Carter's Inc (CRI) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to Carter's first-quarter 2009 earnings conference call. On the call today are Mike Casey, Chief Executive Officer; Joe Pacifico, President; Jim Petty, President of Retail Stores; and Richard Westenberger, Chief Financial Officer. After today's prepared remarks, we will take questions as time allows.

Carter's issued its first-quarter earnings press release yesterday after the market closed. The text of the release appears at 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 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. Now I would like to turn the call over to Mr. Casey.

Good morning, everybody. Thanks for joining us for an update on our business. To help walk you through our results, we've prepared a brief presentation, which you can access on our website. Before we begin that presentation, I'd like to share some thoughts with you.

On our last update, we said that we believed growth was possible this year despite the weakness in the economy. Suffice it to say, we are off to a good start. Our growth in the first quarter was much better than we expected, but shouldn't be viewed as the rate of growth that we expect for the year.

Some portion of our first quarter growth is due to earlier demand for our product, and this will impact our second-quarter results. We do expect to have growth in the first half, but keep in mind, our first half is the lighter half of the year. Our second-half comparisons will be more challenging.

The strength of our results in the first quarter reflect the strength of our brands and products across all channels of distribution. The beauty of our business is that our multi-brand and multi-channel distribution strategy enables us to reach a broad range of consumers, particularly those seeking significant value. Wherever parents are shopping for their young children, they'll likely see one of our brands well-represented.

Over the years, Carter's has developed a reputation for very good quality at a great price. No rebranding to emphasize our value message was needed to respond to changes in the economy. Carter's is a real deal. We focus on the essential products a mom needs to purchase for her young children.

Recent online and in-person surveys with young moms across the country indicated that we are well positioned to gain share in this market. What we heard from these moms is they've change their shopping habits in response to uncertainty in the economy.

They are responding to good sales, and they are using coupons more than they have in the past. They are purchasing more basics and fewer special-occasion outfits. They're purchasing easy mix-and-match outfits that serve multiple end uses, and they are focused on durability so their children's clothes last longer.

The word durable is most often heard in research conducted for our OshKosh B'Gosh brand. Carter's and OshKosh have a well-deserved reputation for quality and durability. The strength of our OshKosh retail performance this quarter is a good indication we are making progress with this great brand.

Our retail segment will lead the way to better results from OshKosh. In our stores, we control the product offering. We control the floor presentation, the branding, and the pricing. What we learn in our stores can help us strengthen the OshKosh assortment and branding for our wholesale customers. We have to earn our way back at wholesale, with consistently good performance in this part of our business.

The outlook for our business is good. Our balance sheet is in great shape, particularly with respect to the level and quality of inventory. Like Carter's, our wholesale customers have used this period to strengthen their businesses, particularly in the area of inventory management.

I can't recall a time when inventories were leaner and cleaner. When you get to this level of quality and inventory management, you have a healthier business, supporting good consumer demand versus backing up with inventory.

Given the current environment, we will continue to conservatively forecast modest topline growth and we will focus on improving our profitability. To that end, we have taken significant steps since our last update to lower our cost structure and Richard will review these actions with you this morning.

Improving the profitability of our business will be an ongoing effort. I've always believed there's no shortage of opportunities in this area. There are a lot of levers to pull to enable growth, even in a less robust economy.

At this time, I'll turn the call over to Richard. Joe and Jim will then provide additional thoughts on each of our business segments.

Good morning, everyone. As Mike highlighted, we've had a very good first quarter, both in sales and in earnings. We've also begun to take some important steps to improve the profitability and efficiency of the Company.

I'll start on page 3 of the presentation, which is a recap of our first-quarter sales performance. In total, our net sales increased 8% in the first quarter over last year. The sales momentum of our retail stores continued in the first quarter, with comps in Carter's stores up over 5%, and OshKosh plus 11%.

We also saw a very healthy improvement in gross margin in both brands, and Jim will comment more on this terrific performance in a few minutes.

We saw good mid single-digit sales growth in our Carter's wholesale business in the first quarter, despite the loss of several customers that went out of business last year. Our products continue to generate strong consumer demand, continuing the strong performance we achieved in the fourth quarter of last year.

We do believe that part of the sales strength in wholesale reflect some earlier-than-planned demand, volume which we had planned to occur in the second quarter. OshKosh wholesale sales were up 16% in the first quarter, driven by the timing of shipments. We expect that first-half sales will be flat to down a bit.

As expected, our mass channel sales for the first quarter were down to last year. Part of this decline was due to the timing of product launches with Target, and our sales of Child of Mine product to Wal-Mart were down, due to the strategic assortment changes that Wal-Mart has made.

Page 4 is our first-quarter P&L. Net sales were $357 million, up 8%, as I just covered.

We continue to see meaningful gross profit expansion, well more than double the growth rate of sales. Consistent with the second half of last year, this gross profit expansion was driven largely by our retail operations. Not only did we have a greater mix of higher margin retail store sales, but we saw a meaningful improvement in gross margin in both brands as compared to last year.

Recall that last year's first quarter included a high amount of clearance and liquidation sales, which depressed margins. We had far less of that activity in this year's first quarter.

In our Carter's wholesale business, we also saw improvement in gross margin due to very strong product performance and a cleaner mix of inventory coming into the year.

SG&A increased $7 million, or 7%, mostly driven by our retail operations. Recall that last year's new-store openings were weighted towards the fourth quarter, so the expenses from those stores are now in the SG&A base. We also opened seven new stores in the first quarter.

Also contributing to the increase in SG&A were increased levels of incentive compensation, and the investments we have been making in improving the presentation and branding of our products on our wholesale customers' floors. The quarter included approximately $9 million in restructuring charges, which I'll cover in a moment.

We saw a nice lift in royalty income during the quarter, driven by higher sales with our licensed partners. Our reported operating income increased $8 million, or 39%, even after absorbing the restructuring charges in the quarter.

Interest expense continues to come down as a result of lower market rates, and on a reported basis, earnings per share increased 47% to $0.28 per share.

On page 5, we have a schedule to help with the comparability of our first-quarter results. As I mentioned, the quarter included approximately $9 million in charges on a pretax basis related to our restructuring. The nature of these charges is detailed here, but they relate mostly to severance and to the write-down of facilities which we are planning to exit.

Making the comparability adjustments for these charges, adjusted operating income increased $17 million, or 82%, from last year. And adjusted earnings per share increased 100% over last year, to $0.38.

To provide a little bit more detail around our productivity initiatives, as we discussed on our last call, we have been in the process of reviewing our cost structure in order to identify opportunities to become more efficient and to reduce costs. This has been a very comprehensive review and we have some solid progress to report.

Our initiatives to date have been centered in three broad areas. First, becoming leaner and more efficient through a reduction in the overall size of our workforce. Second, closing one of our three company-owned distribution centers, and third, improving the productivity of our retail store labor costs.

We have taken these actions proactively and with the goal of strengthening our business for the long term.

To provide a few more specifics on each of these three primary areas of focus, first, we have announced a reduction of positions across our corporate workforce, which we define as our employee population excluding hourly employees in our retail stores and distribution centers.

A significant portion of the reduction involves reducing and consolidating operational and support functions, currently managed in our OshKosh, Wisconsin, facility, into our other corporate offices. These actions will reduce the overall complexity of our business and will lower costs. This will also support our ongoing efforts to improve the profitability of OshKosh.

Beyond this, we have also reviewed our other businesses and functions, and have reduced headcount across our other corporate locations. We will add back some resources as we implement this consolidation, but we will net out at about a 10% reduction of our corporate workforce, which for our Company is quite significant.

The execution of this consolidation and workforce reduction is expected to be completed by the end of this year. Our affected employees are eligible for severance and outplacement assistance, and are working through transition planning with us.

In addition to the severance and asset write-down charges related to the restructuring, we will likely incur about $4 million of costs throughout the balance of the year related to recruiting, relocation, and other transition costs as we wind down our operations in Wisconsin. These costs will more than offset the benefit of the corporate workforce reduction in the current year.

We've also announced plans to close our Barnesville, Georgia, distribution center by the end of the second quarter. We will consolidate the activities currently managed in Barnesville into the rest of our logistics network. This action is an extension of our ongoing initiatives to optimize capacity across our distribution network, increase efficiency, and reduce costs.

Finally, we have taken steps to improve the productivity of our labor spend in retail, essentially eliminating a supervisory level in most stores, which we felt was duplicative, and aligning our benefits to be more in line with the market.

In total, these productivity initiatives are expected to yield annual run rate savings of approximately $10 million, the majority of which will be realized in 2010.

So, solid progress in accelerating our productivity initiatives. We are going to continue to look at all opportunities to make our cost structure more efficient and to enable the investments necessary to compete effectively in the marketplace over the long term.

Taking a look at our performance by business segment on page 6, I think what's encouraging about this view of the business is that we saw operating margin expansion in each of our businesses in the first quarter. Of the $17 million increase in adjusted operating income, $12 million came from retail.

As Jim will comment, we had good sales performance and improved gross margin as inventories were well managed and we had lower clearance activity than a year ago.

In wholesale, we've built on last fall's very strong performance and experienced good over-the-counter selling of our products, and enjoyed the benefits of cleaner inventories coming into the year. We have also been aggressive in managing customer chargebacks, which benefited us in the quarter.

In the Carter's mass channel, we had a favorable comparison to prior year due to last year's Child of Mine product performance issues and higher levels of customer margin support. We do not expect this trend to continue in the near term, due to the planned reduction in Child of Mine sales with Wal-Mart.

And importantly, in terms of OshKosh, we achieved a significant improvement in the total profitability of the brand, approximately $9 million across the wholesale, retail, and mass channels.

Turning to page 7, we had solid operating cash flow in the quarter of over $33 million, up 15% over last year, driven by our higher earnings. We ended the quarter with a very strong cash position, $187 million, up $25 million from year-end and obviously significantly above where we were a year ago.

CapEx was $9 million, compared to $2.5 million last year, due primarily to the seven Carter's retail store openings during the quarter, completion of the rollout of our new retail point-of-sale system, and additional brand presentation fixturing for our wholesale customers.

While we are evaluating ways to accelerate investment in the business where warranted, we continue to feel good about having the strength and flexibility that this liquidity provides us. With that, I'll turn it over to Joe.

Good morning. I will discuss the product and marketing strategies for our brands, and, specifically, how we are implementing these in our wholesale businesses, as well as provide you with our first-quarter wholesale results. Then I'll turn it over to Jim, who will review our retail businesses in greater detail with you.

I'll start by discussing our Carter's wholesale results, which are found on page 8. First-quarter sales were up 4% over last year. We saw increases in all three of our product categories -- baby, sleepwear, and playwear. This sales growth was achieved in a very challenging marketplace, in which most of our top accounts saw declines in their overall businesses.

It is also important to note that we are comping against last year's order pile that included several accounts that have fallen into bankruptcy, and are no longer part of our business.

For quarter one, our over-the-counter performance was very strong, with our customer sales up 8%. The strong over-the-counter selling led to a demand pull model, in which many of our customers requested shipments in the first quarter that were previously scheduled to ship in the second quarter.

The strong product performance is a result of the product and marketing strategies that we began implementing last year. The focus of those strategies was the following. First, product leadership. We want to continue to be recognized by as customers as the market leader in creativity and innovation. This drives continuous product improvement and strong consumer demand.

Second, we are offering great value to consumers, through compelling pricing strategies that produce an average out-the-door price of less than $10 per unit. This is accomplished by a greater emphasis on everyday low pricing, an increase in the amount of opening price points in the mix, and a simplifying of the pricing structure.

Third, we are strengthening our brand presentation. By implementing our newborn to 24 shops, we installed a little over 400 in top account doors in the first quarter, bringing the shop total to just shy of 1,000 doors. We have continued to be pleased with the shop performance and are getting a good return.

We have also received very positive feedback from the customers. In their opinion, this is a game changer.

For fall '09, we are implementing a marketing signing package that was designed specifically for non-shop doors.

We are also continuing to service the floor with our retail merchandiser program, expanding our coverage to over 1,000 doors. We saw great performance with these strategies in fall '08 and are pleased with our over-the-counter results thus far in spring.

Based on our projection, our customers should finish spring in a cleaner inventory position than last year.

In regards to our sales, we are expecting second quarter to be roughly flat to last year, due to the sales increase we experienced in the first quarter.

While we have gotten off to a good start, we recognize it is still very early in the year and there are external factors that we cannot control. Looking at the year, we continue to believe that growth is possible and our results in the first quarter support this.

We continue to feel that children's, and specifically young children's, will be the best-performing area of apparel. Within children's, we have the most trusted brands and our capacity to invest in product and presentation is a significant competitive advantage that we believe will drive shares -- gains in this environment.

Moving onto mass channel on page 9. Consolidated sales for the quarter were down, which was in line with our expectations. For Just One Year, our brand at Target, sales were down due to timing.

As you may recall. sales were up 29% in the fourth quarter, due to an early brand wall launch and early shipment of spring seasonal orders. For the year, we are projecting [to enjoy] flat to modest growth.

As we have discussed on previous calls, we continue to project the total mass channel to be down 15% in 2009 due to Child of Mine. We expect the first half to be down 15% to 20%, and the second half to be down 10% to 15%. While we are disappointed with the lack of growth in Child of Mine, we feel we have found the bottom, and we expect a return to growth in the mass channel beginning in 2010.

We have been encouraged by our over-the-counter performance at both brands, and definitely feel we have strengthened our future product offerings.

Turning to page 10, which is OshKosh wholesale, sales increased 16% in the quarter. That was based on timing. We expect lower shipments in the second quarter, producing a slight decline in sales for the first half.

We have made a lot of progress with OshKosh in the past 12 months, and are coming off a great fall season at both wholesale and retail. That being said, our spring over-the-counter performance has been mixed. We have been very pleased with the spring performance of the OshKosh brand at our retail stores, and Jim will give you some details in a minute.

However, in wholesale, while we are seeing an increase in overall consumer selling, performance has been not been as strong as fall, and has really not been up to our expectation. Certain components have underperformed. This performance is due, really, to placing too narrow of a product assortment.

At the same time, we are seeing very positive results with the selling of our iconic core products.

Looking at the year, our focus is on improving the profitability of OshKosh. We got off to a good start in the first quarter and I feel confident we will achieve this objective.

One final point, as Mike says, and I want to reiterate. The strength of our business strategy is built on having multiple strong brands competing in multiple channels. Our ability 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.

Good morning, everyone. As indicated by the results on pages 11 and 12, both the Carter's and OshKosh retail stores had strong a first quarter, resulting in positive comparable store sales, and increased operating profits and margins for each brand.

While the environment continues to be challenging, our results have been achieved due to strong product performance, continued improvements in inventory management, strong in-store execution, and effective marketing strategies.

As it relates to the Carter's brand, business remained strong through the first quarter. This is best indicated by first-quarter comparable store sales increase of 5%. The strength of the young children's category and our turnaround efforts have resulted in nine straight quarters of comparable store sales increases.

Our first-quarter comp was driven by increases in transactions and average price, with the consumer responding well to all product categories. As a result of improved inventory management and product mix, gross margin quality has improved.

Also, as we enter into the second quarter, inventory is well-positioned. We are clean with an average inventory per door down 9%.

The outlook for second quarter is good and our confidence in the business continues. Due to the continued challenging economic environment, we anticipate modest growth in comparable store sales.

Moving on to OshKosh on page 12, the first quarter reflects continued improvement for the OshKosh retail business, highlighted by a substantial operating income increase, a comparable store increase of 11%, and gross margin improvement over last year. Comparable store sales were driven primarily by an increase in transactions and average price.

The turnaround can be attributed to strong customer acceptance of product, in-store execution, and improved inventory management, resulting in positive comps for the past three quarters. Like Carter's, inventory on a per-store basis ended the quarter down 15% due to less clearance merchandise, which puts us in a good position to continue to focus on gross margin performance as we enter into the second quarter.

The second quarter is off to a good start and we are expecting modest levels of sales growth. We will continue to focus on product, inventory management, and gross margin improvement.

Overall, as we transition into the second quarter, we continue to be encouraged by our progress and results. However, we remain guarded, due to the uncertainty of the economic environment. The retail team will continue to make inventory management and in-store execution a priority.

Also, we will continue to focus on marketing and a strong value equation for the consumer. Now I'll turn it back over to Mike.

There is no question we are tracking ahead of our plan for our OshKosh retail segment. The consumer's clearly responding to a much better product offering. We expect to achieve the milestones we set last summer to show meaningful progress in sales and profitability in our stores.

In our OshKosh wholesale segment, most milestones will be met. Our spring performance at wholesale is good, not great. It's the same product that's selling well in our stores, but in our stores you have the full scope of the brand and the assortment is more compelling.

As Joe said, in retrospect, the assortment at wholesale this spring was too narrow and we are making adjustments for spring 2010.

We do expect better profitability in the OshKosh wholesale segment this year. The OshKosh wholesale segment is the smallest part of our business, but we continue to believe it represents a meaningful opportunity for growth.

The outlook for OshKosh is improving. To frame it up for you, in 2008 OshKosh did about $320 million in total sales with a 2.5% operating margin. For 2009, we expect sales growth of about 5% with an operating margin of at least 5%.

In summary, in this environment, we are very fortunate to be in the young children's apparel space, with brands known for quality and good value. The fundamentals of our business are strong. Despite the tough economy, people are still spending money on their young children.

We are off to a great start this year. It's nice to be ahead of plans so early in the year. We expect to give back a bit of the first-quarter growth in the second quarter (multiple speakers) timing of demand. Our second-quarter sales are expected to be flat to down, due to lower sales to the mass channel.

Second-quarter earnings are expected to be breakeven or better, but given the strong first-quarter results, we expect to have solid first-half performance.

We've executed meaningful cost-reduction initiatives from a position of strength to enable us to stay ahead of risks inherent in this economy. And we've got a solid balance sheet with unprecedented levels of liquidity and nominal debt service requirements for the next couple of years. We are in very good shape to weather this storm and to take advantage of opportunities to gain share in this market.

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

(Operator Instructions). Margaret Whitfield, Sterne, Agee & Leach Inc..

Good morning. First, for retail, I wondered if you could comment on how the comps trended during Q1, and what the comp trend has been thus far here in Q2? And I know you had your first-ever cata-zine mailing in March. I wondered how many customers received that cata-zine. Then I have another one for Joe.

As it relates to the comps, as you know, we believe it's more important to focus on the quarter. We don't comment by month.

However, that being said, the month was -- the quarter was strong, overall. It started a little bit slower, and ended a little bit stronger. But it was a good solid performance on the quarter.

As it relates to the cata-zine, we mailed out approximately 200,000 per brand. And we have been quite pleased with the response from the customers, both in commentary and in overall redemption of our offering. So it was very positive.

How has April trended for you, Jim?

We are off to a good start.

Any difference between the branded stores and the outlets? How many stores in total will you open this year?

The consistent -- the performance is pretty much consistent between both brands. Our brand stores are continuing, our non-outlets, are continuing to perform very well. As far as store openings this year, we'll open some place between 20 and 25 in total.

Skewed, obviously, to Carter's.

Yes. Absolutely.

And for Joe, I wondered if you could discuss the timing issues at wholesale. It sounds like you've had good over-the-counter selling. Wouldn't that, therefore, lead to another good Q2, or are there some specific customer issues here that cause you to be so conservative? And I wondered if you could discuss how your fall orders came in. And also if you've been successful in achieving the zero to 24 month shops for Target for fall.

As far as shipment demand in the first quarter, really what happens is sometimes you have orders in the first week of April. And customers, based on selling, good selling performance, and needing more inventory, will have those orders shipped earlier.

We don't take that to the bank, because you've still got second-quarter sales to deal with, and so we have to wait on that. But that's just moving up the order file we already have in place.

Your second question was -- fall orders. I'd say for all brands, we have positive growth in our fall orders. And leave it at that.

Your last one was zero to 24 with Target. We are not at that point yet. But probably proposing some of that -- more of the Spring 2010 issue.

Could you break out the first-quarter performance in the mass between the two brands, Target and Wal-Mart? How much each grew or didn't grow?

I would just say that, really, the big decline is in Child of Mine. Target was strictly a timing issue where we shipped a heavy fourth quarter because -- last year, we launched the brand wall in January. This year, we launched it in December.

Finally, for Mike, your outlook for second half also appears conservative. I know there was a lot of expense in the second half tied to failed retailers. I wondered if you could tell us what the impact was in both Q3, as well as Q4, in terms of bottom-line impact.

As I recall, the charges that we took last year were some portion of about $8 million or $0.08 a share. I'd say a good portion of that came in in the second half of the year.

With respect to the guidance, this is the time to be conservative. We will give you the best information we have on the quarter that we are in, and as the year evolves, we'll share with you more as we know it. But we are intentionally being cautious on the outlook.

We want to be measured on our results, not our guidance. But we did have some costs in the second half that we hope don't repeat, and that provides some upside.

Your question to Joe on the second quarter, I think an important thing for everybody to know is that the second quarter is the lightest quarter of our year. And whereas we saw some earlier-than-expected demand in the first quarter, whereas that's possibly an opportunity in the second quarter, it's not likely because of the nature of the second quarter. You're seeing the wind-down of spring, and fall starts to ship at the tail end of June.

So it's -- we are not planning on it. It's possible that some earlier demand may come, given the strength of the product performance. But it probably wouldn't be a good way -- a good idea to plan it that way.

Thank you.

Omar Saad, Credit Suisse.

This is Spencer Hill with Credit Suisse, from Omar Saad's team. Good morning, everyone. I think you mentioned your comfort with inventory levels in the channel. Based on how lean they are now, after the destocking we've seen over the last several quarters, we were hoping you could see if there are any signs that your retail partners are starting to loosen up those inventory controls, and maybe even restock a bit.

That's why they are pulling in orders earlier. I do think their inventories are low, and if sales performance stays positive and on this trend, they will continue to take out orders aggressively. But they will still watch their inventories, overall.

Great, thank you. Secondly, given the excess capacity we are seeing on the manufacturing side globally, we were hoping you could talk about some of the opportunities to further reduce sourcing costs. And on top of this, whether the indirect sourcing agent model you use could prevent you from actually capturing some of these savings.

We've got folks over in Asia right now, working on spring 2010 product and cost, and the outlook there is good. Year over year, we are in a much better place in terms of commodity prices and overall product cost. We are one of the few apparel companies that are putting up solid performance. That gives us a little bit of an advantage.

So the outlook on product cost is good. That enables us to take some of that savings and strengthen the product, and strengthen its competitiveness. That's always been our strategy to put the savings back into the benefits -- product benefits to drive topline growth.

We actually view our relationship, particularly with [lee and fun] to be an advantage. So we don't feel as though we are missing opportunities. They have done a terrific job of getting us into parts of the world that we never would have been able to do on our own. And Bangladesh is just one example.

And we are seeing terrific costs coming out and terrific product coming out of that part of the world. So we view that relationship as an advantage. And it provides more opportunities to us than we'd otherwise have.

Great. Thanks, everyone.

Jim Chartier, Monness, Crespi, Hardt & Co..

Good morning. Congratulations on a great quarter. First question, on the SG&A savings from the restructuring, when do you expect to start recognizing the benefit from that?

We'll get a bit of that this year. The portion related to the corporate workforce reduction and the consolidation of our facilities, that's largely a 2010 savings. We'll have some transition costs that will occur this year that will largely offset the end-year savings.

The closure of the distribution center and the retail labor-based savings, we'll get about a couple million dollars across the balance of the year between both those initiatives.

So the net in 2009 would be about $2 million of savings?

Correct.

And then, the mass channel, pricing was up 13%. Was that equal between Target and Wal-Mart, and was there something going on in terms of mix that drove that, or was it just fewer markdowns there?

It was just fewer discounts. Not a big change in the regular average price. Just, last year, we had taken some discounts with Child of Mine and didn't have to anniversary that this year.

And did you say that you expect the margins for mass channel to start declining in the second quarter and for the balance of the year?

We did not. In general, the margin trends are good, I would say, in the business in total. We should have some margin expansion in the second quarter at the consolidated level. I don't think we'd comment specifically about the business segments.

[Taurward] Gary, RBC Capital Markets.

Good morning. First, can you just clarify in your press release your second-quarter guidance? I think it was a little confusing to people the way that it was written. So if it's to be down $0.07 to $0.10 compared to second quarter of last year, does that assume that it's going to be -- or does that mean that it's going to be breakeven to $0.03?

You both are right. We expect to be breakeven or better.

Yes, the comparable adjusted EPS last year was $0.10.

Great. So how much, if any, of the cost savings are included in your guidance for the second half?

We've reflected the couple million dollars that I just mentioned for the balance of the year, and we've also baked in our transition expenses that we anticipate, too, to affect the overall restructuring.

Great, thanks. And then, looking forward, what other opportunities do you see at OshKosh, both retail and wholesale?

OshKosh wholesale, we have the same account base, and playwear's actually a bigger market than baby and sleepwear. So potentially, Carter's is five times as big as OshKosh. We think there's great potential with the OshKosh brand at both wholesale and retail.

From a retail perspective, clearly the customer loves this brand. And the product is performing better, the customer is responding better, the KPI is moving in the right direction, and due to the fact that we have a relatively significant retail store base, as things improve, we have got the advantage of scale.

So our initial -- and has really been for the last kind of year, is to focus on gross margin expansion and inventory management, and that's really been driving the improvement, and as a result of that, comparable-store sales have improved as well.

We do see opportunity to improve the Locust Grove version of the new store design. We've got a new store concept that is a much better showcase for the brand, and that exists in three locations. Those stores are performing very well overall.

We are going to be taking components of those -- of that store and rolling it into the balance of company. We currently have a 20-store test going on, validating that componentry in the existing store base. And we also have a plan to impact approximately 20 additional stores in a more thorough cosmetic way to improve the overall portfolio. And that is our strategy.

In addition to that, we are focusing very heavily on non-outlet store performance, so that that becomes a significant growth vehicle for us in the future.

The only other thing on OshKosh, really our focus is on making that product great and improving our branding at wholesale. And really, increasing the profitability of the brand in total. So that's -- and just get consistent performance.

Excellent. And then, lastly, would you say that the weakness in the Child of Mine brand at Wal-Mart was in line with or worse than what you were thinking it would be at the start of the year? (multiple speakers)

The important thing is the performance of the business we have right now is very good. So that's why we feel as though we've found the bottom and we will grow from there. But the current performance at both Target and Wal-Mart is very good.

Great. Thank you so much.

Susan Sansbury, Miller Tabak.

It was an outstanding quarter. You are to be congratulated. A couple of housekeeping items, really. Richard, can you tell me what the cash portion of the subsequent restructuring charges are going to be in the second and third quarter?

The cash component is around $5.5 million. Noncash is just about $3 million.

Joe, I missed your forecast for sales for the mass channel in the second half. Could you repeat that for me, please?

We said the second half would be down 10% to 15%, and the year down 15%.

And there's no way that -- in terms of these timing shifts, is there an order of magnitude that you might be willing to share with us? At wholesale?

I'd focus on the first half. First half will be good. Inevitably, you will see some shift, just because you are dealing with the spring season. The spring season will straddle the two quarters just like fall will, and the second -- third and fourth quarters. So, first-half outlook for the business is very good.

I think, directionally, what it means (multiple speakers). Directionally, what it means is the product's performing, and they're [pulling] out good, which is a positive sign we will end the season in better shape than the prior year.

Silly question, your inventories are down significantly. Are you running the risk of not having enough product (multiple speakers)?

No. We feel as though we are in a good place. And really, it just kind of lends itself to full-price sellthrough. Last year, we had more clearance inventory than we would've liked to have had, so we feel better about our inventory position.

Any idea at this point what inventories -- what inventory goal you're looking at for year-end?

We are entering the period where we have our seasonal build of inventories, so we will kind of move to a larger position but then we will trend back down again. I would say flattish to up mid-single digits by the end of the year.

Perfect. Thanks ever so much.

Scott Krasik, CL King & Associates.

Thanks, guys. Great job, great job. Joe, can you talk about how many additional shop and shops you expect to open in 2009?

Right now, as we said, we opened a little over 400 in the first quarter. We are close to 1,000. I'd say we'll probably add -- another 300-plus shops for the year.

And then, in terms of a customer rollout, does that incorporate all of the Babies R Us rollout? And then, is there anybody else that's hopping on?

We are testing it with a few different people, but Babies R Us, we are actually working on right now in the second quarter, and hope to have that completed by the end of the second quarter.

Great. Is there any difference amongst your main customers in terms of improved sellthrough, or increased sellthrough? Is there anything you can take from one to the other at all?

I would just -- we are very pleased with the performance, and I'd say -- we wouldn't get specific about any one customer. We are very pleased with the [recruiting].

Richard, the transition costs, as you mentioned it. Why -- if you call them transition costs, why do you put them into your guidance? They are obviously not going to recur in 2010.

Good point. I think these are a bit different in nature than the standard things that we exclude from our reported results, things like severance, asset write-downs. These are more, I think, from an accounting treatment point of view, more typically treated as period costs.

So some additional compensation expense, relocation, recruiting costs, and such. We called them out because they won't be comparable. but we won't strip them out of our reported GAAP results.

But at least as we think about it for 2010, that $4 million or so, most of that will not recur. Correct?

That's right.

Plus an additional $8 million or so of restructuring benefit.

Roughly, correct.

That's real helpful. Just lastly, Mike, you mentioned this is a time to be conservative, but when your sellthrough rates are double your sell-in rates and you're comping positively on lower inventory and the category seems to be holding up, is there anywhere you'd rather be right now?

We want to be crystal clear on what we think we can do in the quarter that we are in. What I am encouraged by, you're starting to get a sense that there is a little bit more optimism, generally speaking, in the economy. Had some of our customers last week come out with more upbeat messages.

But time will tell. It is still very early in the year. I think that's largely why we are being cautious. We don't want to get too bullish and overextrapolate what has been good trends over the past couple of quarters. We are trying to earn our way back.

As we started the year, we said some growth was possible, and given our performance so far this year, we feel very good about the path that we are on, and -- but it's still -- this is the lightest half of our year, and when we chat again in July, we'll have a better view on what we think is possible this year.

Congratulations, you guys did an exceptional job running (multiple speakers)

Marie Driscoll, Standard & Poor's.

Good morning. Great quarter. I have a few questions. The first thing, you mentioned that you have fewer retail clients. There were a number of retailers that went bankrupt. I'm wondering if you could quantify the sales lost that you had in that regard.

And then, if you could -- is there a similar pattern happening amongst your wholesale competitors? Like, are there fewer of them, and how do you see yourself benefiting going forward with that?

I'll answer the first one. We figured in the first quarter, quantified, it would have been about a three percentage point loss versus the prior year.

As far as competitors, we don't comment a lot. We have great brands. We are investing. Our performance is good, so we definitely feel there is an opportunity to take share. We really -- so that's the way we position ourselves.

I guess what I am thinking is that you do have two of the strongest brands in the category. And there is a lot of small, kind of private-label brands, and I'm wondering if you are seeing a lot of them sold in this economic environment. Maybe you are not observing it, I'm just -- it's a question.

There definitely is opportunities is the way I would answer it. We estimate anywhere 30% to 40% of the market is made up of names that own less than 1% share. So, yes, we definitely think we have the resources, and again, investing with these large accounts, and -- we are answering their need. So I do think that gives us a competitive advantage.

Okay. And then -- do you feel that you are exposed to further bankruptcies going forward in 2009?

Sure, there is some exposure. You have some regional retailers that are having a tough time of it. And those that we are concerned about, we've got a close eye on, and managing that risk. There is some risk, but it certainly is manageable.

Okay, and I have just two more questions. What, if anything, could go wrong with closing the DC?

This isn't our first plant closure, so over the years, as you may know, our history is we've gotten out of all of our domestic manufacturing. We've closed many plants. So there's a lot of good experience here on managing that risk. So I am confident it will be handled well.

Okay, but what could go wrong?

You could skip a beat in terms of deliveries, but we have two other distribution centers here in Georgia. So -- I say, it's a very manageable (multiple speakers)

We're timing it for the latest quarter in shipments (multiple speakers), so it's at a very opportune time.

My last question is how are you able to have price increases across your brands? I'm just curious as -- there's been such a struggle at retail with pricing.

I think what you have to -- we haven't taken like garments and raised the prices. What you are looking at is more reflective of the quality of the performance and the quality of the inventory. There is less markdowns associated with the sales, so we are getting paid more because the product is better.

Great job, and it's great to see the inventory down. And keep it going. Thanks.

(Operator Instructions). [Dennis Rosenberg], [DSR Advisors].

Good morning, guys. It's been a while. I've been talking to Eric (multiple speakers). Anyway, the fourth quarter, you had a pullthrough of wholesale sales, also, that you took away from the first quarter. So could you compare that pullthrough to the pullthrough in this quarter, so we see what the net difference is?

I don't think -- I would say it was more in the mass, I think, was the biggest one. With Target, definitely, (multiple speakers) which was really tied to a brand wall launch, and they end up shipping their spring seasonal orders on 12-25 versus 1-5 or 1-10. I don't recall, I don't think in wholesale that we -- in the other brands that we had any significant movement in the fourth quarter.

[Right], because you attributed the fourth quarter [beat], which was also significant, although not as big as this one, to a pullthrough, or part of it. Anyway, everything sounds great, and hopefully, this is going to continue and we will see more big surprises. Thank you.

Margaret Whitfield, Sterne, Agee & Leach Inc..

I wondered if you could comment on trends for the year in gross margin and SG&A. Gross margin in Q1 was up sharply, and there was also some improvement in SG&A. Remodel the year.

I would say that at the consolidated level, we are optimistic on our gross margin outlook. We anticipate that we will have expansion, not at the rate that we saw in the first quarter, which, as I mentioned, was up almost 400 basis points, but for subsequent quarters and for the year, we are forecasting improvements in gross margin.

SG&A reflects, in part, some of the increased investments that we have made -- the additional fixturing at wholesale, which is coming through the P&L in the form of higher depreciation; some higher incentive comp that we have accrued for, and so forth; the investment and retail marketers on the sales floor of our wholesale customers. Those are all impacting SG&A, in addition to just having the higher base of retail SG&A from having more stores in the base.

So SG&A could be up modestly for the year.

I think in that mid-single-digit range that we talked about last time is still achievable.

Okay, thank you.

Scott Krasik, CL King & Associates.

My favorite topic, e-commerce. Any update on the rollout there? What the strategy may be?

We definitely admit we are behind the curve. The good news is we've hired a team, and we are in the final stages of evaluating an outsourcing partner. Based on research, we think we -- potentially, it could be a 5% volume, $75 million business.

Our research shows people love our site. We've had a site up, but want it to be transactional. We think this site will also serve as a customer relations tool, as much as an earnings contributor. The start-up will not be a meaningful contributor until 2010.

But 2010, sort of a full rollout?

Well, it's our first year out. So we will start slow. I wouldn't expect 2010 to be great, but we will start to do sales in 2010.

Thanks.

Jeff Feinberg, JLF Asset Management.

Thank you very much. Good morning. Congratulations on the terrific results. I just wanted to try to get some qualitative perspective. To the extent that there was upside to the conservative guidance as you've outlined, it could be if things continue, is it more on the wholesale retail side, or is it on the margins? Thank you.

Our conservatism is mostly based around the revenue line. I would say we are very modest in our outlook for wholesale. Retail is on a very good trend but we are starting to comp up against some very significant improvement in comp stores in the second half of the year.

Thank you very much.

Susan Sansbury, Miller Tabak.

Going back to e-commerce, a lot of people incur large start-up -- or start-up expenses, and then it takes forever for the e-commerce site to become profitable. When you talk about generating -- first of all, are there any start-up costs associated or embedded in your outlook for this year? And if so, what are they?

Secondly, when you said you're going to start generating revenue next year, can you tell me what breakeven revenue might be? Or whether -- how long any losses that may or may not occur will -- how long it will take to make the e-commerce site profitable?

We have some very modest investment spending, SG&A expense that's in our forecast for the year. And I guess it's probably too specific for me to comment on, but we are, to Joe's point, building a small team of folks that we brought in to help us with this effort.

There's lots of different models that companies can pursue around building a website. I think the path we are going to go down is largely an outsourced model, even though we have some of the internal capabilities we can eventually leverage. We think that the better turnkey solution is probably the right path for us.

There will be some costs associated with that. To be honest, we haven't completely finished scoping that. Many of them are capitalizable, though, and so we will be able to have that come back through the P&L in the form of depreciation. So I would say reasonably minimal impact to the P&L near-term. And we'll let you know, as revenue starts to come in, we'll have a better sense what breakeven might look like.

Great. Thanks ever so much.

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

Thank you all very much for joining us this morning. We appreciate your very thoughtful questions, and we look forward to updating you again in July.

Ladies and gentlemen, this does conclude the conference call. We do appreciate your participation.