where we were down significantly. On the quarter the brands would have comp positive if we had not to deal with the April weak one shift.

The reason for the positive comps in a large part comes down to inventory mix. We really focused aggressively on getting without carryover goods and as a result we were able to sell full price products and this has been our strategy throughout the second quarter. We go into now the third quarter, cleaner than I think probably the business has ever been and as a result we’re seeing some positive sales response to our fall business as well.

Brad Stephens - Morgan Keegan

Anything that would keep you from comping positive this quarter if that’s what the trend was really in Q2?

Jim Patty

Right now, our focus is on a profitable business. So as I said in my opening comments comps are going follow a well lined business, but this is all about margin improvement and that’s really going to our strategy and we are sticking to that focus.


We’ll go next to Margaret Whitfield, with Sterne, Agee.

Margaret Whitfield - Sterne, Agee

Good morning and congratulations on the quarter. Couple of questions; Mike for you, looking at page 17 it looks like there is a long-term commitment here to OshKosh, although I was under the impression that it was still being assessed. I wanted your point of view on OshKosh and options to the firm.

Then I guess for Joe, if you could give us a run down on the competitive situation of some of your key accounts, private label and brands, particularly Kohls of Jumping Beans and Garanimals at Wal-Mart, that would be appreciated and for Jim, if you could provide us with the running rate on the comps this quarter to-date and whether or not there’s any new merchandise focus for back to school such as more denim at OshKosh, that will be appreciated. Thanks.

Michael Casey

Thanks Margaret. Your two comments are correct, we continue to assess the potential of the OshKosh brand, we’re hopeful that the analysis that we’ve shared with you gives you the sense for why we are committed to it.

Again, as we think about this business, which is 80% retail, where we’ve had significant changes in leadership over the past few years, we’ve probably said many times that that issues we’ve had with OshKosh are not the brand, that they were self inflicted and that’s what we mean by self inflicted. We do not manage the acquisition properly in the numbers of years we made that we’re -- we know that we are fortunate that we have such a strong brand name, and with the trend that we're seeing on the business we’re encouraged that this day will meaningfully contribute to our performance going forward.

So, as we look at the longer-term we often ask ourselves sales “are you better with a single brand in Carter’s and owning the two best brands in the young kids phase?” which are Carter’s and OshKosh, and that answer is maybe one that we’re much better off owning two best brands and we’re setting certain timelines here as to give you a sense for when will we see better performance. Near-term, we will see it in retail. We saw it in the beginning in the second quarter as we started to crush the mix and level of inventory. I think we show meaningfully better profitability in the second-half of this year.

Wholesale will follow. I mean we’re earning our way back in the wholesale. Joe and I in fact have met with a lot of our top customers over the past six months. We walked them through our plans for OshKosh. The consistent thing is that they love the brands, they’ll hopefully fix it because when we fix it, it will contribute to their growth and to our growth, so we are committed to it; based on what you are seeing we are committed to it and that all we can promise you is we will continue to give you clear visibility on the progress that we’re making what the issues are, but we’re committed to fix it.

Joseph Pacifico

Were compared to standpoint I think we have a good understanding, private label and all of the competition out there. We estimate the three private brands by the level it could be as much as 50% of department, which still leaves 50% of $24 billion market open to us.

In specific talking about Jumping Beans, I think it’s a great program and Kohls does a great job, but I think probably they stated that they’re still growing the Carter’s business and we’re -- largely it is the number one or two brand competing with that private label, I think we’re really in good shape. One of the adjustments we did pay and we say that 15% of the business we did adjust was play ware segments to be more competitive with some retailer specific private labels. So, that was the adjustment we made in the pricing.

In regards to granules, again I think it’s a good brand and as we’ve stated we have taken action to really improve the value to the consumer in the Wal-Mart and Child of Mine product offering for fall. So we’ve made adjustments based on competition and we think our performance since then reflects that our changes were positive.

Margaret Whitfield - Sterne, Agee & Leach

And Jim?

Jim Petty

Hi Margaret; a couple of different points that you’re asking, but first it relates to the comp run; for the quarter and Carter’s comp run by month for April, May and June were 31.2, 15.6 and 6.7 again and in quarter 17.3 for OshKosh we were in negative flat 0.8 in April and then rebounded to a 2.6 and 0.8.

Margaret Whitfield - Sterne, Agee & Leach

I am sorry what was the last one for Jim?

Jim Petty


Margaret Whitfield - Sterne, Agee & Leach

And how are we running in July to date.

Michael Casey

We’re having good counts.

Jim Petty

We’re feeling good about it and on that note, let me kind of key on one point.

I tried to say in my opening, the OshKosh story is really about building margin. We’ve got $1.4 million in average store, that’s a robust volume in a 4,000 square foot average size box. So, our focus was we wanted to comps and comps are going to come are by building back the margin foundation of this business. At $1.4 million we could make a lot of money with strong margins, so that’s really going to be accomplish through effective inventory management, which again we cleared inventory in an aggressive way in the first half of this year.

I feel very good about how we are positioned now with the fall for second place and as a result we’re seeing some very solid margin performance out of the assortment. Then secondarily we’re working very closely with several on the assortment itself. This is a life style business, this is about capturing the kids needs that’s got to be a fun brand and that’s where it involves a lot of my time and my GMM’s time in the spend.

So now bouncing back to the second part of your question which is really about back-to-school focus or more specifically denim focus for back-to-school, we feel very strong about it Margaret, we’ve got a great denim assortment and our stores are better set from a visual perspective to highlight our denim assortment in the OshKosh business. So we feel good, we feel as though we’ve got the ammo to have a strong back-to-school and our collateral in our stores and our inventory levels will support that.

Margaret Whitfield - Sterne, Agee & Leach

Final question for Jim; any further additions to staff of note or are you pretty well set now?

Jim Pretty

I’m in a good place Margaret. I have been fortunate and I’ve been lucky enough to both internally from the support I had here in Atlanta, as well as people that have extremely rich backgrounds in the business have come in and joined me in Shelton and I’m very lucky, I’ve got a very good team and so we are in a good place.


(Operator Instructions) for our next question we go to [Ben Rockbottom] with Goldman Sachs.

Ben Rockbottom - Goldman Sachs

Just a quick question on SG&A spend; how should we think about that through the back half and is $18 million in incremental spend there still the right number. Thanks.

Michael Casey

Yes, we’re actually for the year we will see that SG&A will grow at a rate faster than we typically would like it to be, but that’s largely reflective of the investments that we’re making.

As we talked about on prior calls, they’re probably making incremental investments of roughly $0.18; of that $0.07 is being invested in our retail segments between the new leadership team, new systems including a new point of sale of register system for all stores both brands and planning and allocation systems for retail, we have some store growth where Jim has got of good plan to freshen up the stores, have new fixtures programs to present the product better, particularly at OshKosh. We have a new office for the retail group up in Connecticut that was a long overdue investment, that’s $0.07 of the $0.18.

As Joe talked about, we’ve got the shop rolling out in the second half, those newborn to 24 month old shops, we are going to support that with the good people making sure that that rollout is executed properly and the products is out of the back room and on the fixtures to present it as best as possible and that we’re also funding incentives that’s been $0.07 or $0.08 of the $0.18 this year to incentivise good people to help us turn the performance of this company around in a very difficult environment.

SG&A will continue to grow at a rate faster than we would like. We hope that in 2009 we’ll start to report that that’s normalized and we have good growth to get some leverage on the SG&A, but we’ve invested this year.


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

Jim Chartier - Monness, Crespi & Hardt

Could you just talk about the direct consumer marketing, how your mailings were in second quarter, what the plan is for third quarter?

Michael Casey

Sure Jim. Our direct marketing as been first of all significantly more effective from a collateral perspective, a creative perspective and these kind of put that out there. However, we’ve been able to leverage our database and we’ve grow our database in total by about 26%; now that’s in total. The 12 months customers, which are the most random customers have grown at a rate of about 43%.

We’ve enriched our database effectively over this past really 12 months, but definitely over the past quarter and the way that it’s kind of played out from a mailing perspective is that we’ve increased our mailings, our direct mailings by about a 100% over LOI and are really more effective and much more cost effective approach is now which has been our e-mails to our customers have now been going on a weekly basis. So the percentage has got off the charts since it relates to incremental over wide, but it’s been very, very solid in our redemption and have been good as well.

This is going to hold true for the second half of this year, for example we are expecting to drive traffic by doubling our direct e-mail impressions to $24 million for the OshKosh brand going to back to school and by direct I mean that’s the combination of both direct mail and email. Our total direct mail itself will go up to possibly a little over $1.4 million, which is 110% increase to LY and our email reach is much more deeper than that.

Jim Chartier - Monness, Crespi & Hardt

Yes, that’s very helpful, thank you and then your inventory per store down for Carters -- is inventory going to be any drag on comps going forward or do you have the inventory flowing to the stores later in the quarter?

Michael Casey

No, we feel very good about our position.

Jim Chartier - Monness, Crespi & Hardt

And any thoughts given that the performance of Carter’s retail over the last three four quarters on accelerating square footage growth going forward?

Michael Casey

Well, we have a gain plan to open a total 25 stores this year and we are obviously keeping our options opened to more aggressive growth go forward. We do believe that the growth rate in the retail segment moving our outlet for a significant opportunity and we are forming a strategy to obviously level the business as effectively as we possibly can.


And 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.

Michael Casey

Thank you very much. Thanks again for joining us on the call this morning. We appreciate your questions; we appreciate your support and understanding of the environment we are in and the things that we are trying to do to improve our performance. Suffice it to say I’ve been given a real opportunity to lead a very talented group of people here at Carter’s and a terrific company.

I’m very excited about the opportunities that we have ahead of us; the opportunities to improve our performance. I’m committed to delivering better results for our shareholders. We look forward to updating you again in October. Thank you very much.

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