Carter's Inc (CRI) 2006 Q4 法說會逐字稿

Welcome to Carter's fourth quarter 2006 earnings conference call. On the call today are Fred Rowan, Chief Executive Officer, Joe Pacifico, President, and Mike Casey, Chief Financial Officer. [OPERATOR INSTRUCTIONS] Carter's issued its fourth quarter and financial 2006 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 the Company's fourth quarter and fiscal 2006 earnings release and its most recent annual report filed with the Securities and Exchange Commission. Also on this call the Company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the Company's earnings release. Now I'd like to turn the call over to Mr. Rowan. Please go ahead.

Good morning. Joe Pacifico and Mike Casey will follow me with some more detail regarding our performance and the guidance we've given. Typically on these calls I spend some time on our fourth quarter results. Given our recent press release announcing we would lower our 2007 guidance, I prefer to speak directly to the issues at hand and our approach towards strengthening our business model. As we move well into the month of January, it was apparent our issues with our retail stores and the Oshkosh product agenda were continuing to drag on our results. We realized we needed more time to correct them than we had anticipated. We have a long history of being candid and conservative with our investors, therefore we felt we should lower expectations and take the necessary time to fix them. We are convinced we know what to do and we feel we are seeing evidence of actions we have taken. We simply underestimated the turnaround window. It will take this year to regain momentum. We will remain cautious until there is more certainty. We will individually walk you through our thinking on the call and offer plenty of time for Q&A.

The marketplace is conducive for brands. The young children's sector is large at 22 billion and it grew at 9% of last year. There is ample room for several competitors to do well. There is no concern that we cannot continue to increase market share in all of our brands and channels or that the market will be dominated by one or two competitors. Our issues are not that. We have two powerful consumer brands in Carters and Oshkosh, leveraging strong growth in our three sub brands. Oshkosh resonates with consumers, with very high awareness and favorable recall. The consumer clearly conveys in research they want to purchase Oshkosh products, they just want a more compelling product proposition. We have marketed certain products that support this view. We are sticking to our belief that we will grow 8% to 10% revenue and 15% to 20% earnings. Not to beat a dead horse, but we must take the time to position to continue that growth. We've also built into our model the important investments for building this Company for extended high growth.

Those areas of major investment include hiring a strong retail president, increasing branding, more emphasis on consumer research and branding itself, fixturing our products at retail and at the wholesale floor, customer relationship marketing with systems capability, continued retail store growth, the proper level of inventory and share repurchase. We are not taking our eye off of Carter's wholesale. In fact we will be more competitive. I don't want to convey too much detail on this call for competitive reasons, but rest assured we will continue to grow our Carter's business and we will position Oshkosh for bigger things. You should expect a shot in the arm for our wholesale brands as we move through this year and set the stage for better things. We are not limited in resources in what we can do that's important for this Company. We have enormous cost reduction opportunities planned to fund competitive products and the right investments.

We will restore our margins as well. Joe Pacifico is Interim President of Retail and making significant strides to get that business turned around and also to reposition the Oshkosh brand for continued growth. We will recruit a retail president and we are repositioning Oshkosh certainly to be a leader. Our inventories are in good shape, meaning in addition to rebuilding our retail store deficiencies, which we are catching up, we have no problems with any of our customers. Our supply chain is of high quality. It's positioned to offer up chunks of cost reduction and product innovation. Our cash flow is strong and some will be used to repurchase shares. Our board has authorized us to purchase up to $100 million. Mike will speak more to that subject when it's turned over to him. At this point I'll turn the call over to Joe and I'll return at the end of that -- this meeting to have some closing comments about our strategy.

Thank you, Fred. Good morning. We had a good 2006 and achieved our consolidated earnings per share goal. The strength of 2006 came from our Carter brand wholesale business and our mass channel business. However, our retail business and Oshkosh product performance did not meet our expectations. We believe retail and Oshkosh are both correctible over the next year and we have a very focused agenda to make these corrections. Our balanced portfolio of strong consumer brands, essential core products and diversified distribution strategy is a competitive strength that we expect will continue to drive growth in our core businesses. I will now provide you an overview of our 2006 performance in each of our business segments, along with some commentary on the coming year, pointing out the initiatives we are focusing on as a Company. Start with Carter's brand wholesale, very strong finish to an excellent year. Excluding off-price for the fourth quarter, we finished up 20%, which led to a 10% increase for the year.

For the year we had positive sale growth in all three of our product markets, led by baby plus 18, sleepwear was plus 6 and play wear was up 2. We finished the year with very strong growth at our top accounts, including over 10% growth from four out of our top five retailers. Right now we have over 90% of our Carter's fall orders in hand. This gives us really good visibility on our business through the third quarter of 2007. I'll make a few comments on each one of the product markets. In baby we have a dominant marketing position, evidenced by strong over-the-counter selling and bookings growth of over 10% in the first half of 2007. With our fall bookings also up over 10%, we project the business will provide double-digit sales growth for the year. In regards to sleepwear, our spring bookings were up double-digits. We believe our fall '07 product is better than last year, however, we believe we are being penalized for our performance in the fourth quarter of last year, so we are projecting fall shipments to be flat and we expect sleepwear sales to be up 2% to 4% for the year.

In regards to play wear, again our spring bookings were up double-digit, fall shipments we are projecting up 6% to 7% and we believe we will be able to achieve our growth objectives of plus 6 to 8 for the year. Coming off a strong year in Carter's wholesale, we feel good about our '07 guidance of 7% growth as we continue to invest in and strengthen our partnerships with the best retailers in the industry. Oshkosh wholesale, sales were down 12% due to our decision to close unprofitable accounts last year and our positioning of the price model too high for our fall and holiday '06, as we mentioned on the last call. Our spring bookings were up 2% and our summer bookings, which represent close to 15% of our annual business, increased 20% over last year. However, spring selling is off to a slow start and, as a result, we are being cautious about our fall '07 commitments. As of now we expect fall orders to be flat to down 10%. We believed we could fix Oshkosh product proposition in the first year and it's taking longer than we initially believed.

We have made improvements to the product but we still have not established enough high volume core items and our prices definitely need to be more competitive. We still believe the Oshkosh brand has great potential. It is only a $90 million wholesale business versus over $450 million at Carter's. It only has a 5% share of zero to seven market, so a lot of potential. It is a highly recognized and well loved brand for the consumer. We will get the product and the price right and that we have the resources to accomplish this. Talk about the mass channel. Excellent fourth quarter and year in mass. We finished the year plus 28 at Target with our Just One Year brand and plus 21 at Wal-Mart with our Child of Mine brand. With Target I am really pleased with the balanced growth we experienced across baby sleepwear and play wear, each segment grew over 20% in '06. The components of our overall 28% growth consisted of -- 5% new doors; 11% new space; 5% comps; and 7% productivity gains. This past year we also experienced very strong growth with Wal-Mart.

In baby sleepwear and play wear each one of the those segments was up at least 15%. The components of our 21% growth at Wal-Mart -- 3% new doors; 7% new space; 2% comps; and 9% productivity gains. The mass channel continues to grow substantially, is now a $9 billion market for '07. This is the fastest growing segment of the children's market and represents an important continued growth segment for us. We only possess a 6% share of the '07 market. With our Wal-Mart fall orders in hand and expected orders from Target, we are well-positioned for a strong '07 in the mass channel and we believe we will achieve our guidance of plus 10% sales growth. Carter's retail, 2006 was not a good year for our retail business. While sales were up plus 5 in total, we fell short of our comp expectations of plus 3 to 4. After experiencing negative 1.6 comp in the fourth quarter, we will finish the year flat. There are several factors that contributed to our results but I believe the biggest is we simply did not plan and execute well. We did not perform as well as we did in wholesale because our inventory buy plans were weak.

We did not have the appropriate inventory to support our sales plan, which was particularly true in play wear and accessories. We made decisions early in the year to cut inventory levels in the second half in an effort to create cleaner stores and increase turns. We still believe our objective was correct, however, we went way too far with this decision. Inventory levels in the later half of the year ended up 25% to 30% lower than the previous year. Since taking over the day-to-day management of our business in November, I've been focusing on improving our inventories in the open to buy process. We have been improving spring inventory levels, which I think will really begin to impact our business positively beginning in April. We've also done a much better job of planning our fall buying. At Carter's we have a history of execution. This past year we brought in a new retail leadership chain and we really tried to do too many things too quickly. We experimented with multiple models, opened 31 new stores, we tested new floor sets and we changed our inventory strategy and processes as I have discussed.

We have a competent team, however, they were new to Carter's business and that did not execute as well as we had hoped. I think we are doing a much better job of collaborating between retail/wholesale and the rest of the Company. We will now roll out -- we are now rolling out a new floor set that will be in place by March 1st. It will properly market key items and communicate a clear value message. Combining with the improvements in inventory, this will definitely be a positive move for the business. I believe we are putting the right pieces in place to stabilize our model and grow this area of our business. I am encouraged by the fact that many of our problems we face were self-inflicted and am confident we are well on our way to fixing them. Oshkosh retail 2006 was a challenging year for us with our Oshkosh retail stores, as well as with wholesale primarily problem for Oshkosh retail is product related. We just did not go far enough to develop dominant core products.

In addition we were effect by carrying lower inventories than the previous years in an effort to adjust the mix. I worked closely with the team to adjust all fall buys and the drive marquee item impact. I believe we can lower prices appropriately to drive the right value equation in our stores. As with Carter's, we have an entirely new team trying to execute a lot of new initiatives. This team is now focused on executing a more and consistent powerful floor set and price message. The Oshkosh floor set will also be in place by March 1. As we fix product at Oshkosh and the team gains experience, we should be able to again see positive comps. As with Carter's, we expect to begin seeing improvements in the business starting in April.

In closing, we are working hard to improve our retail business and we are making progress. In regards to Oshkosh product, we know what we need to do and we are making the necessary changes. Meanwhile, we have very strong growth in our core Carter's brand business and in the wholesale channel. I have a high degree of confidence in our people and culture. We have had some issues over the past year but we know what we need to do and we are doing a better job of combining the strengths of the resale and wholesale teams. It was a combination of good and talented people with different skills that will drive our future. I am encouraged by what we have learned and feel real good about the future of our business. With that I will turn it over to Mike Casey.

Thanks, Joe. Good morning everyone. I will walk you through our fourth quarter and our fiscal 2006 results. I will also comment on our outlook for 2007. To begin it's important to note there's a meaningful difference between our earnings on a GAAP basis and our earnings as adjusted for certain charges in 2005 and 2006 related to the acquisition of Oshkosh, the refinancing of the Company's debt, the adoption of a new standard for stock option accounting and plant closures. Because these charges impact comparability, I'll comment on our results and our guidance excluding these charges, which we've outlined in our press release. Our adjusted earnings for the fourth quarter are $0.47 per diluted share, up 38% to last year, $0.01 better than the guidance we shared with you on our last call. For the year adjusted earnings were $1.51 per diluted share up 24% to last year. In terms of sales for the fourth quarter, consolidated sales were $377 million, up 8% over 2005 and slightly better than the guidance we shared with you on our last call.

Carter's sales, excluding Oshkosh, increased 15% to $283 million driven by a 21% increase in Carter's wholesale sales and a 17% increase in our past channel sales. Oshkosh sales were $95 million, down 9% in the fourth quarter, which reflects a 4% decrease in Oshkosh retail sales and a 3% decrease in wholesale sales, excluding off-price sales. Oshkosh's off-price sales were down 75% in the fourth quarter. With respect to profitability, our consolidated gross margin in the fourth quarter was 36% compared to 36.9% last year. The decline in gross margin was driven by our sales mix with mass channel sales up 17%, wholesale sales up 13%, and only 1% growth in our higher margin retail business. Within our retail segment gross margin decreased from 50.4% to 49.8% due to more aggressive promotions to stimulate sales. With respect to spending in the fourth quarter, on an adjusted basis SG&A was 24.2% of sales, nearly 300 basis points better than last year. The reduction in SG&A as a percentage of sales reflects lower incentive compensation provisions, lower consulting expenses and lower recruiting costs.

The improvement in SG&A also reflects our efforts to control discretionary spending and our progress integrating Oshkosh. On a consolidated basis our royalty income for the quarter was $7.6 million up 10% to last year. Carter's royalty income increased 12% driven by our Carter's and Child of Mine brand licensing arrangements. Oshkosh's royalty income in the fourth quarter increased 7%, driven by growth in international licensing. On a consolidated and adjusted basis our operating margin in the fourth quarter was 13.8%, up 200 basis points compared to last year, driven primarily by controlling the growth in spending. Interest expense for the fourth quarter was $6.6 million, down 11% compared to last year. The reduction in interest is due to the progress we've made reducing debt since the acquisition. In 2006 we reduced debt $85 million or 20%. Since the acquisition we've reduced debt by $155 million, over 30%, and reduced our leverage from 3.6 times to 1.0 times EBITDA.

We are very comfortable with this level of leverage and given our current valuation, we plan to use excess cash to begin repurchasing shares of our outstanding common stock. Last Friday our board of directors authorized a $100 million share repurchase plan, which at our current valuation represents about 7% of currently outstanding shares. With respect to taxes, on a consolidated and adjusted basis our effective tax rate in the fourth quarter was 36.7% compared to 39.1% last year. The decline in the effective tax rate is due primarily to lower levels of state taxes. Just to recap our performance for the year, we had a very strong year in terms of our Carter's wholesale and mass channel businesses. Carter's wholesale sales were up 9% last year and our mass channel sales were up 24%. The strength of these businesses helped to offset the weakness we experienced in our retail segment and Oshkosh wholesale sales. On an adjusted basis our operating margin for 2006 was down 10 basis points to 12.9% compared to the prior year, due primarily to the performance of our retail segment.

In terms of liquidity, cash flow from operations in 2006 was $88 million, compared to $137 million last year. Keep in mind that we purchased Oshkosh in July, 2005 when it's working capital was at its peak, resulting in a reduction in working capital and significant positive cash flow contribution from Oshkosh subsequent to the acquisition. Our consolidated inventories at the end of the year were $194 million, up only 3% compared to last year. The low growth in inventory reflects a much cleaner mix of inventory and much lower inventory per door at both Carter's and Oshkosh's retail stores. As Joe mentioned, we ran too lean on inventories in our stores. At the end of 2006 average inventories levels per door at Carter's were down 25%. Oshkosh inventory on a per door basis was down 10% from the prior year-end. Additionally our excess inventory levels are half of what they were at the end of 2005 due to better forecasting of demand and supply chain performance. CapEx for 2006 was $31 million, primarily for retail store openings and systems integration. CapEx in 2006 was 2.3% of sales and that's in line with historical levels.

With respect to guidance, weakness in our retail business at both Carter's and Oshkosh has continued into 2007 and it will impact our near-term growth plan. We are in the process of making what we believe to be the necessary improvements in our business, specifically getting the right level and mix of inventories back into our stores. We also have more work to do improving Oshkosh product performance, which is taking longer than expected and will impact our growth in Oshkosh wholesale sales this year. Our consolidated net sales for 2007 are planned at $1.4 billion to $1.415 billion, up 4% to 5%. Sales of our Carter's brands are projected to be $1.072 billion, up 5% with 3% growth in wholesale sales. Carter's wholesale sales are planned up 7%, excluding off-price sales. Our mass channel sales are planned at 10% for 2007. For Carter's retail stores we are projecting sales up 5%, assuming comps flat to down 1% with ten new doors and six store closures. Oshkosh sales are planned at $328 million, up 1% over 2006, with wholesale sales planned down 9%, down 7% excluding off-price sales.

We are projecting Oshkosh retail store sales to be up 5%, assuming comps flat to down 1% with five new doors and three closings. Our consolidated gross margin for 2007 is planned at 35.9%, down 50 basis points from 2006 reflecting investments to upgrade our products. As we discussed on our last earnings call, we expect our gross margin will be lower in the first half and better in the second half of this year. We are currently projecting gross margin down 170 basis points in the first half, up 40 basis points in the second half of the year. In 2007 we are planning to control the growth in SG&A to 4%, excluding cost related to the closure of our White House, Tennessee distribution center. Yesterday we announced our plans to close this facility. Over the past few years we've significantly improved the efficiency of our distribution centers in Georgia and expanded the use of third party warehousing and distribution on the west coast.

These improvements have enabled us to absorb the capacity of the White House distribution center in our remaining distribution network. The cost related to this closure are estimated to be $0.09 per diluted share for 2007, including $0.06 per share in the first quarter. The closure of this facility is expected to lower our distribution expenses by $2 million in 2007 and lower expenses by at least $4 million annually beginning in 2008. Consolidated SG&A as a percent of sales is planned to be 26.2% flat with 2006, largely due to the low growth in retail in Oshkosh wholesale sales. Our SG&A assumptions for 2007 also reflect our plan to invest in areas which we believe will raise the awareness of our brands, such as co-op advertising, point-of-sale marketing, direct mail marketing, customer relationship management tools and system upgrades. Our royalty income in 2007 is projected to be $32 million, up 10% over last year. Carter's royalties are planned up 9%, Oshkosh royalties are planned up 10%. Interest expense for 2007 is planned at $27 million, which is comparable to last year.

Our consolidated operating margin in 2007 is planned to decrease 40 basis points, from 12.3% to 11.9% due largely to the lack of expense leverage on low growth and sales. CapEx is planned at $36 million, or 2.6% of sales, again in line with historical spending. With respect to cash flow, we expect cash flow from operations will be about $60 million for 2007, lower than 2006 due to the increases in working capital, primarily the growth in inventories to get our stores back in stock. Average working capital in 2007 will be 18% of sales compared to about 15.5% of sales in 2006. Diluted earnings per share for 2007 is expected to be $1.42 to $1.49 per share, flat to up 5% over 2006 excluding charges of $0.09 per share related to the closure of our White House, Tennessee distribution center. We are assuming effective tax rate of 37.8% and 61.4 million diluted shares. For the first quarter consolidated sales are projected to be $305 million, up 3%. For our Carter's brands, first quarter sales are projected to be $238 million, up 5% with 7% growth in wholesale sales, 10% growth in the mass channel and no growth in retail sales. Comps in our Carter's retail stores are planned down about 7%.

Oshkosh first quarter sales are projected to be $67 million, down 5% from 2006 with wholesale sales down 8% and retail sales planned down 3%. Comps in our Oshkosh retail stores are planned down about 10% in the first quarter. Gross margin for the first quarter is planned at 33.4%, down 310 basis points compared to last year due primarily to investments upgrading our products. We are disappointed we did not see an acceleration in sales as a result of these investments. SG&A is planned at 29.1% of sales, it's up 110 basis points from 2006 due to the low productivity of stores opened last year and higher distribution expenses. Our distribution expenses reflect the impact of higher unit volume to rebuild retail store inventories. Our consolidated operating margin is planned at 6.7% for the first quarter, down 420 basis points as compared to 2006. Diluted earnings per share is expected to be $0.14 per share, down 46% compared to last year, excluding $0.06 per diluted share for costs related to the closure of the White House distribution center.

We characterize this earnings guidance for the first quarter as the bottom, based on what we know today. We had a good President's Day weekend in our stores and we are starting to see better comps. With better comps and the timing of certain investments, it is possible earnings could be $0.02 to $0.03 better than the guidance for the quarter. In summary we achieved over 20% growth in earnings in 2006 despite the weakness in our retail segment and Oshkosh's wholesale business. We are committed to fixing retail and Oshkosh in order to achieve our historical and longer term growth objectives of 8% to 10% top-line growth and 15% to 20% growth in earnings. Achieving these goals is subject to making progress with our retail business in Oshkosh product initiatives this year. At this time we will open up the call to your questions.

[OPERATOR INSTRUCTIONS] Would will take our first question from Omar Saad from Credit Suisse.

Thanks, good morning. Fred, I wanted to, Fred and Joe, I wanted to ask you about Oshkosh, a couple of questions about Oshkosh and some of the issues that you've had there. Do you think that the core product business model that has been so successful with the Carter's brand in driving the growth there in terms of revenues and profitability, do you worry that that's not as easily translatable to the Oshkosh given the difference in age and some of the other difference in the brand and the segments that it targets?

The answer is we do feel that Oshkosh is similar to Carter's and it should be a core essential products. The mistake we made is we elevated -- our impression was early on that Oshkosh could carry more [cashay] than it can, meaning we elevated too many benefits and we raised the prices too high. Subsequently, we've done a lot of research, a lot of competitive analysis and we feel that we know what to do with that. So our mission going forward is to introduce a lot more core products and be much more competitive in our pricing. We definitely feel it's a core essential brand. We feel it's a great, great brand. The consumer has a very high awareness of Oshkosh. There's a good feeling about the experience they've had. They recollect historically that it carries, should carry our konic products, particularly dominant in denim and tops to go with it.

We just lost the edge on our positioning, so that's getting corrected. Our customers have a high regard for this brand. They've always wanted Carter's to acquire Oshkosh well before we did it. They need the brand to compete with the likes of the specialty store brands. Our key customers are actually in fact are buying more. The big customers are buying more of Oshkosh than they've been buying. It's just they want the proposition, the core product proposition more in line as well. We have high confidence there. We would just admit that we screwed up on the initial positioning of it and that is getting correcting and that's why we want to take this year to reposition it.

Okay. And then if I could switch gears. You've discussed some of your new store plans and plans for the retail business and outside of the inventory issues. Can you talk about, as we think back -- think to the long-term growth opportunities for the retail business, and it may be too early to do this as you make the adjustments this year, but can you talk about the performance in the non-outlets and versus the outlets and how you think about those two aspects of the retail business?

We definitely think there's still growth in non-outlets. Again as you said we want to focus on getting our model right this year. I think we tried to do way too many things last year and got us off track. We definitely believe there's still potential in opening stores. We are just slowing it down a little bit this year to correct our core model and then we will start expanding again.

Just to add to that, Omar, the performance of these brand stores in term of the comps have been better than the non-outlet. So we have not abandon the brand store growth. The comps for the fourth quarter were down 1.6, but the comps in the brand stores were up 3.7. So, of the 61 Carter's brand stores we have, 33 are comping, they are comping and nicely. What we were disappointed in last year is that as we opened up some of these new stores and we went more aggressive with the roll-out, we opened up 31 stores, we typically opened up about a dozen in any one year. As we opened up more stores we made some mistakes in terms of site selection. So the new stores that we opened up in 2006 opened up at a rate lower than what we were accustomed to. But what we found over the past four years is that these stores open up at a lower level but they have good, solid comps in the following years. They are good stores. I would say the issues that affected the overall chain affected those new stores, but we think by getting the right level of inventory, a stronger presentation of core, a very clear pricing message on the product, we think that all the stores will be better including those new stores.

As you think about that in all your different channels, you are obviously using a multi channel strategy, what are you learning about the differences in the consumer who shops in the outlet store versus the brands store versus your traditional wholesale channels versus your mass channels? Is there a lot of overlap or are you finding very distinct consumer segments shopping these channels?

You'd have to think there's some level of cross shopping and we went into that multiple channel strategy knowing that you would have some of that. But it's not, it's not material. Our research does show that it's not material to our other brands, other channels. There is a difference in the consumer. There's no question there's a difference between the Wal-Mart consumer and the Target consumer and the department store consumer. And we do attack that with different level of product design and a different economic model. So we've been really good about that. I still say those are not the issues, it's more how we position Oshkosh initially and it's how we had disruptive changes in our retail format.

I don't think we have structural problems here. We've discussed that quite a bit internally. We feel good about we correct these two issues, it's going to take sometime to do it and to think that we -- in retrospect we figured we'd fix Oshkosh in a year was a bit optimistic. Some of the great successes in the apparel business and in retail take sometime. J. Crew, who is the darling of Wall Street today, took two to three years to reposition their business. We were a bit naive to think we could do all this, having taken on a major acquisition, we just need the time. That's our concern is getting the time here and we think with taking this year to build, rebuild and better building blocks we will get it done.

Great. Thanks.

We will take our next question from Brad Stephens from Morgan Keegan.

Good morning, guys. Mike, can you walk us through the composition of the comp this past quarter, baby versus play and sleepwear, ticket traffic, outlet brands, geography, et cetera?

Sure, be happy to. The comps in the Carter's stores in the fourth quarter were down 1.6% and what we found interesting is there was weakness in two categories. And if you look at the value, the dollar value ascribed to that comp decline of 1.6% it's about $1.5 million. Of that $1.5 million sales decline about $2 million of that was in accessories and the accessories bucket in the fourth quarter comps were down 13% and we were carrying 44% less inventory on a per door basis. That goes back to Joe's comment that we went too far cutting back inventories. So the other bucket was in fall play wear. Of the $1.5 million decline in comp sales, about $3.8 million of that was in the fall play wear category. The comp was down 11% and we were carrying 25% less inventory on a per door basis in the fourth quarter. So you can see the weakness, the real strength, the baby comps were up about 4.5% in the fourth quarter, up 8% for the year. Our sleepwear comps in the fourth quarter were up 3%.

Spring play wear, spring play wear comps in the fourth quarter were up 44%, up $3 million and up 44%. There we were only carrying about 7% inventory on a per door basis. And the spring play wear comps for the year were up 5% and for the year we were carrying on average 10% more inventory on a per door basis. We are making a direct correlation between where we supported these product categories with inventory we had very good performance, where we didn't we got hurt. And that we believe is correctible and we feel as those by early in the second quarter we will be back in stock and a better inventory position. Similar impact at Oshkosh. In Oshkosh the comps in the fourth quarter were down 6.7%. The dollar value of that comp decline is about $5 million. In the accessory categories of that $5 million, we were down $3 million. The comps were down 21% with 27% less inventory on a per door basis.

The other bucket is in the infant category. We made a decision we wanted to de-emphasize infant and strengthen the boys two to seven and girls two to six categories. In the infant category the sales were down about $2.3 million, comps down 14% with 31% less inventory on a per door basis. If you look at the boys category and the girls category, the boys comps in the fourth quarter were actually up 3% to 4% and the girls comps, I would say, were flat with flat inventory on a per door basis. So it gives us some comfort that when we correct the mix of inventory and the level of inventories, we should be looking forward to some better comps.

And ticket traffic and UPTs?

Yes, sure, for Carter's in the fourth quarter the comp decline of 1.6, the transactions were down 2.1%. The average transaction was up five tenths of a point. UPT is down six tenths of a point. You can see there's no light variation in any one of these metrics and the average price was up a little over 1%. That's for the quarter. For the year at Carter's the comps were down a tenth of a pont, the transactions were up two tenths of a point, with the average transaction down three tenths of a point and the UPTs were basically flat, average prices were down four tenths of a point. That's at Carter's. At Oshkosh for the quarter comps down 6.7, the transactions were down 7%. The average transaction was up three tenths of a point. UPT is down 3.3. And the average prices up 3.7%.

Okay. So when we look at this new Q1 guidance, which, I guess, you think at this point if comps get a little better in March, which I believe is about half your quarter, there's the potential for some upside.

You're right, that's an important point, Brad, that in the month of March we will do as much in March as we do in January and February combined. And we think with, to Fred's point, with more moderate temperatures in the country and a nice mix of spring product in the stores, we think that it could make a meaningful difference in our first quarter results.

Okay. Then going forward, you classify the guidance as pretty much this is the bottom, what is it going to take for us to see you carry through this couple cents of upside through the remainder of the year?

Good question. Certainly better comps will make a meaningful difference to the guidance we've given for the year. For the year we are saying comps flat to down. That is certainly not what we would have envisioned on our last call. I think on the last time we updated you we had hoped that comps for the year, coming off a very low base, would have been up 4% to 6%. And that just as we looked at November and December comps, Jan into February, it became clear to us that that was not going to be possible based on the trends in the retail business. But I think the first indication we are going to get as to whether or not the initiatives we have at retail are working is going to be the month of March. So we will give you a good update when we speak with you again in April. But better comps, I think we got an appropriate level of investment built into our plans. It's going to be about how this product performs, particularly at retail and wholesale, and wholesale, obviously.

Okay, two last questions. The mass business still going strong. What is the long-term target on that? How big can that business get? And then second a question for Joe, when I'm looking at this Oshkosh business and last time you updated us you guys were a little more optimistic and you are saying that spring is not off to a good start. Where is that product at now? Is that in stores and how much is that impacting this gross margin decline in the first quarter?

Okay. As far as mass, we've always said we wanted to be about 15% of our business and at $2 billion that would be a $300 million business. So 10% to 12% growth per year pretty much lines up with that objective. So we feel very good about that. As regard to Oshkosh, your question, repeat your question, again, Brad on the Oshkosh?

You said that your spring isn't off to a good start, so it's obviously already at the retailers. So I assume that you are having to pay substantial mark-down allowances on that. Is it still at the retailers or have you decided to liquidate the rest of the product that you told us that bookings were going to be up a little bit more robustly for and how much is that impacting Q1 gross margins in order to liquidate this product?

Well, number one, like Mike said, we still think it's early, we are just not enthusiastic. But it is still early. March is really out. We are really heading into spring. So I think it's a little early. We haven't had to make any mark down commitments yet and we have no excess goods. We shipped and our stores are actually selling a little bit more spring. The spring performance in our stores is much better than it is at wholesale. So I don't see an accommodation, we were just a little disappointed it didn't get off to a more robust start. But again like Mike said, give us another six weeks, maybe we will -- we definitely know summer will be stronger. We will update you in a little while.

One last question for you Joe, while I have got you on the line here. We talked about initiatives, investments, et cetera at retail, a year from now systems-wise what will you be able to do at your retail stores that you are not able to do today, whether it be CRM, maybe regional pricing, high/low pricing, et cetera?

CRM we just started putting in place today. Now we are in the process of gathering data and starting to track history of the customers. So that's just -- right now the next six months we will probably be gathering data. I think we will use it more proactively as we get into the second half of '07. Then when we put in new point of sales systems, which is targeted for '08, we should be fully operationally by then. We will start doing that first quarter.

And those are the two major investments, Brad. It was CRM, you are always upgrading the systems, there's been no shortage of investment in the systems historically last year and for next year. I would say CRM upgrades, the merchandising system and to POS. I think the -- I've seen in the different analyst reports that there is concerns about systems. These are the same systems that enabled an 8% comp in baby last year, 44% growth in our spring play wear business in the fourth quarter. So the systems we would say are adequate, always room for improvement in systems and it's being appropriately funded.

All right, thanks, guys.

[OPERATOR INSTRUCTIONS] We will take our next question from Margaret Whitfield from Sterne Agee.

Good morning, everyone. I wondered -- a small question, if you could quantify the price adjustments that you may have to make on the Oshkosh line in the second half?

Well, for competitive reasons we'd prefer not to get specific about pricing. But once again we do feel that we have priced that brand and our core products too high. What we have done is we've done extensive competitive analysis. We feel we know exactly where all of our brands should be priced. We plan to make the appropriate adjustments in our spring '08 launch. And suffice to say we feel that it will really propel the velocity of both Oshkosh and Carter's. We just had too big a gap between Carter's and Oshkosh.

Okay. In looking at the Q2, it sounds like you will be back in the game in inventories. Will you still be down in the two tiers of play wear and accessories and if so, roughly what magnitude? And would that auger well for a pickup in earnings over last year?

Q2 we will be back in shape. We will have no inventory deficiencies anywhere.

As we see it today, we hope that we're back reporting a positive comp in the second quarter. We do think there's a correlation between the two.

One small question, the Mall of America store, could you give us an update on how that's actually going?

We looked at it as a test and strictly a test. It's a lot smaller square footage. We are trying to do some consumer research in that store and that's the purpose of the store. I would say we didn't expect a big revenue generator as much as a way of seeing how we would do in that environment and how we would do in a smaller environment. So I think we are happy with what we are learning from that store.

Okay, thank you.

I think we should say that the store is not the answer to our future. This business core product dominance is always the answer and where we are putting greater emphasis on is being the absolute leader in core products in all our brands. Granted, we needed to improve our stores. We have rolled out a new floor set in our Carter's stores that we are encouraged by. Later in this year we will roll-out a better look in our Oshkosh stores. We say first things first. Mall of America, as Joe said, you should view that as a test only. We did too damn much testing last year. We kind of confused ourselves. Ultimately we will have a store that's more aspirational and will elevate brand pull. But first things first.

Mike, could you comment again on the brand store comps in Q4? I missed that.

Thank's okay. The brand store comps, the comps for the chain at Carter's were down 1.6, the brand stores were up 3.7.

Thank you.

We will take our next question from Margaret Mager from Goldman Sachs.

Hi, first I would like to know are there any other management changes at either business, Carter's retail or Oshkosh, beyond what we may have talked about already that we should know about or be thinking about? And then with regard to the cost outlook, I think Joe said there's some enormous potential for cost savings. Can you talk about what some of that might be?

There are no other management changes planned, to answer that. It's not to say we don't always upgrade the skill of our Company, but there are no significant moves other than getting a strong president of our retail chain.

In terms of cost reduction, Margaret, we are still focused on improving that operating margin at least 25 basis points a year and the big drivers of that come in three areas, it's in product costs, it's in distribution costs and the productivity of our stores. Fred commented on the product cost. We are reducing the complexity of our product scope. There is still room for improvement in Carter's, significant room for improvement in Oshkosh. We are reducing SKUs. They've been reduced significantly since the acquisition, still considerable room for improvement there. We are reducing the number of fabrics in our line. The fabric being used in Oshkosh products we've concluded was too expensive. Fabrics represent over 50% of the product cost. We continue to reduce the number of countries, the number of factories to get better leverage on higher unit volume and improving the productivity and the efficiency of the sourcing process. In distribution we've made great progress there. We continue to consolidate more unit volume in fewer D.C.s and reducing our cost per unit shift.

We announced the White House, Tennessee distribution center closure last night. That will save us over $4 million a year beginning next year. We will probably get about half of that this year. And we are expanding what we refer to as this D.C. bypass initiative. This is where we take product from Asia to the west coast, from the west coast directly to our customers. And we third party out in the west coast and mix in that business last year was around 25%. We think near-term we could move it closer to 35% of the units shipped. And retail, I think the message is clear. We are very disappointed with our retail performance. The retail operating margin has slipped from nearly 20% to 17% over the past year and every point of margin there is worth about $6 million. We are cutting back in stock with better mix of inventory. Going to have a much stronger presentation at core product. Clear value message, we wouldn't give ourselves high marks on that this past year and we are going to have better execution with this new team. In our view there's no shortage of opportunity to improve the profitability of the business.

Okay, thank you.

You're welcome.

We will take our next question from RJ Hottovy from Next Generation Equity.

The first question I had has to do with, in terms of the site selection process, and it sounds like last year you took away a lot of new information in terms of what makes a site more profitable than those that weren't. I was just curious if you could share with us a little bit what you learned about the site selection process this past year?

We definitely learned we had to increase our demographics in a smaller radius than we had looked at before. And specifically the spending on the zero to seven year-old child. We also looked at tenant mix. A lot of it's we are learning a lot of this as we go, what tenants we perform, what size of a mall and also where our position is within the mall. We are learning a lot and starting to build a database of what is winning and what is not. And slowing it down a little bit, all of those -- and we are projecting our new stores this year to be a much better revenue off the bat than they were last year.

Is there any change to the floor size for this year's openings or is it going to be approximately still at the 5,000 square feet size?

Yes, 4 to 5,000, no significant change, no.

My second question has to do with the share repurchase program. Do you feel confident with the amount of productivity initiatives that are in the pipeline that -- obviously the share repurchase program is a good way to return value but do you feel that you have enough cash flow out there just to really facilitate these initiatives that the cash could be used for these initiatives as opposed to the repurchase program?

Yes, we are confident. If you look at Carter's we have got a long history of strong cash flow. That's what attracted three private equity sponsors over the past 14 years. Even as we studied Oshkosh. Oshkosh has a long track record of strong cash flow. So we are confident that we can execute our growth initiatives and also support this repurchase plan.

Okay. Thank you very much.

We will take our next question from Jenny [Zing] of W. R. Hambrecht.

Hello, good morning. My first question is, while it seems that the Company missed opportunity at retail on product mix, what was the breakdown by comp product category? And also what do you mean by the right product mix going forward?

Just to recap in terms of Carter's, where the comps were impacted are primarily in two categories in the fourth quarter. The accessories category the comps were down 13%, the fall play wear category the comps were down 11%. In the fall play wear we were carrying about 25% less inventory on a per door basis, in accessories we were carrying about 44% less inventory on a per door basis. That's what we mean by the mix. Conversely in the spring play wear category in the fourth quarter, our comps were up 44%, we were carrying only 7% less inventory on a per door basis. That's at Carter's. Then at Oshkosh, as I mentioned, the two categories where we were hurt in terms of comps is where we carried less inventory in the infant and accessory categories.

The comps were down about 7%, that equates to about a $5 million comp sales decline. Of that $5 million, we were down $3 million in accessories with 27% less inventory per door and in infant we were down about $2.3 million with over 30% less inventory per door. As we have started to build those inventory levels back up, we are starting to see better comps. In the key categories in Oshkosh in the fourth quarter, in the boys and girls play wear categories, boys comps were up 3% to 4%, in the older boys the strongest comp was 4%, we were carrying about 18% more inventory on a per door basis. So there is a correlation and I think the best indication that we are going to get as we rebuild these inventories is in the month of March and that we'll update you on in April.

Okay. And the second question is at wholesale for Oshkosh, the value equation has been the main issue, what was the right pricing differentiation from Carter's branded products?

Once again, we don't want to be specific for competitive reasons about the pricing. Just say that we do not have a major price problem in Carter's. We over priced the Oshkosh product agenda and we will lower that significantly. At the same time we will lower those costs. So we don't expect any margin deterioration. In fact we expect to improve our margins.

And also could you give us some update on hiring of new retail leader?

We've -- yes, we've turned that over to a search firm. We've been looking at resumes for a couple of months now. We've started the interviewing process. We've gotten some candidates we didn't like. We have got a few we do like and we are taking our time. We've asked our board to even get involved in this to help us in the interviewing process so that we do the proper due diligence. We are making, I think, good progress. We are not going to rush to make a mistake.

Last one is what's the guidance for the Q1 sales for Carter's and Oshkosh?

For the first quarter, first quarter guidance for Carter's is $238 million and for Oshkosh $67 million. That's of course $377 million.

We will take our next question from Brian McGough from Morgan Stanley.

Thanks a lot, I'll be quick. Just a quick question on the Oshkosh planned closure. I think you've noted there isn't a cost problem there, it's a revenue problem. So can you just talk about what your focus is for those savings? Should we expect you to flow them through to get margins higher in the back half of '07 and '08 or maybe reinvest that back into the business in order to stimulate the top-line? Thanks.

In terms of what we plan to do with the cost savings?

Yes.

The plan is to do what we've done historically. Where we get the cost savings we are going to make that -- the product right and I think the mood we are in right now is we are going to get more competitive in price. The whole focus with Oshkosh right now get the product right. We feel as though we have too much make in the product and we feel as though there is a significant opportunity for cost reduction in terms of how we approach the development of that product, getting it much more focused on core. You should expect that we are going to get more competitive in price. So some of that savings will be used to lower prices.

At the same time we feel we can increase our margins.

Just I think to frame it up, we do not feel that we have a low level of benefits in our product. In fact, not to be too repetitive, Oshkosh has too high a level of benefit. We don't feel under the Carter's umbrella that we need to take that cost savings and pump it into elevating benefits. We still need to always be dominant in color, what our fabrics are good, our silhouettes are good, constructions are good. We are going to take more of that cost savings and get more competitive in our pricing formula. We don't want to say more than that because it's a very competitive issue. But we definitely feel that we have the cost reductions to increase core product value.

Great. Thank you very much.

Just wanted to clarify a point, a question that was just asked about first quarter sales guidance. The dollar value of Carter's sales for the first quarter quoted $238 million, that is the guidance. Oshkosh standalone $67 million. The total of that, the total sales guidance for the first quarter is $305 million.

We will take our next question from Jim Chartier from Monness, Crespi and Hardt.

I was just wondering if you could give us a little guidance on the mass channel, where you see the 10% growth coming from in terms of square footage within existing stores, new store growth, productivity, et cetera?

We really in our business model haven't built in a lot of new space, it's really all driven off of productivity and comps. Again we've got -- our new brand walls are set. We've already got selling in our baby and our spring products, so we feel good about that. We have all of our fall orders in hand. So everything is really based on productivity, new store and comp. There is not any incremental space built in. Not to say that we are still not feel that there's a few opportunities, we have just not built any of that our model.

Okay. And then could you just comment on the performance of the direct mail testing that you did for both the Carter's and Oshkosh retail stores?

Again it was the first test that we did of that. The redemption rate was good and where we really were pleased were the spending per customer of the people that returned. Again that was our first attempt. We are studying that. As we figure out where to make our investments in '07, we will see if we will expand that and what direction we will take there.

Okay. Thank you.

You're welcome.

We will take our next question from David Glick from Buckingham Research Group.

Just a quick follow-up on the retail business. Could you talk about the inventory and what levels you are targeting the inventory at for as you kind of flow through '07? Are you looking at '05 levels? Clearly you are looking at targeting levels above '06. Can you give us some color on what you think the ideal inventory levels are going forward?

March 1 -- you have got to remember most of our inventory problems took place in the second half of '06. When we say we are at '06 levels in the first half that's not bad. As you get into the second half is when we really started running 25% and 30% low. We are at -- at March 1st and April 1st we will be at '05 and '06 levels on a per door store. In fall we will probably average this year looking more like averaging 50,000 units per door versus 40 the year before versus around 45 to 46 in '05.

Just in terms of -- as I looked at where we are today, whereas at Carter's we ended the year with about 25% less inventory on a per door basis. As I look at last week's results our inventory currently is down only about 7% on a per door basis. We are making considerable progress. The models that we have right now would suggest at the end of the first quarter, to Joe's point, it was more of a second half issue. At the end of the first quarter we expect that inventories will still be down about flat to down 4% on a per door basis. By the end of the second quarter, up about 10%. At the end of the third quarter, up nearly 40%, up about 60%. Big percentages but to your point, relative to '05 it would be a normal rate of growth over '05 levels. Most of the damage in terms of the inventory levels was done in the second half of the year.

So is it fair to say that Q4 is really your greatest comp store opportunities and your plans as the year unfolds reflects that.

Yes.

Q3 and 4.

Very good. Thank you very much and good luck.

We will go next to Elizabeth Montgomery from Cohen. Ms. Montgomery, your line is open. We will go next to Charles Weissman from Lazard.

I'm sorry if you already covered this, I had to jump off the call for a little bit. I guess historically your management compensation was based on sort of an EPS based methodology. Can you talk about the '07 plan?

That's correct, it is largely based on earnings per share and for 2007, based on the guidance that we have given, there will be a significant reduction in the provision that we are making. Just to put it in perspective, just to reinforce what we've said that we are still committed to this 15% to 20% growth in earnings, to earn our target incentive for 2007 our EPS would have to be up about 16%. So that's what we are focused on. Below 16% growth in EPS there are significant haircuts. Our view has always been if the EPS growth is insufficient, there would be a significant reduction in the incentives.

Okay. Thank you.

You're welcome.

With no further questions in the queue, I would like to turn the conference back over to the management for any additional or closing remarks.

Thank you. Let me briefly sum up our intent and our building blocks to return to 8% to 10% and 15% to 20%. Number one is to significantly increase product value, particularly in the Oshkosh umbrella, but even in some parts of the Carter's business. Two, we are going to focus on having much less complexity in our product agenda so that we will become far greater efficient. Three, we've gone back to basics in this retail store operations. We are going to stop the core execution and we feel a lot that is already behind us. Fourth, we are going to have more emphasis on our wholesale customers. We feel we should do a lot more to improve their profit model as well as branding in their stores. We are going to have major cost reductions to fund all the important investments and to get back to quality margins.

We certainly can be very competitive in our core products and still have the margin integrity. And we are going to have a new retail president to run what we still consider our growth engine. We know where we screwed up and we intend to fix them. This management team has been together for a long time, even before Carter's. This is the only time we've had to take our guidance down in about 20 years. We've had bigger battles. We are each heavily invested in Carter's stock and we don't like the stock being depressed either. We thank you always for your time and quality questions. The questions are always beneficial to our future. Thank you.

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 1130 AM eastern time today through midnight, Friday, March 2nd. The dial in number for the replay is (888)203-1112 in the U.S. and Canada, and (719)457-0820 from international locations. The confirmation code to access the replay is 4494088. Again that is (888)203-1112 in the continental US and (719)457-0820 internationally. And the confirmation code is 4494088 You may disconnect at this time.