Carter's Inc (CRI) 2007 Q1 法說會逐字稿

Welcome to Carter's first-quarter earnings conference call.

On the call today are Fred Rowan, Chief Executive Officer, Joe Pacifico, President, and Mike Casey, Chief Financial Officer.

After today's prepared remarks, we will take questions as time allows. If you have any questions after today's call, please direct them to Eric Martin, Vice President of Investor Relations. Mr. Martin's direct telephone number is 404-745-2889. (Operator repeats number.)

Carter's issued its first-quarter earnings press release yesterday after the market close. The text of the release appears at Carter's Web site 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 please, 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.

Now, I'd like to turn the call over to Mr. Rowan. Mr. Rowan, please go ahead, sir.

Good morning. I'd like to thank each of you for joining our call.

We performed considerably better during our first quarter than we planned, which gives us confidence we're moving in the right direction. Joe and Mike will provide more insight into our results, but we did better in our stores, we shipped more to our wholesale mass channel accounts, and we achieved additional cost reductions.

Because of our weakness in our business as we entered 2007, we conducted a thorough strategic review and have designed what we consider a better route for both short-term turnaround and improved long-term growth. The components of the short-term fix are quickly fix the operational issues affecting our stores, slow our store growth until we get our hands around the business, launch a better floor set and marketing plan in our stores, get a retail President, lower our costs, and set the stage for high-quality growth formula.

The meaningful shifts in long-term thinking are make Oshkosh a more competitive mainstream brand with dominant, essential core products for spring '08; be also dominant in all of our brands and sub brands in the core products and less complex in product SKUs; invest more in our wholesale accounts for their high returns for both our brands and our customers; build more strength in Carter's merchandising and design; invest in consumer research and in our retail stores so as to strengthen our decision-making; return to growth in our stores but with a more competitive model and more distinctiveness in our brands stores versus the outlet stores; attack certain key processes which will enable us to be quicker and more accurate, like product development; permanently lower our cost structure and restore our margins; and finally, to make the right investments for growth. To accomplish these objectives requires the better part of 2007 and well into 2008, but it should move us to 8 to 10% revenue growth, 15 to 20% earnings, and a continuation of improvement in our operating margin. It also requires a very methodical and disciplined mindset every day and patience to see this through.

I will turn it over to Joe Pacifico.

Thanks, Fred.

We are pleased with our first-quarter results. We exceeded both our consolidated revenue and earnings goals for the quarter. Strength came from the Carter's brand wholesale and our mass channel brands. However, both our Carter's and Oshkosh retail businesses performed better than expected. Our Oshkosh wholesale business was down to last year but in line with our expectations. We are confident our strategy of driving a balanced portfolio of strong consumer brands, multiple distribution channels and essential core products continues to be a powerful competitive strength, as seen in our results.

I will now provide an overview of our first-quarter performance in each of the segments, along with some commentary on our outlook for the year. Let's start with Carter's wholesale. We had an excellent quarter at Carter's brand wholesale. Excluding off-price, our sales finished up plus 11% overall. Positive revenue growth in all three of our product markets -- Baby was up 18% to last year, playwear +6 and sleepwear +4. Also in total, our over-the-counter sales were up double-digit versus the prior year, and we are in a good inventory position with our retailers going into the second quarter. We now have all of our Carter's fall orders in hand, which really gives us good visibility for projecting the year.

In regards to Baby, our fall commit orders are up double digits and we are projecting double-digit sales growth for the year. This growth is on top of a very strong Baby business last year and further demonstrates our ability to drive growth in our core business.

Sleepwear, as we said on our last call, our fall orders were flat to last year, and that was really due to poor over-the-counter selling in the fourth quarter. We believe our fall '07 product is much improved, and coupled with stronger-than-anticipated over-the-counter selling of our spring sleepwear line, we are projecting our sleepwear sales to be up 2 to 4% for the year.

In regards to playwear, our fall orders came in +6% to last year. With the strong over-the-counter selling that is taking place with our spring line, we believe we will achieve our growth objective of 6 to 8% growth for the year.

We feel good about our '07 guidance of +7 growth in Carter's brand wholesale as we continue to invest in and strengthen our partnerships with some of the best retailers in the industry.

Oshkosh wholesale, consistent with plan, Oshkosh wholesale sales, excluding off-price, were down 8% to last year. As we discussed previously, our over-the-counter selling of spring product is below our expectations. Our summer bookings, which were up 20% to last year, began shipping the first week of April, and it's a little early to get a good read on the sell-throughs at wholesale.

In our stores, summer has been selling very well. In line with our guidance, fall orders came in down 6 to last year. We are now showing the holiday line, and we will see double-digit growth in bookings. If you combine our fall and holiday lines together, we would be flat to slightly up to the prior year.

Our focus now is on finalizing our spring '08 line. Our key initiatives for spring '08 are, one, elevated product design; two, increased velocity through key iconic items, and those items for Oshkosh are jeans, overalls, T-shirts and sweats; four, more competitively priced product; and five, both improving our internal margins and our customers' margins.

I feel very good about the progress we've made and the line's potential. We will be showing lines to our key accounts in July, and will provide you an update on our next call.

In the mass channel, excellent first quarter. Sales growth of +11 at Target with our Just One Year brand and +16% at Wal-Mart with our Child of Mine brand. Spring selling has been very positive at both retailers and both are in good inventory positions at the end of the quarter. We have all of our fall orders, and we feel well positioned for a strong 2007 in the mass channel and will achieve our guidance of +10% sales growth.

For the Retail division, we ended up with positive first-quarter comps at both Carter's and Oshkosh retail stores. At Carter's, we had guided flat revenue and a -7 comp for the quarter. Our actual revenue came in +8 with a +0.7 comp. This was due to a strong comp in the month of March, after having negative comps in the first two months. We believe a number of factors contributed to the strong March results. As we stated on our last call, March/April is when we felt we would begin to a kickback execution issues at retail.

The first factor was our new floor set, which features core items at key price points. The second reason can be attributed to more comprehensive and powerful promotional strategies. This drove an increase in traffic transactions of 2.8% and units per transaction +5. The third reason was the rebuilding of our inventory levels. As we have discussed previously, inventory levels were one of the primary detriments to our performance. Customers have really responded well to the changes we have made. As a result, we comp positively with the spring line in all three of our core product markets. The accelerated sales in March did require additional inventory. However, we will be able to catch up to our planned inventory levels by the end of April.

Oshkosh retail -- as with Carter's, our retail business rebounded better than anticipated in the month of March. Based on January and February performance, we have guided a -10 comp for the total quarter. Because of positive March comps, we finished the quarter with a +0.8 comp and a total +8% revenue growth. Our boys and girls play clothes business both comped positively. We were predictably pleased with the toddler and older segments of both boy and girl.

Our 0 to 24 business and our accessory business were both lower than last year, and that was due to our decision to deemphasize these businesses. Our inventories are in good shape going into Quarter Two, and we are encouraged by the selling of our summer line.

In closing, I'd like again to point out the strength of the quarter we just had. We experienced positive sales growth in five out of our six business segments. On the last call, I discussed two areas of our business that have been weaker than we would like, along with our plans for improvement. The areas were our Retail business and our Oshkosh product performance. I am encouraged by the progress we've made this quarter in both areas.

Both our Carter's retail business and our Oshkosh retail business made dramatic improvement. While we have much work to do in building inventory, improving execution and solidifying our presentation and communication messages to consumer, I feel very good about the track we are on. With Oshkosh product, we have made substantial improvements in our spring '08 line. I believe the product will be better, and I am confident we will have the right mix of key core items in our offering and definitely priced more competitively than in the past.

I've spent the past several months guiding the day-to-day management of our retail business. I am encouraged by the strength of the teams we have in-place and the way we have been able to combine our skill base at corporate with the talent we have at retail.

By leveraging our respective strengths, we're doing a much better job of executing a winning formula. There is always more work to be done and I see areas of improvement for all of our businesses, but I feel we are off to a good start for the year with the quarter we just completed.

I will now turn it over to Mike to discuss our financial performance.

Thanks, Joe. Good morning, everybody.

I will walk you through our first-quarter results and I'll comment on the outlook for the balance of the year. We are reporting GAAP earnings of $0.16 per share, which includes charges of $0.06 per share related to the closure of our White House, Tennessee distribution facility. Because these closure costs impact comparability, I will comment on our results in our guidance, excluding these charges, which we've outlined in our press release.

Our adjusted earnings for the quarter are $0.22 per share, down 15% compared to earnings of $0.26 per share in 2006. Our first-quarter results were better than we expected. On our last call, we characterized our first-quarter guidance as conservative. We were cautious on the guidance that we gave, given the performance of our retail stores earlier in year. As Fred and Joe mentioned, the performance of our stores in March was much better than we had planned, and we continue to have good progress in terms of cost reduction. Based on our first-quarter results and our current outlook for the year, we are raising our guidance for sales and earnings for 2007.

In terms of sales for the first quarter, consolidated sales were $320 million, up 8% over last year at $15 million or 5% better than the guidance we shared with you on the last call. Carter's sales, excluding Oshkosh, increased 11% to $249 million, driven by growth in all channels of distribution. Oshkosh sales were $71 million, flat compared to last year.

With respect to profitability, our consolidated gross margin in the first quarter was 33.2% compared to 36.5% last year, down 330 basis points. That's consistent with our guidance for the quarter. We had planned our gross margin down in the first half of this year to reflect the cost of product upgrades. Our actual product costs were better than we planned, and that benefit was offset with higher-level promotions in our retail stores and markdown support for our Oshkosh wholesale segment.

With respect to spending in the first quarter, on an adjusted basis, SG&A was 27.1% of sales compared to 28% last year. That reduction in SG&A as a percentage of sales reflects our progress controlling discretionary spending, continued benefits realized from integrating Oshkosh, and lower provisions for incentive compensation.

With respect to our licensing business on a consolidated basis, our royalty income for the quarter was $7.5 million, up 5% to last year, driven by growth in our mass channel and Oshkosh licensing businesses. On a consolidated basis, our operating margin in first quarter was 8.5%, down 240 basis points compared to last year, driven by the decline in our gross profit margin.

Our interest expense for the first quarter was down the 17% compared to last year. That was driven by an $82 million or 19% reduction in our average borrowings due to accelerated debt reduction.

As I mentioned on our last call, we are very comfortable with our current leverage. We've used $30 million of excess cash in the first quarter to purchase nearly 1.3 million shares of our common stock at an average price of less than $24 a share. Subject to market conditions, we plan to invest a total of $50 million in the share repurchase plan this year. At our current valuation, that would represent over 3% of our outstanding shares.

In terms of liquidity, cash flow provided by operations in the first quarter was $6.7 million, compared to cash flow used in operations of $14 million in the first quarter of 2006.

Our consolidated inventories at the end of the first quarter were $160 million, up only 3% compared to last year. As we discussed in our last call, we are building inventories to get back in stock in our retail stores. We expect our consolidated inventories at the end of June will be up about 20% compared to June 2006. Year-end inventories are also expected to be up about 20%. Keep in mind, we were light on inventories in the second half of 2006. Our average growth in inventories at June and December this year, as compared to the 2005 levels, is projected up on an average about 10%.

CapEx for the first quarter was about $3 million, primarily for our retail store relocations, remodelings, and investments in systems. We expect CapEx for the year will be between $30 million to $35 million; that's about 2.5% of our total sales, consistent with our historical spending levels.

With respect to guidance for the second quarter, our consolidated sales are projected to be $290 million, up 4.5%. For our Carter's brands, second-quarter sales are projected to be $223 million, up 8% with 9% growth in wholesale, 8% growth in our mass channel sales, and 7% growth in the retail sales. Comes in our Carter's retail stores for the second quarter are planned flat to slightly positive.

Oshkosh second-quarter sales are projected to be down 5% with wholesale sales down 31% and retail store sales up about 5%. Comps in our Oshkosh retail stores for the second quarter are also planned to be about flat to slightly positive. For the year, we are projecting comps in our Carter's and Oshkosh retail stores will be flat to up 2%.

Gross margin for the second quarter is planned at 34.5%, down 50 basis points compared to last year, due again to the cost of product upgrades. We are planning that our second-half margins will improve, and we expect gross margin for year will be about 36%, comparable to last year.

SG&A for the second quarter, excluding closure costs, is planned at 31.6% of sales, compared to 29.7% in the second quarter of 2006, due primarily to higher distribution and freight costs to rebuild inventory levels in our retail stores and the costs related to the integration of Oshkosh IT group. With sales planned up only 4.5% in the lightest quarter of our year, there is a bit of negative expense leverage in the second quarter. For the year, we expect SG&A will be about 26% of sales; and that's in line with last year.

Royalties from our licensing business for the second quarter are planned up 13%, reflecting increases in our Carter's and Oshkosh licensing businesses. Our royalty income for year is projected to be about $32 million, up 10% over last year. Carter's royalties are planned up about 8% for the year, Oshkosh's royalties planned up about 12%.

Interest expense for the second quarter is planned to be about $6 million, down 16% and for the year. Interest expense is planned to be about $24 million, down 10% to last year.

Our consolidated operating margin is planned to be about 5.6% for the second quarter. For the year, we expect our adjusted operating margin will be about 12%, down 40 basis points from last year.

Diluted earnings per share for the second quarter is expected to be $0.11 per share, down 27% to last year. That excludes $0.02 per share for costs related to the closure of our White House distribution facility.

For the year, we are increasing our previous estimates. Our consolidated net sales for 2007 are now planned at $1.420 billion to $1.430 billion, up 6%. Diluted earnings per share for 2007 is expected to be $1.47 to $1.52 per share, up 4 to 7% over 2006. Again, that excludes charges of $0.09 per share related to the closure on our White House, Tennessee distribution facility. This guidance assumes a share count of 61.3 million shares.

With respect to cash flow, we expect cash flow from operations will be approximately $60 million for the year. That's consistent with our previous guidance and lower than 2006 due to increases in working capital, primarily the growth in inventories to get our stores back in stock. Average working capital in 2007 is expected to be about 18% of sales; last year, it was about 16% of sales. We are assuming depreciation and amortization of 33 million for the year, including $2 million in accelerated depreciation as a result of the White House closure.

With respect to guidance, we expect that our first half will be more challenging, given the investment in product upgrades. We are on track to improve our performance in the second half of this year, and we feel comfortable raising our sales and earnings estimates for the year. Our retail comps in April have been impacted by weather and as weather has improved recently, our business has gotten better. As we saw in the first quarter, if retail trends continue to improve, our retail results, our total results could be better than what we are currently projecting.

At this time, we will open up the call to your questions.

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Robby Ohmes, Banc of America Securities.

Good morning, guys. I was hoping we could get the breakdown of EBIT margins by division, if that was all right, in terms of the wholesale for both Carter's and Oshkosh and the retail for both as well. Thanks.

Right. Robby, I would suggest -- I will give it to you excluding the impact of the White House closure costs, which is -- as I walk through this, for Oshkosh -- let me start with Carter's. For Carter's Wholesale, I will give you dollars [in] the margin percent. For Carter's wholesale, the operating income was $21.3 million, 18.9% margin; for Oshkosh wholesale, a small loss of about $0.5 million, a negative margin of 2%; for Carter's mass channel, operating income of 8.3 million, the margin was 13.5%; for the Oshkosh mass channel, which is genuine kids, contributed about $600,000 to our first-quarter operating income, no margin there because there's no sales; it's a licensing business. Carter's retail business, the operating income was $7.9 million, margin 10.5%; Oshkosh retail, a loss of $1.1 million, a negative margin of 2.3. Then we have the corporate overhead, the non-allocable costs of about a $9.3 million deduct, and that's 2.9%. So that gives you $27.2 million of operating income in the first quarter, and the margin is 8.5% of sales.

Then just a quick follow-up -- if I got your numbers right, it looks like the mass channel EBIT margin came down in the first quarter versus last year. Could you --?

It came down, but the absolute dollars were comparable. Again, across all segments, our focus was to upgrade the products, so the gross margins in the mass channel were lower. They are expected to improve in the second half.

Great. Then just one other question -- the build in inventory, the up 20% that you're looking for at the end of the second quarter, can you give us a little more detail? Is that very focused on the retail side, or it doesn't seem to line up with your backlogs or your comp expectations.

I would say it's primarily driven by two things. It's for sure retail but we also had heavy launches at the tail end of June, a new starters launch (technical difficulty) that Joe talked about. So I'd say it's retail and building for the second half.

Great. Thanks a lot, guys.

Margaret Whitfield, Sterne Agee.

Good morning, everyone. I was wondering if you could comment on the comps within your retail stores. I know the trouble there is the infant segment and accessories for Oshkosh as well as of course the accessories in the playwear at Carter's. I wonder if you could break down the comps and break down the inventories as you ended the period, so we can understand what areas need to be beefed up.

Okay, in terms -- let me start with Carter's, so as Joe said, the comps for Carter's in the first quarter were up 0.7%, but if you look at the components, it shows you the strength of our core business. The Baby comps were up 12%, the sleepwear comps in the first quarter up about 3.5%, spring playwear comps up 1%. So, those were all positive.

Where the comps were down and by design is we carried had less fall playwear into the first quarter, so the comps in fall playwear were down about 22%. The accessories was also a negative comp because we were cleaning up and reducing the level and improving the mix of accessories in the tail end of last year. In the first quarter of this year, we started to see a better bedding program, hosiery program, underwear program, so the comps in the first quarter in accessories down 11% with about 26% less inventory on average.

Okay.

At Oshkosh, to your point, a couple of areas that impacted us was in the Baby category where the comps were down 20% with 32% less inventory. We are building the Baby business starting in fall '07, rebuilding the (inaudible) program for spring '08. So in retrospect, those are two areas that we deemphasized that we're putting more emphasis on in the second half of this year.

The accessories category for Oshkosh, the comps there were flat with about 14% less inventory. The strength at Oshkosh in the first quarter was in the girl and boy categories for toddler and older age segments. The comps for girls was up 5% with about 3% more inventory. The boys comps were the strongest, comps up 17% with 8% more average inventory.

So I take it the focus on inventory build at retail will be certainly in accessories and playwear?

Yes (multiple speakers).

(multiple speakers) 24.

Correct.

Playwear for fall and accessories.

Okay. How did the brand stores to versus the outlets at Carter's?

The brand stores continue to outperform the outlets. The brand stores comps were up 3.7 in the first quarter; the outlet store comps were flat.

Okay. Could you give us an update on the search for that new President of Retail?

Yes. As I mentioned in our earlier call, you know, we've had that with a search firm that we've done business with over a long period of time. We are also using a consulting firm to help build the prerequisites for that job, if you will, the scorecard. We are also using several members of our Board in the interviewing process. We've begun the process of interviewing. We like the way it's going. We are being patient about this; we don't want to make any mistakes.

The prerequisites are we want someone with a good track record, very strong operating skills and leadership traits, someone who understands the mainstream branding, mainstream retailing, and a basic understanding of branding and merchandising but not required to be a highly skilled merchant.

As I mentioned, the process is begun. We are interviewing and we're pleased with the way it's moving.

Okay, final question -- you mentioned, in comments about retail, that you had better promotional activity, which led to higher UPTs and traffic. What exactly did you do and what are the plans for the current quarter at retail?

As we said earlier, we are trying to get more impactful promotions, Margaret, with I think our Baby sale. All of the sales we are having, we are trying to be -- definitely drive more core products and be more impactful. I think they were a little vague in the past, so definitely trying to be more dynamic sales to bring the consumer in.

Brad Stephens, Morgan Keegan.

Good morning, guys. Joe, I guess a question for you -- you talked pretty aggressively here or pretty confidently about the fourth quarter at Oshkosh. Can you talk about the categories where you think you'll see that reacceleration at?

Then secondly, when I look at or look for your Oshkosh product right now, I frankly have a pretty tough time finding it in with your retail partners. Could we discuss maybe how door counts have looked and how that's kind of following out throughout the year with the product flow, etc.?

Okay. As far as fourth-quarter holiday bookings, we've been out for about two weeks and our orders are due at the end of next week, so we've got a great deal of confidence on -- you know, we've already got some of them, and we will get the rest of them for next week. So we are very confident in the bookings in the holiday line, the guidance I just gave you. Now, it's across the board; it's in all categories, boys and girls.

As far as stores, we are in every Kohl's store, every Babies R Us store, every Bon-Ton/Carson store. The only place where it gets a little bit tricky, Brad, is in Penney's, where the (inaudible) consumer segment, we may be in 500 toddler boy but not the same as toddler girls, so that's about the only one of the top accounts but everybody else, we should be in all doors.

Now, you are in a transition period right now between spring and summer, so I don't know what you're seeing but initial selling though, we are seeing on summer there we think is pretty decent, too.

Great. At the Carter's brand, a lot of the talk last year was the competitive front heating up with Chaps coming into Kohl's. What are we seeing on the competitive front and how has that impacted you?

Well, we know you've got again American Living going into J.C. Penney's, Chaps coming into Kohl's. We are always going to have good competitors. I think a couple of things -- we are really positioned differently than these people; I think we need to understand that. We are a children's brand, kids work and play, really matters to the (inaudible). These are really adult type brands trying to come down. Different positioning and pricing, also. There's no comparison for the Carter brand and both are higher than Oshkosh.

So, we keep hearing this question, but if you look at our Kohl's performance over the last two years, we've had great performance with an excellent partner, up double digits both years. So you know, I think we are always going to have good competitors, but we continue to perform at these accounts.

All right. Then, can you talk about the international front, what's going on there? That's my final question. Maybe (multiple speakers).

Well, internationally, we don't have any strategy to launch into that arena. We do have a very strong licensed product business with Oshkosh internationally. I would say there's some awareness internationally of Oshkosh, the recognition of the brand. But for the next year or two, there are no plans to move offshore.

R.J. Hottovy, Next Generation Equity Research.

Good morning, everyone. I just had one quick follow-up question, as most of mine have been taken here. I just wanted to clarify the guidance. On the sales line, it looks like it's pretty self-explanatory. You guys beat by 15 million above what your original first-quarter sales guidance was, so that could get us to the full-year numbers. But on the EPS side, given that you had $1.42 to $1.47, I expected, with the $0.08 upside that you guys saw in the first quarter, that would have been reflected in the full-year numbers, yet they were only up about 4 to 5%. I think some of it's probably coming from that deleverage effect that you talked about in the second quarter. I just want to make sure I'm not missing anything on that and just kind of explain (multiple speakers).

No, you are exactly right; we are not taking all of the earnings that we picked up in the first quarter to the year. We are being cautious. This is only the first quarter. It's April. We've got a lot of the year still ahead of us.

I think the important thing to understand about the second quarter, it is our lightest quarter of the year. There's seasonality to our business; we are between the spring and fall programs. We've seen at Oshkosh some of the summer came earlier. In the first quarter, we are seeing some of the fall come more in the third quarter, so because you are between seasons, inevitably there is different timing of when the demand comes from the customer.

I would encourage you to focus on the year. We feel good about the year. We're making good progress, but we also want to be a little cautious that it is only April and the year is not determined by the second quarter. But we feel very good based on the progress we're making with our sourcing initiatives, based on the strength of and the profitability of the promotions, the more impactful promotions Joe spoke to, and the fact that we're still in a mode of building these inventories to support the demand from our consumers. So, all of those things are in-process. We are just being a bit cautious on that second-quarter guidance.

Okay, thank you and keep up the good work on the retail side.

Melissa Otto, WR Hambrecht.

This is Jenny with WR Hambrecht. I have two questions. The first one is can you give us an update on the progress made with wholesale accounts for both Carter's and Oshkosh?

Progress -- progress being, I mean if you look at Carter's wholesale, we are still projecting the year to be up over 7%. Good fall bookings in all three products was led by Baby, definitely double digits -- Baby in the 6 to 8 and I think we are projecting sleepwear 2 to 4 for the year. So Carter's business has been strong each season.

In regard to Oshkosh, we've had our ups and downs. Spring was flat; summer was up; fall we said down; and the holiday we are projecting up. I think we're calling the year as down, slightly down for the year.

So for the whole year, Oshkosh is slightly down?

Yes.

Okay. Also the second question is in terms of higher-priced selling in the three channels, could you give us a sense of what (inaudible) sell-throughs are doing in the three channels for both brands?

Higher --?

Higher-priced selling?

Oh, our spring sell-throughs, you can take Carter's, all three of the Baby sleepwear and playwear all performed better than they did the before. Again, we're entering the second quarter with a much better inventory position than we did the year before. So Oshkosh, we said spring was tough, summer we just started shipping. We are encouraged by the sales of the summer line. In mass, a good first quarter in all [SPUs] across the board.

I think, with regard to your question about the sales per year, Oshkosh, while it's slightly down, our strategy is to move the position at the brand to very competitive mainstream pricing come spring '08, which we launched in the fourth quarter, and make it less complex, a much more efficient formula. So we are anticipating a turnaround as we enter the spring '08 season.

(OPERATOR INSTRUCTIONS). Jim Cartier, Monness Crespi & Hardt.

My first question was I just wanted to ask an earlier question a little bit differently. Have your expectations for second-quarter sales or margins changed from when you originally provided your 2007 guidance?

No. I think the only thing -- because our retail stores in the first couple of weeks were impacted by weather, we've rounded down the earnings guidance by about a couple of pennies. So, we had always planned that second quarter to be lower.

Okay. Then it seemed, from Joe's comments, that your inventory levels in your retail stores may have been a little light in April to date because of the stronger-than-expected selling in March. Is that correct?

Yes, we started April lower than we would have liked. Again, it was because we sold a lot more units in March than we had planned. We just caught up as of the end of this week, so going into the last week of April, I think we are in good position again.

Yes, just to put it in perspective, one of the things we talked about on the last call -- we entered the first quarter very light on inventory. On a per-door basis at Carter's, the inventories were down about 25% on a per-door basis. The last time we had the update at the tail end of February, we had proved the inventories to be, on a per-door basis, down only about 7%. Because of the acceleration in our business in March, at the end of March, inventories were down 19% on a per-door basis, so that's what we were rolling into April with. But today, inventories today on a per-door basis are only down about 5%. So we still have a little work to do but I think it just shows you how quickly we can get back in stock. But because the business has accelerated in March, we did enter into April a bit lower than we expected to.

So has that had a negative impact on April comps to date?

I would say we were more impacted by weather than the inventory levels.

Margaret Mager, Goldman Sachs.

I just wanted to ask about the Oshkosh strategy. Can you talk about the stores versus wholesale? Will the shift in merchandise and pricing strategy be similar in your own retail stores as well as the wholesale approach. Of, say, the top three customers, Kohl's, Babies R Us and JC Penney's for Oshkosh, which -- I'm just wondering which one is the biggest, and which one is likely to really get behind Oshkosh come spring '08, given the change in pricing and if you could talk about, competitively, where that will fit. So where will the market share come from, understanding that there is some fragmentation in the kids' business? But how will your retailers think about Oshkosh competitively and why they should buy into it in a bigger way in spring '08? Thanks.

All three of those retailers support Oshkosh. As I said many times, some years ago, they wanted us to buy Oshkosh, so they were thrilled at the acquisition. They know there's a lot of work to be done. You know, we struggled some, as we said in our last call. We, by design, overpriced that. We thought the cache of the brand would carry higher price points. The cache of the brand is enormous; it's all about getting the right competitive formula there. So there's no issue that our wholesalers don't want this brand; they do. They need Carter's and they need Oshkosh because those are the brands that bring the traffic. We are to them, we are their Children's Place, if you will, and Old Navy. So it's not a psychological barrier. We've just had to get more competitive.

As we move into spring, we do two things. We get a lot less complex in SKUs and we get much more meaningful in the core items and they are priced much more competitively. So, we have a competitive formula.

One thing it does, it should drive acceleration in our units and it should make a lot more money for our customers. The popularity level will increase. At the same time, we are restoring our margins. So we are having substantial cost reductions that we don't have any issues. If anything, the quality of our business improves.

The share of market that we have is low as hell in those wholesalers. You know, the road is up. We certainly feel like we can be every bit as big as Carter's; we just have to do our homework. We really are optimistic as we enter this new formula.

As we move towards spring '08, we're having to promote and we're having to do things that move the goods, but we are seeing improvements there as well. Our retail business is better because we're running our stores better, and our retail is better at Carter's because we're running our stores better. There's no question about it. A lot of it is fundamental blocking and tackling, but as we move towards the end of the year, we have a better strategic formula.

So on the merchandise and price strategy for Oshkosh wholesale/retail, is it the same? So, starting in spring '08, the offerings in the retail store will also reflect the more concentrated SKU counts and the lower pricing?

Yes, but actually, we're able to move faster in our own regional stores. We've already made some adjustments, so we know this will work in our stores. We can move faster and do that ourselves. So we're making those adjustments in our stores quicker than we would. But yes, it has the same benefit in total.

So how do you offset the 10 to 15% price reduction so that you don't comp negatively in your Oshkosh stores as you move to this newer merchandise strategy?

I think, as Fred said before, we would not quote a 10 to 15% number. We said we would get more competitive, which we will, but for competitive reasons, we really didn't want to disclose the exact amount. But as we said before, we've been working with William [Fung] and our key partners. We knew this for a long time (inaudible) in the next couple of weeks, so we knew we had to hit these prices. We've got cost reductions in line.

We plan to improve our internal margins and at the same time give the customer higher IMUs plus increase the velocity through better pricing. So you know, we went out and got the costs to line up with our strategy, pricing strategy.

We've done this before, you know. We have a history of turning around, and we did this in early days of Carter's. And it works. You get [unit] velocity and you get a more efficient and more profitable business.

One last question -- of the top three retailers carrying Oshkosh, who has the best presentation of the brand at retail, and would you expect that to be same come spring '08? I'd like to go and look at it and I'd like to pick the best place to go look.

I don't think anybody has a great presentation yet. That hadn't been part of the plan for the short-term; it's part of the long-term strategy. As we enter spring '08, both brands, we are investing more in the brand marketing. You'll see more better packaging, better point-of-sale, and increased fixturing of the products. You wouldn't see any remarkable presentation of Oshkosh. It's been too early to correct all of those things. But the fact that summer is doing pretty well now with not-great presentation is encouraging.

Yes, definitely. Okay, good luck. It will be interesting to see, come July, how everything shakes out, so thank you.

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

Thank you. We always appreciate your time and questions. I like what's going on Carter's; I like the balance of our thinking, short-term and long-term initiatives. We certainly have the brands to get the job done. We are fortunate there. We are talented but we're making greater investment in talents. I read a comment that one person feels maybe the business has outgrown the organization. I don't feel that's quite true, but the fact is we do need some more talent and we are feverishly working at that. We will restore that as well.

I remind all of us, we need to take the necessary time to fix this business. That's why we guided down and said we want to take this year to get the job done. We are optimistic, but we shouldn't be judged by each and every quarter. We are being very disciplined. We built this company over many years and not on the basis of erratic results. We are a very consistent performer, and we look forward to providing that in the future.

We look forward to the next call. Thank you.

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, May 4. The dial-in number for the replay is 888-203-1112. (Operator repeats number.) In the United States and Canada, and 719-457-0820 -- again, that's 719-457-0820 for international locations. The confirmation code to access the replay is 7222347. That's 7222347. (Operator repeats numbers.)

We do appreciate your participation on today's conference, and you may disconnect at this time.