Carter's Inc (CRI) 2008 Q4 法說會逐字稿

Welcome to Carter's fourth quarter earnings conference call. On the call today are Mike Casey, Chief Executive Officer, Joe Pacifico, President, Jim Petty, President of Retail, and Richard Westenberger, Chief Financial Officer. After today's prepared remarks, we will take questions as time allows. If you have follow up questions after the today's call, please direct them to Eric Martin, Vice President of Investor Relations. Mr. Martin's direct number is 404-745-2889. Again that 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 on Carter's web site at www.Carter's.com under the press release section. Additionally presentation materials for the earnings conference can be accessed on the Company's web site by clicking on the investor relations tab and choosing conference calls and web casts on the left side of the screen. Before we begin, let me remind you 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 the call the Company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements are provided in the earnings release. Now, I would like to turn the call over to Mr. Casey.

Good morning, everybody. Thank you for joining us for the fourth quarter update. We prepared a brief presentation which is available on the web site. Before we walk you through that presentation, I would like to share thoughts on your business with you. In spite of a weak market in 2008 Carter's achieved a record level of sales nearly $1.5 billion, with growth of 6%. Over the past eight weeks we've met with most of our top customers and they've told us that Carter's and OshKosh stood out as some of the best performing brands in their stores. I asked one of our customers why she thought we were doing do so well, she believed in uncertain times consumers are drawn to the brands they know stand for quality.

Overall consumer confidence levels are down, but our results suggest that consumers confidence in our brands is strong. We feel as though our products provide exceptional value to the consumer, and in this environment there is no question consumers are looking for the best value for their money. Nearly 80% of the products sold in our stores are sold for less than $10 - it's a very affordable purchase. In 2008, we took steps to strengthen the competitiveness of our products. We introduced an everyday value component of our playwear offering to more effectively compete with the private label brands. In our wholesale segment, we invested in new fixtures to increase sales productivity and we strengthened our branding on the floor. We also invested in our retail segment to enable continued door growth and more efficient store operations.

We are making very good progress with OshKosh B'Gosh. It's performance in the fourth quarter was very good. Our challenge now is to be consistently good, season after season, building on what the consumers responding to and editing out less productive skews. Achieving the milestones for progress we outlined for you last summer and we'resetting new goals for the next phase of the OshKosh turn around. In 2008, we achieved an unprecedented level of liquidity through excellent inventory hedge disciplines. We believe we have the flexibility to maintain a very healthy cash position which is a real advantage in this economy. There is no question 2009 will be a tough market for retailers, in 2008 most of our customers reported negative comps, and many are projecting negative comps this year. To help them, we will continue to strengthen our product offerings and our brand presentation on the floor. We will invest in our own store model. To extend the reach of the Carter's brand use 2009 to further strengthening the OshKosh model enabling a good store roll out plan beginning in 2010.

I'm disappointed in some missed opportunities for better earnings in 2008. The impact of retail store bankruptcies last year on our business was unprecedented. The Mervyns, Gottschalks, Bosov's and Goody's store bankruptcies cost use about $0.08 a share, $0.03 from receivable write offs and the balance from excess inventory charges caused by cancelling new orders. Looking beyond this current period of uncertainty, we have a strong long-term outlook. We own two of the best known brands in young children's apparel known by generations of Americans for great value. We have the largest share of a $24 billion market, and our share of that market has been growing. We are the largest supplier of young children's apparel to the largest retailers in the country. And the fundamentals of our business continue to be strong. Despite the current economy people will continue to have children. In 2007, the number of births in the United States was the highest in the past 50 years, and we expect to outfit many of these children for at least the next five to six years. Wherever you are shopping for young children's apparel you will likely see a Carter's or OshKosh brand well presented on the floor. At this timely turn the call over to Richard Westenberger, our new CFO, who will walk you through results. Joe Pacifico and Jim Petty will then provide additional commentary on each of our business segments.

Good morning everyone. Its's great to be here at Carter's and I'm looking forward to working with everyone on the call. I would like to begin on page three of the presentation which is a recap of the fourth quarter sales performance. We were pleased with fourth quarter sales which increased 7% over last year. Sales for the quarter were led by Carter's and OshKosh retail stores posted terrific comps in a tough retail environment. Jim will cover the drivers of this performance in a few minutes. We saw a nice lift in mass channel sales with Target, largely driven by the timing of Brand Wall shipment. Carter's wholesale sales were basically flat for the quarter, and as expected, OshKosh wholesale sales were down in the quarter, and Joe will cover the wholesale and mass channel performance shortly.

The P&L for the fourth quarter on page four, we saw meaningful gross profit expansion double the growth rate of sales. The improvement in gross profit was driven by a higher mix of retail segment sales which carry higher margins than the wholesale and mass channel segments, in addition to margin improvement in the OshKosh retail and wholesale segments and mass channel. SG&A up $23 million to last year, most of this increase driven by higher retail store and administration expenses. Given the momentum of our retail stores, we feel very good about these investments. Prior year results also included the benefit from the reversal of some stock based compensation expense. On a reported basis, net income in quarter $27 million versus $29 million a year ago.

On the next page we have a schedule to help with the comparability of our results. We didn't have any adjusting items in this year's fourth quarter, but last year included the item related to the reversal of stock based comp expense adjusting for this a better comparison on operating income is $49 million this year versus $48 million last year. In terms of EPS, our adjusted EPS for the fourth quarter was $0.47 a share compared to $0.45 last year, an increase of 4.4%. Full year sales shown on page six, similar to the fourth quarter retail drove the overall increase in sales for the year strong sales growth in the Carter's and OshKosh stores. We saw good performance across all product categories baby, sleepwear and playwear. Sales of one year at Target up 16% for the year. We had good growth in all three product categories driven by new door growth, timing of product launches and the addition of new programs. Despite the roughly $14 million in lost sales from bankrupt accounts, Carter's wholesale sales increased 2% for the year. We were particularly encouraged by the performance of our fall and Holiday products, with very strong over-the-counter sales and improved margins. OshKosh wholesale sales were down for the year in line with our expectations, given the product performance issues from last year. Here again, we're very encouraged by second half over-the-counter selling which will enable growth in this segment in 2009.

The next page shows our full year P&L, gross profit for the year increased 6% consistent with the growth in sales. In rate terms, gross profit increased 30 basis points, mostly driven by improving margins in our retail stores and a higher mix of retail versus wholesale in mass channel sales. Offsetting this benefit were lower gross margins in the wholesale and mass channels. SG&A increased 12% over last year, consistent with the fourth quarter the full year increase in SG&A was driven by our retail store segments both in the store and administration expenses. We opened 19 stores in 2007, mostly in the second half of the year which were then opened for a full year in 2008. We continue to see very a good trend in productivity from the newer stores.

Also contributing to the increase in SG&A were higher provisions for incentive compensation and bad debt expense related to bankrupt retailers. Just to tick through a couple of other items on the page, interest expense declined $5 million reflecting lower interest rates versus last year. We also repurchased over two million shares during the year for approximately $34 million. Our reported operating income for 2008 was $136 million. We reported an operating loss in the prior year due to the OshKosh write down. And the adjustments required for comparability detailed on page eight. Once you make these adjustments, our operating income was down $10 million versus last year, with a adjusted earnings per share flat a $1.37.

Taking a look at the performance by business segment on page nine and taking out a couple of the significant variances in the Carter's brand wholesale segments operating income declined $11 million. In part, lost sales from bankrupt accounts required higher liquidation of inventory purchased for those customers through the off price channel. This business experienced a bad debt expenses I mentioned previously and a modestly higher level of mark down in margin support to support wholesale customers given the highly promotional environment. As we discussed, we saw step up in profit contributions from the Carter's retail stores for the year. Profitability in the mass channel declined due to disappointing Child Of Mine product performance largely in the spring 2008 selling season. Over all OshKosh profitability flat for the year reflecting improved profitability in both the retail and mass channels. We believe we will continue to have margin expansion in the OshKosh segment given the meaningfully better trends in product performance achieved in the second half of 2008.

Turning to page 10, while we met our sales objective for the year, adjusted operating income declined about $10 million. This is obviously a disappointment. We are committed to improving the profitability of this business and we have a number of initiatives underway to address this. As you know, the most significant component of our cost structure relates to product costs. We have a number of initiatives in this area, beginning with focusing on reducing the complexity of our overall product development (inaudible) and tightly managing our assortments. Through global sourcing, we are taking advantage of emerging markets and lower cost geographies, and in the supply chain area we've realized very good efficiencies to date from using third-party logistics providers and shifting more packaging and handling tasks to Asia versus performing those functions here in the states.

Beyond product costs we are also intensifying our efforts around reducing SG&A. We have taken some specific actions recently to protect profitability in is likely to be a challenging 2009. These actions include freezing wages, and head count across the organization. We've also suspended the Company's 401k matching contribution. Most areas of discretionary spending and overhead functions are planned flat to down from 2008. Beyond this we are in the process of conducting an assessment of the organization with a focus on identifying ways to become leaner and more efficient. Overall I believe Carter's is a reasonably lean Company, That said, we clearly have opportunities to improve. We haven't reached any conclusions yet but it's likely as we move through the process we will incur some level of restructuring charges in 2009. We will give you an update on these activities on our next quarterly call.

On page 11, we finished the year with a very strong cash position, $162 million and record operating cash flow. Our operating cash flow as $184 million for the year, an increase of $132 million. This was the result of improved working capital management particularly in better management of our inventory position. We also funded significant investments in the business this year, spending $38 million in Cap Ex-which supported retail stores, our fixturing initiatives to improve our brand and product presentation at wholesale and the roll out of new point of sales system at retail. And as I mentioned previously, we repurchased 2.1 million share for approximately $34 million, which represented about 4% of our shares outstanding. The average repurchase price was $15.82. Overall, we feel extremely comfortable with our liquidity position, our borrowing costs are low on our existing term loan, we have not used our revolver since October of 2007 and don't anticipate a need to do so in the foreseeable future. With that I will turn the call over to Joe to cover the performance of our wholesale and mass channel businesses.

I will cover our wholesale business and turn it over to Jim who will review our retail business. I'll start by discussing our Carter's wholesale business which is on page 12. Sales were down 1% for the fourth quarter but ended up 2% plus 2% for the year. From a relative perspective we feel this is a very good performance considering we had an estimated $14 million in lost sales due to credit risk accounts. Our over-the-counter performance in the fall was very strong with our top customers. Sales were up 18%, and they ended the season with 5% less inventory. The performance was achieved in a very challenging marketplace, in which our top accounts saw their total business being down double-digit comp. We feel our product performance was a direct result of our product and marketing strategies we implemented this year. We improved product, we dedicated a lot of resources to increasing our design skills increased value with a higher mix of opening price point products, a higher percentage of every day low pricing in our mix, and then implementation of our newborn to 24 shops.

For 2009, we have planned our business conservatively in light of the external factors that we cannot control, such as cancellations, door closures, and overall inventory reductions. We have, however, attempted to build these risks in to our plan. Looking at the year, we believe growth is possible and all of our current information supports this. First, we have good visibility into our order file. We now have spring and fall orders in hand, which represent about 75% of our annual order file. Replenishment represents approximately the other 25% of our revenue. Our year to date replenishment bookings combined with our seasonal orders suggest modest growth in wholesale. Secondly and more importantly, we are carrying the same successful strategies from fall '08 into spring '09, and thus we should have the same relative performance improvement. Very early in to the season so far we are off to a good start for spring.

Third, we're optimistic about the '09 performance because we expect to have over 1000 newborn to 24 shops in 2009 versus roughly only 500 that were open in November and December last year. As we shared with you on the last call, the shops pulled together our three product categories - baby, sleepwear and playwear - in the newborn to 24 month size range, which offers consumer a more compelling and convenient shopping experience. The shops also allow us to make a strong brand statement and control floor space. These shops are good investment with a good return, Our performance thus far has been in line with our goals. To frame all this up, children's and specifically young children's has been the best performing area of apparel. If you look at the results from our customers base you will see that this area has been consistently outperforming their overall business. We have the most trusted brands in the children's space and our capacity to invest in product and presentation in most of our top doors is a significant competitive advantage that will drive our share gains in a tough market. Based on product performance and our initiatives we believe we will outperform the competition and are relatively optimistic about 2009 although we are certainly cognizant of the challenges in the marketplace.

Moving on to the mass channel on page 13, you can see that we had strong top line performance in the quarter of plus 16% which exceeded guidance of mid single-digit growth. The larger than expected increase was primarily due to earlier than planned spring product launches which were driven by strong fall seasonal over-the-counter performance. In Just One Year, our sub-brand at Target had a strong quarter which sales up 29%, all product categories up double digits. Good fall over-the-counter performance led to early spring shipments in December, which combined with a launching of the Brand Wall in December this year rather than January, brought on the large increase.

For the year we have had consistently good performance at Target, even without the earlier demand for spring product and the new Brand Wall launch, we would have been up over 10%. Both of our Target sub-brands, Just One Year and Genuine Kids, are performing well from a relative perspective. In regards to Child Of Mine, our sub-brand at Wal-Mart, consistent with prior discussions with you, we are playing the business down in 2009. A component of the business, the Brand Wall has not performed well. We expect Brand Wall sales to decline $20 million in 2009. We will also negatively be impacted by the timing in our seasonal hanging programs the other component of our business.

We are and have been working closely with Wal-Mart, and have been told that both sides are committed to seeing the Child Of Mine business grow. We are their largest baby and sleepwear brand. We believe there will be positive growth after the disappointing hit we are taking in 2009. In total we are expecting the mass channel to be down 15% in 2009. We are starting to see better performance in our over-the-counterselling for spring and believe by a establishing a base in 2009, the initiatives we have in place will put us in position to return to growth in sales and margin expansion beginning in 2010.

Turning to page 14 which is OshKosh wholesale, as planned sales were down for the quarter and the year. The decline was due to customers replacing orders based on the 2007 performance. 2008 has proven to be significantly stronger. For fall Holiday 2008 our over-the-counter selling up strong double digits. This led to a 15% improvement in sell through before permanent markdown and a strong improvement in the retailers margins. Our focus in 2008 was on accomplishing these two key initiatives that we believe would drive future positive bookings and improve the brands profitability. We accomplished both these objectives for spring and summer and now, fall Holiday.

We have been pleased with the consumers response to the brand. Our consumers seem to be clearly embracing the product and our new pricing strategies. This is evidenced by the over-the-counter selling results at wholesale, as well as much stronger selling in our own stores. We are also building confidence with our customers who believe the OshKosh brand has a place on their floor who are happy with the second half performance. This gives us optimism as we head into 2009. We expect to achieve positive sales growth this year while improving profitability for us and for our accounts. As Mike and I discussed before the strength of our strategy is built on multiple strong brands competing in multiple channels about it to manage in this economic downturn is strengthened by this strategy. I will now turn the call over to Jim Petty for an overview of our retail business.

Thanks, Joe. Now turning to pages 15 and 16, I will cover the retail results. As stated on the third call, Carter retail has momentum and strong customer acceptance for its product and value equation. Over the last year we've improved both brands by focusing on product, inventory management, execution with a strong team and marketing effectiveness. As relates to the Carter's brands, business remains strong for the fourth quarter indicated by fourth quarter comparable store sales increase of 4.1%, year to date comps increased 9%. The strength of the young children's category in our turn around efforts has resulted in eight straight quarters of comparable store sales increases. Our fourth quarter comp was driven by increases in transactions and average price, with the customers responding well to all product categories. Year to date results highlighted by positive comp performance in all categories and gross margin improvement due to better inventory mix. Inventory on a per door basis at the end of the quarter was down 14%, and we are well positioned as we enter in to spring. First quarter of 2009 is off to a good start with positive comps and better margins and our confidence in the business continues. Due to the increasingly challenging economic environment, we anticipate modest growth in comparable store important form for the first quarter. We expect the performance to be accompanied by better gross margin performance and better managed inventories.

Moving on to OshKosh the fourth quarter reflects continued improvement for the OshKosh retail business, highlighted by operating income increase of 25%, a comp store increase of 3.6%, and significant gross margin improvement over last year. Comps and gross margin were driven primarily by the number of transactions as the customer responded well to all product categories. We attribute the turn around to correcting the inventory position in the first half, which led to positive comp store sales in Q3 and Q4. We are seeing significant improvement in operating profit driven by better product and in store execution. Inventory on a per-door basis ended the quarter down 19%, our inventory in the OshKosh stores is also well positioned as we enter into 2009.

OshKosh is off to a good start and we are expecting a modest level of sales growth as we continue to focus on gross margin improvement. We are pleased with our fourth quarter results, for both Carter's and OshKosh and entering 2009 with a firm foundation for growth. It is important to note that while both businesses entered the quarter with momentum, March carries significantly more weight due to the volume associated with Easter and spring selling.

As I've mentioned on past calls, I've had the pleasure of assembling a very strong retail team. 2009 will be the first full year of our collective impact on the business. We feel confident in our brands and the focused action plans we have in place for 2009. I will now turn the call back over to Mike for additional comments on OshKosh.

Thanks Jim. On page 17 we have the milestones we set to track our progress with OshKosh. In 2008 we began to see better product performance. We believe we corrected the brand positioning and pricing issues that have impacted our results. In 2009 we expect to show better profitability in both the retail and wholesale segments. In summary we are committed to deliver better performance for our customers and shareholders in 2009. Growth is possible in 2009, and our incentives are tied to sales in earnings growth. I'm encouraged by our performance so far this year. It's early, but our spring products are selling well over-the-counter and comps are positive for both brands. As the year progresses, we will continue to provide clarity on our performance, and opportunities for improvement. I do believe we have the brands, the business model, and the resources to weather this storm. That concludes our business overview and we will open up the call to your questions.

(Operator Instructions) For our first question we go to Scott Krasik with CL King.

Thanks, hi guys, congratulations.

Thank you.

First question is on Carter's wholesale, I know you don't like to talk a lot about what you are seeing on going, but you did say that spring is up quarter to date, what are you seeing on the sell throughs what is going on with the category, how are they viewing private label at this point versus brands in terms of driving traffic. A lot of clarity there would be helpful.

This is Joe. As we said, we are off to a good start for spring. We feel that trends should continue but it's really early. Again, the same strategies we employed for fall 2008 roll in to spring 2009, so we expect to have a relatively good performance, a lot depends on the consumer but we are off to a good start and feel our spring orders were positive so feel good about the business.

One other thing that's working for us, the inventory is cleaner than it has been in recent years. If you remember this time last year most retailers were backed up with inventory. So there was heavy discounting in the first quarter of last year to clear that inventory out and make room for new product. We don't have that situation, most of 2008 our retail customers were (inaudible). Our largest customer had quoted that by the end of the Q3 they had hoped their inventories year-over-year would be down about 15% so I actually think that that has worked well for us, and we are hopeful that provides us some better earnings opportunities in 2009.

Is the sales growth meaningful from the shop in shop installation, can you break that out?

We modeled those shops that they would have to deliver a 5% sales growth would deliver about a 14% ROI, and we are achieving our plans and we're pleased with it. The customers are pleased with it.

Feed back from customers has been terrific, if you were to stop in the stores today where you see most of the shops are in Kohls and JC Penney and to some extent Macys.

And then private label in terms of driving traffic?

Always a good competitor, what we are pleased about in fall and continued in spring is that our growth is across all three product markets- baby, sleepwear and playwear, there is always going to be private label. We think we have to two brands that help private label.

Okay. Thanks. Take care.

Thank you.

For our next question we go to Margaret Whitfield with Sterne Agee.

Question on the mass channel with the spike in shipments to Target in fourth quarter. In terms of the Brand Wall as well as you know, earlier shipments of spring, what does that imply for first quarter and first half, will there be growth at Target and also on the Child Of Mine situation, if you could elaborate on some of the issues on the Brand Wall and hanging product is it your own internal product issues, is it competition? Thanks.

As far as the earlier shipments really what they are driven by is we had very strong fall over-the-counter perform, all the retailers had their shipments in December, so when fall performs better they are low on inventory so they move up the spring deliveries at the end of the month versus probably falling in the last week of the month or the first week of January. As far as the outlook for just one year, that they are taking in spring earlier, is a positive sign. We are planning that business flattish, based on their total performance.

Flattish for the first half or for the year, Joe?

I would say for the year. I don't want to get in to too much in terms of the quarters but I would assume given the environment it would be flattish.

Then Wal-Mart must be down significant double digits if you are planning the whole business down 15.

As we explained, there's two components of Wal-Mart , there's the Brand Wall, which is where we are taking the hit really that was based on performance and little bit of Wal-Marts focus on putting packaged goods and less apparel on the Brand Wall. The hanging was a timing price. So there's two come components of that, one is timing one is a hit we will take in 2009, but we think we will turn that around in

What is the timing issue with the hanging product at Wal-Mart? Same thing as what happened with Target?

Right, good fall performance, so they pulled in a lot of the spring goods that could have fell in the first week of January, they shipped them on December 5th and 10th so we put the shipment in 2008 versus 2009, and then Wal-Mart is changing some of the strategies at the end of 2009, they are going with to what they call split-out store sets and order flow, so we are being conservative thinking we are going to get hit in December 2009 with the same thing moving in to January 2010.

For Joe, any store openings planned for the retail segment this year?

Yeah, Margaret, we will open 20 stores in the first half of the year. And you know if we can strike great deals in the second half of the year we will look at that as well.

These are Carter's or Oshkosh B'Gosh stores?

Predominantly Carter's.

Okay, thank you.

We go next to Ben Rowbotham with Goldman Sachs

Thanks, following up on the last point with the door openings scheduled for next year, hoping you could take a few moments to talk about SG&A and how you see that evolving over the year.

Over all we will be front loaded from a store opening perspective, we will open them in the first half of the year, most of that impact will occur there. As you seen in the fourth quarter, of this past year, most of our store growth was in fourth quarter with 19 store openings,.

In the fourth quarter can you talk about what happened there with the $23 million lift?

Yes, this is Richard. The majority of that increase was really related to the on going growth in our retail stores so as we've continued to open new stores, Jim has also continued to build out his home office team and his field organization - that's the lions share of the increase. We did have some increased costs related to some reorganization expenses, some stock based comp expenses, but by in large related to growth in our retail segment.

Got it. And so as you look forward, is a mid single digit rate possible?

Yes, SG&A growth, yes.

Perfect. Then, just any comments you might have on the increased floor service initiative that you guys put in place in the back half.

Our commitment is really to try and service all the shop doors. And we are pleased with the return so far. Again, It's early. We just finished Penneys, and by February 15th, Kohls had been up for a few months, so we are pleased with the results so far.

Perfect, thanks so much.

You're welcome.

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

Following up on the last question, the second half of this year that Carter's retail operating margin declined, on pretty strong same store sales, so will we continue to see that in the first half of this year and when will we start to see some leverage on those comps?

We will start to see some leverage, as Richard mentioned we opened 19 stores in fourth quarter which is an expense load that is not compensated or offset by a large selling period, and in the first half of this year, in 2009 we will open our 20 stores that is something we will make happen. But by that being said we will see leverage.

In first half of the year?

Yes.

Okay. Then, Mike, it sounds like you are trying to avoid giving guidance for earnings, but can you give us any perspective there?

We think growth is possible. I don't think it's the environment to be giving specific ranges or specific numbers but the models we built support both in sales and earnings, and in this environment I would say the growth in sales will be modest. And in this environment, we are going through a period of uncertainty. But when I look at some of the missed opportunities in earnings last year I'm hopeful that that gives us an tune to show better performance on the bottom line, so that's very much part of our focus.

Then, Jim, can you talk about the effectiveness of the direct consumer marketing - how you expect that to continue to progress going in to 2009?

Yeah. We've continued to see our active database to crease nicely, we're up 67% by year end for the end of 2008, and we experience about a 43% increase in our direct mail impressions and our email impressions were up significantly above that, all marketing responses were up about 39%, so we continue to enrich the database and equally as important improve the effectiveness of the collateral that we are distributing.

Are you seeing similar response from Oshkosh B'Gosh as you get from Carter's?

Over all yes.

I notice you're distributing some coupons at Destination Maternity - can you talk about what you are planning there?

I don't want to get too much if detail on this, this is a very early stage relationship that we have developed, but the coupons we are distributing have had a relatively nice return or redemption rate, it's a very early stage relationship but we think that they are a potential partner to be aligned with.

Thanks. Good luck in 2009.

Thanks.

For our next question we go to Susan Sansbury with Miller Tabak.

Thank you so much. The question is the use of this cash buildup, can we discuss priorities, debt pay down versus share repurchase or acquisition?

Sure. Happy to. I think at the moment we feel pretty good about having the extra liquidity on our balance sheet given the environment. The debt that we do have have as a organization is extremely low cost and I think it's also important to point out we are fully funding our growth initiative. So we feel good about the level of investment we are putting back in to the business. I think debt paydown is clearly an opportunity which we are going to continue to evaluate. That's probably the first priority beyond investing in the business, followed by share repurchase and we will be prudent about it. But at the moment, we feel good about having the cash on the balance sheet.

When do you expect to be able to discuss some of these restructuring and/or cost saving initiatives that you eluded to earlier in the call?

On our next quarterly call - we are moving through the analysis now.

Thanks very much.

We go next to Omar Saad with Credit Suisse.

Thanks, good morning.

Good morning, Omar.

Some interesting things happening in your business, sounds like you are in a position where orders are getting pulled forward, sell throughs seem pretty decent, meanwhile a lot of the other apparel suppliers, a lot of the same channels that you're shipping in to, are seeing a fairly negative impact from retailer destocking and I wanted to get your sense on how you feel inventories are out there at retail - have you seen any retailer destocking in your category, do you expect to see any as retailers become more focused on this and are holding shorter time on inventory in their stores?

We are not seeing any impact on our business on destocking, fourth quarter has been described as probably (inaudible) Holiday shopping period in decades. We had good performance. I think it's important to keep in mind the space that we are competing in. The demographics are favorable, people are having children, we have more floor space in young childrens than any other brand. I think it's a very affordable purchase, a less discretionary purchase. And we have some strategies that are working for us, very much part of our focus last year to strengthen product offering, to that when you are shopping for young childrens, which moms will continue to do, our brands will be the brands that stand out on the floor, so I think that's working for us.. I was encouraged by the feed back from our customers that we helped them in the fourth quarter with terrific over-the-counter performance, that has continued in to the first quarter, the crystal ball is given the overall environment is cloudier than you'd like, but we are going to focus on the things we can control. We're going to focus on product, making sure we are absolutely the best on the floor, we're making some good investments in brand presentation. I do feel as though over the past several years we got tired of looking on the floor so we are doing some very good things with our customers to freshen the branding and the other thing we can control is our cost structure. I think we've got good initiatives around cost, I don't think there's any shortage of cost reduction opportunities in our focus for 2009. We will be improving the performance particularly on the bottom line.

So it sounds like retailers from your segment aren't planning on taking down inventories in the baby and kids category. I think if you follow their announcements generally, they highlight kids as one of the better performing components of their business and I think it's largely because that's where children are growing especially in the age range that we are competing in, children are going through multiple wardrobes, and so that is working for us.

I think they are down relative to the sales performance. Last year and this year, we built in increased term plans for all accounts so that's part of our plan. Really we are driving up productivity in the same space, we are increasing turns so they are supporting sales but it is a more conservative approach even in our area but we are getting funding based on performance.

The comment I made earlier, I think a good portion of the inventory being down is they are cleaner they do not have the extent of prior season carryover goods that they had this time last year.

Great, thank you, that's really helpful.

We go next to Tara Gary with RBC Capital Markets.

Thank you for taking my call.

Good morning.

Could you provide some detail on plans for reducing complexity in the product development process?

That opportunity is much more on the Oshkosh B'Gosh side of the business than Carter's - Carter's is a pretty well oiled machine - but we continue to refine the process in Oshkosh B'Gosh, as you know in recent years we have been finding our way earning our way back at wholesale, figuring out what the consumer is responding to. Putting more emphasis on the things that are selling well and editing out the things that are not. That's very much a part of improving the productivity of the line.

Secondly, we put Oshkosh B'Gosh used to have four seasonal releases and we've lined up wholesale now with Carter's and Oshkosh B'Gosh, both have only two season as year. So we're getting some leverage there, and that will help the complexity also.

Okay. Great. One follow-up question on the shop in shop, I believe you said JC Penneys you've finished there, how many do you have open now and how many more to you expect to open this year?

We're over 500 with Kohls right now, we're about 350 with JC Penneys, I think we're close 16 to 20 with Macys and we're testing it with a couple of other accounts right now.

Excellent. Thank you so much.

You're welcome.

With a follow-up question we return to Scott Krasik with CL King.

Thanks just wanted to clarify earlier question, you thought it was reasonable that SG&A could be at mid single digits on a dollar basis in 2009?

Correct. Our focus is that SG&A growth in SG&A would be contained to mid single mid single digits or better. That's our focus. I think what you were seeing in 2009 is a significant investment in the retail component of our business and you can see the type of growth we are getting because of that investment. You'll see that start to normalize in 2009.

Okay. Then we are pretty tricky guys. And then you said sales growth would probably be modest in this environment?

Yes.

And then pressures on gross margin, we've seen it a little bit with the mix issues and the liquidating, is that existing in 2009 as well, or do you think you can get something back there?

I'd like to think there is an opportunity - there was a significant cost associated with the bankruptcies last year, so suffice it to say we bought a meaningful amount of inventory for the retailers that went bankrupt, we had to move those goods out through the off-price channel. Not unlike our retail customers, we found ourselves with more inventories than we would prefer this time last year. So the level of activity with off price retailers was more than we would like. We'd like to think that's an opportunity for us in 2009.

Okay. Thank you, guys.

You're welcome.

Also with a follow-up question we return to Susan Sansbury with Miller Tabak.

Circling back to SG&A question, this mid single digit increase, inherit in that assumption, did you make any assumptions about this cost saving initiative that is forthcoming when you came up with this mid single digit estimate?

Just be clear here what was suggested is could we manage to a mid single, we believe we can so there will be opportunities that we will share with you on the next call in terms of how good we can be in terms of managing the overhead of our business. We will be more specific on the next call.

Great. I don't know your business very well and frankly I got really confused about the explanation about what is going on at Wal-Mart. I do know that Wal-Mart is consolidating a lot of their formal private label business under two labels one being Danskin, and so the question is what implications does that infer for their branded childrens wear business specifically your product category? If you could amplify on what Joe was trying to say about what is going on at Wal-Mart in the latter part of 2009 I really didn't understand.

Let us help you with that. We have had a terrific relationship, we've had very good performance with Wal-Mart for a number of different years - over the past year we talked about the fact that we were not performing to our expectations or theirs on a component of the business we do with them, which we refer as the Brand Wall. On the Brand Wall you have both licensed products - products that we work with our licensees on the Brand Wall and there's also product that we ship to Wal-Mart in terms of apparel and other soft goods. The part that we ship to Wal-Mart on the Brand Wall wasn't meeting productivity expectations and that performance of the business will be cut back in 2009. It wasn't meeting their expectations or ours. I would also say that the issues that they had on the Brand Wall were not unique to Carter's, so when you don't perform it's reasonable to expect that you will be cut back, and we will be. We have been working with Wal-Mart on what should go on the Brand Wall, and they're shifting their emphasis more towards a gift strategy and we will help them then with that. At least near term that will not be as productive as what we had had in the past and we are going to have to rebuild that component of the business. The other component of the business is what we call hanging apparel, and that product has been performing extremely well for us. With that said one other component that is impacting us at Wal-Mart, given the environment, they are emphasizing their entry level brands. Danskin doesn't have much of an impact on our business but Grranimals does. That's their entry-level price point brand. If you think of a good-better-best strategy, Grranimals is good and Child Of Mine is the best. That's where Wal-Mart wants it to be, that's where that brand is. But more business is probably being done at the entry level price point, just given the overall economy. Wal-Mart's view is as the economy improves they hope that they hang on to many people who historically probably haven't shopped at Wal-Mart and they hope that they will continue to shop with them and purchase more of the better brands. So relationship there is good. We didn't perform - when you don't perform, you get cut back. We have a new base that will grow off of. Our focus was to find the bottom, establish a new base, but the Wal-Mart business will be a growth business for us going forward.

We go next to John Curdi with Principal Global Investors.

What does Cap Ex look like for fiscal 2009, and second, where do you anticipate inventories on a per store basis in your own retail stores being at the end of this year? What are you planning to?

On Cap Ex, I'd anticipate we are going to try and manage to a level no more than where we were this year. We are trying to be appropriately prudent in our capital spending.

This is JIm, on a door by door basis by the end of the year we expect Carter's to be flat and Oshkosh B'Gosh to be flat to slightly up, modestly.

Thank you very much.

You're welcome.

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

Thank you very much. That concludes our remarks, we appreciate you joining us and we will update you with the first quarter results at the end of the April.