We are the largest branded marketer in the United States of apparel exclusively for babies and young children. We own two of the most highly recognized and most trusted brand names in the children’s apparel industry, Carter’s and OshKosh. Established in 1865, our Carter’s brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to seven. In fiscal 2005, we acquired OshKosh B’Gosh, Inc. Established in 1895, OshKosh is recognized as a well-known brand that is trusted by consumers for its line of apparel for children sizes newborn to 12. We have extensive experience in the young children’s apparel market and focus on delivering products that satisfy our consumers’ needs. We market high-quality, essential core products at prices that deliver an attractive value proposition for consumers.
We have developed a business model that we believe has multiple platforms for growth and is focused on high volume and productivity. Our Carter’s, OshKosh, and related brands are sold to national department stores, chain and specialty stores, discount retailers, and, as of January 2, 2010, through our 276 Carter’s and 170 OshKosh outlet and brand retail stores. We believe each of our brands has its own unique positioning in the marketplace. Our brands compete in the $23 billion children’s apparel market, for children sizes newborn to seven, with our Carter’s brand achieving the #1 branded position. We offer multiple product categories, including baby, sleepwear, playclothes, and other accessories. Our distribution strategy enables us to reach a broad range of consumers across various channels, socio-economic groups, and geographic regions.
Since fiscal 2005, including OshKosh, we have increased consolidated net sales at a compound annual growth rate of 9.2%. Since fiscal 2006, our first full year of sales from OshKosh, we have increased consolidated net sales at a compound annual growth rate of 6.0%. Our pre-tax results have ranged from income of $75.9 million in fiscal 2005 to $183.8 million in fiscal 2009, with the exception of fiscal 2007 in which we had a pre-tax loss of $37.3 million. In fiscal 2007, our pre-tax results were impacted by OshKosh related intangible asset impairment charges of $154.9 million and distribution facility closure costs of $7.4 million related to further integrating OshKosh. In fiscal 2008, our pre-tax results were decreased by executive retirement charges of $5.3 million and a write-down of $2.6 million on our White House, Tennessee distribution facility. In fiscal 2009, our pre-tax results were decreased by $5.7 million related to professional service fees incurred in connection with the customer margin support investigation, $5.5 million related to the reduction in the Company’s corporate workforce, $4.3 million of expenses associated with the closure of the Company’s Barnesville, Georgia distribution facility (including accelerated depreciation), $1.2 million of asset impairment charges net of gain associated with the closure and sale of the Company’s Oshkosh, Wisconsin facility, and a $0.7 million related to the write-down of the carrying value of our White House, Tennessee distribution facility.
The Company is a Delaware corporation. The Company and its predecessors have been doing business since 1865. The Company’s principal executive offices are located at The Proscenium, 1170 Peachtree Street NE, Suite 900, Atlanta, Georgia 30309, and our telephone number is (404) 745-2700.
OUR BRANDS, PRODUCTS, AND DISTRIBUTION CHANNELS
CARTER’S BRANDS
Under our Carter’s brand, we design, source, and market a broad array of products, primarily for sizes newborn to seven. Our Carter’s brand is sold in department stores, national chains, specialty stores, off-price sales channels, and through our Carter’s retail stores. Additionally, we sell through the mass channel our Just One Year and Precious Firsts brands at Target and our Child of Mine brand at Walmart. In fiscal 2009, we sold over 228 million units of Carter’s, Child of Mine, Just One Year, and Precious Firsts products to our wholesale customers, mass channel customers, and through our Carter’s retail stores, an increase of approximately 2% from fiscal 2008. Under our Carter’s and Just One Year brands, sales growth has been driven by our focus on essential, high-volume, core apparel products for babies and young children. Such products include bodysuits, pajamas, blanket sleepers, gowns, bibs, towels, washcloths, and receiving blankets. Our top ten baby and sleepwear core products accounted for approximately 67% of our baby and sleepwear net sales in fiscal 2009, including the mass channel. We believe these core products are essential consumer staples, less dependent on changes in fashion trends, and supported by a strong birth rate and other favorable demographic trends.We have four cross-functional product teams focused on the development of our Carter’s baby, sleepwear, playclothes, and mass channel products. These teams are skilled in identifying and developing high-volume, core products. Each team includes members from merchandising, design, sourcing, product development, forecasting, and supply chain logistics. These teams follow a disciplined approach to fabric usage, color rationalization, and productivity and are supported by a dedicated art department and state-of-the-art design systems. We also license our brand names to other companies to create a complete collection of lifestyle products, including bedding, hosiery, underwear, shoes, room décor, furniture, gear, and toys. The licensing team directs the use of our designs, art, and selling strategies to all licensees.
We believe this disciplined approach to core product design reduces our susceptibility to fashion risk and supports efficient operations. We conduct consumer research as part of our product development process and engage in product testing in our own stores. We analyze quantitative measurements such as pre-season bookings, weekly over-the-counter selling results, and daily re-order rates in order to assess productivity.
CARTER’S BRAND POSITIONING
Our strategy is to drive our brand image as the leader in baby and young children’s apparel and to consistently provide high-quality products at a great value to consumers. We employ a disciplined merchandising strategy that identifies and focuses on core products. We believe that we have strengthened our brand image with the consumer by differentiating our core products through fabric improvements, new artistic applications, and new packaging and presentation strategies. We also attempt to differentiate our products through store-in-store fixturing and branding packages and advertising with our wholesale and mass channel customers. We have invested in display units for our major wholesale customers that more clearly present our core products on their floors to enhance brand and product presentation. We also strive to provide our wholesale and mass channel customers with a consistent, high-level of service, including delivering and replenishing products on time to fulfill customer needs.
CARTER’S PRODUCTS
Baby
Carter’s brand baby products include bodysuits, undershirts, towels, washcloths, receiving blankets, layette gowns, bibs, caps, and booties. In fiscal 2009, excluding mass channel sales, we generated $404.0 million in net sales of these products, representing 25.4% of our consolidated net sales.
Our Carter’s brand is the leading brand in the baby category. We sell a complete range of baby products for newborns, primarily made of cotton. We attribute our leading market position to our brand strength, distinctive print designs, artistic applications, reputation for quality, and ability to manage our dedicated floor space for our retail customers. We tier our products through marketing programs targeted toward gift-givers, experienced mothers, and first-time mothers. Our Carter's Starters product line, the largest component of our baby business, provides parents with essential core products and accessories, including value-focused multi-packs. Our Little Collections product line consists of coordinated baby programs designed for first-time mothers and gift-givers.
Playclothes
Carter’s brand playclothes products include knit and woven cotton apparel for everyday use in size three months to size seven. In fiscal 2009, we generated $351.7 million in net sales of these products, excluding the mass channel, or 22.1%, of our consolidated net sales. We have focused on building our Carter’s brand in the playclothes market by developing a base of essential, high-volume, core products that utilize original print designs and innovative artistic applications.
Sleepwear
Carter’s brand sleepwear products include pajamas, cotton long underwear, and blanket sleepers in size 12 months to size seven. In fiscal 2009, we generated $187.4 million in net sales of these products, excluding the mass channel, or 11.8%, of our consolidated net sales. Our Carter’s brand is the leading brand of sleepwear for babies and young children within the department store, national chain, outlet, specialty store, and off-price sales channels in the United States. As in our baby product line, we differentiate our sleepwear products by offering high-volume, high quality core products with distinctive print designs and artistic applications.
Mass Channel Products
Our mass channel product team focuses on baby, sleepwear, and playclothes products produced specifically for the mass channel. Such products are differentiated through fabrications, artwork, and packaging. Our Child of Mine product line, which is sold in substantially all Walmart stores nationwide, includes layette, sleepwear, and playclothes along with a range of licensed products, such as hosiery, bedding, toys, furniture, and gifts. We also sell our Just One Year and Precious Firsts brands to Target, which include baby, sleepwear, and baby playclothes along with a range of licensed products, such as hosiery, bedding, toys, furniture, gear, and gifts. In fiscal 2009, we generated $240.8 million in net sales of our Child of Mine, Just One Year, and Precious Firsts products, or 15.1%, of our consolidated net sales.
Other Products
Our other product offerings include bedding, outerwear, swimwear, shoes, socks, diaper bags, gift sets, toys, and hair accessories. In fiscal 2009, we generated $67.9 million in net sales of these other products in our Carter’s retail stores, or 4.3%, of our consolidated net sales.
Royalty Income
We currently extend our Carter’s, Child of Mine, and Just One Year product offerings by licensing these brands to 17 domestic marketers in the United States. These licensing partners develop and sell products through our multiple sales channels while leveraging our brand strength, customer relationships, and designs. Licensed products provide our customers and consumers with a range of lifestyle products that complement and expand upon our core baby and young children’s apparel offerings. Our license agreements require strict adherence to our quality and compliance standards and provide for a multi-step product approval process. We work in conjunction with our licensing partners in the development of their products and ensure that they fit within our brand vision of high-quality, core products at attractive values to the consumer. In addition, we work closely with our wholesale and mass channel customers and our licensees to gain dedicated floor space for licensed product categories. In fiscal 2009, our Carter’s brand and mass channel licensees generated wholesale and mass channel net sales of $211.3 million on which we earned $18.5 million in royalty income.
In fiscal 2008, we extended the Carter’s brand licensing arrangements internationally with three licensees who currently license the OshKosh brand. In connection with these arrangements, our international licensees generated Carter’s brand retail sales of $17.7 million on which we earned $0.7 million in royalty income in fiscal 2009.
CARTER’S DISTRIBUTION CHANNELS
As described above, we sell our Carter’s brand products to leading retailers throughout the United States in the wholesale and mass channels and through our own Carter’s retail outlet and brand stores. In fiscal 2009, sales of our Carter’s brand products through the wholesale channel, including off-price sales, accounted for 32.8% of our consolidated net sales (32.7% in fiscal 2008), sales through our retail stores accounted for 30.8% of our consolidated net sales (28.3% in fiscal 2008), and sales through the mass channel accounted for 15.1% of our consolidated net sales (17.0% in fiscal 2008).
Business segment financial information for our Carter’s brand wholesale, Carter’s brand retail, and Carter’s brand mass channel segments is contained in Item 8 – “Financial Statements and Supplementary Data,” Note 14 – “Segment Information” to the accompanying audited consolidated financial statements.
Our Carter’s brand wholesale customers include major retailers, such as Kohl’s, Toys “R” Us, Costco, JCPenney, Macy’s, Bon Ton, and Sears. Our mass channel customers are Target and Walmart. Our sales professionals work with their department or specialty store accounts to establish annual plans for our baby products, which we refer to as core basics. Once we establish an annual plan with an account, we place the majority of our accounts on our automatic replenishment reorder plan for core basics. This allows us to plan our sourcing requirements and benefits both us and our wholesale and mass channel customers by maximizing our customers’ in-stock positions, thereby improving sales and profitability. We intend to drive continued growth with our wholesale and mass channel customers through our focus on managing our key accounts’ business through product mix, fixturing, brand presentation, advertising, and frequent meetings with the senior management of our major wholesale and mass channel customers.As of January 2, 2010, we operated 276 Carter’s retail stores, of which 173 were outlet stores and 103 were brand stores. These stores carry a complete assortment of first-quality baby and young children’s apparel, accessories, and gift items. Our stores average approximately 4,600 square feet per location and are distinguished by an easy, consumer-friendly shopping environment. We believe our brand strength and our assortment of core products has made our stores a destination location within many outlet and strip centers. Our outlet stores are generally located within 20 to 30 minutes of densely-populated areas. Our brand stores are generally located in high-traffic, strip centers located in or near major cities.
We have established a real estate selection process whereby we fully assess all new locations based on demographic factors, retail adjacencies, and population density. We believe that we are located in many of the premier outlet centers in the United States and we continue to add new brand store locations to our real estate portfolio.
OSHKOSH BRANDS
Under our OshKosh brand, we design, source, and market a broad array of young children’s apparel, primarily for children in sizes newborn to 12. Our OshKosh brand is currently sold in our OshKosh retail stores, department stores, national chains, specialty stores, and through off-price sales channels. In fiscal 2009, we sold over 47 million units of OshKosh products through our retail stores and to our wholesale customers, an increase of approximately 2% over fiscal 2008. We also have a licensing agreement with Target through which Target sells products under our Genuine Kids from OshKosh brand. Given its long history of durability, quality, and style, we believe our OshKosh brand continues to be a market leader in the children’s branded apparel industry and represents a significant long-term growth opportunity for us, especially in the $16 billion young children’s playclothes market. While we have made significant progress integrating the OshKosh business, our plans to grow the OshKosh brand in the wholesale and retail store channels have not met our expectations to date. We continue to focus on our core product development and marketing disciplines, improving the productivity of our OshKosh retail stores, investing in new employees and talent development, leveraging our relationships with major wholesale accounts, and leveraging our infrastructure and supply chain.
OSHKOSH BRAND POSITIONING
We believe our OshKosh brand stands for high-quality, authentic playclothes products for children sizes newborn to 12. Our core OshKosh brand products include denim, overalls, t-shirts, fleece, and other playclothes for children. Our OshKosh brand is generally positioned towards an older segment (sizes two to seven) and at slightly higher average prices than our Carter’s brand. We believe our OshKosh brand has significant brand name recognition, which consumers associate with rugged, durable, and active playclothes for young children.
OSHKOSH PRODUCTS
Playclothes
Our OshKosh brand is best known for its playclothes products. In fiscal 2009, we generated $243.0 million in net sales of OshKosh brand playclothes products, which accounted for approximately 15.3% of our consolidated net sales. OshKosh brand playclothes products include denim apparel products with multiple wash treatments and coordinating garments, overalls, woven bottoms, knit tops, and playclothes products for everyday use in sizes newborn to 12. We plan to grow this business by strengthening our product offerings, improving product value, reducing product complexity, and leveraging our strong customer relationships and global supply chain expertise. We believe our OshKosh brand represents a significant opportunity for us to increase our share as the $16 billion young children’s playclothes market, including the mass channel, is highly fragmented.
Other Products
The remainder of our OshKosh brand product offering includes baby, sleepwear, outerwear, shoes, hosiery, and accessories. In fiscal 2009, we generated $94.9 million in net sales of these other products in our OshKosh retail stores, which accounted for 6.0% of our consolidated net sales.
Royalty Income
We partner with a number of domestic and international licensees to extend the reach of our OshKosh brand. We currently have six domestic licensees, as well as 23 international licensees selling apparel and accessories in approximately 36 countries. Our largest licensing agreement is with Target. All Genuine Kids from OshKosh products sold by Target are sold pursuant to this licensing agreement. Our licensed products provide our customers and consumers with a range of OshKosh products including outerwear, underwear, swimwear, socks, shoes, and accessories. In fiscal 2009, our domestic licensees generated wholesale and mass channel net sales of approximately $184.0 million on which we earned approximately $9.3 million in royalty income. In fiscal 2009, our international licensees generated retail sales of approximately $114.8 million on which we earned approximately $7.9 million in royalty income.
OSHKOSH DISTRIBUTION CHANNELS
In fiscal 2009, sales of our OshKosh brand products through our OshKosh retail stores accounted for 16.2% of our consolidated net sales (16.7% in fiscal 2008) and sales through the wholesale channel, including off-price sales, accounted for 5.1% of our consolidated net sales (5.3% in fiscal 2008).
As of January 2, 2010, we operated 170 OshKosh retail stores, of which 158 were outlet stores and 12 were brand stores. These stores carry a wide assortment of young children’s apparel, accessories, and gift items and average approximately 4,700 square feet per location.
Our OshKosh brand wholesale customers include major retailers, such as Kohl’s, Bon Ton, JCPenney, Fred Meyer, Sears, Belk, and Costco. We continue to work with our department and specialty store accounts to establish seasonal plans for playclothes products. The majority of our OshKosh brand playclothes products will be planned and ordered seasonally as we introduce new products.
GLOBAL SOURCING NETWORK
We have significant experience in sourcing products internationally, primarily from Asia, with expertise that includes the ability to evaluate vendors, familiarity with foreign supply sources, and experience with sourcing logistics particular to Asia.We also have relationships with both leading and certain specialized sourcing agents in Asia.
Our sourcing network consists of approximately 90 vendors located in approximately 14 countries. We believe that our sourcing arrangements are sufficient to meet our current operating requirements and provide capacity for growth.