Carter's Inc (CRI) 2008 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 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 first quarter earnings press release yesterday after the market closed. The text 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 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 and now I would like to turn the call to Mr. Rowan. Please go ahead, sir.

Good morning everyone. Welcome to our call. It's no surprise this remains an uncertain period, no one knows the depth of this recession nor the timing of the recovery. Given that it makes it very difficult to gather the market with any certainty. That dictates two things from us: one, be very conservative, which we are and two, focus on what we have control of, which we are. Parts of our business units are performing quite well. A couple are (inaudible) but have emergence successes. We are not pessimistic but we're realistic and determined. We have a clear focus and discipline strategic agenda with muscle behind each of our major initiatives. We are committed to long term quality growth but we have to be sensible as we work through these headwinds. We have, however, may materially strengthened our business through these new business models. You will hear this from Joe and Mike as we move through the models and more specifically about that and also during the questioning and answering period.

To summarize our strategic agenda, it goes as follows. The first is be certain we have and keep the core talent to execute the turnaround and position this company for long-term growth. Secondly, to be the absolute leader at product value. Third, to optimize both wholesale and retail growth to powerful business models. Fourth, to accelerate the turnaround of OshKosh. Fifth make the key investments both short and long term. And finally, substantially reduce our cost structure. I'll turn the session now over to Joe Pacifico.

Thank you Fred. Good morning. I'll give you a brief overview of our first quarter performance and then Mike will provide additional details on our results. I will also share with you our strategic initiatives that we will begin implementing this fall. I will start with a quick overview of the Carter's brand new wholesale business. We had a good quarter in this segment with positive sales growth. Our over-the-counter selling of Spring product was flat to last year and our top accounts in total saw slight improvement in margin. There inventories are higher than last year at the end of the quarter but are at the appropriate level to support the second quarter retail sales plan which is higher this year due to the calendar shift. As expected OshKosh whole sales were down in the quarter. In regards to over-the-counter selling unit sales improved significantly. Our customer margins were up slightly to last year. Customer inventories are in line with plan and should be cleaner at the end of the second quarter than they were last year. Summer selling is off to a very good start. As we have told you before while spring was much improved, as reflected in our over-the-counter selling results, summer should be stronger and our goal is to build upon each subsequent line. Based on this product performance we are rebuilding confidence with our accounts and we expect to see this reflected in our year-over-year bookings.

I'd like -- would now like to focus on strategic initiatives. I want to make sure you have a clear understanding of the model that will kick off starting in fall '08. For the wholesale channel we are implementing a far more competitive model. The model is fact based and supported by extensive research. There are five key components to the model. The first component is product leadership. Our strategy is to drive high velocity essential core products to be the market leader in color and art and to that end we have and we'll continue to increase our design skills. At Carter's we've strengthened our creative department with a VP of design, we have increased the number our full time artists and have expanded our freelance network and intern programs. At OshKosh, we have a new EVP of the OshKosh brand and a new Vice President of merchandising and design. We are also validating our product with the consumer and customer in our development process. The second component of the model is more competitive consumer pricing. Through extensive analysis including the help of an outside firm we have looked at our of all competitors specialty stores, branded apparel, and private label along with an historical over-the-counter sales, to determine the price points that optimize revenue and margin for our core products. Based on the analysis we are improving product value by lowering consumer prices 8% to 10% at Carter's and 10% to 15% at OshKosh. At the same time we lowered wholesale prices to be able to execute an every day value pricing strategy which we feel optimizes performance and is supported by our research. A third component is branding. Based on our research we are investing to improve the consumer shopping environment. For Carter's we have created zero to 24 shops which pull together all of our product markets, baby playwear and sleepwear, in the newborn to 24 month size range. The shops drive brand awareness, are convenient for the mother, drive top-line growth and allow us to maintain and grow floor space. Carter's is positioned better than any other children's brand to do this because of our brand strength and baby being the foundation of these shops. Early test results have been positive and we plan to roll out 300 shops in the third quarter with 200 more following in the fourth quarter. We will also commit to servicing the floor at the top doors of our top accounts by expanding our retail floor servicing program. We will service over 1,000 doors in the second half of this year. The fourth component of the model is to increase our consumers profit. To do this we plan to increase revenue through better product, lower consumer prices and more impacable branding on the floor. Secondly we will improve customers natural margins through lower wholesale prices. Finally the model is built to their increase profitability through increased turn which will pick up as a result of every day value pricing and inventory manage. The final component of the model is joint business planning with our accounts. It's critical to get mutual agreement on strategic direction and for us to understand the metrics that are most important to our accounts. Execution of this model in its totality, along with the strength of our consumer brands plus the ability we have to invest should enable us to achieve or exceed our customers objectives. We believe that there is no one else in the children's space that has the ability to put together a model like this. We have already presented this model to some of our top accounts and the feedback has been extremely positive.

Now, I'll talk about the mass channel. Our Just One Year business at Target, performed very well in the quarter with strong sales growth. We had very good selling at the floor and inventories are in good shape. We have all of our Fall orders in hand which gives us good visibility into the second half of the year and we are expecting to see positive growth. The Child of Mine business at Walmart struggled in the quarter. Product performance and certain Spring programs has deteriorated more than expected. We have moved aggressively to get the Spring sales and inventories in line by the end of this season. For Fall we feel we have corrected the issues. We are significantly elevating product benefits and lowering prices where necessary to improve the consumer value equation. Our fall deliveries will start shipping the last week of June. Our new brand (wall) launches in mid July. I'm confident the second half will provide positive growth at Walmart supported by the Fall orders we have in hand.

Turning to retail, I will begin with the Carter's side of business and then follow it by OshKosh. Carter's retail is the strength of our business right now. It's a great story, finishing the quarter with it's fifth straight quarter of positive comps all four of our product categories comp positively in the quarter. For the quarter, we also have improved product margins over last year and our inventories are in good shape. Carter's retail should provide good growth in the second half due to better product and an improved value equation, more significant assortment of opening price point product an improved floor set and lastly more impactful consumer marketing and increased impressions. OshKosh retail performed below (inaudible) in the quarter and still a work in progress. However, we are making progress. Margin and inventory management are really the issues, and we expect to see improvement in those areas in the second half of this year. For Fall, OshKosh retail will have a significantly stronger business agenda. Better product, expanding the opening price point programs, a strong denim offering, better value to the consumer, improved planning and allocation process, a better store (inaudible) environment, based on the investments we have made in fixtures, mannequin's and in store photography and more impactful consumer marketing. In closing really, I think our organization has done an excellent job in positioning us to succeed in this environment. We are being proactive in implementing a comprehensive business model on each of our brands and business segments that will kick off in the second half of this year. We believe the positive material change to our model will provide an opportunity to gain share. I'll now turn it over to Mike to discuss financial performance.

Thanks Joe. Good morning, everybody. I'll walk you through our results and also comment on our outlook for the balance of the year. For comparative purposes keep in mind that our results in the first quarter of 2007 include a charge of $0.06 per share related to the closure of an OshKosh distribution center. Because that charge impacts comparability I'll comment on our results excluding the impact of that charge. For the first quarter of 2008 we are reporting earnings or $0.19 per share, thats down 14% to last year. Our earnings were way down by an operating loss incurred at OshKosh which was approximately $9 million in the first quarter or $0.09 per share. That loss is about $6 million higher than the first quarter of 2007. Our earnings were also negatively impacted by disappointing performance of our Child of Mine brand. Partially offsetting the weakness at OshKosh and Child of Mine, were significantly better performance in our Carter's retail segment and the strength of or Just One Year brand. With respect to sales in the first quarter total sales were up $10 million or 3% to last year. That growth was driven entirely by our Carter brands with sales up $18 million or 7%. Our growth in the quarter was led by the Carter's retail segment.

Our Carter's retail sales increased 15% with a 12% increase in comp store sales. This increase was driven by a stronger product offering, a significantly better inventory position, and better execution by the new retail team. We are seeing an acceleration in baby product sales which is our highest margin business. Our brand stores continue to perform the outlets, the brand store comps were up 18% in the first quarter. The outlets were up 11%. Sales in Carter's wholesale segment grew 5% in the quarter, a good portion of this growth was in our sleepwear business and was largely related to the timing of shipment. Wholesale sales for the first half are expected to be comparable to last year. Our mass channel sales increased 2% into the first quarter. As Joe discussed our business with Target has been terrific. Up 20% in the first quarter, expected to be up 10% in the first half. Sales to Walmart were down 9% in the quarter. We had weak selling in certain components of the product offering which were improving for Fall 2008. At OshKosh wholesale sales decreased 26% in the first quarter. Most of this decline can be attributed to price reductions to improve the competitiveness of the product. Average wholesale prices for the year are planned down about 12%.

Our OshKosh retail sales decreased 3% in the first quarter with a 6.6% decline in comp store sales. The decline in sales was driven primarily by aggressive promotions to accelerate the clearance of excess levels of fall and holiday merchandise. With these aggressive promotions, we're improving the level and mix of our inventory in our OshKosh stores. In recent weeks, we have started to see positive comps from these stores with better margins year-over-year. Our current model reflects meaningfully better profitability from the OshKosh stores beginning in the third quarter. With respect to profitability our gross margin declined 140 basis points to 31.8% of sales. This decline equates to approximately $4.5 million of margin erosion, the major components of that decline include erosion in OshKosh margins due to product performance and related markdowns and lower margins earned on certain components of our Child of Mine product line. Offsetting these declines, was better profitability in our Carter's retail segment which earned higher margins in each product category. With respect to spending in the first quarter SG&A was 28% of sale, that's 90 basis points higher than last year due primarily to the investments made in upgrading the retail management team and the impact of expenses related to new stores. Our loyalties from licensing activities were up 5% to last year the increase was driven by our Carter's domestic licensing business. On a consolidated basis our operating margin was 6.2%, down 230 basis points compared to last year driven largely by the losses incurred at OshKosh. Interest expense in the first quarter was down $1.2 million or 21% driven by lower interest rates. With respect to taxes our effective tax rate in the first quarter was 27.9% compared to 37.8% in the first quarter of 2007. This reflects a $1.6 million benefit from the reversal of income tax reserves following the completion of a recent tax audit.

In terms of liquidity, cash flow from operations in the first quarter was $29 million, that's $22 million higher than last year due primarily to the change in inventories. Our inventories at the end of the first quarter were $174 million, up 9% to last year. The growth in inventory reflects higher levels of inventory in our Carter's retail stores and the timing of shipments to our wholesale customers. In absolute dollars, inventories grew about $15 million year-over-year of that $15 million increase, $9 million is in our Carter's retail stores. As we discussed on previous calls in 2007, we were significantly under inventoried in our Carter's stores and that had a negative impact on our results. We are now at a level we believe is appropriate to support demand. Inventories will trend higher during the second quarter they may be up 15% to 20% mid year. We've decided to bring in inventory earlier to help avoid any disruption in the flow of product that could result if there's a West Coast port strike. We are projecting inventories up about 4% to 6% at the end of this year. CapEx for the first quarter was $2.5 million, primarily for investments in systems, including our new retail point of sales system which we are rolling out this year. We plan to invest approximately $45 million in CapEx during the balance of the year primarily for retail store openings, our new point of sales system and fixturing for our wholesale customers.

With respect to the share repurchase plan we purchased about $10 million of our stock in the first quarter at an average price of $14.86 a share. Today we've invested $74 million in the share repurchase plan retiring 6% of our shares at an average price of less than $21 a share. With respect to guidance, we are planning low single digit growth in sales this year. With respect to earnings, on our last call we expected that we could achieve a level of earnings comparable to last year. And while that level of performance is still possible, given the continued weakness in consumer spending and the performance at OshKosh I think it's reasonable to assume that earnings this year could be down 5% or more. It's important to know, included in our earnings estimates our significant incremental investments in our retail segment this year including the new leadership team, better systems, and a new facility for our retail group. We are also investing in the new fixturing program for our wholesale customers. We are investing in outside help to support a deeper analysis of growth and cost opportunities and we are investing in consumer research. Our estimates also include funding incentives to reward key employees who are leading the initiatives to strengthen our business. Near term you will see the impact of these investments on our second quarter performance. Our current model reflects sales in gross profit, down low single digits to last year. Second quarter spending will be slightly higher than the first quarter of this year and up about $10 million or 12% to last year. As a result of higher investments we're projecting second quarter results will be break even to small loss. Keep in mind our second quarter is the lightest quarter of the year in terms of sales contributing less than 20% of our annual sales. The incremental cost of these and other investments this year, is about $18 million or about $0.18 per share. We believe the cumulative effect of these investments will position us for good growth beginning in 2009. That concludes our business update and we'll open up the call to your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). And for our first question we go to Omar Saad with Credit Suisse.

Good morning.

Good morning.

Quick question on the new model. I think it was very instructive laying out of the, kind of the five pieces to that model. On the sourcing side, especially as you look to increase customer profits and giving them better natural margins and lowering pricing, how do you balance that on the sourcing side? There's been a lot of talk about inflation coming out of the far east and you have kind of always kind of used the agency model, with your sourcing and restructure. Have you thought about reconfiguring that? Or, can you give me your current thoughts on that side of the business?

Omar, this is Mike. There is no question costs in China are going up. We've been staying very close to (Leane Fung, William Fung) specifically. That agent model has been an important part of our success, it will continue to be. Because the costs are going up in China we've reduced our sourcing mix in China and we've shipped it to lower cost countries like Bangladesh, Indonesia, Vietnam -- and we're seeing some very good performance from those countries. Fabric as we've talked about in prior calls, that's the largest component of our product cost. So, for the past year, we've been focused on narrowing the scope of our fabrics, leveraging fabrics over multiple products and brands where appropriate. We equate complexity with cost so we've been attacking complexity in the product development process. We've been narrowing the number of SKU's particularly at OshKosh. We still feel as though the assortment for the consumer is too broad at OshKosh for Spring 2009, we'd estimate that we've SKU's by about 20%. We see a similar opportunity for Fall 2009 and the SKU reduction enables a crisper point of view for the OshKosh product assortment for the consumer. It increases the efficiency in sourcing. It enables us to increase our forecast accuracy and it also enables us to carry less inventory. So, there are a number of good initiatives that we feel as though enable us to continue to lower our cost structure and improve our margins. So, I'd say we are making good progress and have a number of opportunities in the sourcing area and elsewhere in the company to offset the rising of cost in China.

Okay. But it sounds like you are still very committed to the agency.

We are.

Okay.

Yes, we are.

Switching gears a little bit, on the store shops that we are talking about, how many are out there today? I haven't seen any of these, but are they radically different than your current format in the stores? And where can we go to see them?

Yes, we think they are radically different. We've got three out there today. We're installing a few more before we get -- and the major push will start in the third quarter.

Okay. And it's Kohl's and Penny's? Or, you know, which retailers?

Yes, Kohl's and Macy's and Penny's, we're working a plan on right now.

Got it. Can you tell us where the three are that are out there today?

Yes, Kohl's is Sussex, Wisconsin. Macy's is Dadeland, Florida, and then (Harold), 34th street.

Got. It thank you.

You're welcome.

Our next question we go to Brad Stephens with Morgan-Keegan.

Hey guys good morning. It sounds like you guys actually have a very well laid out plan, which I think we are all pretty excited about. The one question, I think, that I definitely have from the plan here is that you are going to take prices down and yet you expect margins to be up to the retailers. What does that mean for your margins though?

In terms of -- we're going to see near term, we're going to see margins decline. Our model support in the third quarter margins will be comparable year-over-year. We see margins improving in the fourth quarter.

That's from faster turn?

That is --

Leverage?

Yes, it is, primarily from correcting the inventory position. If you think about the things that have weighed our margins down, it's largely been OshKosh and the fact that we were out of balance in inventory, even in our Carter's retail stores last year. If you were to look at the profitability of our Carter's stores in the last couple of quarters, the segment profitability has been up about 30% over the last two quarters. OshKosh, we're still -- most of the decline in the first quarter came from the OshKosh retail stores in terms of much higher promotions year-over-year but as we look at the models, we'll see some of that continuing into the second quarter. But our models now show that the margins will improve meaningfully in the OshKosh stores in the second half of this year. And in fact in the last couple of weeks, we are starting to see the benefit of cleaning up the OshKosh retail store inventory. We put up positive comps with better margins year-over-year. So, we're starting to see some signs of recovery and my view, I think, we are starting to see OshKosh bottom out and we're hopefully that we can see improvement from here.

Second question Mike, to the inventory build, Q2 you said, is going to be up 15% to 20% in part to help alleviate any concerns about a West Cost dock strike. How much of that is a build -- is just bringing in shipments early?

It's entirely due to bringing the shipments in early. We're probably going to carry an extra 18 days of inventory just to give ourselves a safety net in the event that strike occurs. We say today it's probably less than a 50% chance it occurs, but back in 2002 when they went out on strike we did a similar type strategy to bring goods in earlier. We didn't have any disruption in the flow of product. If you were to strip out those extra 18 days our inventory mid-year would probably be up mid single digit. So, it's entirely related to that and we feel good about the outlook for inventory at the balance of the year, that will be back to about mid single digit growth.

Great, your commentary about -- you know, on your last call you kind of said you though earnings could be flattish, now they could be down 5%. When I look at -- kind of how I look at OshKosh in Q1, there was about a $6 million dealt in profitability. So, one will OshKosh be break even this year? Better or worse? And then --

It could be. It could be.

It could be. So it could be another year of a loss?

It could be. Could be flat to down this year in terms of contribution.

So then your only change really is your outlook is OshKosh?

I think that's fair to say. Primarily OshKosh.

Okay. I know you said you've seen some improvement, but are there any milestones along the way that you sit there and say, "look it doesn't work"?

This is Fred. We actually think the worse is behind us at OshKosh. Just in summary we've got terrific leadership there with a brand leader over the brand and over SoHo. We've got a good leader and a good GM at our retail stores. It's the vastly more competitive business model for our wholesale accounts. We're actually seeing good results for the wholesale. Spring is selling well and Summer is off to a far better start. So, the product is evolving as we've mentioned on previous calls, it's been validated by customers. Our customers are pre-lining it and giving us input. There's far less complexity in the line, as Mike said, which helps the cost margin story. And there's a return to the (iconic) core. We'll have this big denim offering. We'll have the big classifications that are important as we move through the year. Just to remind you it's a season by season evolving story, we've had good top meetings so far with our customers. They think the brand is important and we are optimistic. It's going to take sometime as we move through the year.

Okay. And then one last one. Joe, can you tell us compared to maybe last year or just historically, what percent of bookings do you have in it at this point and are retailers holding out longer and longer to give you those bookings?

Actually we've our Fall bookings in, we've had them in for a while. We are in pretty good shape with Fall. I think we quoted mid single digits up in all three product markets. A long way to go, but the initial bookings look good.

All right guys best of luck.

Thank you.

Thanks Fred.

Our next question we go to Margaret Whitfield with Stern Agee.

Good morning. I was very impressed by your retail comps. I wondered if you could discuss if those trends have continued here in early Q2 and whether the comp particularly in those brand stores were driven by ticket or traffic if you could comment and how that worked. That's a first question then I have one or two more.

The strong performance has contained into the second quarter. So, we're really encouraged by the progress we are making in the Carter's retail stores.

And is it fueled by ticket transaction? Do you have those numbers?

It is driven by the -- I'll give you the actual results. Let me speak to Carter's specifically. In the first quarter of the 12 comp, it was driven largely by strengthen units per transaction, I mean, the consumer loved what they saw and perceived a deal. The number of transactions were up about 4% and prices were up about 1%. So, nice to see a strong comp with a stronger margin on prices that were comparable to last year.

Okay. And then on the investment spending, I think you said Q2, $10 million? Did I hear that incremental investment?

Correct.

$18 million for the year. So, would the remainder be primarily in the third quarter and if so what would be some offsets to that investment spend?

Actually Margaret, just -- the level of spending the SG&A will be up $10 million for the year. We would say that incremental spending would be about $18 million. So, included in that $10 million increase in spending in the second quarter are investments and the whole focus was on getting the right team in place in retail. You could see the benefit from that investment in the Carter's retail performance. We are hopeful that Jim and his team could replicate that same type of performance beginning in the second half of this year with OshKosh. I think you know as Joe said, every key position in retail was upgraded beginning with Jim mid-year last year. So, we didn't have that expenses of the team in the first half of last year. We are comping up against that now. We are funding incentives. Incentives this year will probably be some portion of the $9 million that were not in our spending last year. We have new systems for retail. We have the fixturing program. The new shops that Joe talked about. We're investing in what we call, retail marketers people who actually go in and make sure those shops are executed properly and supported with good inventories. We get that inventory out of the back room and on to the fixtures. So, it's a comprehensive approach to strengthening the presentation of the brand on the floor. We're investing it -- research consulting. So, 2008 we're characterizing it's going to be a year of investment. Our whole focus is to make sure we're taking all the important steps necessary to get ourselves back on a growth path beginning next year.

Well, it sounds like a lot of these investments are going to fall also in Q3, but I take it you're planning on volume to offset it.

Actually, I think you should focus on fourth quarter's where you are going to start to see the strength in the business. I think I would set your expectations that the growth this year will start to come in the fourth quarter because we are starting to roll these shops out and I think it's important for everybody to break the business down into its components. At Carter's these shops will start to roll out, these newborn shops, in the third quarter. They'll hit the floor some time during the third quarter but the full impact won't be seen until the fourth quarter. Carter's retail, we are going to continue to see terrific performance that we have seen over the past couple of quarters in the mass channel, we've had some issues with the Child of Mine brand in the first half but that will start to be corrected beginning in the third quarter but the full impact won't be seen until the fourth quarter. When you go to OshKosh, retail -- the OshKosh retail is 80% of the sales in all of the profitability. So, we're are going to see the performance get better with OshKosh retail stores first. Our model suggests that it will begin in the third quarter and it will continue into the fourth quarter. OshKosh wholesale I would just encourage it, it's the smallest component of our business and it will probably lag the turnaround in OshKosh retail. Retail is the leading indicator and then OshKosh wholesale will follow. But to Fred's point we're starting to see some pretty good selling over-the-counter with Spring product and we're hopeful that's an indication that better days are ahead.

In terms of wholesale I know you spoke earlier there were inventory cutbacks early in the year, mark down money requests, have those conditions continued here in Q2 with further cutbacks beyond your expectations?

No everything is in our plan. We have accounted for everything, accommodations are within budget and we think we've actually been more proactive this year in looking at our order file. So, we feel pretty good about it.

Okay, thanks and best of luck.

Thank you.

We go next to Jim Chartier with Monness, Crespi & Hardt .

Good morning. Just a few questions. On the direct mailing side for the Carter's and OshKosh, were you pleased with that? And can you give us some metrics to judge the performance there?

We increased the amount of impressions and I think the pay back, we are still analyzing that, but I think it's definitely reflected in the Carter's revenue in quarter 2, we expect to have about $17 million impressions for each brand. So, we are increasing the impressions and we are starting to track with our new point of sale system and our CRM. But I'd say -- I don't have an exact number on the redemption. We can get back to you with an exact number, but it has been positive.

Okay, and then how many -- you said you are going to service a 1,000 doors in the second half of the year. How many doors are you servicing now and how many were you servicing in the second half of last year?

I'd say it's probably at least twice as many more probably around the 300 to 400 range this year rolling out to a thousand in the second half and then we plan to expand that in 2009. We think there's potentially probably 2500 doors we'd like to target.

And our top to top means with our accounts thus far, there's great demand for zero to 24 shops and servicing the floor managing the house keeping at the floor.

Great.

We are very encouraged by that.

Okay. And then what is the inventory plan for OshKosh retail? It sounds like you've had some additional promotional activity. Are you taking inventories down there to moderate promotional activity?

The levels year-over-year are comparable there's still an opportunity to reduce it further. It's not so much the level as it is the mix. We found ourselves with too much Fall and holiday carry over so we got promotional on that. We've actually helped the retail group by taking some of what they would have otherwise taken in Spring and we're moving it out to the off price channel. We are taking charges related to that. Our whole focus is, and Jim's plan is to make sure that as we roll into that third quarter, we got a better mix and level of inventory. So, I'm not sure you're going to see a significant decrease in the level but the mix of the inventory is what we're focused on improving.

And how -- are you happy with the mix at the end of the first quarter?

No.

No.

No.

No, the mix of that inventory won't get better until early in the third quarter.

Great. Good luck. Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) We go next to Bob (Kainer) with Ramius Capital.

Hi. Thanks for taking my question. You talked about the potential for the West Coast strike and the inventory build to mitigate that risk. Are there incremental costs in the P&L that you are modeling for should the strike occur?

Yes, we are, yes.

Can you put a number to that?

I'd rather not be specific but we've worked it into the estimates.

Are those sunk costs or would you get those back if the strike doesn't occur?

Good question. If that strike doesn't occur, there's an opportunity to save a bit. Yes.

Okay. Just a quick question. What was D&A in the quarter?

Bear with me a second.

And then maybe while you are looking for that, how much is left on the share repurchase authorization?

About $23 million. About $23 million. D&A in the quarter was roughly $7 million.

Okay and can you just talk about the share repurchase plan? We are clearly in an uncertain retail environment. You do have a little bit of leverage. Can you help us understand why that's -- now is a good time to be buying back or to be using that capital to buy back shares?

The program was put in place last year. I'd say the pace that we've been repurchasing shares has not been aggressive, its clearly an opportunity. Our leverage today is less than two times (inaudible) EBITDA. Level of leverage we are very comfortable with. There's clearly an economic benefit of repurchasing shares given where the current valuation is relative to paying down fairly low cost debt. Our after tax cost of borrowing is less than 4% and clearly we see a better economic benefit repurchasing the shares. With that said, our focus on the use of cash is to fund our growth initiatives and to the extent we feel comfortable that there is excess cash, those dollars will initially go to a share repurchase plan and then to debt reduction. If you look at our balance sheet we are carrying over $60 million of cash. We are clearly being cautious on just how aggressive we get on the share plan. We will do it thoughtfully, we'll do it over time. You shouldn't expect that we're going to get overly aggressive on a share repurchase.

I should probably know this, but what is the maturity schedule on that debt?

On the debt, 2012. It's a fairly modest amortization requirement between now and then.

Okay, alright. Thanks for taking my question.

You're welcome.

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

Just a few comments in closing. While these are rocky waters we're in. I would want to remind and I don't say this in jest, it's not our first Rodeo. We have a history of dealing with disappointments. We have always believed in and continue to believe in the teams with the best talent and the best business models win. We think we have both. We have unprecedented investments in people and business models. We are much closer to the consumer and the customer. We feel the worse is behind us with OshKosh. We have a very disciplined approach to decision making and we'll have a lower cost company. All of which I feel is going to position us for quality growth. We always thank you for your participation and your quality questions. We look forward to our next call.

And ladies and gentlemen, this does conclude today Carter call. If you would like to listen to a replay of this call, it will be available beginning at 11:30 a.m. Eastern Time today through midnight Friday, May 2. The dialing number for the replay is 888-203-1112. Again, that is 888-203-1112 in the United States and Canada and at 719-457-0820. Again, that is 719-457-0820 for international locations. The conformation code to access the replay is 5965436. Again thats -- I do apologize thats 5470912, again thats 5470912. Again that is 888-203-1112 in the continental United States and 719-457-0820 internationally and the confirmation code is 5470912. Thank you for your participation. You may disconnect at this time.