Carter's Inc (CRI) 2005 Q4 法說會逐字稿

Good day everyone and welcome to Carter's fourth 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. That's 404 745-2889. Carter's issued its fourth quarter earnings 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 the Company's most recent Annual Report filed with the Securities and Exchange Commission. And now I would like to turn the call over to Mr. Rowan.

Thank you. Good morning. We appreciate each of you joining our call. We had a terrific quarter. We delivered strong results all year long. We closed the year with momentum and a good feeling about 2006 and we feel good about our long return prospects. I'll begin with a brief overview of our strategic initiatives, the building of our core skills, an update of the Carter's and Oshkosh brand studies and a recap of the Oshkosh integration. Our President, Joe Pacifico, will discuss specific results in each of these initiatives plus offer his view of '06. Mike Casey will wrap up the presentation phase with the financials and our guidance.

Strategically we have many links with organic growth. They include our wholesale retail customers, Carter's retail stores, the sub-brands at Target and Wal-Mart, Oshkosh and a formidable supply chain driving product innovation and cost reduction. All initiatives contributed materially to the year as we were hitting on all cylinders. We have increased our market share in all product categories, which reflects the quality of our work. Behind the success is our investment in core people skills and a relentless focus to do well. Never is enough said about our philosophy that teams with the best talent win and superior results of execution is a must. Since Berkshire Partners purchased us in '01 we jointly committed to get the skills needed in all functions, expand the breadth of our senior management team, upgrade deep into the organization and make certain we had successful candidates at all levels. We feel we're the industry's best as we are broadened deep and far more creative.

Along with the additions inside our Company we decided to make alliances with the industry's best consultants in branding, sourcing, distribution and integration. We maintain we should not simply breathe our own air but always select the best outside resources to help us. This conscious effort to build talent and go outside enabled us to acquire Oshkosh without major distractions. With respect to the branding studies we're well into our second year of the Carter's study. We launched a significant upgrade in level of design in our baby business for Spring '06 and much improved marketing agenda for our wholesale accounts in our own stores. Response has been very rewarding. Sell throughs and comps are up. There's a great deal more coming this year as we attack all product, the retail floors and our stores with higher emotional content. We maintain we serve our wholesale accounts first. We remain steadfast concerning their importance to our consumer and to us. Ultimately our stores will set an extremely high brand standard and that will benefit all. We began a similar study for Oshkosh soon after we did the deal. We now have distinct point of views for each brand and a clear view of product differences. At Oshkosh we will begin rolling out an improved marketing agenda for our customers and our stores in Spring and Fall.

Joe and Mike will speak individually to the Oshkosh integration but let me say we feel we did the right thing acquiring them. There were no material surprises after the deal due to our good due diligence. We feel the brand has a billion dollar potential. We feel we are on our plan. It's important to realize this will take some time to reach the potential. Fall '06 product is materially better but holiday '06 and Spring and Fall of next year will move well ahead of Fall '06. We are hearing the front-- we are learning the front end about their brand at a rapid pace. Our back end is providing great support until we elevate growth. Thank you and I'll turn it over to Joe.

Good morning. I'll give you an overview of our fourth quarter performance and a current 2006 outlook for Carter's and Oshkosh on a standalone basis and then Mike Casey, our CFO, will talk about results on a consolidated basis. We had an excellent quarter based on both our financial results and our on our progress to get the key strategic initiatives. I'll start by talking about Carter's. Carter's had another great quarter with revenue up 6% for the quarter and for the full year we finished with revenue up 12%. We also increased Carter's quarter four gross margins in wholesale and retail based on product performance and better sourcing. Carter's also had a positive growth across all three channels, wholesale, retail and mass and in all three product markets for both the quarter and the year. More importantly our current Spring product of selling of off to a very strong start, all channels, which we expect will drive a positive first half of 2006. Spring product utilizes our new branding, our new, our new packaging and our new size information and the reaction has really been great. We achieved all of these results while at the same time integrating Oshkosh, strengthening our retail team, launching new brand initiatives for Carter's and beginning work on the Oshkosh brand positioning.

Now I'll give you a view of the different business segments. For the Carter's brand wholesale revenue in the fourth quarter was up 3% versus up 16% the year before and we finished the year up 8% in total. Baby was down in fourth quarter primarily due to the shift of our starters launch from quarter four to quarter three. You might remember our baby revenue was up 15% in quarter three. For baby we finished flat in 2004 and this is due to poor performance in our classics product and that was in the first half of 2006. Classic is the basic fashion segment of our baby business and about 30% of our total mix. We identified the weaknesses in this area and made powerful moves to fix the model and the creative execution. The new model is designed to create more newness on the floor with a delivery every quarter. We accelerated the introduction of three new programs in quarter four and quarter one and all the new programs are achieving their plan. These programs drive replenishment for the first half of 2006 so we're very confident in classics performance for '06.

Our core starters business, which is 70% of the baby, was up 12% in the year. We launch a new starter's core line annually in the third quarter. Sales for the most recent launch have been about 20% versus the year before in November, December and January with our top account so again, this drives replenishment for the first half of 2006. Our Fall product sell in the baby was very successful. Accounts all had positive reaction to the improvements we've made in the product. We will have a very strong year at baby and I feel we have a strong pipeline of new creative product introductions in place.

Sleepwear had a strong fourth quarter plus 29% and was up 5% for the year. We are currently finalizing our bookings for Fall sleepwear and for the full year we expect sleepwear growth to be in the mid single digits. Playwear, our third product market was up 1% for the quarter to finish the year up 23%. If you remember quarter three was up 32%, very happy with our playwear result. Consumer takeout is strong and we are exceeding our customers' expectations. We have our Fall playwear line planned up 10%, high single digits for the year, and we should have them-- again, we'll have all of our orders by the end of this month. We feel very confident we will achieve our playwear numbers. In regards to our top account, six of the top eight were up in 2005. I think it shows you the broad base support we have for our branded product. We are focusing on developing two to three year business plans with each of our top accounts meeting regularly with the senior management to be sure we are building collaborative plans. At this point we have great visibility for the whole year and confident we will achieve our plan and meet the 10% top line growth. Fall orders will be in hand by the end of the month and our Spring and baby selling are stronger than a year ago.

Talk about the mass channel, combined revenue for the mass channel was up 8% in the quarter and 22% for the full year. Our Just One Year, which is our shipments in Target, were down the fourth quarter and that was due to a shift of the timing of their annual brand wall launch. We saw the benefit of this in quarter three while we were up 40% and now we're seeing the other side. We had an excellent selling on the brand wall since the recess and this will drive baby replenishment orders in 2006. Additionally all of our other Spring 2006 seasonal products are selling very well across the board at Target and we should over achieve our plans. For Target we have booked two of the three Fall deliveries and are on track to meet our Fall goals.

Child of Mine, which is our sub-brand at Wal-Mart, another great quarter, plus 28% and we were plus 27% for the full year. Spring product is selling and selling in total is achieving our plan. We have all of the Fall 2006 bookings from Wal-Mart. We are confident that we will achieve our growth agenda. We are confident in total that we will achieve our 2006 revenue in the mass channel.

Our retail division, again in 2005 Carter's had 193 retail stores, 41 brand stores and 152 outlets. We opened 10 brand stores in quarter four and closed 3 and in total we opened 17 stores for the year and closed 4. We had another great quarter thanks to strong product performance in both our Fall and Spring lines. Revenue in quarter four was up 8.9 for the chain while accounts were up 6,1 and we were up against an excellent 2004 accounts at plus 13. For the year revenue grew by 8.6 and accounts were up 4.8. All store categories performed well in quarter four and for the year. Brand store accounts were plus 7. 4 in the quarter and plus 10.7 for the year. We attribute a lot of the success to our new retail leadership and the benefits of our core product improvements. As you are aware we have made significant upgrades in retail management. [Patty DeRosa] joined us in October. She has been a very positive impact in the short amount of time. Patty has also brought on [Tom Herney], as Senior VP of Store Operations and Rick Welsh will be our GMM for our Oshkosh stores. These additions significantly improved our skill base for the future. In regards to licensing, our licensing business was very strong for the year. We finished the year up 12% in royalties.

Talk about Oshkosh now, we built a strong integration plan after acquiring Oshkosh in July of last year. The integration is on plan. I feel good about the progress we've made and even better about the opportunity I see to increase the power in the Oshkosh brand. We made a lot of significant moves. We exited unprofitable businesses, 15 Lifestyle stores we closed and got out of the e-commerce business. We closed 14 outlet stores. We closed the Liberty DC. We have closed the Honduras manufacturing facility and we are in the process of closing the Mexican plant. We reduced complexity dramatically. In the Fall '06 line we had a 50% reduction in style colors versus the year before. We also are putting together a better model for our retail customers. We eliminated up front discounts and unprofitable accounts. We put in a new alliance structure for Fall '06 really focusing on core versus collections. Most importantly we significantly upgraded the product for Fall '06. We have integrated all of our support functions of Oshkosh under Carter's management and we also moved Oshkosh design under Patty DeRosa as of January 1. You've got to remember 65% of the Oshkosh business was retail and with Patty in it [unintelligible] it will enable her to drive a more focused product mix for retail that can also support our wholesale growth and we also began the Oshkosh brand study in this year.

Retail outlets the end of the year were 142 stores. With all the changes of 2005 comps is really the true measurement of retail. Quarter four outlet comps were plus 1.2 and were plus 1.9 for the full year. 2006 comp plan we're projecting low single digits positive. We expect to open 14 stores this year and close 3 for Oshkosh. The new stores will have some immediate improvements to the current model including better lighting, clearer price messages and new fixtures. Oshkosh wholesale 2006 plan is mid single digit sales growth. I think it's important to look at both Spring and Fall the changes we've made in the second half of the year. We planned the first half flat as we continue to clean up the Oshkosh wholesale distribution channel but we are planning a double-digit increase for Fall. We did again eliminate discounts and we improved our product margin and we eliminated accounts from the mix that were unprofitable and not able to support the new brand model, which is less promotional and more focused on higher product benefits. We are projecting a double-digit increase for Fall '06. All the orders are due by the end of the month. I'm confident we'll achieve that plan even though we excluded a lot of accounts from year before.

Our priority going forward for Oshkosh, continued product improvement and a more competitive value formula, stronger more important use of denim in the mix, improve the retail performance. We have specific store improvements we're talking about, more key items at competitive price points, a clearer promotional strategy and then beginning in the second quarter we're going to quarterly marketing campaigns for both retail and chains. We also have a renewed focus on wholesale with a more profitable model and stronger partnerships with our accounts. We'll also focus on reduce-- continue reducing costs, continue to leverage the Carter's volume and expertise while at the same time reducing SGA as a percentage of sales.

In regard to operation we had solid performance in quarter four and for the year. Our distribution costs increased less than 1% for the year despite a 12% increase in revenue so a great job in our operating area. Our inventory turned 4.1 times in 2005, which was the highest turn we've ever experienced. In 2006 our focus continued lower logistics costs and increased higher inventory turns. Regards to global sourcing continue to get lower costs, we've been able to increase the product benefits. With Carter's brand we closed two plants in Mexico in 2005. In regards to Oshkosh we closed our Honduras facility in 2005 and we'll close Mexico this quarter so now both brands will be 100% sourced. 2006 focus on the Carter's brand, continue to lower costs while increasing product value, continue to increase our sleepwear base in Asia and working on a revised product development process that deals with more frequent product introductions path, more speed to market on a shorter process time. For Oshkosh focus is on upgrading product while lowering costs and two, we continue the integration; three, narrowing both the country and factory base; four, building a stronger resource base for wovens and denim and five, leveraging the volume of all of our brands together, Carter's, Oshkosh, Just One Year and Child of Mine.

As I stated in the beginning, I think we've made great progress in achieving our strategic initiatives as a Company. We grew our core business in Carter's and we aggressively integrated the Oshkosh business. We established the Oshkosh-- we established the operating disciplines and business principles at Oshkosh that have been so important to our success at Carter's and finally, we continue to add key talent to support our expanding Company and to position us for continued growth. Now I'll turn it over to Mike Casey.

Thanks, Joe. Good morning everybody. As you can see, we've made significant progress since our last earnings call. Carter's has continued to achieve strong organic growth with good growth in all business segments and product categories. We've made significant changes to Oshkosh's business. We've stopped the decline in earnings and we have begun rebuilding Oshkosh to the profitable growth business that it was not that long ago. What I'd like to do this morning is walk you through our fourth quarter and our fiscal 2005 results, also share with you our outlook for 2006.

For the fourth quarter we're reporting GAAP earnings of $0.57 per share, which includes charges of $0.11 relating to the acquisition of Oshkosh and costs associated with the closure of our Carter's sewing facilities in Mexico. Excluding these charges adjusted earnings are $0.68 a share, up 36% in the quarter. In our earnings release issued last night we outlined the nature and dollar amount of these charges and their impact on our fourth quarter and annual results. Our Press Release is available on our Web site. For clarity what I'd like to do this morning is walk you through our results and our guidance excluding the charges that we outlined in our Press Release.

In terms of other highlights for the quarter our consolidated sales were better than we expected and strong cash flow enabled us to pay down an additional $39 million on our new $500 million term loan during the quarter. Since the acquisition last summer we've paid down $70 million or 14% of the new term loan. With respect to fourth quarter sales, consolidated sales were $350 million, up 51% including $104 million in sales from Oshkosh. Excluding Oshkosh our consolidated sales were $247 million, up 6%. Our retail segment was the largest contributor to our growth in the fourth quarter. On a consolidated basis our retail sales were up $84 million or 98%. Oshkosh contributed $77 million in retail sales during the quarter. Excluding Oshkosh Carter's retail store sales increased 9% driven largely by the strength in our baby and playwear product categories.

With respect to Oshkosh's retail stores, we closed all 15 Oshkosh Lifestyle stores eliminating their losses from our results. The Lifestyle stores were trending to contribute less than $10 million in annual sales with an operating loss of about $4 million a year. As part of our integration plan we identified an additional 23 under performing outlet stores and developed a closure plan. Since our last call we revised our plan for outlet store closures from 23 stores to 17 stores, 14 of which were closed in 2005. The remaining 3 stores will be closed in the first half of 2006. The other 6 stores, which we had previously planned to close, have shown improvement under new management and for now will remain in the portfolio. In total we've closed 29 stores since the acquisition. That's 17% of the 171 stores we've acquired. The closure costs are provided for in purchase account and will not impact our earnings. In total these 32 stores contributed about $25 million in annual sales. That's less than $800,000 in sales per [door] and that's about half the chain's average and collectively this group of stores was unprofitable.

Consolidated wholesale revenues increased $30 million or 28% in the fourth quarter including $27 million in wholesale revenues from Oshkosh. Excluding Oshkosh Carter's wholesale revenues increased about $3 million or 3% in the fourth quarter. Also had solid growth in the mass channel during the quarter, up $3 million in sales or about 8%. With respect to margins in the quarter, very good results. On adjusted basis consolidated gross margin improved 70 basis points from 36.2% to 36.9%. The improvement was driven by our Carter's brand. On standalone basis Carter's gross margin improved from 36.2% to 37.8%. Margins for almost every Carter's product category was better than a year ago. The improvement also reflects significant progress in reducing costs related to excess inventory. Oshkosh's adjusted gross margin was 34.8% in the quarter. We plan to improve Oshkosh's product margins by strengthening their core product offering with less fashion and lower markdowns and by leveraging our global sourcing capabilities to significantly lower product costs.

With respect to spending during the quarter, SG&A on a consolidated and adjusted basis was bout 27% of sales, up 260 basis points compared to last year. The growth reflects Oshkosh's higher cost structure given its heavier mix of retail store operations. Oshkosh's SG&A in the quarter was in line with our plans. The growth in spending also reflects the investments we've made in fourth quarter on the brand study, integration consulting and recruiting our new retail senior management team. Greater efficiencies in our Carter's distribution network partially offset the growth in spending. As Joe said, our distribution costs were relatively flat year-over-year and our distribution costs are the second highest component of SG&A, second only to retail store expenses. On a consolidated basis royalty income for the quarter was $6.9 million and includes $3.6 million in royalties earned by Oshkosh. Excluding Oshkosh royalty income was up 7% in the quarter.

On an adjusted basis our consolidated operating margin in the fourth quarter was 11.8% of sales, down 120 basis points compared to last year. As we expected, the decline in our operating margin during the fourth quarter was entirely driven by lower margins currently earned by Oshkosh. Just as a reminder, Oshkosh's operating margin in 2004 was less than 5.5%. In 2005 Oshkosh was trending to have an operating margin of less than 5%. One of the reasons we invested in Oshkosh is we believed Oshkosh was significantly under performing its potential for profitability. By comparison prior to the acquisition, Carter's operating margin was trending to over 13% in 2005. We continue to believe we can make significant progress improving Oshkosh's operating margin from less than 5% in 2005 to over 9% in 2006 and over 10% in 2007. Over the next few years we believe Oshkosh's operating margin could approach Carter's operating margin.

In terms of liquidity cash flow from operations in 2005 with was $137 million. This strong cash flow enabled us to pay down $70 million of debt since the acquisition, $67 million more than required. Cash flow was driven by the growth in earnings and very favorable changes in working capital. Keep in mind with that we purchased Oshkosh at a point in the year when their working capital was at its peak resulting in a reduction in working capital and positive cash flow contribution from Oshkosh subsequent to the acquisition.

Consolidated inventory levels were $188 million at the end of 2005. That's an increase of $67 million compared to December 2004. Oshkosh accounts were $57 million of this increase. Excluding Oshkosh inventory levels in our Carter's business are 8% higher than last year and that's in line with our growth in sales. Cap ex for the year was $23 million or about 2% of sales for investments primarily in our retail stores, our distribution centers and information technology.

Just to recap our performance for the year, we had a terrific year with growth in all channels of distribution both with and without the contribution from Oshkosh. On an adjusted basis our operating margin grew 70 basis points to 13% of sales. Our adjusted net income increased about 49% to $74 million and earnings were $2.45 per share, up 47%.

With respect to guidance we expect consolidated sales for fiscal 2006 will be over $1.3 billion, up 18 to 21%. We expect Oshkosh to contribute approximately $350 million in sales in 2006. Excluding Oshkosh we expect Carter's sales to be over $1 billion this year, up 8 to 10%. Earnings for the year are projected to be $2.90 to $2.95 per share, up 18 to 20% over last year excluding charges related to the new accounting requirement to expense stock options and non-cash amortization charges related to the acquisition. The new stock option expense will be $0.10 per share for the year. That's dilution of 3%. The non-cash amortization charge related to the acquisition will also be $0.10 per share for the year.

For the first quarter consolidated sales are projected to be $290 million, up 41% including $70 million in sales from Oshkosh. Excluding Oshkosh first quarter sales are projected to be $220 million, up 7% with good growth in each of the Carter's three business segments. Wholesale excluding off price is expected to be up about 5% in the first quarter. Retail will be up around 6% and the mass channel will be up over 20%.

First quarter earnings are planned at $0.53 per share. That's growth of 15% excluding $0.05 per share for charges related to the new stock option accounting requirement, amortization charges related to the acquisition and the final charges related to the Mexico plant closures. It's important to keep in mind we purchased Oshkosh last July and our 2005 result had the benefit of Oshkosh's most profitable portion of their year, their second half. Historically Oshkosh had not been profitable in the first half of their year. We plan to improve Oshkosh's operating margin from negative to positive in the first half of 2006. However, Oshkosh's operating profit in the first half of 2006 is insufficient to absorb the interest cost of approximately $11 million pretax related to the acquisition financing. We expect Oshkosh will be diluted in the first half of 2006 but meaningfully accretive in the second half and accretive for the year. You should expect over 15% growth in consolidated earnings in the first half of 2006 at over 20% growth in consolidated earnings in the second half.

With respect to cash flow we expect cash flow from operations to be about $70 million for 2006. Cap ex for the year is planned to be approximately $40 million or about 3% of sales with over $20 million allocated to our retail segment to open 30 new Carter's stores and 14 new Oshkosh stores. Given the continued strength in cash flow we plan on paying down approximately $30 million in debt this year.

So in summary, we've continued to deliver strong organic growth at Carter's. We've moved quickly to correct the Oshkosh business and have made very good progress with the integration. That concludes our business overview. I'll open up the call to your questions.

[Operator Instructions] For our first question we go to [Omar Sahid] with Credit Suisse.

I was hoping you could expand on the gross margin trends and what the moving parts are as we think about 2006 and how we should think about that.

Sure. Well it's important to kind of break it down between Carter's and Oshkosh. Carter's gross margin is approximately 37%. It's in the high 30s. As we continue to make progress on the sourcing side of our business we will do what we've done historically, continue to reinvest a good portion of that savings back into product to drive double-digit revenue growth, made terrific progress in 2005. In product margins across the board we're better than a year ago. For 2006 I would expect that Carter's gross margin will be comparable to 2005. You should expect that the margins at Oshkosh will improve. We've seen significant opportunities for cost reduction, product cost reduction at Oshkosh, and so whereas their gross margin is roughly 35%, you should expect that to improve to a margin rate at least comparable to Carter's in the high 30s.

Great, no, that's helpful. Digging into Oshkosh a little bit further, if you think about it-- I mean you talked a lot about some of the moves you've made on the retail side there and what you're doing to improve the performance of that side of their business, can you give us a little bit more detail on your expectations for the wholesale side of their business and what your expectations are and how we should think about the progression of any sort of traction in growth in that business?

This is Joe. Yes, we Fall '06, like I said, we have a double-digit increase planned for the wholesale line. We would anticipate the same for holiday. Oshkosh has four lines a year, which is a little different than Carter's but-- and then we would expect that to pick up more as we get into 2007. We learn a lot each time we come out with a line. We had good, very good customer feedback. We placed the product in the accounts we wanted to place it in so we feel very good about that, but we also see there's a lot of room for improvement as we go forward.

Great, great. Thanks and one quick last question, kind of a just detail on the Carter's wholesale growth in the quarter, the 3% number, could you just elaborate a little bit on the nature and magnitude of some of the timing issues you mentioned?

Yes, I think always in the fourth quarter you run into that with 12/30 shipments and 12/25 to 12/30. Seventy percent of the goods probably go out in the last five days of the month so you we always run into a few issues at that time and we look at it as a year. You know we came in 8% for the year in line with what we anticipated and again we were up against a 16% fourth quarter from the year before, so timing, no real change in the business.

And we go next to Melissa Otto with DE Investment Research.

Good morning and congratulations on a great quarter. First question, on the segment breakdown by channel, would you give me the gross margin numbers for retail, wholesale and mass channel?

Sure, I'd be happy to. So, again, if you look at it on a consolidated basis for Carter's, I'm just giving you round percentages Melissa. It's around 37% for Carter's on a consolidated basis, the gross margin for wholesale around 32 points, mass channel around 20 points and retail around 53 points of gross margin.

Can you give me the actual gross profit numbers for those channels just for Carter's?

Sure. So, again, and just to give you the Performa basis or adjusted basis excluding some of the plant closures, again are round numbers, Carter's gross margin around 339 million, wholesale was around 135 million, mass channel around 35 million, retail around 169 million.

Great. And then just was wondering if I could take that a step further and get the operating numbers from you guys as well?

Okay. So, again, on an adjusted basis the operating income for Carter's around $126 million, 82 million from wholesale, 21 million from mass and 62 million from retail.

Thank you and then one follow up question. Could I get a little more color on off price? I didn't really hear anything on the call about what was happening with that. Could you tell me about how it performed and--?

Yes, just so everybody understands, when we talk about off price we talk about any product that we sell that's more than 25% off what we'd sell to any one of our other customers and as we came into 2005 we made a decision to move more of our excess inventory out through the off price channel. That's to customers like TJ Max, Marshall's, Ross stores and others and the important thing to understand is the quality of this excess was good and as the mass channel brands have become more widely known there's more demand and we realize more of the cost that we've got invested in those mass channel brands. So we made a decision to sell it most out through the off price channel and keep our retail stores a bit cleaner and I will tell you we've had a significant reduction in excess inventory because there was good demand for good product and I think our retail store performance realized a benefit from it as well, so whereas off price sales was in the mid 30s in '05 you should expect it to be somewhere in the mid 20s for '06. It never has been much more than say 2 to 3% of our consolidated sales, so it's a relatively small component of our business.

Okay and then one follow up on the SG&A comment, is that 27% of sales going to continue to trend forward for 2006?

It should get better, but the important just if you know our history, as we've grown and as we've improved our product margins what we've also done is invest it. We've invested in new distribution centers, invested in talent. The big investments in '05 and '06 will be in the in the brand consulting projects now for both brands. We've investing in integration consulting, but directionally you should that SG&A we will get a significant benefit from managing the growth in other spending and at the same time investing, investing in things we believe is important to the future of the business, but directionally you should expect that we'll get a benefit from leverage in SG&A.

Great. Those are all my questions. Thanks, again, and congratulations on a great quarter.

And for our next question we got to Christina de Marval with Next Generation Equity Research.

Good morning, everybody, I'd like to have my congratulations too. First, on the retail business at Carter's, can you give us a little bit more color in terms of the composition of-- was it traffic that drove the comp upside and also wondering if you can segment the same store sales improvement by store type as you've done in the past?

Sure, just assume that the accounts for both brands was driven largely by traffic and say that the average unit retail in Carter's were probably down 1 to 2% in the quarter, but it was largely driven by traffic.

Okay.

On the store segmentation, in terms of we've shared with you in the past, if you want to just talk about the quarter, again in round percentages the quarter was up 6% and it was lead by the brand stores, but I would tell you as I look at it across the board we had strength in all of our store segments in the fourth quarter and really for the year.

They were all positive?

I think also-- this is Fred, that as Joe mentioned earlier we really elevated the level of our design and product and we had great performance across all our categories; baby sleepwear and play clothes and we saw, therefore, a resurgence in our core stores. You know even though strategically we're pointed toward having greater brand stores, new prototypes, first and foremost we tend to the core business and we saw that all our segments picked up. Even the drive to outlets that had been our weaker segment had great performance and that rolled into January as well.

Okay, appreciate that. And with respect to the new store-opening plan, first at Carter's the 30 stores, can you break that down in terms of how many of those are brand stores or might there be some other locations? And also if you can give us a sense of what we should expect in terms of the progression by quarter, the number of openings by quarter? And then, I guess, the same thing for Oshkosh, will those be in outlet centers or where might we expect those new store openings?

In regards to Carter's, of the 31 I imagine you'll probably-- over 25 of them, probably 25 to 27 will be brand stores and a few of them will be outlets. In regards to Oshkosh strategy, there'll be a mix. Some outlet stores where we think there's big opportunity and then we'll open some strip center stores, brand stores also for the Oshkosh brand. As far as by quarter, I think we're-- we haven't finalized, of course, the second half, but I'd say it's split pretty evenly between first half and second half.

Okay and then more broadly, my final question is about the competitive landscape out there, particularly in the wholesale side of the business. Wondering if you have any thoughts about new developments there, particularly at Kohl's, for example, there was the Chaps boy's launch, just wondering what implications you think that has for you and the positioning relative to both the Carter's and Oshkosh brand and where you might see some market share opportunities, any specific accounts where you see some low hanging fruit.

Well, with regards to-- first, let me deal with Chaps. We generally don't comment on competition. It's not that we don't watch what competitors are doing, you know except for the very high-end competitor, very high-end retailer. We have lots of competitors, so our strategy is not to bash competition. Chaps should do well. We don't know a lot about it, but we feel that that's out of our price range and they have a different brand position. It's a large market and there's plenty of room for competitors, so Chaps is not a concern for ours. We've had discussions with Kohl's and we both should do well there, so we don't feel that being a threat.

As far as general competition, I think you really have to go to the dynamics of the marketplace and say first of all, this is a large and growing sector and the demographics are very favorable. We feel the consolidations will continue, both for customers and suppliers like ourselves. It is difficult to compete if you're too small. We feel we're in a good position because we've got resources and capability to do things to serve that wholesale customer and also to serve our stores. Private labeling is a competitor and it's a serious competitor across all these channels. What it means is that the brands who can build more distinction and can meet the needs of their customer base will do better, so as a competitor we feel we're in a good position to meet the requirements of the marketplace. We're in these brand studies building great differentiation between us and other competitors and we're also bringing distinction between Carter's and Oshkosh. There's a lot of sameness out there and I'm not criticizing our customers. I'm just-- if you look across all channels, even the specialty channels most of them look the same. We feel there's a great opportunity to step out and be not just different, but we offer formula that's truly rewarding for our wholesalers and will do well for our stores.

Retailing is important to us because we feel anybody that's going to be great tomorrow has to think like a retailer. You know we have a long history of being prepared for big moves. Our wholesale channel is very important to us, but so is our retail and the better our retail gets the better our wholesale gets, so that's generally the way we're looking at the world.

And, if I may add for Mike just a real quick one. On the accounts payable the number was a little higher than I would have expected, just wondering what's going on there?

I will tell you it was largely driven by inventory that we had in transit. Now that we're out of the western hemisphere, out of the plants in Costa Rica and Mexico for both brands we have product coming from Asia, so it was largely driven by an increase in, in transit payables, so you can view that as largely as timing.

Okay and that's not a bad thing. Great, thanks.

[Operator Instructions] We go next to Margaret Whitfield with Ryan Beck. Mrs. Whitfield, your line is open. Please check your mute button.

I was wondering if you could comment on your retail comps trends to date with nearly two months in?

We really don't comment on comps, so through the quarter I can only say that we got off to a good start. We're always sensitive to the first quarter because it is a volatile one in terms of weather. We like to work our way through the quarter, but we feel good about the trend.

Okay.

In terms of first quarter, what you should expect is for Carter's accounts will probably be [flacked] up 2%, but for the Easter holiday we probably would have been up some portion of 3 or 4% for the first quarter, so we're expecting good comps for the year. At Carter's--

But the Easter shift would have been 3 to 4 points roughly?

Correct. The first quarter would have otherwise been up 3 to 4, but for the Easter and holiday shift and into the second quarter.

And Patty has been on board what, close to six months now or five months, wondered if you could comment on what strategic changes she might be considering or has made in your retail business?

What we like about her are a number of things. She has great brand experience and she has tremendous product insight or instincts for product and also for people. She's already brought in some real key players that we think are going to make a huge difference to our business. What we also like is she understands the need for first always attacking your core business, so she's really helped improve the core performance of the business. She sees the opportunities for a reduced level of merchandising in our stores, for example. We are running a lot of tests currently and we can see that ultimately we won't have to have as much merchandise on the floor. We'll do better with fewer things. She added benefit too. She felt that we ought to wait a bit on these prototypes because; one, she'd like to spend more time understanding the business and strengthening our core business, and secondly, there were some things about the prototype she thought could be a lot better. We agreed, so I would say at this point in time after not too many months on board we're really pleased.

Okay. I wondered if you could discuss the Oshkosh wholesale business? It sounds like you have perhaps shrunk some of the marginal customers. Could you quantify that?

Sure. I tell you, Margaret. I think the important thing for 2006 is think of it as first half, second half and the reason we say that is our first ability to impact product doesn't come until Fall '06. We start shipping in the second half of the year so I'll tell you, we updated our board last week and if you look at Oshkosh's wholesale business in the first half the best thing we could say about it is that we have stopped the decline that they have had in their wholesale business probably over the past three or four years, so in the first half exclusive of the lot of accounts which we have intentionally edited out because they were either marginally profitable or unprofitable. Our wholesale with the customers we want to move forward with will-- the level of sales will be flat year-over-year and I would say we probably edited out some portion of $5 million or more of what we'd consider to be off price sales.

The more powerful story is the second half of the year, again, exclusive of these off price customers, we're planning double digit growth in the wholesale business, so that's-- we're very encouraged by that. We're getting good support for the product and planning double digit growth, but I'd say in total for the year we're probably editing out a better part of $15 to $20 million of wholesale sales.

And could you tell me where you think the biggest upside is in terms of getting Oshkosh back to its former sales level with some of the majors?

I think it's this brand formula. I think its elevating product design. It's getting a greater emotional marketing formula for the brand. It's training people to perform at higher levels. It's getting great benefit out of the supply chain, lower costs, increased speed and innovation. I think it goes across all our business functions. I think as I've said in the opening it takes time. We reflect back on the days when we turned around the Carter's brand and you just have to have a very disciplined approach. The biggest thing we watch and we're always concerned about is trying to move too fast and we want to build the infrastructure before we get too adventurous.

Can you be specific as to which customers you think you have realized success with in terms of regaining some footing for Oshkosh?

No, we prefer not to do that. It never creates goodwill, so we just avoid that. Thank you, anyway.

All right. Thank you.

And we go next to Randy Conneck with Goldman Sachs.

Hi. It's actually Randy Conneck for Margaret Mager. Just a couple quick follow up on Oshkosh, could you just walk us through in terms of the 350 million in sales guidance, just kind of the rough outlook for first half versus second half and how do those numbers kind of shape up with what Oshkosh reported full year of 2005 recognizing that you just owned the business in the second half and if you kind of back out all the reductions that we went over and the store closures, the off price, etcetera? Can you just kind of walk through the organic growth you're seeing there.

And then secondly, follow questions on retail, just can you give us-- with the comps up 6.1% in the quarter, could you just walk us through the comps, how they progressed during the quarter? Did they strengthen during the quarter? And I know the comp number that was reported was above our expectation, so what drove that positive, kind of, upside there? Was it product? Was it on the execution of marketing? And finally, on averaging at retail down slightly, was that a mix issue, what was that?

Let me just take your first question. Of the $350 million you should assume that say 245 million of it will be in the retail stores, the balance in wholesale. If you were to look at a full year '05 probably compares to-- we did 200 million in the stub period, but for a full year of '05 I'd say it was around $362 million, about $248 million in retail and the balance in wholesale. Of the 350 million in '06 I would say that about $205, $206 million would be in the second half of 2006, so that's how we're splitting it down first half, second half.

As far as what drove those comps; it was one, improved product, two, stronger marketing programs in our stores, three, better execution and four, inspired leadership.

And I think your question, each month was positive. In the quarter all three months were positive and as we gained momentum each month got stronger.

Just on the AUR?

You should assume it's largely traffic.

Now, is just the driver of the AUR down slightly?

Down slightly?

Yes, yes. What drove that?

If anything it was largely driven by mix.

Got it. Thank you.

And we go next to Dennis Rosenberg with DSR consulting.

With Oshkosh the second half of this year of '06 versus '05 looks like it will be up relatively modestly, but moving ahead to '07 I would think that you should probably see some accelerated top-line growth and if that's the case, what impact will that have on the bottom line growth rate versus the current '06 expectation?

I'll tell you, Dennis, one, we agree with your first comment. We should see acceleration in 2007 and in terms in what will it do to earnings, I still come back to what our view was. Going into the Oshkosh acquisition we felt as though it would enable us to sustain the type of growth that we've had historically, which in a broad sense 8 to 10% top-line growth, 15 to 20% earnings growth. I think you know our track record. We've been performing at the top end-- or above the top end of that range, but the important part of the Oshkosh story to understand starting in the second half of '05 and '06 and then again in '07 Oshkosh is in need of investment, so there is significant cost reduction opportunities, but there's also significant investments that we're going to make. The net effect of what we will save and what we will invest we plan to continue to grow the business at say 15 to 20% in earnings a year. Now for '06 it's going to be 18 to 20% and, again, we give you guidance at a level that we're comfortable based on where we are in the year and based on what our visibility is, but we rang every nickel of opportunity out of Oshkosh near term we could outperform that guidance, but that's not then our style. It's not been our track record. What we love about Oshkosh it's going to enable us to continue putting up good revenue and earnings growth numbers for the foreseeable future.

Okay and--

I think it's important to note too to Mike's point that we significantly invested in '05 and we were raising that in '06 and we will continue that well through '07. We're investing in the brands, in our wholesale accounts, in our stores and in people. And, you know, these things may not flourish in the short run, but they'll definitely pay. We're in business for a long time here. We want to extend the growth.

Okay, that's good. And what's the EPS accretion for Oshkosh in '06 versus '05?

Yes, Dennis, I actually mentioned on the last call. We're actually prohibited from commenting on that once we give you a bridge from GAAP to non-GAAP. That's a non-GAAP measurement and I'll tell you what I feel comfortable saying is and I think it is the more important measurement and if you think of the history of Oshkosh, go back maybe 5 years, they were approaching the 500 million in annual sales and their operating margin was around 12%. In 2004 their operating margin was close to 5%. In 2005 their operating margin was probably 4.5%. Our focus is how do we restore their operating margin back to 12%, so we had thought for that '05 we could get their operating, or let me give you a full year of '06; we could get their operating margin back to 7.5%. It'll probably be closer to 9.5% in '06 and then the plan is let's see if we can't improve that in some portion of 20 to 50 basis points a year. Near term we'll probably outperform that, but one of the reasons we loved the Oshkosh opportunity is we felt as though it was significantly under performing its potential for profitability, so we're focused on improving their operating margins and we're making good progress doing that.

Okay, great. Thank you.

And we go next to Marie Driscoll with Standard & Poor's.

I'm wondering how-- we viewed the product, I guess, about a month, a month and a half ago and at that time you spoke about reducing the skews and-- and this is for the Oshkosh product-- reducing skews and taking a strategy of core less fashion and I'm wondering how that's working a month and a half later?

Yes. We presented that in January to our top accounts and the numbers where we reduced the style colors about 50% and then previously Oshkosh's wholesale line had been really a collection business, one collection per month. Very hard to maintain profitability under that model, so we changed the model to drive a lot more core. We didn't out of the collection business, but we probably to 4 a year versus the previous model of 12 a year and then do more than half the business on the core or the key item and the strategy was well received by all of our accounts. They all felt that was the right direction and, as I've said before, the bookings will be a double-digit increase so that achieves our goal.

Okay. Do you, as you look at a year, or two, or three foresee segmenting the Oshkosh brand the way you have with Carter's through the mass channel, developing different brands for customers like Target and Wal-Mart?

Well, we already have a business with Oshkosh and Target, Genuine Kids by Oshkosh.

Yes.

That was in place when we did the acquisition. It's not a priority of ours to segment yet. Our priority is to restore the preeminence of the brand and its performance. We've had no discussions otherwise.

Okay. And my final question is on SG&A. If SG&A-- if the top cost is store expenses and the second most expensive factor is-- or the second largest proportion is distribution and given the amount of stores that you're opening, I'm wondering how you're going to achieve SG&A leverage and, I guess, part of that is related to in new store openings how do they open relative to the rest of your chain?

The important point for to know for both brands one component that we've shown good progress on and that we still believe is a big opportunity is how do we improve the productivity of our stores, so just a refresher on the Oshkosh opportunity, Oshkosh's operating margins in their retail segment on a four wall basis, if you just look at their store chain, their operating margins are around 22 points. Carter's are close to 30 points, so there's a significant opportunity to improve the productivity to our stores. One of the things we loved about Patty DeRosa, her point of view when she looks at the productivity of our Carter's stores, which we had felt as though and have been a very profitable component of our business, she feels as though it's under performing its potential. So she's got a lot of new ideas, some important initiatives that we'll share with you over time in terms of that as they take shape, how do we improve the productivity of our Carter's stores, so we see opportunity. We've built detailed models and we see opportunities to realize SG&A leverage. You shouldn't assume that, notwithstanding very good performance for a long period of time, there is still significant opportunity to improve the profitability of our business.

In regards to distribution in the second part of your question, Carter's around $0.18 a unit and Oshkosh is about $0.30 a unit, so you can see the opportunity between the two brands. We also are dealing with DC bypass where we kind of don't even deal with the goods coming into our distribution center. That became 11% of our business last year. We see that increasing again in 2006, so we have a very strong team on the operating side that have been driving down distribution costs consistently and we see that continuing.

Great. Thank you.

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

Yes. We thank you for your attendance once again. We always appreciate the quality of your questions. They most assuredly help us. We feel there's opportunity for continued top and bottom-line growth over the next several years. We feel good about being equipped as a Company to meet consumer and customer expectations and we're fully committed to our shareholders to continue our high returns. Thank you, very much.

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, March the third. The dial in number for the replay is 888-203-1112 in the United States and Canada and 719 457-0820 from international locations. The confirmation to access the replay is 5943057. Again, those numbers are 888-203-1112 in the continental US and 719-457-0820 internationally and the confirmation code is 5943057. We do appreciate your participation and you may disconnect at this time.