Carter's Inc (CRI) 2005 Q2 法說會逐字稿

Welcome to Carter's second-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 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. (OPERATOR INSTRUCTIONS)

Carter's issued its second-quarter earnings press release yesterday after the market closed. The text of the release appears at Carter's website at www.carters.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. And now I'd like to turn the call over to Mr. Fred Rowan.

Good morning. We certainly appreciate each of you joining our call. Joe Pacifico, Mike Casey, and I each will speak to the results. I'll begin with a general overview of Carter's and OshKosh.

We're pleased to announce an outstanding quarter, one that both exceeded every critical measurement plus positions us for continued excellence. With reference to growing the Carter's brand, we achieved good results in our core categories and set the stage for successful launches of our spring '06 product agenda. Our playclothes initiative is working well, not only because it is growing double digits; it is adding to Carter's as an iconic lifestyle brand.

Our own retail stores' performance was another highlight. It's all about focus on increasing productivity in our existing stores and reaching additional consumers with the better brand store formula in strip locations. The results are solid increases in revenue, comparable store sales, and increased customer satisfaction. We're clearly making our stores more desirable and a destination. Now we have a growth opportunity with our strip stores.

Our branding formulas with Target and Wal-Mart are working well. Both retailers respect our management teams, the business models, and the successful results. We have excellent relationships with both and a continued growth opportunity. We have simply been outstanding in our supply chain, made significant improvements in product benefits. We've had excellent margin improvement because of major reductions in product logistical cost. We've experienced nothing less than superior deliveries to all channels of distribution, along with big improvements in inventory management.

We are just completing the Carter's brand project. We will be presenting the new formula to our wholesale customers during the first two weeks of August in New York. We will launch three of our own store prototypes during November. We feel the customer and our consumer will view the Carter's branded formula as more emotional, better benefits in our core products, easier to shop, more family friendly, and a far more aspirational experience.

With reference to OshKosh, I'll open up with some comments; Mike will add to the discussion later on with reference to the economic model. I think it is important to understand we are restoring this brand and company in phases. Each phase is meaningful with respect to our shareholders, and we are confident we know what to fix first. We closed the acquisition on July 14 and have been heavily involved since. Our excellent due diligence proved to be very beneficial. There have been no big surprises.

OshKosh is definitely a unique fit with significant growth opportunities. There are meaningful synergies, and we can get it turned around without major distractions at Carter's. The first phase of this turnaround goes as follows.

In marketing we will have reduced the number of brands and SKUs for fall '06. We are already identifying the meaningful core products for fall '06 and will materially lower product costs, elevate the product benefits, and in a number of cases lower the prices. We know exactly the cost opportunities as we have costed the important products.

We are already discussing opportunities with our wholesale customers, leveraging our strong relationships. We will launch a powerful denim group in '06. We will also begin a branded study similar to Carter's to build a distinctive point of view.

With respect to their retail stores, we are near to a solution with their lifestyle stores. It was a strategic miscue. We are quickly also upgrading their talent base. We will dispose of excess inventory, making the stores a better shopping experience. Retail will also benefit materially from the marketing initiatives just discussed.

With respect to the supply chain, we are clearing out excess inventory. We are using our leverage to source more competitively. We will move more production to Asia. We're evaluating the competitiveness of their offshore plants. We will make their distribution strategy much more efficient. And we're implementing Carter's operating disciplines.

In finance we have begun to rapidly implement our disciplined system of measurement, reporting, and conservative forecasting. Mike will discuss that in more detail.

With respect to organization we removed the top layer of management the day we closed. We implemented a consolidated strategy with all functions such as retail stores, the supply chain, human resources, finance, and IT. We, as communicated in a previous call, will keep the brands independent. They have a strong chief merchant and head of design who will report in to Joe Pacifico. We will place Dave Brown, our head of operations, almost full-time at OshKosh to enhance execution.

Robin Rice, the Carter's head merchant, recently decided to return to the Bay area to accept a position with Williams Sonoma; Robin feels it is an important opportunity for her. She has done an incredible job here, and we wish her well. She built a significantly stronger talent base in her group, as we have done the same throughout the Company. We had a replacement for Robin, and we will now announce that in the near future. With that I will turn it over to Joe Pacifico.

Good morning. As Fred stated we had a very strong quarter. On a consolidated basis all three of our product categories and all three distribution segments had positive growth. For the quarter we had excellent over the counter selling that resulted in strong demand for our product.

Our revenue by product category was baby, plus 35%; sleepwear, plus 1.3, and that's a timing issue which I'll get into in more depth. We really -- what we did is we moved our initial fall delivery first month to line up better with consumer take-up. Our playwear business was up 26% for the quarter. Our first-half revenue by product category, baby would be up 16%; sleepwear, 5.5; and playwear, almost 29%.

Now I'll walk you through highlights of each of our distribution segments. For the Carter brand wholesale, our baby business was plus 7 for the quarter; year to date we are minus 5. If you remember in our first-quarter call we made a conscientious decision not to anniversary certain marketing programs in the first quarter. The second quarter we had definitely better product performance, and productivity are up over the previous year, resulting in a positive demand in second quarter.

We are also transitioning our Carter's core program, which is about 50 to 65% of our baby business, 30 to 45 days earlier than the year before. So we are in excellent inventory position. Our retailers' inventories are a lot cleaner than last year, as are our internal inventories.

Our new product will ship in August this year, and that is supported by our new brand packaging and point-of-sale signage. That will all be set up in-store by 9/1. We've had excellent customer and consumer reaction to both the product and the branding. The rest of baby, we booked all of our third and fourth quarter launches; so we have achieved our plan for launches for the balance of the year.

Our sleepwear business at wholesale, revenue was down 10% in the second quarter; and that was based on eliminating our fall 5/20 delivery, so you will see a bigger pickup in the second half. Year-to-date we are plus 1%, and that was based on a positive spring '05 season.

Our fall sleepwear is planned up 4%. We think this is very conservative based on the new product introductions, our microdenier blanket fleece and our prewashed cotton PJs. We have made great strides through product innovations in this category and the new sourcing arena. Initial selling in our stores on these two new products has been extremely positive. Our spring '06 product looks very good. We will present it to our customers during the August prelines, and we will have our orders complete by September 30.

Playclothes, our third product category, plus 33% for the quarter and the year, ending a successful spring season; our over the counter selling exceeded our expectations. Much higher turns for our retailers than the year before. We're currently shipping fall through the June through October period. That is planned up double-digits. And we have booked our spring '06 playwear; all of our orders are due by the end of this month. Right now we know we have enough bookings right now to support our goal of plus 10% increase.

We feel very good about the wholesale business in total for 2005. We expect to achieve 8 to 10% top-line growth. We have orders for the entire year, with the exception of our baby replenishment orders for the last five months and our spring 2006 preship. So basically we have 90% of our year booked. We are projecting we will end the year, baby and sleepwear will be up positive single digits over last year, with playwear up double digits over last year.

Talk about our retail segment. Mark Sersted's (ph) team had another excellent quarter. Sales were up 13 for the quarter, comps were up 7.1. Year to date our sales are up 13% with comps up 7.9. We are delivering greater logistics efficiencies to our store, which is allowing our store personnel to really focus on selling. Our inventories are much cleaner than they were the year before. We are exiting prior seasons much more aggressively than we have the year before. Our transitional deliveries are more productive, and we are really planning the business better.

In regards to store segmentation, our brand stores still lead the pack. Year to date our brand stores are up over 16% comp. Second would be the mills outlets, close to 13% comp. Our tourist outlet, which are plus 7 comp; trade area outlets, plus 8.5 comp; and drive-to outlets, which are plus 4.5 comp.

In regards to product categories, for baby we are up 23% to the prior year. Sleepwear we're down 2% to last year; and that again is we moved our fall delivery and we ended the spring season with about 15% less inventory than we had the year before. Definitely a much cleaner and more profitable business. Playwear, we are up 16% for the half to last year. All consumer segments were positive.

A couple things we're doing in our stores, we have been testing higher prices in our brand stores, and we are very encouraged by those results. We are also looking at initial fall selling in sleepwear and playwear; very, very good selling, and that really is a key indicator for our total business for the second half.

We originally planned to open 12 stores in 2005. We now believe we will open six to 10 more brand stores, depending on lease negotiations. So instead of the 12 planned, we are probably more realistically around 18 to 20 for the year. And we will exceed our retail budget.

In regard to the mass channel, great second quarter. The quarter we were up 71% to last year, and Mike will talk about the specifics there. Year to date we are up 41% to last year. Child of Mine, which is our brand at Wal-Mart, product and sellthroughs have been very strong. Newborn playwear, which is a new category for spring '05 for us, the selling has really been excellent, and we know we will receive excellent placement for spring '06.

The new wall sets on 9/1. We set it every year at that time, part of their annual update. The good news is we've updated the packaging with this to strengthen the brand presence, and every indication this new set will be stronger than the prior year. As we look forward to spring, we've got 100% of our spring '06 already booked with Wal-Mart.

In regards to Just One Year, our brand at Target, product selling exceeding plan in second quarter and year to date. Again we do a wall update with Target, versus a major set, in September. And as we look forward to spring we've got 67% of our spring '06 booked, which is really the first two deliveries. The only thing we're missing is the third spring delivery, which is around 3/1, which we don't require from them till around October 1. So very good shape looking forward with both mass brands.

Operations, as Fred said, really done a great job of controlling inventories while getting our product shipped on time at lower cost. Shipping performance year-over-year, 300 basis points better in '05 versus '04. At the same time our inventory levels are lower than last year, with a 17% increase in revenue. We have reduced excess, done a great job of reducing excess as a percentage of our total working inventory. In total our logistics costs were lower than last year, with that 17% increase in revenue.

In regards to sourcing, again, favorable variances year to date. One of our key initiatives, you remember, was to improve sleepwear margins. Our sourcing group is beating their plan, so we are encouraged by that.

As you also know, we announced the closure of our two Mexico plants. Final production will cease in August. We really effectively placed all of that production in Asia beginning spring '06. Very pleased with our execution of this final transition to full package.

In summary, I am very pleased with our product performance as well as the way we have executed across all business segments. I attribute our results to our commitment to focus, our core product strategy, and to great talent. We have very strong depth in all areas, and this depth of talent is what allowed us to achieve a very robust quarter while completing the due diligence and the acquisition of OshKosh. Now I will turn the meeting over to Mike, who will walk you through our detailed financial results.

Thank you, Joe. Good morning, everyone. I would like to comment on Carter's second-quarter results and our outlook for the third quarter and the year, including the contribution of sales and earnings we expect from OshKosh this year.

With respect to Carter's, we continue to experience strong demand for our products. Our second-quarter sales are up 23%, with double-digit growth in each of our business segments. In June we announced our decision to close our sewing facilities in Mexico, completing that transition to third-party sourcing. I'd say the closure is going better than we expected; there has been no disruption in the flow of goods; and the closure costs will be lower than we had previously estimated. Excluding the closure costs, our operating margin grew 60 basis points in the quarter to 9.6%, and was 11.5% in the first half. That's up 80 basis points over last year.

We had strong cash flow in the first half, which enabled us to accelerate debt reduction, paying down an additional $15 million in June for a total debt reduction of $35 million in the first half.

In the second quarter our wholesale sales, excluding off-price sales, were up over 8% with good growth in baby and playwear. Including off-price, wholesale sales were up 17% in the quarter. We are clearing most of our excess inventory out through the off-price channel, giving our retail stores a cleaner mix of inventory. Sales in the off-price channel I'd say are in line with our plans and will be less than 3.5% of Carter's sales for the year. Last year our off-price sales were about 2.5% of sales.

With respect to our retail stores, at the end of the second quarter we had 185 stores; 30 stores in strip center locations, which we refer to as our brand stores, and we have 155 outlet stores. We opened four stores in the second quarter, two of which were brand stores.

Our retail sales for the quarter, again, up 13%; strong comps for the quarter and year to date. Good performance in all five store segments, with the brand store comps double the comps of the chain. During the second quarter our transaction counts in our stores were up over 5%. Both units per transaction and average retail prices were a bit higher than last year.

Sales in the mass channel were up over 70% in the second quarter. The accelerated growth reflects incremental brand wall space, new product placement, and the timing of fall launches at Wal-Mart, which fell in June versus July last year. Excluding the earlier launch, the mass channel is up 50% in the second quarter. Strong growth with both our Child of Mine and our Just One Year brands.

With respect to gross margin in the second quarter, our gross margin was down 380 basis points, due primarily to a higher mix of lower margin, mass channel, and off-price sales in the quarter. Gross margin also reflects a charge of about $1 million for accelerated depreciation in connection with the plant closures. We had previously estimated the closure cost to be approximately $12 million; our revised estimate is less than $10 million, with savings from the closures estimated to be $5 million a year. Again that savings will be reinvested back into the product. We expect gross margin for the year on a pro forma basis, excluding the plant closure cost, to be 36%; and that is comparable to last year and consistent with what we shared with you on our last call.

In terms of SG&A the improvement was driven by controlling the growth in spending, higher productivity from our retail segment, and exceptional performance from our distribution centers. We are seeing a nice return from the investment we made in our new distribution center over the past couple years. Year-to-date our sales are up about $60 million with no growth in distribution costs. We've had higher efficiencies at our distribution centers, and we increased the rate of direct shipping bypassing our facilities.

In terms of liquidity, cash flow from operations in the first half of the year was approximately $23 million. That is $28 million better than the first half of 2004. Cash flow was driven primarily by the growth in earnings and careful (ph) changes in inventory. Inventories at the end of June were 6% lower than June 2004, and our shipping performance has been excellent. We expect turns for the year to be 3.8 turns, and that is slightly better than last year.

CapEx for the first half was $6 million for investments in our retail stores, information technology, and fixturing with certain key wholesale customers. We expect CapEx for the year to be in the range of 25 to $28 million. We will allocate approximately $8 million to open up 18 to 20 retail stores this year.

With respect to the acquisition of OshKosh, I think you as you know we paid $312 million for 100% of the outstanding stock and employee stock options. We financed the acquisition with bank debt. The new credit facility is comprised of a $500 million term loan with a seven-year maturity. Amortization is nominal; it is $5 million a year for the first six years. We also have a $125 million revolving credit facility with a six-year maturity. Interest on both the term loan and revolvers, LIBOR plus 175 basis points; there is a pricing grid that provides for a reduction in rates as we delever.

With respect to OshKosh, as a result their second-quarter sales were in line with the plan they shared with us earlier this year when we began the diligence process. OshKosh's second-quarter sales were down about 7%. The decrease in sales was entirely in their wholesale business. Their outlet stores continue to do well; their comps were up over 3% in the quarter, up over 5% year to date. The lifestyle store business has grown since last year, but the losses on an annual basis are running over $4 million a year; that is comparable to last year.

OshKosh's net loss in the second quarter was comparable to last year, about $1 million. Their loss for the first half also comparable to last year, about $2 million. Keep in mind, given the seasonality of their business, they have historically been more profitable in the second half of the year.

We've begun to integrate OshKosh. I would characterize the savings opportunities as significant, and we will realize those savings over time. I think it is important to know that in 2004 OshKosh's operating margin was less than 5.5%. In 2002 their operating margin was over 11%, and we believe we can restore their operating margin to over 10% by 2007. We are firming up our assumptions now that we have full access to the OshKosh organization. There will be some integration costs and some purchase accounting charges, which will partially offset our estimate with respect to savings.

Based on what we know today we're elevating our previous estimate of accretion in earnings from OshKosh for 2005 from $0.05 a share to a range of $0.08 to $0.10 a share, assuming 30.6 million shares, excluding purchase accounting charges. For 2006 accretion is now expected to be at least $0.20 a share. Both estimates exclude the impact of purchase accounting charges which, based on preliminary valuations, we estimate to be $0.24 in 2005 and about $0.09 in 2006.

Given the current trends in Carter's business on a stand-alone basis, we expect third-quarter sales to be $275 million. That is up 10% over last year. We expect OshKosh to contribute an additional $95 million to third-quarter sales. In the third-quarter Carter's earnings on a stand-alone basis are estimated to be $0.76 a share; that is up 23%. We expect OshKosh to contribute an additional $0.05 to EPS in the third quarter.

For the year we're estimating sales for Carter's to be in the range of 924 million to 928 million; that is up 12 to 13%. OshKosh is expected to contribute an additional 195 million to 200 million in sales in the second half of the year. That brings total sales for the year to over $1.1 billion.

Carter's EPS on a stand-alone basis is now estimated to be $2.08 to $2.12, up 25 to 27%, again with an additional $0.08 to $0.10 from OshKosh, bringing total EPS for the year in the range of $2.16 to $2.22; and that is up 29 to 33% for the year. That concludes our business overview. We will open up the call to your questions.

(OPERATOR INSTRUCTIONS) Gregory Fowlkes with Morgan Stanley.

Just a couple questions. On the inventory piece, I know you guys spent some time talking about that. How much of that was planned versus how much of that was actually primarily due to better than expected sales? I know you talked about sort of turns for the year; but can we expect just sort of better inventory management going forward?

Second question on the sourcing front. I know you have talked about some of the improvements that you have been making in terms of logistics and sourcing. How much of the cost declines that you've seen there come primarily from quota elimination?

On your first question, with respect to inventory, we had expected inventories at the end of June to be up somewhere in the range of 8 to 10%. As we were monitoring the performance in the second quarter it seemed as though inventories would be up some portion of 5% or more.

I would characterize most of what we are seeing at the end of June as timing. Certain goods got on the boat from Asia a week later than we expected. There's no delivery issues. It's always a question of estimating when goods would be placed on the boats heading from Asia. So some portion of it is timing. I'd say the larger portion of it is timing.

Another portion is our sales were higher than what we had expected. With that said, there is no question in terms of the focus we've had on inventory management over the past year. We've got terrifically talented people devoted to that. We brought on a couple new guys over the past year who -- much sharper focus on inventory.

Right now our outlook for the end of the third quarter, inventories will be comparable to the September '04. At the end of the year, based on our current outlook, I would expect inventories to be up somewhere in the range of 10 to 15%. That would be in line with the growth that we are planning in the first quarter of next year.

With respect to the other question, in terms of cost reduction as it relates to quota, quota has never been a significant component of our cost in recent years. I think our quota costs last year were some portion of $5 million. Quota on baby products was eliminated a number of years ago. So a lot of the discussion with respect to the elimination of quotas, we never expected it would have much of an impact on our business.

Okay, great. Thanks very much.

Christina de Marval with Sidoti Research.

First question, relating to the Carter's business. Wondering if you could elaborate a bit on the surge in the discount channel growth. You mentioned there are a couple of factors including new product placement. I am just wondering if you're referring to the introduction of toddler playwear at Wal-Mart, or if there are some other factors. And if you could just give sort of an order of magnitude of the various pieces that accounted for that increase. That is the first question.

For the quarter we are up 70%. Included in that is that we had -- the launch of fall product to Wal-Mart came about a week earlier than it came last year. Last year the fall launch was in the first week of July; this year it fell into the last week of June. That was some portion of $6 million. So excluding that we still had strong growth in the second quarter, up about 50%.

We do have some new product placement. We launched playwear with Wal-Mart back in January, and that product is selling extremely well.

I'd say there is a third component. We have talked about it in the past. We allocated, based on the stronger productivity of product we ship into the mass channel, we allocated more space on the brand walls at both Target and Wal-Mart to product we ship apparel product. As we analyzed the productivity, we found that the consumer was responding more favorably to product we ship versus licensed product.

So for both Target and Wal-Mart I think the initial brand wall set was more 40% product we ship to those customers, 60% licensed product. I would say today the split on the brand wall is more 50-50. And we continue to monitor that. We look at productivity on the brand wall weekly, and we allocate space based on what is turning quickest. So that is what us driving the business.

I'd say in the second half of the year you should see, in both the third and fourth quarter, you will see high single digit growth in both the third and fourth quarter for the mass channel. For the year we expect that sales into the mass channel will be up about 20%. On Carter's on a stand-alone basis, the mass channel will be about 19% to 20% of our revenue mix.

Okay, that is helpful.

And that is in line with what we expected. So there is no question we had a bit of acceleration into the second quarter. But it will balance out for the year.

Okay. Then shifting to OshKosh, just wondering what contributed to -- as you have had a closer look at the business, what contributed to the change in your outlook in terms of the accretion? And wondering if you could detail a little bit, in terms of the fourth quarter and full year outlook, some of the underlying assumptions in terms of comp, and store growth, and wholesale revenue.

I would say what changed, in our last call we assumed that we would have some portion of $0.05 a share accretion this year before purchased accounting charges. The only thing that has changed is just better visibility. I would say we will have better visibility between now and the next time we update you on the business.

We closed less than two weeks ago. We are scrubbing the assumptions. We certainly have high confidence in the Carter model assumptions. I'd say we are in a process of validating our model assumptions for OshKosh right now. But what we seen so far is that there is tremendous opportunity both in sales and earnings contribution from OshKosh over time. There is no question that we are validating the assumptions that we have. It's just a question of how quickly we can get at those opportunities, and it's going to be a source of growth for a long period of time.

In terms of the assumptions for the balance of the year, just taking the high end of the range of $0.10 a share contribution this year, you should assume that assume that it's, again, at the high end of the range, 200 million, assuming that we are going to pick up a $0.05 a share in each of the third and fourth quarters this year from OshKosh.

Again I characterize that as preliminary. We are working with the folks at OshKosh. We are fortunate we've got some terrific people out there helping us get underneath some of the assumptions that we developed in diligence. So I'd characterize what we have right now as preliminary assumptions, and we will update those over time.

Okay. Just looking longer-term, wondering if you can provide us with a sense of where you think sort of normalized level of SG&A would be at their business. I recognize that they do have a greater mix of retail; but even taking that into account, it seems somewhat high. (multiple speakers) could be an opportunity there.

Sure. I think a better way to think about their business right now is their operating margins last year were around less than 5.5% of sales. In the second half of this year, we estimate their operating margins will be somewhere around 7.5%. I would hope that by 2006 we're running at a level for the full year at about an operating margin of 7.5%. Then by 2007 we expect that the operating margin will be 10% or better. It wasn't that long ago that their operating margins were nearly 12%.

So I don't know if we can be so precise on gross margin versus SG&A. We are focused more on improving the operating margin. We see an opportunity to do that short-term.

Okay, I appreciate that. Two quick follow-ups on that. First, with the lifestyle stores, could you repeat what you said there and what the plan is? Also their Target business is a license arrangement. Wondering if that may potentially switch to more of a wholesale type arrangement, similar to your own business with Target?

This is Fred. The comment about their lifestyle stores was that it was not a good strategic move for the company. So I think you can conclude from that that (multiple speakers) our intent is to get out of it. It is an opportunity, a short-term opportunity to shore up the financials. That gives us then the ability to really concentrate on the wholesale business, refocus the brands, and then improve their retail store business.

Thanks. Just wondering about the Target.

Their Target license business is doing really well. The Genuine Kids there is performing really well. I'm personally very impressed with what they have done there. The product is great, it's a well-focused line, it's a good formula.

And it will continue to be under royalty income?

Yes, we have no plans for change there.

Thanks.

Melissa Otto with DE Research.

Just a question about the retail stores. I was wondering, would you give me a little bit more color on what was actually driving the performance in there? Was it a mix of merchandising changes, was it product, etc.?

This is Joe. Definitely driven by product and better planning than the year before. We are exiting our seasons much more cleaner than we ever -- got much more aggressive, and we're starting to see the benefits of that. Mark has really done a good job of, for the store personnel, focusing them on selling. They had really been receiving goods and spending a lot of time not productive versus selling. So we've really got them focused.

Product definitely drives it, always drives it. And they have been up in all categories except for sleepwear, where we had actually ended the season much earlier with less inventory and starting the fall later. So product driven and then the focus on selling is really what is driving their business.

In terms of the new store openings, is that trajectory fairly sustainable for the next, say, 12 to 24 months?

Yes.

Great. That is all that I have. Thank you.

Margaret Whitfield with Ryan Beck.

I was just curious when Robin left, and if she had completed the spring '06 line, and if the replacement will likely be an in-house promotion.

She is still around through this week. We definitely completed the spring '06 line. It looks great. And it is very likely we will promote from within.

On the accretion estimate for next year, I was surprised that it would be $0.20 or more, hopefully more given the fact that you could do $0.10 a share. What went into your planning to get to that accretion estimate?

I think the thing that is important to know is that their wholesale business has had negative trends. Our first opportunity to meaningfully impact their product comes in fall of '06, which starts shipping in June of '06. So you should expect that, and the way we are planning it is that their wholesale business will have some declines this year, and it will likely decline next year. And that we expect to start growing their wholesale business in 2007.

So I think at this point we are being very thoughtful about how we model, based on what we know today. We are trying to give you some direction, and certainly a direction of growth. There is plenty of opportunity. Again, it is just going to be a question of how quickly can get to the opportunities. Now the next (ph), after we get the third quarter behind us, we will have better visibility on 2006.

If they should hit a 10% operating margin by '07, what level of accretion would fall out (ph)?

Well, I think it is too early to talk about a 2007. There are some assumptions in terms of integration costs and other estimates which we have not fully defined for 2007. So I think it is much too early. But I would hope that directionally, if it is $0.10 year, $0.20 next year, it should be at least $0.30 the year thereafter.

What should we assume in our modeling for next year? That their losses continue in the first half of the year?

I don't we had enough visibility by quarter. We are looking at spring 2000 booking trends right now. I think will have a better handle on that next time we chat. Just know the last two years they have had -- they are less profitable the first half of the year.

Okay. The dip in their wholesale business, is that coming across the board or from certain specific accounts where they have lost momentum?

I would say it is across the board.

Okay. Thank you.

Dennis Rosenberg (ph) with DSR Consulting (ph).

Good morning and congratulations. On the OshKosh, what kind of synergies are you assuming in the $0.20 estimate for next year?

I think the big opportunities there, starting with the wholesale business, correcting the product, turning that wholesale business around, and that will start before fall 2006.

In retail the productivity of their stores, even though their outlet business is growing and doing well, their productivity is much lower than Carter's. Our four-wall contribution for our stores is close to 30%; theirs is closer to 20%. I would say they are not as efficient in terms of the use of labor. Their rent structure is a bit higher; I think we have the ability to negotiate some better rent costs for them. I think their merchandising strategy could be improved, enabling to achieve higher margins in their stores.

In terms of sourcing, right now we are assuming some modest cost reductions, some portion of $5 million. Until we correct some of the issues that they have on complexity and the product markets go (ph), once that is corrected we will have bigger opportunities on the sourcing side.

Then in distribution, their cost per unit shipped is close to $0.35 a unit; ours is closer to $0.20 a unit. So on their 50 million units that is some portion of $8 million. Now we are not going to realize all of that in 2006, but we will show progress in that area. So those are the four major areas of opportunities as we see them today. Turning around the wholesale business, higher productivity in the retail stores, certainly sourcing, and distribution.

Using this year as a base, and the $0.20 from OshKosh plus your typical close to 20% growth from the base business, I come to kind of a minimum expectation of maybe 275 to 280 for next year. Then carrying that forward to '07 it looks to me like another 25% growth. Would you care to comment on that?

Well, I'm giving you an indication of what we think is possible with OshKosh based on what we know today. For Carter's typically we would not give guidance until we have the third quarter behind us. We would not give guidance for '06. Just know that we have good organic growth ahead of us at Carter's, and I would expect that Carter's on a stand-alone basis has an opportunity to continue to grow 8% to 10% top line, 15% to 20% earnings growth.

You know our track record. We are focused at the top end of that range, and we've done that for a long period of time. But I think it's appropriate to give you that type of guidance today.

Okay, great. Thanks.

Robbie Ohmes with Banc of America Securities.

A couple of quick questions. First, can I just get a clarification, a follow-up on Greg Fowlkes' question? Did you say inventory would be up only 10% to 15% for the year? And is that including OshKosh? Because that implies that your inventory to sales ratio --

No, I'm just trying to give you Carter's on a stand-alone basis.

Okay, got you. Can you give me the number with OshKosh?

Including OshKosh, we expect our inventories at the end of the year will be up (ph) $215 million.

Okay, great, that is really helpful.

Compared to about 121 million last year.

Got you. Then, Fred, I was hoping you could comment a little bit more about the impact of turning around OshKosh's wholesale business on the core Carter's business. How are you guys going to avoid cannibalization there? It seems like you are set up to have a problem there potentially.

We wouldn't have bought the business if we felt we had a cannibalization issue. As I think we communicated in the previous call, we really did our homework and due diligence, studying the consumer, to understand what the consumer felt about the brands. They clearly see the brands very different. We also talked to the wholesale customers at length with independent surveys so we would not get a clouded view of it.

I might let Joe comment on the differences in the brands. But we feel, I just want to comment in general, we feel the primary thing is not to worry about a cannibalization. Our concern is to make sure we can focus to their product and their brands.

I don't want to say a lot more about that, because we are getting ready to go in the coming months to their customer base and present a much stronger formula of core, essential products, higher value proposition in those products, much more competitive formula than they have ever had. So we have great confidence in that. For as far as the uniqueness of each of these brands, I'll let Joe comment.

I think, as Fred said, both brands are driven by central core products, and both brands are lifestyle brands with popular pricing. The big difference is, Carter's we do about 65% of our business in the 0 to 2, while OshKosh does 65% of their business 2 to 7. They have -- definitely the consumer recognizes them as more durable, more woven and denim products, definitely authentic, and a little more adult-like. Where Carter's I would say is soft, more knit driven, definitely more adorable, a little bit more childlike.

Also if you look at price positioning currently, which we will affect, there's probably almost a 30% difference in average price between the two brands out the door. So we've talked to all of our top customers,. We have really -- if you look at the market, you still have 40% of market at 35 -- with brands that own less than 1%. So even if private-label is at a tops of 30, we are still competing with the two best brands for the other 70% of the business. So we see absolutely no cannibalization of the two.

Great. Just a last quick question. Can you tell us what role Robin is going to be playing over at Williams Sonoma?

Yes, she is going to be their chief merchant in a new start-up business there. I understand it is off to a good start.

Terrific. Thanks a lot, guys.

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

I had two questions. One was regarding sales to the off-price channel. I was wondering if you could tell us what they were in dollars and the percent increase over last year.

Then if you could talk more about retail and where you see that. You mentioned you are going to open 18 to 20 new stores. Is it all branded stores? On a go-forward basis I guess you said 12 to 24 months you anticipated to maintain that kind of door opening. Is it in branded again? So for the long term, how do you see your business being wholesale, mass, and retail? So those are my questions. Thanks.

Let me address your question with respect to off-price. In the second quarter off-price sales were about 12 million compared to 5 million last year. For the first half off-price sales were about 18 million versus 9 million last year. Again, for the year we are estimating that off-price sales for Carter's, stand-alone basis, around 3.5%, compared to about 2.5% last year.

The quality of this inventory is good, and we have a choice of always moving those goods through our retail stores or through the off-price channel. Our decision starting when Mark Sersted joined us last year is to give him an opportunity to take the best of the excess and then move the balance through the off-price channel. And that has been a good strategy for us.

With regards to the retail brand stores, 18 to 20 this year, all but two of those would be brand stores. Next year we definitely will maintain that pace with I'd say 90 to 95% being brand stores.

Okay. So longer-term, how do you see your revenue mix and your product mix in terms of retail, wholesale and mass?

Say you should expect, again, the 8% to 10% consolidated range for Carter's on a stand-alone basis. You should expect that our wholesale business will be growing some portion of 6% to 8% a year; our retail stores I would assume will grow some portion of 8% to 10% a year; and the mass channel will probably grow over 10% a year. So that is our current view.

Okay, thank you.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Rowan, I will turn the conference back over to you for any closing remarks.

Thanks once again for attending our call. I think just in closing this is a very talented Company with depth and breadth in management. We've got multiple platforms for growth. OshKosh is a great addition which definitely lengthens the earnings horizon. We will have new energy for the Carter's brand as we launch this new brand project for spring '06. No question that being a larger Company we have leverage to be more competitive for our customer base and in our stores. And we remain very highly committed to our shareholders. With that I thank. I look forward to our next call.

And ladies and gentlemen this does conclude 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 August 5. The dial in number for the replay is 888-203-1112 for those in the United States and Canada; and 719-457-0820 from international locations. The confirmation code to access the replay is 546-5302. (OPERATOR INSTRUCTIONS) We do appreciate your participation on today's call, and you may disconnect at this time.