Carter's Inc (CRI) 2007 Q4 法說會逐字稿

Welcome to Carter's fourth quarter earnings call. On the call today are Fred Rowan, Chief Executive Officer; Joe Pacifico, President and Mike Casey, Chief Financial Officer. After today's remarks, we will take questions as time allows. If you have any follow-up questions after today's call, please direct them to Eric Martin, Vice President of Investor Relations. Mr. Martin's direct telephone number is 404-745-2889.

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

Before we begin, let me remind you that statements made on this conference call and in the Company's press release other than those concerning historical information should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the Company's most recent annual report filed with the Securities and Exchange Commission.

Also, on this call, the Company will reference various non-GAAP financial measures. A reconciliation of the non-GAAP measurements and to the GAAP measurements is provided in the Company's earnings release.

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

Good morning. I don't think it's a surprise to anyone, these are difficult market conditions with the likelihood it will persist. Consumer sentiment deteriorated a lot during December and more so in January. All of our customers are guiding lower for this year.

As a result, our fourth-quarter results were negatively affected. We experienced some customer cancellations, higher costs for inventory disposal and higher costs for margin support for our wholesale customers. We also had some pushback on fall '08 product orders. We must also be cautious. While we are less affected by economic downturns, it is simply a very tough environment.

While we are approaching this year very conservatively, we will not alter our strategic platform or fail to invest for short and long-term growth. In fact, we did elevate our investments in 2007. Prime examples were investment in talent, product and systems. We are extremely focused and we are equipped to be a better competitor.

We do feel we have long-term organic growth in all channels, all brands and our sub-brands.

I will speak to our strategic initiatives, which we firmly believe will both lead to a recovery and a continuation of quality growth. The first is to upgrade and fill the talent voids to execute both a turnaround and assure continuity and growth; secondly, to materially improve the important product benefits for all operations and sub-brands; thirdly, launch a far more competitive economic model for our wholesale customers; fourth, to fix the organizational issues, operational issues with Carter's retail; get much closer to the consumer and customer, meet or exceed their expectations; substantially reduced our costs and fix the OshKosh product agenda.

With that, I will turn it over to Joe Pacifico.

Thank you, Fred. In a difficult fourth quarter retail environment, five of our six businesses achieved positive sales growth, which led to growth of plus 4 on a consolidated basis. For the full year 2007, we're satisfied with our results in the Carter's brand business across wholesale, retail and the mass channel. Our OshKosh brand did not perform well during 2007.

During the second half of 2007, we identified the need to be more aggressive in positioning our brands for success. As a result, we moved to lower cost to the consumer for both Carter's and OshKosh in 2008, providing our wholesale customers with higher natural margins by lowering cost to them and we have accomplished this through greater sourcing leverage and by lowering noncritical expenses in 2008. We are increasing our investments in floor presentation, inventory systems and retail and talent across the Company. We are investing in more impactful and a comprehensive marketing message to consumers through our retail division.

Based on these initiatives, we feel we are well positioned in 2008. I will now walk you through the performance of each of our businesses on a stand-alone basis, covering quarter four annual performance and our outlook for 2008.

Start with Carter's wholesale. We had a challenging quarter at Carter's brand wholesale. Our shipments were slightly positive last year but our net sales were down 6% or down 4% excluding off-price. This is 7 points lower than our guidance, or roughly $9 million. The decline from our guidance was due to three factors -- higher customer cancellations, increased margin support and lower basic replenishments than we had planned.

Based on the positive product performance we have had in our own retail stores which I will discuss later, I believe the decline can be attributed primarily to macroeconomic factors. In looking at the year, we're satisfied with our overall revenue growth of plus 6%, which -- excluding off-price. Including off-price, our sales grew 4%. This is our eighth straight year of positive growth in this channel.

As we look into '08, we're taking a conservative approach and planning our business. We expect to finish 2008 with low single-digit growth which will come in the second half. The first half is coming in lower than we had previously guided based on spring line cancellations and reducing our basic replenishment assumptions. We are also being affected negatively due to the less fall orders falling in our last week of June due in large part to the shift in our customers' calendar.

For Carter's fall '08, we have put together a powerful and comprehensive business model for our consumers and customers. For the consumer, better product and we validated this through consumer testing and pre-lining with our top accounts. Lower prices to the consumer, a much stronger value message to the consumer through the implementation of an everyday low pricing strategy. And, we are funding a better store presentations. We're expanding on the zero to 24 concept that we implemented in spring '08 and took it a step further at Kohl's where we will actually be putting in 250 shops in the third quarter. We're also increasing the servicing of the floor at our top doors.

Our customers will also benefit from these initiatives through increased revenue and sell-throughs, as well as increased margins due to lower wholesale cost.

OshKosh wholesale -- excluding off-price, OshKosh wholesale sales were up 3 in the quarter. Including off-price, sales were up 8%. For the year, OshKosh wholesale finished down 10%, in line with our guidance. We have discussed the poor product performance on every call this year as well as improvements we have made to the 2008 lines. Much of the improvements are product specific, however we have also implemented a new model that should greatly benefit both the retailer and us. The improvements we've made to the '08 line are -- the key item focus with clear merchandising statements; younger, more understandable art and color; lower prices over 10% to both the retail and then end consumer; improved customer margins. We're also invested in better branding at the floor. We have reduced the complexity in our style colors by more than 20%. At the same time, we've lowered cost which should lead to better margins.

For spring 2008, we're seeing better early sell-throughs this year than we did last year at our major accounts. However, March is the largest volume of the quarter, so we will need to see those results before drawing any conclusions. We have received fall orders and while we're disappointed with the way they came in, the decline was to be expected. This is a much improved line, and yet our retailers are remaining cautious until we prove ourselves again with stronger consumer selling. Because of these fall orders, we're projecting the year now to be down double-digits.

We have a new OshKosh brand leader in place at the EVP level, Suzanne Calkins. Suzanne is a proven Carter's executive with 18 years of multiple leadership roles within the Company. We have also brought on a new chief merchant to drive design merchandising in our SoHo design studio.

In regards to the mass channel, or mass channel business beat guidance in the fourth quarter, providing sales growth of plus 12% on a consolidated basis. This resulted in a very positive year with growth of plus 10. Our Just One Year business at Target performed very well, providing sales growth of plus 20% in the quarter which brings us to plus 13% for the year. Child of Mine sales at Wal-Mart were plus 4 in the quarter and finished the year plus 9. Our Child of Mine results in quarter four were in line with our expectations. We had outlined on the last call that business had become difficult for the following reasons -- the macroenvironment, our product performance issues and tighter inventory initiatives. We do see this continuing through the first half of 2008.

For fall we're aggressively addressing these issues by elevating product benefits with no increases in price and in some cases offering lower prices; improving turn through improved sell-throughs, lowering our average weeks of supply and execution of our top door allocation strategy. In looking at the full year 2008, we project Child of Mine revenue to come in relatively flat through '07, weaker than we had previously expected. The JOY business looks strong and should provide double-digit growth. In total, we are planning the mass channel to be down in the first half and up low-single digits for the year.

Carter's retail -- turning to our retail business, I will begin by discussing quarter four performance for the Carter's brand side of the business followed by OshKosh and then an outlook on '08 for both brands. We had great a fourth quarter at Carter's retail, beating our previous guidance with revenue at plus 14.8% and a comp increase of 8.9%. This brings us to plus 10% revenue growth for the year and a plus 4.1 comp. Carter's retail has now delivered positive comps eight straight months. We finished the quarter especially strong with a combined November-December comp of plus 13%. In addition to top-line revenue growth, we also saw margin quality improve in the overall business. Much of these improvements can be attributed to product performance and our inventory management versus last year.

At OshKosh retail, we had another challenging quarter. Total revenue for the quarter was up 3.9 and comps were down 3%. For the year, we had revenue growth, total revenue growth, of plus 2 on a negative 4.3 comp. In the later part of the quarter, we did see a slowdown in demand for our fall holiday product. As a result, we have significant fall holiday carryover in quarter one. Our objective is to aggressively move through this inventory and be out of it by the end of quarter one. However, this will have an effect on the selling of our spring products as well as on our overall product margins.

In addition to the product value strategies I mentioned in the wholesale discussion, we have also allocated approximately 15% of our spring mix to our new incremental opening price point categories, making us more competitive and providing more product to the value-conscious consumer. This mix will increase to 25% with the shipping of the summer line. We have also added new product categories to the line, such as layette and girls basic denim and we will begin to see those results in March.

I feel good about our overall retail business as we move into the first half of '08. [Jim Petty] has put together a good team and I'm pleased with the plans that each functional later has presented me for 2008. Our spring floor sets for both brands look good, product is improved, both color and art and from a value equation perspective, we have a much better shopping environment with many more lifestyle product presentations, we have added an average of about 30-plus body forums per store this year. Much stronger consumer value message throughout the store with an improvement in price clarity, driving a lot more price points versus percentage (inaudible) as well as a new sign package for both brands. And we're building a much more comprehensive marketing package. We are beginning to build a powerful database of customers, greatly expanding our previous list of names. Weekly impressions or e-mails, direct e-mails to customers -- we'll have 26 million impressions in quarter one '08 versus 6 million in quarter one of '07. Based on our team and initiatives, I'm confident you will see good improvement in retail sales and margins in 2008. On the Carter's side, business in the first two months of '08 has actually been stronger than the performance we saw in quarter four.

I will now turn it over to Mike.

Thanks, Joe, good morning everybody. Last night, we reported our fourth quarter results, so this morning what I would like to do is walk you through the results and I will comment on our outlook for 2008.

With respect to our performance in 2007, there are three items which impacted our earnings that should be considered when reviewing our results. The first is the OshKosh impairment, which was recorded in the second quarter. The second relates to the cost to close an OshKosh distribution center. Most of those charges were also taken in the second quarter. And the third item impacting our results was the benefit from reversing provisions for certain provision equity incentives which we recorded in the fourth quarter. Because these items impact comparability, I will comment on our results and our outlook excluding these items which we have outlined in our press release.

With respect to our fourth quarter results, our adjusted earnings for the quarter were $0.45 per share, flat to last year and $0.05 lower than the guidance we shared with you on the last call. Most of that shortfall relates to a decline in our gross margin which was 140 basis points lower than we expected. This margin shortfall equates to approximately $5.5 million, or $0.06 per share. In our first quarter, our markdown support to our wholesale customers was $4 million higher than we planned. We also had off-price losses and inventory provisions which were $3 million higher than we expected due to order cancellations and changes in the 2008 forecast. We were able to partially offset these charges with better product costs and better margins in our retail segment.

With respect to sales in the fourth quarter, total sales were up $16 million or 4% to last year. That growth largely came from Carter's retail stores where sales grew $14 million or 14%. With respect to profitability, our gross margin in the fourth quarter was 34.5%. That is down 150 basis points to last year due to the lower margins earned in our OshKosh segments and higher provisions for excess inventory.

With respect to spending in the fourth quarter, on an adjusted basis SG&A was 24.3% of sales. That is 50 basis points better than last year due to lower provisions for incentive compensation and progress with our cost reduction initiatives. Our royalties from licensing activities in the fourth quarter were $7.8 million, up 4% to last year. Carter's royalties were down 2% due to the shift of our JOY brand [wall] launch from December to January. OshKosh royalties in the quarter were up 9% driven by the growth in our domestic licensing business. On a consolidated and adjusted basis, our operating margin in the fourth quarter was 12.2%, down 100 basis points to last year. That margin erosion equates to approximately $4 million, all of which is due to the decline in OshKosh profitability.

Interest expense in the fourth quarter was down 14%, driven by a $49 million or 12% reduction in (inaudible) borrowings and a lower effective interest rate. With respect to taxes, our effective tax rate in the fourth quarter was 36.6%, comparable to our fourth quarter last year.

Just to recap our performance for the year, we had total sales growth of $69 million, up 5%. All of that growth came from our Carter's segments. At Carter's, sales were up $74 million, or 7%, including 10% growth in the retail and mass channel segments. Carter's wholesale sales increased 4% last year, lower than we had planned due to the weakness in that channel in the fourth quarter when our wholesale sales decreased 6%.

At OshKosh, sales were down for the year were down $5 million or 2% driven by a 10% decrease in wholesale sales. On an adjusted basis, our operating margin for 2007 was 10.9%, down 140 basis points to last year due primarily to the performance of our OshKosh segments. The operating margin erosion in 2007 equates to approximately $20 million. The margin erosion at OshKosh alone was $24 million.

In terms of liquidity, cash flow from operations in 2007 was $52 million, $36 million lower than last year due to higher inventory levels. Our inventories at the end of the year were $227 million, up 17% compared to last year and in line with our guidance. The growth in inventory reflects higher levels of inventory per door in our Carter's and OshKosh retail stores which were under inventoried at the beginning of 2007. CapEx for the year was $22 million, primarily for 19 retail store openings and the integration of our information systems.

That is a summary view on 2007 and I will comment on our latest thoughts on 2008. As we discussed on the call, this is an unusually weak environment. Our wholesale and mass channel customers are being very cautious on inventory commitments and as a result, it's very difficult for us to forecast growth with them. Accordingly, we've decided to be more directional and less specific with our guidance. For 2008, we're currently projecting low single-digit growth in sales and earnings at a level comparable to the earnings we achieved in 2007. Based on our current trends, we are not projecting sales growth in the first quarter and we expect first quarter earnings will be lower than last year due to the continued weakness at OshKosh and higher provisions for customer support. We'll focus this year on the things we can improve, like product competitiveness, cost reduction, inventory management, system upgrades and other investments we believe will support our growth initiatives. For example, CapEx is projected to be approximately $50 million this year. Most of that CapEx will be allocated to our retail segment. We're currently planning to open over 20 Carter's stores and about five OshKosh stores. We will also invest about $15 million in the retail systems, $10 million for a new point-of-sale system and $5 million for a new planning and allocation system. We will fund these investments with operating cash flow, which we expect will be meaningfully better than last year. Free cash flow is expected to be about $30 million, which is comparable to last year.

That concludes our opening remarks and we will open up the call to your questions.

(OPERATOR INSTRUCTIONS) Brad Stephens, Morgan-Keegan.

Where to begin? With OshKosh here, can you give us maybe some milestones along the way to you guys which proves this is a viable brand still and how we can monitor this success or improvement in this brand?

I will give you an overview and how we feel there. We feel committed to OshKosh. We have revisited the consumer and the consumer sentiment of that brand is high. We know our customers still want the brand to do well. If I felt that was not the case, there is no question we would shut this business down. I have said it 100 times and I will say it 101, we believe most of the OshKosh problems by far were our own miscues and we think we have identified them. We have repositioned that brand to be more core key items. It is more competitively priced. The product is going to be far superior. The milestones will -- be spring '08 is not a panacea. We've said that all along. We have starred improving the product for the spring launch, we are seeing some bright spots there. Summer, we validated all of this with our customers and the consumer. We're using consumer panels for all our product development. Consumers see the summer even better than spring. We particularly struggled in girls' consumer segment, and particularly in color over -- since we have really acquired the business. The consumer likes the summer girls' colors. We have done the same with fall. Actually, our customers are seeing product improvement. But it's a phasing issue here with us. It should improve as the year moves on. We're very focused on that. We have better talent, there is no question. The settlement inside is we have a very talented group at SoHo now that are really fixed on the brand product and doing a good job.

Okay. It sounds like you're committed there for at least the near-term. Moving on to the Carter's wholesale business, can you give us more color on that? Maybe one, as it pertains to the higher vendor allowances. Was that something you realized throughout the fourth quarter, or is this something that the retailers came back to you more recently and they are really starting to clamp down on the vendors in general? And then if you could talk about your order looking forward -- why is it weaker? Is it a case of the product has slowed down? Is it a case of you have just seen traffic slow down at the retailers? And is you could maybe delineate between the different baby sleepwear and playwear. Is it EDI, is it fashion, what is it that's causing the slowdown here at wholesale?

I think, Brad, you have to go to the fact that this is an unusually weak market. When you have the best retailers in the country all guiding down, we definitely would see less strength in our order base. So that is a macro issue. This is a tougher market than I remember and it's $101 for a barrel of oil and the mortgage rates are very difficult and it's an election year. So you have to start with that, and everybody's going to watch the inventory and watch their expenses.

As far as the accommodation, really it heats up in the month of January. Their quarter -- our year end is December, their year end is January or actually February, I think the first week in February this year. So we look at it monthly, but really business got very tough. November was actually a decent month because of the calendar, December got bad and then the requests we started handling from the middle of January to the end. So it caught us -- we knew things weren't good, and we know they always ask if it was more aggressive than we thought.

As we look at '08, we will start planning conservatively, as Fred said, as are our accounts. I think the first quarter and maybe the first half will be affected by 2007 performance of our customers. They're going to be carrying over additional inventory into the first half of the year. I think retailers will be managing their inventory investments. When times get tough, cut expenses and watch your inventories. I think our spring product in our stores are performing well, although we don't want to start being confident based on the month of February. It's not a big enough month. Fall '08 as far as I'm concerned, best products and total marketing package we have had since we have been here. We have fall orders in our hands for fall and we are up. In all three product markets, we have positive growth -- baby, playwear and sleepwear -- in the mid-single digits. So we do have -- we're just looking at the market and guiding conservatively.

Alright, guys. Best of luck.

Robby Ohmes, Banc of America Securities.

A couple of quick questions. The first is, can you give us a sense of what the backlogs actually are for spring and what you're looking at for fall '08 for Carter's and OshKosh? And then the other question is, can you guys give us the breakout on the sales and profit margins, or the profit margins, the EBIT margins for Carter's and OshKosh wholesale in retail so we don't have to wait for the K to get that? Thanks.

I'm not sure I understand your backlog. Are you talking about inventories?

No, can you actually tell us what the spring '08 and fall '08 backlogs are for Carter's wholesale and OshKosh?

Spring '08, we were positive in baby and playwear a total of 6%. We were negative in sleepwear, which I think we covered on the last call. We eliminated a couple of product categories that really took away in our increase in sleepwear. For fall -- this is Carter's I'm talking about -- all three -- baby, seasonal, fall playwear, fall sleepwear, are all up mid-single digits.

OshKosh, spring was actually positive. Summer was down, which we had thought would have been positive based on good reception in spring. We knew the summer line was better. Actually when it came time to get orders, which was after our call, they were worse than we expected and fall is down dramatically as I said. So that [has] led us to double-digit increase at OshKosh for the year.

I think your second question relates to segment profitability?

Yes.

For the year, the operating margin will go from around 12.3%, down to about 10.9%. If you look at it by segment, Carter's wholesale, it's interesting, despite the weakness in the fourth quarter, the operating margin for Carter's wholesale actually improved. Last year, it was around 18.8%, and in 2007 it will be about 19.2%. So throughout the year, we saw very good product performance and we got caught off guard at the tail end of the year, particularly in January when we saw our customers' performance and the demand they had for mark down support. Carter's in the mass channel, the operating margin last year was 15.2%. For 2007, it will be 14%. And we did have some product performance issues in the second half at Wal-Mart and those are being corrected for fall 2008 which will start to ship in June.

At Carter's retail, the operating margin last year in 2006 was 16.9%. That will be slightly lower, it will be 16.4%. If you remember in the first half of 2007, we were out of balance on inventory. We entered the year with a significantly lower inventory position than was appropriate and we spent most of the first of building those inventories. As the inventories built, we saw better performance, particularly in baby and the fourth-quarter margins were stronger year-over-year. So we are in good shape as we go into 2008 at Carter's retail. But for the year, the year is being weighed down by first half performance. OshKosh performance suffice to say, not good. Last year, the OshKosh wholesale margin was 11.6%, it will have a negative margin this year because of the product performance issues and the markdown support. The Genuine Kids component, we made about $2.4 million in '06, slightly more in 2007, about $2.7 million. There's no margin because there's no sales. It's a licensing program and we feel good about what's going on at the Genuine Kids brand. The lack of significant growth there reflects the fact we were transitioning out of big girls sizes and transitioning in a new toddler denim program that we feel good about. OshKosh retail in '06 had an operating margin of 8.2% and that dropped in 2007 down to 2.8%. It's all in gross margin, significantly higher markdowns because of the product performance and the product mix.

And just a quick follow-up question. So on the revenue outlook for the first half of '08, when I'm looking at those backlogs, so it's primarily mass channel is going to be down pretty significantly, offset by positive growth in baby and playwear in Carter's wholesale, or is sleepwear such a big drop that it offsets the positive spring '08 backlogs for baby and playwear? I'm just trying to understand how to get to the down revenues in the first half of '08 off of those backlogs?

Carter's brand wholesale, I think we're planning pretty much flat to down slightly for the first half, and that is sleepwear affecting that. Plus, we went back and looked at our basic assumptions based on the environment and we have lowered our basic assumptions. If you added that back in, we would be at -- so we are assuming things based on the environment. Mass, you are correct. Child of Mine will be down in the first half. We'll be up in the second half. We think we have fixed those issues for the second half, and Target should have good first, good second half, good year.

And the retail comp assumption you guys are using in the first half?

We will have the growth at Carter's retail, and I would say and it's upper single digits and then retail OshKosh retail would be low single-digit growth.

Margaret Whitfield, Stern Agee.

Could you give me some background on what happened in Q4 among the three components of wholesale, baby, playwear and sleepwear? And I guess you have given us some outlook for the new year.

Directionally, I think it's pretty much in line. With baby and playwear, we're positive, and sleepwear being the negative.

Okay. And given the performance of retail versus Carter's wholesale, obviously we have new management, better execution, but it's the same product. Any additional thoughts you could give us on the disparity in performance? Similar customer, I believe.

We look back at it, Margaret, if you really look at our top customers, they had difficult third and fourth quarters, probably negative comps if you're talking our two biggest Carter branded. And to our knowledge and from the research we have done, we have performed -- and kids usually performed better than total store, and we performed as good as or in a few cases better than their children's department. So we think it's really reflective of their performance in the third and fourth quarters and January, which is their fourth quarter.

So there are no competitive issues in the wholesale channel that you can relate this to? it's a macro issue?

I think there is no question, our customer's private-label business has gotten better, and with our new economic model that we're rolling out in Carter's, particularly as we start the fall launch, we closed the gap in private-label considerably. Our product is better, our prices are more competitive. So you have to say that that has been some issue. But we feel that there are no huge issues we can't deal with.

The markdown accommodations that were a factor in January, is there certain timing? Will there be any issues in Q2 of business conditions remain challenging, or is it a year-end situation?

We provide for it throughout the year, Margaret, and we have obviously baked in a level that we think is appropriate given the environment into our estimates this year.

You said the first quarter would be down. What would need to change to improve the second quarter results, or should we, if we are conservative assume a down Q2 was well?

The things that are weighing us down will continue to be OshKosh. So when we start to see better performance from OshKosh, then that will make the performance better.

Well I applaud your investment in retail. I think long-term, that is the way to go. Thanks again.

R.J, Hottovy, Next Generation Equity Research.

Just really one quick question in regards to the OshKosh wholesale. You have given us some feedback from the focus groups and what not in terms of the product for spring and summer. I'm just trying to get a better sense in knowing that some of your wholesale partners have cut back on orders for the year. What are they saying in terms of the product quality, though? Is there any feedback you could give us there in terms of it hasn't been well received or just a little bit more color if you could, right there?

I think they are saying predominantly our color and art is getting far better. Keep in mind that far better means as we move through the seasons. The most persuasive feature or an attribute for product in our business is color and art. It's the emotional connection with the consumer. And we were in OshKosh too forward in colors, particularly in girls. So they see that being corrected as we move through the seasons. Not so much in spring girls, but far better in summer and they have seen fall and they see not only the color and art, but they see our pricing is more competitive and they see we are matching up to their models. We're in the midst of our spring '09 now and we cannot report on that yet, but we think the new team that we've put in place at SoHo is dramatically changing, even had a big influence on holiday which launches in September. So we can only tell you that customers like our direction and we validate it with consumer panels. We're actually showing consumers the color and the art and the style as we develop the line. So it's not focus groups. We don't put a lot of validity in focus groups. We put it in with, do they like it and would they buy it? I don't know if that answers your question.

It covers it to an extent.

The customer is not negative on the brand. The customer just doesn't want to stick their neck out and over-order. So when we say fall's down significantly, that's a smart thing to do. It's also not bad for us because we don't need the extra margin support either. It's better to be more conservative.

So really when it comes down to it, you would say it's more of the environment than it is the product?

No, OshKosh?

Yes.

No. I would say OshKosh is mostly self-inflicted us. It certainly affected -- the environment certainly affect it, but the product has been the issue.

But going forward?

Going forward, yes.

Brian McGough, Morgan Stanley.

Joe, you had noted that when times get tough, you should watch inventories and cut costs, and it seems like that's exactly what you're doing. Inventories appear to be getting better on the margin. Your SG&A was down this quarter on top of a fourth quarter last year when I think it was also down. But there are a couple of other brands out there who are actually putting up some pretty good numbers in light of the current environment who are really going the other way and they are investing money back into their model, even if it hurts their operating margin for a couple of quarters. But it just has gotten their top line really going again in a pretty strong way. And I am wondering in light of where you guys have been over the past, say, year, when do you think you might get to a point where you have a change in your view, if at all, just about how you approach the model?

I think we are making investments again in both the wholesale and retail sides of the business. We talked to you about the 250 stores that we're going to build, 250 shops with Kohl's in the fall this year. We are increasing what we call, it's a retail marketing organization which will start servicing more doors. So those are -- and I don't want to include product investments, but those are major. And on the retail side, we have invested dramatically in talent, fixturing, systems. I think it's all kind of evolving because we're doing it and we're doing a lot of it this year. So I don't want you to think we're not investing in things that are critical to both the customer and consumer because we think we are. So some of our expense controls have been, let's cut things here to invest here, but not cut down total investments.

What are the other offsets? What categories are down to get what you view as the key real business drivers out?

I'm not clear on the question.

He said, where do we cut back on expenses -- do we cut back on (multiple speakers).

We've been reining in spending since we started to show weakness in our retail business in the second (technical difficulty) 2006. To Joe's point, our issues have not been for a lack of investment. We got off track because of product positioning at OshKosh and we have leadership and execution issues in our retail business. I would say one of the most significant investments we made last year was in talent. Jim Petty, he has an entirely new team, a need team -- a new head of store operations, new head of planning and allocation, new head of marketing. And so the issues that we have had are the areas where we have been investing. As we have done for 16 years, we rein in spending where we can and we have done a good job. We have had a very good track record in terms of watching how we spend our money and spending as we can afford to spend. So I would not say there's one major area. The thing that we unfortunately had to do in 2007 is eliminate the incentive provision. But our style all these years have been we want to take care of the shareholder first, and if the shareholder has been taken care of, then we are rewarded. And given the performance, we made a decision to rein in those investments. We will fund incentive comp for 2008 because we think that's important to do. We have a very talented group of people here at multiple levels in all of our functions and we want to make sure they are incentivized to drive the things that are important to grow this business.

Mike, one last point on the balance sheet. I think about half of your debt is floating-rate. And so one, is that right? And just two, in light of what is going on out there in the credit markets, how are you managing that in order to ensure that there is no creep on the debt service side and no risk on the refinance side?

We are in good shape. Our timing was good. I think a year or so ago, we restructured the debt to take advantage of what was then a fairly favorable interest rate environment. So today, our interest rate is LIBOR plus 150 basis points and about 70% of that is protected under interest rate hedges. We have both a collar and another hedge in place. So about 70% of that is protected. So we're in good shape. The leverage is less than two times our trailing EBITDA. The debt service is some portion less than $4 million a year. So we're in good shape there. We don't feel as though we are exposed to interest rate fluctuations. That's a very manageable component of our balance sheet.

Okay, great. Thanks, guys, best of luck in '08.

Jim Chartier, Monness, Crespi & Hardt.

What kind of assumptions are you using for wholesale margins, vendor allowances and such for first half of '08? Is it similar to what you saw in the fourth quarter?

We are assuming that we're going to have low growth in sales. We're assuming that the markdown support will be comparable to what we saw in the fourth quarter unless we're proven otherwise, and we are assuming no growth in the margin on those sales. That is what is putting the pressure on the first half.

And then, you reorganized sleepwear under the baby leadership team. How has that gone? Are you seeing any improvement there?

As I said, our fall bookings in sleepwear are up fall '08 versus fall '07, and they were negative -- and that was really the first full line that fell under the leadership of the (inaudible) for the baby team. So yes, we are seeing good feedback from our accounts and good bookings.

Great. And then as far as rising costs pleasures, labor costs in China, appreciating yuan, higher raw material prices. Is that going to impact the second half of the year at all?

There is no question, costs are going up in China. Fortunately with the way our group manages the supply chain, we have not seem much pressure on our prices. We have visibility out about six months in prices. It's always been a challenge. There's nothing new about this environment in terms of managing cost. It has always been a challenge. But we have a number of initiatives that enable us to manage the growth in product costs.

And what percentage of sourcing do you do in China these days?

A little over 50%.

And then, when will we start -- when will the new POS and planning and allocation system for retail be installed, and when should you start to see some benefit from that?

The point of sales system is being rolled out currently. It should be in place for all approximately 400 stores by the latter part of the third quarter. And planning and allocations, the new leader there is scoping out a number of different products and he's focused more right now getting a very good process in place so that we match the right system up with the right process. My guess is that will launch sometime in the fourth quarter this year, may spill into the first quarter of next year.

And then, can you comment on how the loyalty program performed for you the fourth quarter and what your plan is for that? And then also on the direct mailings, I believe you had one for spring; how is that performing?

Regards to the loyalty program, we have has 1.2 million active names. We projected it to be about 15%, 17% of our current transactions. We believe it has the potential to be over 50%. It is tied -- part of the automation is tied to the POS and it will get stronger as we roll out this year. We are seeing increased repeat business and we are seeing an increase in customer spend. So we do think it's working, but we need to tie it to the POS, get more results as we get further into the year. As far as weekly impressions, what we call impressions are e-mails, direct marketing mailers for the customer and post cards. Those are the two things we really call impressions and we are saying we're going to have 26 million this year versus 6 million the year before, and I think it's reflective in the Carter retail performance.

(OPERATOR INSTRUCTIONS). [Forrest St. Claire], (inaudible).

Can you give out the OshKosh brand loss for 2007 in absolute dollars and what the -- implied in your guidance for earnings for '08, what the implied loss is for the brand?

What I can share with you, Forrest, is what we will report in the 10-K in terms of segment profitability. For 2006, OshKosh contributed roughly $32 million of the $165 million we had in operating margin, operating profit. For 2007, it will contribute about $7.9 million. So it has dropped about $24 million but it is still reporting a profit from a segment standpoint. For 2008, we are assuming negligible growth in that. So we are assuming it will be flat to up of that for 2008.

And in terms of, ultimately, there is obviously a cost with the debt that was assumed with the acquisition. So net-net, of the debt on the balance sheet, the total purchase price, etc., how much is that loss, how much is that impacting the numbers?

It's a non-GAAP measurement that we don't disclose. But suffice it to say, if you saw Carter's performance before the acquisition and the track we were on to repay the debt, to your point with the debt service, you could make a care that OshKosh is dilutive. But it's a non-GAAP measurement and we don't disclose that.

The reason why I ask is obviously the stock is being penalized right now, one for macro reasons, but also two, due to the dilutive impact there. Clearly, this has been a focus for people and I'm just trying to help better understanding the true underlying value of the Carter's brand as a stand-alone. At what point, whether it's 2008 or 2009, do you say we have given it our best shot and it's not going to work?

With respect to OshKosh, we're not in love but anything but winning and we're going to do the things that are necessary for that brand. It's going to take the better part of this year. And believe me, we don't like losing and you don't either. I would be the first to shut it down if I thought we did our best work and it still didn't work. But we are optimistic. Such just follow through the year, don't panic and just believe that we can fix these things. And if we can't, we'll do something about it.

And second question as it relates to the first-half earnings of 2008. Given the significant recovery and improvement in the retail business, which is clearly -- it looks like it has turned the corner, there has to be some pretty significant margin pressure in the rest of the business in order for the year-over-year earnings to be flat to down. I think the previous caller asked the question on the wholesale side. What was the wholesale Carter's margin in the quarter, and what was the mass channel margin and looking over the next couple of quarters? I think you said --.

In terms of the fourth quarter --.

That's correct.

-- for wholesale? The fourth quarter for wholesale was year-over-year comparable. Again, the issue was not so much that the support was significantly higher. We anticipated it would have been better, just based on how our business was trending. So the fourth quarter operating margin for Carter's wholesale went from 16.7% to 16.9%. Your question on the first half, again, we are assuming -- we're not assuming much growth in terms of total sales in the first half of this year. In terms of a gross profit margin, we are assuming that down because, again, it's largely being weighed down by the issues that we are having at OshKosh. SG&A will be higher because you're going to have the full cost of the new retail team, our unit volume is up --.

What is the delta in the SG&A year-over-year?

In terms of what?

It looks like -- It's it about (multiple speakers).

For what period?

Kind of like the Q4 run rate versus the first half of '07?

You should assume that the spending will be higher in the first half, the first half of '08. For the three things that are driving that is investment in this new team, the cost of the additional stores. You have higher unit volumes, the distribution and freight costs are going to be higher. We're making provisions for the risk of the West Coast dock strike, which may increase our distribution costs. We are hopeful that is an upside to plan. The other thing that was not in the fourth quarter spending that will be in the first half is a higher provision for incentive compensation.

Wayne Archambo, Blackrock.

You have referenced a few times on this call on the OshKosh business, shutting it down. Has any thought been given to possibly selling this business?

The only thought we have given to the business is fixing it. We have not had discussions about shutting it down. If you're thinking you're hearing that, that is not the message. The message is fixing it and we believe in it. I don't want to beat a dead horse here, but the issues we think the problems with OshKosh are fixable. It will take this year to get it done.

So this time next year, mark my calendar, February 27, 2009, if we're having this discussion and it's still not fixed, is the line in the sand 12 months from now?

I did not draw a line. We will keep you posted.

Thank you.

We're not going to let it continue to be a drag on shareholder value, that is for certain.

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. Just a quick summary. I think we all know the market conditions are tough. I would describe it in one word as uncertainty. I don't think anybody knows the depth of it or the longevity of it. What we are doing is going about improving our business model. The young children's market is large, it's growing, the demographics are favorable, it's fragmented, there's plenty of opportunity [of a] share gain. We have a far better competitive model for our customers and we are about to meet with each one of them. We have the talent to do the job. We're making the important investments. We are watching the inventory and the expense and our job is to stay focused on that. We look forward to our next call. Thank you.

Ladies and gentlemen, this does conclude the Carter's call for today. If you would like to listen to a replay of this call, it will be available beginning at 11:30 AM Eastern standard time today through midnight, Friday, March 7. The dial-in number for the replay is 888-203-1112 in the United States and Canada, and 719-457-0820 from international locations. The confirmation code to access the replay is 596-5436. (OPERATOR INSTRUCTIONS).

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