Carter's Inc (CRI) 2008 Q2 法說會逐字稿

Welcome to Carter's second quarter earnings conference call. On today's call are Mike Casey, Chief Financial Officer, Joe Pacifico, President, and Jim Petty, President of Retail Stores. 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. Barton's direct telephone number is 404-745-2889. Again, that is 404-745-2889.

Carter's issued it's second-quarter earnings release yesterday after the market close. The text of the release appears on Carter's website at www.Carters.com under the Press Release section. Additionally presentation materials for today's earnings conference can be accessed on the Company's website by clicking on the Investor Relations tab, and choosing 'Conference Calls and Webcasts' on the left side of the screen.

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 on Form filed with the Securities and Exchange Commission.

Also on this call, the Company will reference various non-GAAP financial measurements. A reconciliation of those non-GAAP financial measurements to the GAAP financial measurements is provided in the Company's earnings release. We would also like to remind you that today's call is being recorded.

And now, I would like to turn the call over to Mr. Casey. Please go ahead, sir.

Thank you very much. Good morning, everyone. Thanks for joining us on our call. We what we would like to do is walk you through our results in a new format this morning. We have a presentation that we hope gives you a better understanding of our results, and more importantly, the opportunities we have to improve our performance. Particularly with respect to the OshKosh segment. So for those of you who are joining us online, we will start on page 2.

Our sales in the second quarter were better than we expected. We had growth in all but one business segment. Our sales were up 5%, driven primarily by the strength of our Carter's retail stores, which grew it's comp store sales over 17%. We continue to see a very significant return from the investments made over the past year, upgrading our retail teams, and strengthening our product offering.

Overall, I would say we are weathering a very challenging retail environment. With respect to earnings, on our call in April, we had expected our earnings in the quarter would be about breakeven to a small loss. On a GAAP basis, our earnings were $0.05 per share, including charges related to Fred Rowan's retirement. On an adjusted basis excluding those charges, earnings were $0.10 a share. I would say at least $0.06 of the $0.10 we are reporting is due to earlier than planned shipments, and the timing of spending.

Given the uncertainty in the economy, and the fact that the most important part of our year is still ahead of us, I would say it's premature to assume the $0.10 we picked up in the second quarter is upside to our previous estimates for the year. We have made good progress control in the growth of our inventories. On our last call we had expected inventories could be up as much as 20% at the end of June. That projected increase reflected our decision to bring in goods early, to avoid disruption from the threatened West coast dock strike.

By bringing the goods in early, we were able to ship more in the second quarter than we planned. As a result, inventories grew only 8% at the end of June. You should expect mid-single digit growth in inventories for the balance of the year. Our cash flow continues to be very good. This will enable us to continue to make investments in our business, including repurchasing our shares.

Our outlook for the year is consistent with the guidance we shared with you on our last call. We don't believe the consumer feels any better about spending the money in the second half of this year, than they did the first half of this year. We are fortunate to be doing business in young children's apparel, which we feel that it is a less discretionary purchase. We believe this gives us an advantage in this tough retail period. As you know, we serve a broad range of consumers at multiple retailers, and in multiple channels. Wherever you are shopping for a young child, you will likely see a Carter's or OshKosh brand well presented on the floor, offering significant value to the consumer.

On page 3, we have our leadership team. And you can see to the far right that the number of years each of us have invested in Carter's. I am very fortunate to have this depth of talent to support me. For most of the past 16 years, this team has delivered exceptional results for it's investors. That is not been the case over the past couple of years, due largely to the lack of progress with the OshKosh acquisition. We are committed to fixing what has eroded our shareholder value. Our executives have a substantial portion of their net worth tied to Carter's performance. We are heavily incentivized to turn this business around, and are confident we will. Our near-term focus is to strengthen our retail performance, and to fix OshKosh.

On page 4, you have a snapshot of the growth and sales for each component of our business. We had growth in each business segment except for Child of Mine, which Joe will discuss with you. On page 5, you have our second-quarter P&L. I think it is important for you to know that the second quarter is the lightest quarter, in terms of sales and earnings contribution. It typically contributes about 20% of our annual sales, and less than 10% of our annual operating income.

Our gross profit margin in the quarter was comparable to last year. What we gained in better margins in our Carter's stores, we gave back in lower margins in our wholesale segment. I will walk you through the segment profitability in a few minutes. As expected, SG&A grew at a rate faster than gross profit dollars. SG&A is up about $8 million, which includes a $6 million increase in retail store and administrative expenses. I have highlighted the unusual charges in both periods, which for 2008 reflect the charges related to Fred's retirement. In 2007, those charges related to the OshKosh impairment and plant closures. At the bottom of the page, you have EPS on a GAAP and adjusted basis.

On page 6, we reconciled the GAAP to adjusted earnings. In footnote A at the bottom of the page, you have the components of the charges related to Fred's retirement. On page 7, you have our second-quarter segment profitability. Carter's operating margin decreased 70 basis points in the quarter.

That decrease in our wholesale margin includes the impact of higher cancellations at the tail end of the Spring season. Those cancellations resulted in higher provisions for excess inventory, and higher discounts to sell the products. Directionally our cancellation rate is typically a low single-digit percentage of bookings. It was a high single-digit for the Spring season.

As you know, many retailers took steps to reduce their inventory commitment in the first half of this year. That had a negative impact on our results. The lower margin also includes higher provisions for bad debts. At OshKosh the operating losses were higher in both segments. Over the past few months, we were aggressively reducing our Spring and prior-period inventories, to get a cleaner mix of inventory going into the second half of the year. I would say that we are in very good shape heading into the second half.

On page 8, you have the cash flows for the first half of the year. We ended the quarter with a stronger than expected cash position. We generated $24 million in cash flow from operations, with better earnings and lower growth in inventory. For the year, we expect our excess cash flow will be about $30 million. And on page 9, you have a summery of our share repurchase activity. We have $23 million remaining in our share repurchase program. We will resume purchasing shares when the window reopens for us this Friday.

I will turn the call over now to Jim Petty who will review the retail results with you.

Thanks, Mike. Good morning, everyone. Retail results are found on page 10. I just finished my first year with the business, and had the opportunity to build a strong and talented team.

Our key focus of returning the profitability of Carter's retail has been accomplished. This is indicated by the 17% comparable store sales performance by Carter's retail during the second quarter, and the fourth consecutive quarter of four-wall operating margin improvement. This past year I have seen improvements in talent, in-store presentation, price clarity, value equation, marketing, service levels, and inventory management.

Our strong results during the second quarter were driven by comparable store sales performance in all product categories, accompanied by better margins and positive performance in all key performance indicators including transactions, average transaction, units per transaction, and average price. Second-quarter results indicate significant momentum, and strong customer acceptance in the Carter's retail business.

Third quarter is off to a good start, and our confidence in the business continues. And although the economic environment continues to be increasingly challenging, we anticipate healthy comparable store sales performance for Carter's retail, accompanied by strong margins, and better managed inventories.

Turning to OshKosh, results can be found on page 11. As we shared with you on the last call, the focus at OshKosh retail has been to clear excess inventory levels, and in turn set the base for a strong margin business. I feel this has been accomplished.

Before I elaborate on further actions we are taking, let me share with you a couple of key points. OshKosh is a robust business. Our average store does $1.4 million in sales. We have more than enough customers, transactions, and units per transaction, to support a very productive and profitable business.

Therefore, our continued focus will be on product mix and margin. Positive, comparable store sales performance should follow. However, our primary focus will be on improved margin and inventory management. In addition, we have improved our buying organization with the placement of a new GMM, who brings with him strong retail experience, and seven years of playwear experience from Carter's. Also, not unlike what we have accomplished with the Carter's business, we are dramatically improving in-store presentation to include body forms, tables, fixtures, marketing collateral, and signage.

This should improve or overall in-store experience, and provide for a more effective lifestyle presentation. Early reads on Fall performance are strong, in both top line and margin performance. For the third quarter, you should expect flat to slightly negative comparable store sales, with improved gross margin quality and four-wall contribution. We expect second hand operating profit to increase at least 15% as compared to last year.

Now I will hand it over to Joe Pacifico.

Thanks, Jim. Good morning. I will start with Carter's wholesale, on page 12. Carter's wholesale sales were up 1% for the quarter, and 3% for the half. I think a key take-away is we did have lower average unit price in the second quarter, which was primarily due to increased discounts as a result of higher cancellations.

Looking forward to our Fall line, one, we believe we have a much more compelling product offering this year versus last year. Secondly, we are driving an everyday low pricing strategy, that should provide price clarity and a stronger value message to the consumer. And in turn, increase the number of units sold before permanent markdowns. Third, we have got more competitive with our pricing in certain product categories. And those categories represent about 15% of the sales of our Fall line. I think it is very important to note these strategies will have no meaningful effect on our product margins.

Fourth, for Fall, we are planning to implement over 400 in-store shops. While customers have responded to these initiatives and booked Fall positively, we have had to adjust our forecast downward to compensate for planned cancellations with our high-risk, high credit risk accounts. Net result, we are projecting the second half and the year to finish flat to up low single digits. We are currently selling in our Spring '09 line, and are also projecting growth of low single digits.

Page 13 shows you our in-store shop. This shop pulls together our three product markets, baby, sleepwear, and playwear in the zero to 24-month size range. The objective of the shops is, one, to drive top-line growth, two, increase brand awareness, and three, provide a convenient and compelling shopping environment for the mother. We are also committing to service these shops with our retail merchandising organization. Our test results proved significantly better than the rest of the chain. We are expecting at least a 10% to 15% sales lift on the 400 doors, which should be in place prior to the holidays.

We turn to page 14. The mass channel results. Consolidated sales for the quarter were down 14%, and down 6% for the first half. In the mass channel we have two distinct set of results. At Just One Year, our branded target, a very consistent and positive story. Good over the counter and a good sales performance. For the half sales were up 12%, and we project the year to be up low double digits.

In regards to Child of Mine at Wal-Mart as we have discussed on the last call, product performance for the Spring season, which carried into the second quarter, was not good. Child of Mine was down 22% in the quarter, and 16% for the half. We believe we have corrected these issues in our Fall line by strengthening product value. Early Fall selling reflective of these chains is off to a positive start. We project Fall performance in Child of Mine to drive positive second-half growth. We are projecting Child of Mine down mid-single digits for the year because of the first-half actual.

Turn to page 15, and OshKosh. Wholesale, our performance has not been good. Really our 2008 sales are a direct result of our product performance last year. In order to drive positive bookings going forward, we really have to accomplish two things. One, increase the product sell-through percentages before prior markdown, and two, improve our retail customers' natural margins.

We saw good improvement of both of these areas with our Spring/Summer '08 lines. The consumers responded very well to product, which led to improved sell-through percentages. Our sell-throughs went from 44% last year before term to 55% this year. At the same time, we also saw significant improvement in retail's natural margins over the prior year. Based on the positive year-to-date performance which we believe will continue into the second half of this year, we are expecting to see an increase in Spring '09 bookings.

Now I will turn it back to Mike.

Okay. Thanks, Joe. On pages 16 and 17, we want to give you a sense for what we feel is the progress and potential of the OshKosh brand. On page 16, we have summarized the key milestones we see in the OshKosh turnaround. We are encouraged by the recent trends in the OshKosh retail segment, which represents about 80% of OshKosh's sales. In the three years that we have owned OshKosh we have had three different retail management teams. There is no whether the level of turnover has hurt us.

A year ago, Jim Petty and his team began executing a more disciplined approach to managing our retail operations. You have seen the better performance at Carter's. We are hopeful beginning in the second half this year, we will deliver better results in our OshKosh stores. As we have improved inventory management this year, we have seen a better trend in comps and product margins. We expect the OshKosh retail metrics will improve sooner than the wholesale metrics. We control the floor in our stores as we show progress in our own stores with OshKosh, we believe better results will follow at wholesale.

As Joe discussed in the wholesale segment, the consumer is responding more positively to the OshKosh product. Our wholesale customers sell-throughs and margins are improving. Achieving those two milestones is an important step in building confidence with our wholesale customers that OshKosh is a growth brand. We plan to show better performance in the OshKosh wholesale segment in the first half of next year. Retail results are improving, we expect to show better profitability from that segment in the second half this year.

On page 17, we have summarized what we believe are reasonable growth assumptions for Oshkosh. Suffice it to say we would be disappointed if this is all we could achieve. Despite OshKosh's brand strength, it's performance is a fraction of what we have achieved at Carter's. In the retail segment, we believe it is fair to assume that we can grow the number of stores by at least 10% a year on average over the next five years. That would bring the store count to 260 stores by 2013.

By the end of this year, Carter's will have approximately 250 stores. We currently do about $1.4 million in sales for each OshKosh store, as the opportunity has presented we have tempered that to $1.2 million per store, to give effect to the ramp-up of new stores. We believe it is reasonable to assume that the retail operating margin could be at least 12%. Carter's operating margin this year will be close to about 17.5%. At wholesale, the opportunities we have presented assume 10% annual growth in sales on average over the next five years. That would bring sales to $120 million.

Again, we would be disappointed if we didn't achieve that level of sales, given Carter's wholesale sales will be about $500 million this year. We believe there is a meaningful upside potential to this assumption. In the mass channel and international markets, we have assumed annual growth of 10% in royalty income. Collectively, these opportunities support over $60 million in operating income in 2013. As we firm up our 2009 plan later this year, we will give you more clarity on how much this opportunity is possible next year.

And finally on page 18, our outlook for 2008 is consistent with what we shared with you on our last call. The second half growth will be more heavily weighted to fourth quarter, given the timing of Fall orders. Third quarter sales are expected to be flat, with earnings down 20% to 25%. For the year, we expect low single-digit growth in sales. Our earning for the year are expected to be down 5% or more. If the current trends in our retail segment continue, earnings could be comparable to last year. We expect to generate about $80 million in cash from operations, inventories are expected to be up about 5% at the end of the year, and we expect to invest about $50 million in CapEx, largely in our Retail segment.

That concludes our business overview. We hope this is helpful, and we will now open the call for your questions.

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

We will pause for just a moment to assemble the question roster. And for our first question we go to Omar Saad with Credit Suisse.

Thank you. Good morning.

Good morning, Omar.

Quick question, Mike, just kind of a clerical question. Did you say at the beginning of the call that $0.06, the quarter benefited by $0.06 from earlier timing of shipments and expenses? I just wanted to make sure you clarify that.

Absolutely. Of the $0.10 I would say probably $0.04 is due to better retail performance, better spending, I would say, the other $0.06 is largely due to the timing of shipments and the timing of spending.

Got it. Got it. Okay. So I wanted to ask you, if we look back at some of the comments from the last call, last quarter, talked a lot about, as a company, talked about strategic initiatives to lower pricing to retailers, raising retailer, getting retailer margins going higher. Kind of in the face of an inflationary cost environment. So if you can give us an update on the three dynamics, where you stand on them, what inflation kind of impact has been having, and you expect it to have? And whether you still want to continue to pursue that strategy?

In regards to the pricing I think we ought to clarify the objective. Really it is to provide clarity and a stronger value message to the consumer. And what we are referring to is the pricing before perm markdown. We probably caused a little confusion in that that was interpreted for the whole season, and that we are lowering wholesale prices accordingly. It is really a change in more of the pricing strategy, the everyday pricing strategy consumer before perm markdown.

The second objective was really to increase the customer and our margins. So the strategy changed initial prices from high-low, to everyday low pricing on certain products, to sell more prior to markdowns. Then reduce margin assistance at the end of the season. We base this on research we have done with stacks.

But the bottom line is in the average wholesale prices probably went down about 4%. It was all attributed to one segment of the business, which is about 15% of our revenue. Our internal margins --

The playwear separates --

Yes, the playwear separates, our internal margins we feel there is no impact to our internal margins. So we are not lowering wholesale or lowering our internal margins.

Okay. And inflationary impact on your price, on your cost structure?

I would say, Omar, this year we are in good shape. I would say Spring we were seeing probably cost increases somewhere in the range of 1% to 2%. That wasn't so significant that we couldn't absorb it in our cost structure, with some offsetting savings elsewhere in the business.

And in terms of 2009, I think it's well known that the expectation is costs will go up more than that. We expect that they will. We have been working with Lee and Ty and sharpening up our supply chain initiatives, and other cost reduction opportunities we have in the Company. So what we believe today we have at least an equal amount of cost reduction opportunities to offset the cost input pressures.

And again, as the year evolves, as we start to firm up our '09 plan, we will give you more visibility on that. I don't think cost increases is anything new. The magnitude of those cost increases I think is what has people concerned. And fortunately, we have got a heads up on it. And we are on it. So based on what we know in terms of the models we have for 2009, we feel as though we will be able to offset any type of product cost increases.

Okay. And then could you clarify, too, there was a comment about some of your customers, the quality of their credit and having to write off some receivables and forward business?

Sure. I mean, the report is you have a short list of retailers out there who are struggling, Goody's went bankrupt, that cost us some portion of the penny in the second quarter. You have got some others who I won't mention by name, but that they are on a short list of customers that we're concerned about. They are on credit hold, we have some exposure to them. We have worked that into our estimates.

I will tell you as a company in the 15 years I have been here, we have never had this magnitude of bad debt exposure. We are on it, and it is adequately provided for and we have worked it into our models. So I don't expect that that is going to be a meaningful impact of earnings on the year.

All right. Last quick question. Sorry. Did you see the article in the 'USA Today' recently about kind of the new baby boom, and the fact that '07 was the highest number of bursts in the US since the 50's, or something like that. Any comments around that?

No, I will tell you, listen, we look for all kind of good news. That is a bright spot especially in our business. And the birthrate has been strong. The demographics, the overall demographics have been positive. People are spending more money on their children. And that is good for our business.

But the beauty of our business is unlike years ago, but regardless of where you are in terms of income, I mean if you are strapped we have got terrific brands in Wal-Mart, and in Target. If you are shopping at Kohl's, or Penney's, we have got great brands, well presented. What is interesting as you see by the outlook results, where the consumer is shopping, we have very strong comps in Carter's.

The comps at OshKosh were better than we had expected. So wherever you are shopping for young children, we are well presented. We don't count on a strong birthrate to drive our numbers. But generally speaking the trends have been very positive in the birthrate.

Thanks for taking my questions. And thanks for all of the disclosure. It was great. Great. Very helpful stuff.

Okay. Thanks, Omar.

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

Hey, guys. Good morning.

Good morning.

Joe, couple questions for you. To the goods that shipped early, I take it this a case of the retailers wanting the goods. Is this more in fashion goods or replenishment goods? And then is it fair to assume that maybe the sell-through levels have exceeded the sell in, and we are now to a point that the flow is going to be more even going forward, or it will be more destocking in your opinion?

Yes. To answer your question, most of the big majority of what we shipped early was baby. Baby seasonal and baby starters, so that is driving it. And that also drives replenishment business in the second half of the year. And that performance is off to a pretty good start. I am not sure I understand, will it level out over the --?

I was asking a question if they are asking for goods early, if we are to a point that after retailers pulling back on inventories they are now to probably the bottom of the cutbacks.

Yes. I believe so. Yes, we shipped, this June we have had the best shipping performances since I have been with Carter's, about getting goods out the door, and retailers revising bulk orders. It has really been pretty amazing.

We thought it may be more difficult based on the environment. Actually, we had a great shipping performance on the Carter's brand, and all on time. And we think it will be reflected in selling product.

I think most retailers including Carter's have gotten much more aggressive managing their inventories. Our first half, particularly the second quarter, both in our own retail business and in wholesale, there was a very aggressive cleanup of Spring and prior season inventory. I do think pricing generally speaking, retailers are cleaner with inventory. Have more conservative models in the second half of this year. We are seeing some movement of seasonal orders, more to the right. We are seeing more of our Fall products shipping in the fourth quarter.

And that is largely why the third quarter sales will be flat and the earnings will be down, because we are seeing more of that Fall product moving to the right. More 'Buy now Wear now' and simply being more conservative with the inventory models, in terms of when do they really need Fall product. And they need it more at the tail end of September into October, and November, as opposed to July and August.

Okay. The inventory levels, up 8%. A lot better than what you had guided to. But I am looking at your retail stores down pretty substantially.

Yes.

I guess that implies your wholesale inventories are up. Can you speak to that?

Sure.

And to that, the shop-in-shops, where are we at on the rollout of those, and how does that impact your inventory levels?

Okay. To your point at our own retail stores, both at Carter's and OshKosh, the inventory on a per-door basis is down about 10% year-over-year. So again, we are very clean. We made sure that we didn't carry a big mix of the Spring product into the third quarter. The increase is largely what we talked about on the last call.

We brought in about 18 days more inventory than we would normally carry, to get ahead of the threatened dock strike out on the West coast. We wanted to make sure there was no disruption in the flow of goods. That contract expired July 1. There has been some slowdown that hasn't had any meaningful impact on our business, because we are carrying that extra inventory in our wholesale segment. And time will tell.

I think if anything happens, we will have more information in August. But if there is a strike, and it is shorter than an 18-day walkout, we are in good shape. If it's longer than that, we will have to assess what impact if any, it will have on our business.

And on the --? The shops --

Yes. We will install over 400 shops. Probably late third quarter, early fourth quarter. We will expect to see results over the holiday season.

Great. Then the last question for Jim here. You said you comped positive 10 of the 13 weeks. Was that at the beginning or the end of the quarter? And can you give us some more color on why you think you comped positive? I know you have talked a lot about getting sharper pricing and more basic items. Is that what is driving it?

Yes. The price, the comping really has occurred in the OshKosh brand, I think is what you are referring to.

Yes.

It occurred really throughout the quarter. Our non-comps actually occurred in April week one, which is where we were down significantly. On the quarter, the brand would have comped positive if we had not had to deal with the April week one shift.

For Easter.

For Easter. Right. Just so they understand.

The reason for the positive comps in large part comes down to inventory mix. We really focused aggressively on getting rid of carryover goods. And as a result, we were able to sell full-price product. And this has been our strategy throughout the second quarter. We go into now the third quarter cleaner than I think probably business has ever been, and as a result, we are seeing some positive sales response to our fall goods, as well.

Anything that would keep you from comping positive this quarter, if that is what the trend was really in Q2?

Right now, our focus is on a profitable business. So as I said in my opening comments, comps are going to follow a well-run business. But this is all about margin improvement. And that is really going to be our strategy. And we are sticking to that focus.

All right, guys, good luck.

Thank you. You, too.

We go next to Margaret Whitfield with Sterne Agee.

Thanks. Good morning. Congratulations on the quarter. A couple of questions. Mike, for you looking at page 17, it looks like there is a long-term commitment here to OshKosh. Although I was under the impression that it was still being assessed. I wanted your impression of OshKosh and options to the firm.

And then I guess for Joe, if you could give us a rundown on the competitive situation at some of your key accounts, private label and other brands, particularly at Kohl's with Jumping Beans, and Garanimals at Wal-Mart, that would be appreciated.

For Jim, if you could provide us with the running rate on the comps this quarter to-date, and whether or not there is any new merchandise focused for Back-to-School,' such as more denim at OshKosh. That would be appreciated. Thanks.

Thanks, Margaret. Your two comments are correct. We continue to assess the potential of of the OshKosh brand. We are hopeful that the analysis that we have shared with you, gives you a sense for why we are committed to it. Again, as we think about this business, which is 80% retail where we have had significant changes in leadership over the past few years, Fred has said many times that the issues that we have had with OshKosh are not the brand, that they were self-inflicted. That is what we mean by self-inflicted.

We did not manage the acquisition properly. And a number of errors were made. But we know what the errors were. We are fortunate that we have such a strong brand name. And with the trends that we are seeing in the business, we are encouraged that this thing will meaningfully contribute to our performance going forward.

So as we look out longer term, we often ask ourselves, are you better with a single brand in Carter's, or owning the two best brands in the young kids' space, which are Carter's and OshKosh. And that answer is an amazing one, that we are much better off having, owning the two best brands. And again, we are setting certain timelines here. Just to give you a sense for when will we see better performance.

Near term we will see it in retail. We saw it in the beginning in the second quarter, as we started to fresh the mix and level of inventory. I think we will show meaningfully better profitability in the second half of this year. Wholesale will follow. I mean, we are earning our way back in wholesale. Joe and I, and Fred have met with a lot of our top customers over the past six months. We walked them through our plans for OshKosh. The consistent theme is that they love the brand. They hope we fix it.

When we fix it, it will contribute to their growth and to our growth. So we are committed to it. Based on what we are seeing, we are committed to it. All I can promise you is that we will continue to give you clear visibility on the progress that we are making, what the issues are. But we are committed to fix it.

Okay.

From a competitive standpoint, I think we have a good understanding of private label and all the competition out there. We estimate between private brands, private label could be as much as 50% of the department. And that still leaves 50% of a $24 billion market open to us.

In specific, talk about Jumping Beans. I think it is a great program and Kohl's does a great job. And I think publicly they say that they are still growing the Carter's business, as long as you are the #1 or #2 brand competing with that private label, I think you are in really good shape. One of the adjustments we did make when we said that 15% of the business we did a adjust, was playwear segments to be more competitive with some retailers, specifically private label, so that was the adjustment we made in the pricing.

In regard to Garanimals, again I think it is a good brand. And as we have stated, we have taken action to really improve the value to the consumer in the Wal-Mart and Child of Mine product offering for Fall. We have made adjustments based on competition, and we think our performance since then, reflects that our changes were positive.

And Jim?

Hi, Margaret. A couple of different points that you are asking for. First, it is related to the comp run. For the quarter and Carter's comp run by month for April, May, and June were 31.2, 15.6, and 6.7. And in the quarter, 17.3. For OshKosh, we were a negative 5.8 in April, and then rebounded to a 2.6 and a 0.8 --

Sorry, what was the last one for June?

0.8.

And how are we running in July to date?

We are having good comps.

Yes, we are feeling good about it.

Third quarter, we are having good comps. We are feeling good about it.

Yes.

On that note, let me key in on one point. I tried to say in my opening up, the OshKosh story is really about building margin. We have got $1.4 million an average store. That is a robust volume in a 4,000 square-foot average-size box.

So our focus while we want comps, and comps are going to come, are about building back the margin foundation of the business. At $1.4 million, we can make a lot of money with strong margins. That is really going to be accomplished through effective inventory management, which again, we cleared inventory in an aggressive way in the first half of this year. And I feel very good about how we are positioned now with the Fall floor sets in place.

And as a result, we are seeing some very solid margin performance out of the assortment. And then secondarily, we are working very closely with Soho on the assortment itself. This is a lifestyle business. This is about capturing the kids' needs. It has got to be a fun brand. And that is where I spend an enormous amount of my time, and my GMM's time is spent.

So now, bouncing back to the second part of your question, which is really about Back-to-School focus, or more specifically denim focus, for Back-to-School, we feel very strong about it, Margaret. We have got a great denim assortment. And our stores are better set from a visual perspective, to highlight our denim assortment in the OshKosh business. So we feel good. We feel as though we have got the ammo to have a strong Back-to-School. And our collateral in our stores, and our inventory levels will support that.

Final question for Jim. Any further additions to staff of note. Or are you pretty well set now?

I am in a good place, Margaret. I have been fortunate, and I have been lucky enough to both internally from the support I have had here in Atlanta, as well as people that have extremely rich backgrounds in the business have come and joined me in Shelton. So I am very lucky. I have got a very good team. We are in a good place.

Thank you.

(OPERATOR INSTRUCTIONS). For the next question, we go to [Ben Rothbottom] with Goldman Sachs.

Thank you. Just a quick question on G&A spend. How should we think about that through the back half? And is $18 million in incremental spend there still the right number? Thanks.

Yes. Directionally for the year, what you will see is SG&A will grow at a rate faster than we typically would like it to be. But that is largely reflective of the investments that we are making. As we talked about on prior calls, we were probably making incremental investments roughly of $0.18.

Of that $0.07 is being invested in our retail segment, between the new leadership team, the new systems including a new point of sale register system for all stores, both brands, and planning and allocation systems for retail. We have some store growth, where Jim has got a good plan to freshen up the stores, have new fixture programs, to present the product better, particularly at OshKosh. We have a new office for the retail group up in Connecticut that was a long overdue investment. That is $0.07 of the $0.18.

As Joe talked about, we have got the shops rolling out in the second half, those newborn to 24-month old shops. We will support that with good people, making sure that that rollout is executed properly. And the product is out of the back room and on the fixtures, to present it as best as possible. And we are also finding incentives. So that $0.07 or $0.08 of the $0.18 this year to incentivize good people, to help us turn this Company around in a very difficult environment.

SG&A will continue to grow at a rate faster than we would like. We hope in 2009 we will start to report that that is normalized, and we have good growth to get some leverage on the SG&A that we have invested this year.

Great. Thank you very much.

You are welcome.

For our next question, we go to Jim Chartier with Monness, Crespi, & Hardt.

Good morning. Can you just talk about the direct-to-consumer marketing. How your mailings were second quarter? What the plan is for third quarter?

Sure. Jim, our direct marketing has been, first of all, significantly more effective from a collateral perspective. A creative perspective. Let me put that out there. However, we have been able to leverage our data base, we have grown our data base in total by about 26%. Now that is in total.

The 12 months customers which are the most valuable customers, have grown at a rate of about 43%. So we have enriched our data base effectively over this past really 12 months, but definitely over the past quarter. And the way that has kind of played out from a mailing perspective, is that we have increased our direct mailings by about 100% over LY. And really a more effective and much more cost-effective approach, which has been our e-mails to our customers, have been going out on a weekly basis.

So the percentages are off the charts as it relates to incremental over LY, but it has been very, very solid, and our redemptions have been good as well. This is going to hold true for the second half of this year. For example, we are expecting to drive traffic by doubling our direct e-mail impressions to $24 million for the OshKosh brand going to Back-to-School. And by directing that compilation of both direct mail and e-mail, our total direct mail itself will go up to approximately a little over 1.4 million, which is a 110% increase to LY, and our e-mail reach is much more deep than that.

That is very helpful. Thank you. And then, inventory per store down for Carter's. Is inventory going to be any drag on comps going forward, or do you have the inventory flowing to the stores later in the quarter?

No. We feel very good about our position.

And any thoughts given the performance of Carter's retail over the last three or four quarters, on accelerating square footage growth going forward?

Well, we have a game plan to open a total of 25 stores this year. And we are obviously keeping our options open to more aggressive growth going forward. We do believe that the growth rates in the retail segment moving off outlet afford us significant opportunity, and we are forming a strategy to obviously lever the business as effectively as we possibly can.

Thanks a lot.

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

Okay. Thank you very much. Thanks again for joining us on the call this morning. We appreciate your questions. We appreciate your support and understanding of the environment we are in, and the things that we are trying to do to improve our performance.

Suffice it to say, I have been given a rare opportunity to lead a very talented group of people here at Carter's, and a terrific company. I am very excited about the opportunity that we have ahead of us, the opportunity to improve our performance. I am committed to delivering better results for our shareholders.

We look forward to updating you again in October. Thank you very much.

Ladies and gentlemen, this does conclude today's Carter's call. If you would like to listen to a replay of the call, it will be available beginning at 11:30 a.m. Eastern Time today, through Midnight Friday, August 1st. 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 5030435. Again, those numbers are 888-203-1112 in the continental United States and Canada. And 719-457-0820 internationally. Again, the confirmation code is 5030435.

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