Carter's Inc (CRI) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to Carter's first-quarter 2005 earnings conference call. On the call today are Fred Rowan, Chief Executive Officer; Joe Pacifico, President; and Mike Casey, Chief Financial Officer. After today's prepared remarks, we will take questions as time allows.

If you have any questions after today's call, direct them to Eric Martin, Vice President of Investor Relations. Mr. Martin's direct phone number is 404-745-2889. Again, that number is 404-745-2889.

Carter's issued its first-quarter press release yesterday after the market closed. The text of the release appears at Carter's web site at www.Carter's.com under the press release section.

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 Carter's most recent annual report filed with the Securities and Exchange Commission.

Now I would like to turn the call over to Mr. Rowan.

Thank you and good morning. We appreciate your joining our call. Joe, Mike, and I will each present today and I will begin with an overview of our business model.

We continue to lever successful results as our first quarter exceeded plan. Most importantly, we exceeded the plan on every critical component of our business. We feel confident this will continue to be the story because our strategic initiatives are broad enough and each has significant potential. No small issue as we have the ability to execute.

The strategic agenda is as follows. Delivering great essential core products, both in baby and sleepwear, which will continue to grow our marketshares. Growing rapidly in a large and growing playclothes category. Developing a successful retail store formula, building consumer brands in the mass channel and, finally, orchestrating a supply chain which fuels product superiority and leading-edge services.

I'd like to spend a few minutes discussing three subjects, all of which are strategically connected and should make us a better company. Those subjects are retail consolidations, Carter's brand study, and our own retail stores.

With regard to retail consolidations, we view the news regarding the mergers of Federated May Company, Sears Kmart, change of control at Toys R Us and Babies R Us, and JCPenney moving to the middle ground as an opportunity for us.

Each of these customers with the exception of Kmart we do not sell feel the Carter brand is essential to their business. Meaning, we are the national brand of choice for attracting and retaining the new mother and grandparent.

These consolidations, for the most part, are intended to create growth by brand building and to drive down cost through scale.

There will be either beneficial or adverse effects for suppliers. These retailers will be more dependent on companies with great brands who have large consumer bases and dependent on suppliers with significant resources for marketing support and supply chain expertise, which can lower costs and provide multiple services. They are reaching for a better model. Consequently, they require suppliers who have a better model.

The smaller player is in an adverse position. We think that bodes well for us as we have been preparing for that for several years. This leads me to the second subject matter, which is our Carter's brand study, Carter's The Brand Project.

We made a large investment several years ago which materially upgraded our merchandising operating and sourcing skills. Almost 2 years ago, we committed to elevated the Carter's brand. We connected it with experts in branding, floor layouts, and store design. Since then we have made remarkable progress and are approaching a consumer- and customer-brand and model that should be viewed as a major facelift.

Keep in mind I cannot be so specific about this for competitive reasons. However, over the next 2 years beginning with the launch of our spring '06 product line starting in September, there will be a material left in product benefits, brand awareness, emotional content and consumer-friendly formats for our wholesale customers and our stores.

We have done it the right way. It is a fact-based strategy, a derivative of heavy consumer research along with customer recommendations. Our intent is to solve the consumers' problem and our wholesale customers' problem which is what a great brand should do.

This brings me to the third subject, our own stores. We again based our research and working with a top retail store architect and tend to revitalize image and deliverables from the Carter's brand. We want that for our wholesale customers and our stores. We will launch several prototype-brand stores in November which will make our brands far more aspirational.

It will materially increase consumer satisfaction. Simultaneously, we will draw from this to launch formats for our wholesale account base. We will be communicating this to our customers late July and early August.

I will turn the session now over to Joe Pacifico.

Thanks Fred. We had a very strong quarter with consolidated revenue up 13% versus last year. I'll walk you through the results for each of our business units. But first I think it's important to understand what is driving our success.

Our fundamentals are solid and unchanged. We are the product leaders because of our focus on dominant core products and our disciplined product model, which is really to increase benefits and to reduce costs season after season. We have a balanced brand and product growth platform that we believe is a competitive advantage.

We also compete in the market that is characterized by a combination of both need and emotion. New babies are born and children continue to outgrow their clothes and people simply prefer to buy for their kids versus themselves.

Finally, we believe that winning brands are best in long-term growth. As you heard from Fred, we are accelerating our investments in our brands to ensure future growth and demand. For quarter 1, these fundamentals drove solid growth across all 3 brands in all channels and across all of our product markets. Our wholesale revenue was up 9%, including off-price, retail plus 14%, our discount up 24 and licensed revenue plus 11% for the quarter.

Our Carter's brand wholesale continues to be very strong. Net sales including off-price again were up plus 9 (indiscernible) the last year. Baby revenue was down 8 the last year and that was a decision we had made not to anniversary a marketing program from March 2004.

Sleepwear and play were up 15 and 30%, respectively, over last year.

As you all know, the retail community continues to consolidate and change. We believe the consolidated will continue to benefit us as retailers focus on the strongest consumer brands and we have proven to them that we can consistently drive their topline growth.

Also, regards to spring season we are selling very well at a faster rate than last spring and our inventories will be much cleaner than last year. We have fall booked and our sleepwear bookings are up 3 and playwear up 20. We are also very confident in the positive performance of fall because of the introduction of our new microdenier and our blanket fleece business as well as prewashing all of our cotton pajamas.

We are on track to achieve increases with all of our key accounts this year with the exception of Sears. Over 80% of our year is booked between fall and seasonal and new baby startups in the third and fourth quarter. We are on track to achieve all of our plans and expect to achieve our 8 to 10% topline growth in Carter's wholesale.

In retail, our results are excellent. Total revenue was plus 14% last year while comp stores are up 8.8. The key initiatives driving our growth is, remember, we had converted 150 of our doors to baby upfront which was to improve our shopability, more room between our fixtures, and more of a core product focus. We also continue to edit our assortment to each season and provide a clear key item pricing message to the consumer.

We feel very positive regarding a lot of the operational improvements we have made as well. Our shipments to retail are greatly improved and our inventory to the store floated the stores has been excellent this year. We see an opportunity to open additional doors last year. Our current -- this year. Our current plan is 12 store openings of 4 closings. We will update you on the opportunities to open more than 12 as the year evolves.

In regard to the mass channel, total mass channel revenue was plus 20% last year. We continue to drive powerful momentum in the mass channel. Child Of' Mine was up strong double digits. Our product and sellthroughs have been excellent across the board. We also launched playwear in the Child Of' Mine brand -- newborn playclothes -- the results have been very good, actually excellent. And we have one week selling on infant and toddler play which is our first venture there and we are showing for baby we probably ran on average about 10%. Playwear is about 15% for the first week.

At Target we launched our Just One Year brand in quarter 1. Initial performance got off to a little slower star than we expected. We made some mix changes quickly in March and now we are beating the plan in April. Program to date -- which is from their February 1 through 4/24, we are up double digits over the counter.

We are also on track to double-digit growth with the Joy brand for 2005. On the supply chain side, the operations side we continue to improve our performance. Service levels continue to get more excellent for the quarter. With that performance we have also managed to growth in our inventory to levels better than expected. Our four weeks of supply are comparable to last year and our inventory turns will be better in 2005.

Distribution and freight was also an excellent story. Our distribution spending was better than planned and less than last year and 13% more more unit volume.

In regard to global sourcing, our strategy as we've stated before continue to leverage our (indiscernible) scale, fewer factories and fewer countries and maximize our logistics efficiency. I'd say our consolidation is ahead of schedule. In fact in sleepwear for fall by moving through the engine base we've improved our margins 200 basis points better than the year before.

With that I'll turn it over to Mike Casey.

Good morning, everyone. I will comment on our first quarter results and then I'll update you on our outlook for the second quarter of the year. As you've heard we've had a strong start to the year. Our first quarter sales are 13%. Net income up 34%.

As Joe said we've had solid growth in each of our business segments -- the largest component growth coming from our retail channel driven by strong comp store growth of nearly 9%. We continue to improve our operating margins by lowering our product costs and leveraging operating expenses against higher levels of revenue. Also, had strong cash flow in the quarter which enabled us to accelerate our plans for debt reduction.

With respect to our retail stores we ended the first quarter with 181 stores, 28 stores in strip center locations which we now refer to as our brand stores. Delta had 153 outlet stores. We opened 1 brand store in the first quarter. Our retail store sales were up 14%.

The store conversions that we talked about last year to this new format, including baby product, moved up to the front of the store, had driven comp store growth in all categories. Through the first quarter our transaction accounts in our stores were up over 8%. Both units per transaction and average retail prices were a bit higher than last year. We've talked about the store segments in the past. We (indiscernible) retail portfolio down to 5 segments and all 5 store segments reported positive comps in the quarter. Our brand store locations continue to outperform the chain. Their comps were up nearly 20% in the first quarter.

Comps for the mill outlet stores were up about 13%. These are outlet stores in indoor malls.

Comps for the trade area outlet stores were up about 10%. These are outlet stores in densely populated areas. Stores at our tourist locations were up 8%. And comp stores for our drive-to outlet stores were up 5%. Those are the traditional outlet stores. So good performance across the board.

The next largest component of growth came from our mass channel business with revenues up about 20% in the first quarter. This growth was driven by our Child of Mine brand. With a successful launch of newborn playwear and we also had good growth in our baby sleepwear and hanging layette products.

The last component of growth was driven by the wholesale channel. Revenues from our Carter's brand wholesale business -- excluding off-price sales -- we are up about 6%. Our playwear business was the largest contributor to this growth -- up over 30%. Season to date our spring playwear shipments -- which began shipping last November -- were up 36% through March.

Our sleepwear business also contributed to the first quarter growth -- up 14%. Season-to-date our spring sleepwear shipment through March were up about 18%. As Joe said, our Baby product category was down in the quarter due primarily to the fact we didn't anniversary certain product launches. We are projecting mid single digit growth for Baby for the year.

With respect to our margins, our operating margins grew 140 basis points. Excluding plant closure costs in 2004, our operating margins grew 110 basis points. And of that 110 basis points 40 points came from better product margins, 70 points came from operating leverage and SG&A. Our Sourcing Group has done a terrific job finding opportunities to lower product costs. We've improved the product margins in each of our wholesale, retail, and Child Of Mine businesses.

The improvement in SG&A was driven by controlling the growth in spending particularly with respect to our distribution costs, which improved 60 basis points relative to sales. We are seeing a nice return from the investments we made in our new distribution center over the past couple of years.

So for the year our operating margins are projected to be up about 50 to 70 basis points. Operating margin should be around 13% for the year.

In terms of royalty income for growth in the quarter, royalties were up 11% driven by the growth in licensed product sales that are our Carter's and Just One Year brands.

In terms of liquidity, cash flow from operations in the first quarter was approximately $25 million. That is nearly twice the 13 million generated in the first quarter of 2004.

Cash flow was driven by the growth in earnings and (indiscernible) changes in working capital, particularly the reduction in receivables.

Inventories at the end of the first quarter, up about 17% compared to March 2004. We discussed the inventory levels on our last call, tough year-over-year comparison. Our March 2004 inventories were 8% lower than the previous year. We felt that the time we had run to lean on inventory and we've built inventories to improve our shipping performance, which as Joe shared with you, we have. We're projecting inventories at the end of the second quarter to be up 10 to 12%. That's more in line with our projected revenue growth.

The turns for the year will be 3.7 turns and that's comparable to last year. Our strong cash position enable us to accelerate debt reduction. We made a voluntary payment of $20 million on the term loan in the first quarter. Since March of 2004, we reduced long-term debt by 20%.

CapEx for the first quarter was a couple of million dollars from investments in our retail stores and that fixed rate with key wholesale customers. We expect CapEx for the year to be in the range of $20 to $25 million. Cash flow for the year is projected to be about $50 million. We are assuming year end working capital of less than 19% of sales that that's a level comparable to last year.

In terms of guidance, second-quarter sales are currently projected to be $175 million. That is up 12%. Earnings in the second quarter are projected to be $0.24 a share. That's growth of 20%. For the second quarter in the year our comps and our retail stores are projected to be up 3 to 5%.

We're elevating the guidance for the year, given better performance in the first quarter. For the year sales will be in the range of $895 million to $910 million. That's up about 10%. Earnings per share will be in the range of $1.95 to $2.03. That's 17 to 22% growth in earnings assuming 30.5 million fully diluted shares outstanding.

That includes our business overview. And we'll open up the call to your questions.

(OPERATOR INSTRUCTIONS) Robbie Ohmes, Banc of America Securities.

Two quick questions. I guess the first question, it sounds like the Playwear strategy is really kicking in for you guys and you got the strong backlogs for '05. Can you just walk us through to help us understand how far you can take this success you are starting to see there? Are you really early stage in terms of getting more fixtures on the Playwear side with existing accounts? Are you opening more doors? Do you have new product coming in, as you move into '06? If you could help us understand? Is this sort of a one-year pop that you think you're to see in playwear or could you really see this business grow double-digit for the next two or three years?

And then the follow-up would just be, I understand you're being conservative on the comps. But is there anything else going on in retail? In retail that would make you think that the (indiscernible) would slow from what you put up in the first quarter?

This is Joe. I'll speak to the Playwear issue. We are still at the beginning of the growth curve on the Playwear. Our success has really been at driving core products and smaller sizes. We've had great success with Kohls on the bigger side but you have to maximize that with a lot of our other accounts. So even though we've seen the performance there it's still -- we have to prove it to the retailers in season.

But I would say, we have the ability to at least double the Playwear business we have now and this is not a one-time pop. I think for '06 we're looking at Playwear also being up about 15% (ph) .

We see quite a few more years in the Playwear business.

You have got to remember that market 5 times bigger than sleepwear and baby combined and it's all about 30% of our revenue.

With regard to our comps -- this is Fred, our comps are conservative. At our last call we -- I think you remember, we mentioned it's hard to predict that first quarter always because of the impact of weather. But there's no question we have great leadership in that channel now. We are thrilled with the new talent that we've attracted.

Joe has explained what we've done with the strip stores and I don't think I need to go back to that. But what we are attempted to do now is really convert those stores to what we call branded stores along with opening a few stores in November. That will have material change. This is directly related to the brand study; and I would say the significant difference in those stores at that point will be a big lift in emotional environment much easier to shop. Significantly higher service levels. We'd be screening the brand and product benefits and there would be a new merchandising layout.

So I would say we are a bit conservative in these stores. And come the fourth quarter we will have a much better view of the impact that we will have with this moving to the branded format.

We also -- on our outlet stores, we are -- our strips have been priced competitively to our outlets. As we convert and open these brand stores we are going to be equal to the pricing foremost in our department store so there is no channel conflict.

I just reiterate what I said in our opening.

The mission of these brand stores is to elevate the imagery of the brand. The aspiration of being in that store and driving, increasing the reach for the Carter consumer but also driving customers to our wholesale accounts.

Margaret Whitfield, with Ryan Beck.

I wondered -- a few questions -- if you could discuss how your share might be changing playwear because of course it's well below and the other segment of your business provide huge opportunity and wondered if you could provide some elaboration on your off-price strategy and how that relates to your retail stores? And a little more color on what went on with the launch of Just One Year target?

We definitely had a significant increase (indiscernible) our Playwear share. We are only about 6% but we've been increasing, making good increases from year-to-year -- the last couple of years. There's no question that we think we could double that market share. So back to Rob's question, too, that we see the next few years double-digit gains. We don't have any significant plans for off-price other than off-price would go in the outlets -- not in the strips and definitely not in these branded stores.

So that definitely differentiates those two channels within the channel. As far as Just One Year, I wouldn't take that as any significant issue. You should keep in mind that we're marketing to numerous channels with several brands and there will always be product issue.

The beauty of our strategic agenda is that we have a lot of legs to stand on and not everyone has to hit a AAA for us to have good quarter and a good year.

We were a little quirky on a couple of colors and the wall -- on the wall with Target; and we also had a low bit of higher prices in a couple there. To Joe's point, we corrected that very quickly and actually the April business has been very good there so we feel good about that.

Child of Mine is hitting on all cylinders. That's not to say that there won't be some issue because we had an issue with Child of Mine when we first started it up and then we learned a lot about it. So all of them have been learning curves.

Just a follow-up with all the retail consolidation the longer-term view looks quite positive for your Company. Might there be some short-term issues while -- if the companies merge together in terms of potential store closings etc., what do you envision and would there be any impact this calendar year?

The 3 we see are May Federated which is -- as Fred said we're the No. 1 brand in both of these accounts. We hear they'll close some doors long-term but those are always the E and F doors in their models so they are really very low volume. I don't see any issue there at all.

Sears Kmart, we were invited to a dinner. Actually, we were the only children out of 34 vendors. That's hard goods and soft goods. For the entire Sears Kmart. What we see them doing, they are starting this new model -- Sears Essential, which is basically a combination of Sears and Kmart combined and converted Kmart locations to Sears.

Since we don't sell Kmart, any location by convert they expect 85 to 100 this year and 400 of them by 2007. We would get the benefit of that because it would be putting Carter product under the Sears brand. And Babies R Us, Toys R Us, the third one to us -- we are in about half of their Toys R Us stores. We anticipate that they will sell off some of those stores. We built that into our model for their real estate value. We will more than compensate for that revenue loss in our plan.

You remember when they closed 146 KRU doors in the first quarter '04, we were able to compensate for that in our plan. So we see no issues in the consolidation.

Christina de Marval with Sidoti & Co.

Nice job on the quarter. Just a follow-up question on the new strip prototype type, the brand stores. Will you convert the existing strip stores to that format or keep them the way they are?

They will be converted.

They will? Okay. Can you give me a sense of the timing on this? Is this fall?

We will start some conversion in late fourth quarter and then it will proceed on and through the first and second quarters.

The perspective of retail business -- the comps in the first quarter. Can you quantify or give a sense of magnitude of the impact of the Easter shift. Was that a helpful -- ?

We had booming January, February, and March started off with horrendous weather patterns; and we were down some but we ended up with a really good March and what encouraged us, in general, March was not a great comp month for retail but ours were high single digits. So we really felt good about that. Sure, there is an impact. Easter and weather and these holidays and it does have an impact. So I would say doing what we do, it was really encouraging.

Do you think the weather and Easter shift impact were essentially offsetting? (MULTIPLE SPEAKERS)

I don't perceive we had much of a benefit in the first quarter from Easter. Generally speaking, most people would say, that didn't help the first quarter much. But overall, yes, we looked at the quarter. We had solid performance and weathered the inclement weather early March. And I would say Easter had a particularly meaningful impact on the business.

We are off to a good start in April.

Sounds encouraging. With respect to the gross margin for the full year are you still expected to be flattened down?

Should be comparable to last year. We're not seeing any big shift in channel mix. Just assume the margins for the year should be approximately 36%.

Was there a benefit in the first quarter from channel shift?

No, I wouldn't say so. I think the big benefit we had in the first quarter is really the progress their sourcing group is making on product costs, upgrading product, finding opportunities for lower-cost. The other big benefit just in terms of operating margins was really big component cost reduction was in our distribution centers. We had a 13% increase in unit volume, in the first quarter, our distribution spending year-over-year is flat.

Melissa Otto with CE Research.

Congratulations on a great quarter. Just have a question around the branded stores. Just wanted to get a little bit more color on basically how the store locations are selected and what sort of strategy is behind that and what sort of expectations you have around some of the branded store openings?

We have a very disciplined approach to opening stores, finding locations. So we are still staying in strip locations. We have no intent of moving into malls. We feel we understand our brand well enough to know it's a -- We are a mainstream, high-value, need to drive lots of units type brand. Very popular price. The strips fed us well. We built a profile not to go on in detail but we have consumer profile. We are looking for in a nut enough families with lots of young children and that all goes into the thinking. I'm not sure if that's answered all your questions.

I'm trying to get a sense for, basically, how the stores are pinpointed and what sort of strategy is behind it? And what progress have you made and where are we in the pipeline in terms of these new store openings?

Keep in mind, the major intent of the store -- the brand store -- is to prove to the consumer and our wholesale accounts is this the way we should look. And secondarily it is to reach consumers (technical difficulty) traditional channels so that we increase our revenue as well. And keep in mind (technical difficulty) stores, we also do for our wholesale accounts. So it's fair to have a very proper balance there. We are not in need of having gigantic numbers of stores. The primary mode is not just that we feel that we are not going to grow, have good growth story if we don't do that. So that's a (indiscernible) as well.

We are currently studying how many stores we should have. And we are spending a lot of time on the right location. We don't want to get into bad locations. So I would say we are still in the steady state there. We don't have if you will a 3 or 4 year plan on how many stores we're opening. We are being cautious and conservative. And as well, we want to make sure that these -- this fourth-quarter conversion goes well.

Some of this is new for us, as much as we are confident in the amount of research we've done, both with the consumer and our customer base, we want to make sure that when they go to the cash register they're buying things.

Margaret Mager with Goldman Sachs.

Is anything going on with pricing at all that may be stimulating your business? Have you added any more items to your pack sizes or anything like that? Can you talk about the competitive environment? Where do you think you are gaining market share because you're clearly growing faster than the overall kids' business.

Last question I have is regarding the pricing strategy in your strip stores where you said that you want to have comparable pricing to department stores. How does that compare to the balance of your retail operations? Where I think you have -- offered discounts in department stores if I am not mistaken.

There's nothing going on in pricing. Our focus is on improved product benefits and improving the marketing agenda as we move towards this branding launch. So there is nothing significant going on there.

We typically charge our sourcing people with driving down costs and our logistics people do the same so we can fund increased benefits in every category and every brand. With regards to the competitive arena, it varies by channel and varies by category within the channel. Given private labeling is the major competitor in every channel and Disney is everywhere.

Department stores are pretty much made up with niche players. There's Little Me and there's a small brand called Vitamins and they're niche players; but our opportunity in department stores and baby and sleepwear is to increase market share over small players. Still, that is 40% of that market are very small players. In play clothes the primary competitor would be the national brand would be Oshkosh and then again there are lots of small brands there. So it's about increasing share to rate product improvement, increasing the play clothes business, adding fixtures there.

We all, obviously -- there's some kind of competition specialty stores maybe not so direct. Baby Gap is not really a direct competitor but Children's Place and Gymboree and Old Navy are to some degree. Our position here is that we are a mainstream brand popular prices. You can buy a lot of units with us and not blow the budget. So we are -- and we have super quality one-stop shopping so that's our mantra and the mass channel it varies. Some of the competitors are Gerber in both Target and Wal-Mart and then of course Target has Serka (ph) and Cherokee and Wal-Mart would have Garen as playclothes.

But once again, I'd say in the aggregate it's to knock out smaller players to the opening I had about the importance of big suppliers to big retailers.

As far as your last, one, I'll take on the retail store pricing. Our outlets are hard to figure with everybody on sale every day and coupons and everything in the market. So we probably estimate from a 10 to 13% probably discounts to the full line department stores. In the strips we will be closer, we will be beyond that and we've tested that on some of our core products in baby. We've already tested it in 15 of our strips and have actually seen no deterioration. Actually it's been positive results. So we're very confident there's no issue there.

So it will be a little bit higher price than the rest of the factory outlet stores?

Part of it will be mixed and still have the stress group and second will have is much but they should be matching the prices. (indiscernible) show we want to show the retailer how to make more money is the objective.

Speaking of Oshkosh, do you know anything that's going on with that situation at all?

We would never comment on a subject like that. I appreciate your question but we have no comment.

In your opinion why is the factory outlet channel as a channel scene into his traffic trend because we're hearing that a number of different places that traffic is picked up quite nicely. Do you have any feel for that?

Yes that channel has always been 1 where people like to go. As a destination for people who like the day of. It's more than just shopping. It's lunch. Some of the better ones have entertainment so I would say, it's an event. They don't go as often as they go to other channels. They do like that.

Lastly, the stock market has been worried about consumer spending. Do you have any take on the outlook for consumer spending into 3Q, and 4Q? How are your wholesale customers, in particular, assessing the outlook and how are they thinking about you in that context? I have to think you are in a marketshare gaining mode but just in general any perspective on how your wholesale accounts are looking at consumer spending?

I don't think we have anything to really offer there. I think the way they look at us is what are we doing for them? Meaning, are we hitting the revenue goals and are we hitting the margins goals and are we managing those inventories? I would say in the last couple of years most everybody has been much more cautious about inventory and we have -- although we built up our inventories to service at very high levels we haven't built their inventories. So we don't have an inventory problem with them. Nevertheless I would say that most of them are conservative but once again, the open (indiscernible) goes to top performers. That is all they've worried about about us. And that's all we want them to worry about and we don't get into too many high-level discussions with them. About their outlook on the economy.

(OPERATOR INSTRUCTIONS) Marie Driscoll with Standard & Poor's.

Good quarter. My question -- I have a few questions. Can you tell me what Celebration Club is? That's my first question.

That's in our retail stores and I think it's just people they sign that. It is not a formal CRM but it's -- they get notified of sales and stuff. It is our first attempt at through our retail stores to sign up customers and build the database.

Can you tell me -- I'm wondering as you -- will what you've learned from your branded study as you transform your mall-based stores into the new branded stores, right? Can you fill us in on what you've learned from your brand study and how you -- you talked about their not being a channel conflict and I don't understand how that would be? If your brand has the same price as -- are you going to have the same price as the department store or did you say you're going be a little bit lower? I'm not clear.

We don't want to underprice our department stores with our branded stores. That's all I meant by that.

So that means that in the mall you are going have basically the same price as well as you can tell vs. the department stores.

Yes. And what Joe says, we've tested some higher price points and they have been very positive so we have a high degree of confidence that we can execute that.

As far as what we've learned from branded studies I tell do that would be I would be telling all our competitors what we're going to do. But in general what we have learned is great brands offer great products; but they go beyond the product agenda. They offer an emotional connection with their consumer that is unique to that brand. So I can only be vague at the moment. But we've discovered through great research and lots of dialogue what we think is an emotional formula that will make it a very aspirational shopping experience.

We've also discovered a lot of problems consumers have in the shopping experience but in either specialty stores or department stores were everywhere they shop and what we put in this in the execution phase of this is how to solve every one of their problems and I -- once again I can't be too specific about that but that's the material change.

And we're going to see that in November?

Yes.

I'm wondering. Can you tell us the percent of your business that is on automatic replenishment now and how that compares with last year?

About 75% of our baby business is automatic replenishment. That is about 50% of our wholesale revenue. In the Carter brand and it would be a higher percentage in Child of Mine and (indiscernible). (MULTIPLE SPEAKERS)

Should be comparable to last year.

Ladies and gentlemen, we have no further questions on our roster at this time. Therefore Mr. Rowan, I'll turn the conference back over to you for any closing remarks.

Thank you. Once again we thank each of you for attending and we do appreciate the quality of questions. We are confident we can keep generating these positive results for our shareholders. We are very excited about our future because of investments and people in brand and we feel we will make a material difference. We certainly look forward to our next call. Thank you.

Ladies and gentlemen, this does include today's Carter's call. If you would like to listen to a replay of this call, it will be available beginning at 11:30 AM Eastern time today through midnight, Friday, May 6. The dial-in number for the replay is 888-203-1112 in the United States and Canada or 719-457-0820 from international locations. The confirmation code is 564-3788. We do appreciate your participation in today's call and you may disconnect at this time.