Carter's Inc (CRI) 2009 Q2 法說會逐字稿

Good day everyone and welcome to Carter's second 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 second 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 (inaudible). Additionally presentation materials for today's 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 in this conference call and in the company's press release other than those containing 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. Also as a reminder, today's call is being recorded. And now I would like to turn the call over to Mr. Casey. Please go ahead sir.

Thank you very much. Good morning everybody. Welcome to the call. We have a brief presentation which summarizes our second quarter results for you and that presentation is available on our website.

Well, suffice it to say our second quarter results were much better than we had projected. Our results reflect very good product performance in almost all segments of our business and very good execution of our inventory management and cost reduction initiatives. Our results also reflect the investments we have made in recent years strengthening our organization and improving our product offerings and branding at the floor.

The young children's apparel space is going relatively well and we continue to be the market leader in this space, with our brands sold in all important channels of distribution. Our brands have a well-earned reputation for quality and good value and that reputation has certainly helped us in this economy.

Our Carter's business has been exceptionally good. Our Carter's brands contributed about 80% of our second quarter sales and all of our earnings. We are achieving growth in our Carter's wholesale and retail segments. As you know we took a step back in our mass channel segment this year due to a shift in Wal-Mart's merchandising strategies, and as a result we lost some space on their floor. But we are performing well in the reduced space.

Our business with Target is good and it is growing. On our last call we had expected mass channel sales to be down about 15% this year. We're currently tracking a bit better than that.

In Oshkosh the results are improving in both the retail and wholesale segment. In this environment big gains are tougher to achieve, but we continue to build on the feedback from our wholesale customers and our consumers to strengthen this part of our business. In our Retail segment we had a stronger than planned response to our first direct-mail effort for Oshkosh which drove double-digit comps in April.

Our May and June comps in our Oshkosh stores were not as robust because certain key items sold out early and the inventory mix was less than ideal. It should be a nice opportunity for us in the second quarter next year. In our Oshkosh wholesale segment our focus has been on increasing its profitability by improving the product assortment, branding at the floor and inventory management and there is plenty of room for improvement in each of these areas.

For the year we believe we are on track to achieve about a 5% operating margin at Oshkosh, double the level of profitability last year. Over the next few years we plan to build the operating margin to about 10%.

By comparison, Carter's operating margin this year is expected to be over 15%. Oshkosh continues to be a good opportunity for us to grow over time.

Given the strength of our first-half performance, we're projecting a higher level of earnings this year. With almost seven months into the year we expect to meaningfully exceed our original growth objectives for 2009. We will use this upside to explore opportunities to fund certain investments we believe will enable us to build on our solid performance this year. Those investments will largely be in the front end of our business.

Given the strength of our cash flow, we are in a good position to invest in our growth initiatives which include strengthening our product offerings, supporting our customers' efforts to improve their presentation of our brands and extending the reach of our brands through our own stores. In this low growth environment we will continue to focus on improving our cost structure to enable higher profitability and longer-term growth.

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

Thanks Mike. Good morning everyone. As Mike highlighted our second quarter results were substantially better than expected. Before I go through our presentation I will give you some high level comments on the drivers of our outperformance given that it was so significant.

First, and these are in order of magnitude, our retail stores performed much better than expected. We did not forecast the level of comp store sales that the business delivered. Additionally, the margin trend in the Oshkosh retail business showed significant improvement to last year.

Second, our overall level of spending was below our forecasts. Our distribution and freight costs were managed well and overall we reduced our level of discretionary spending. And finally, the consistently strong demand for our products during the quarter allowed us to manage our inventory levels very effectively, resulting in lower costs associated with excess inventory.

Turning then to the details of the quarter, on page 3 of today's presentation we have a recap of second-quarter sales. Consolidated sales were up 5% despite an expected $7 million decline in mass channel sales resulting from lower sales with Wal-Mart. The sales momentum of our retail stores continued in the second quarter, particularly in our Carter's stores with sales up 19% and comp store sales up 8%. Note that this 8% comp is on top of a positive 17% comp in last year's second quarter.

Oshkosh retail store sales increased 5% with comps up 2.6%. Carter's wholesale sales increased 6%, reflecting a continuation of the strong demand for our products that we experienced in the first quarter. Oshkosh wholesale sales were down about $2 million to last year. However, sales for the first half were up 2%. And as I just mentioned, mass channel sales were down the last year due entirely to our Child of Mine business with Wal-Mart due to the strategic assortment changes Wal-Mart has made.

Page 4 is our second quarter P&L and I've are ready covered the drivers of the increase in sales.

Consistent with what we saw in the first quarter, we had meaningful gross profit and gross margin expansion in the second quarter with gross profit up $17 million and gross margin up 360 basis points versus one year ago. These improvements were driven a few factors. First, we had a higher mix of retail sales during the quarter, representing 51% of our net sales this year compared to about 47% a year ago driven mostly by the increased sales in the Carter's retail stores.

Oshkosh retail stores were a bit higher than last year, but with much better gross margin performance. And as I just said, our overall strong product performance allowed us to manage inventories well, which resulted in lower excess inventory charges and better recovery on sales made though the off-price channel.

In our Carter's wholesale business, despite the increase in sales, gross profit was relatively flat largely due to a higher mix of off-price sales and higher provisions for customer support. Keep in mind this is our lightest quarter of the year and we expect to have improved gross profit and operating margin performance in our Carter's wholesale segment for the year.

I will speak to the drivers of increase in SG&A in a moment. During the quarter we recorded approximately $3 million of restructuring charges, roughly $2 million related to additional severance and other termination benefits related to the reduction in force we announced in April. As an update we have now closed our Barnesville distribution center.

The other productivity initiatives which we announced last quarter including the reduction in our corporate workforce and consolidation of operations currently managed in Oshkosh, Wisconsin remain on track. Recall we expect the run rate savings from these actions will amount to approximately $10 million, the majority of which will be achieved in 2010.

The remaining $700,000 in charges for the quarter reflect the write-down of our White House, Tennessee distribution center which has been held for sale. We are hopeful to complete a sale of this property in the near future. Prior-year results include $5.3 million related to the retirement of our former Chief Executive Officer.

Looking at the bottom line, reported operating income increased $11.7 million, more than 100% over last year. We continue to realize a nice benefit in the form of lower interest expense as a result of lower market rates. On a reported basis, earnings per share more than doubled to $0.19 per share.

On page 5 we have a summary of the more significant drivers of SG&A which increased $8 million in the second quarter driven mostly by our retail store operations. The higher retail expenses are entirely a function of new store openings. Last year's new store openings were weighted towards the fourth quarter but these expenses have increased our SG&A base thus far in 2009. We have also opened an additional 21 new stores so far this year. Important to note our retail businesses did achieve SG&A leverage in the second quarter.

SG&A was also impacted by increased levels of incentive compensation and the cost of rolling out our in-store shop fixturing and core service programs at wholesale. Benefiting SG&A for the quarter was more favorable bad debt and customer chargeback experience, our cost reduction initiatives and reduced levels of discretionary spending.

On page 6 we have a schedule reconciling our adjusted earnings to earnings reported on a GAAP basis. These adjustments should help with the comparability of our second quarter results. After making these adjustments, adjusted operating income increased $10 million or 69%. Adjusted earnings per share increased over 100% to $0.23 per share.

Moving to page 7, we have a summary of our performance by business segment. Overall, we saw meaningful improvement in our consolidated operating margin in the second quarter driven largely by our retail segment. Our Carter's wholesale operating margin decreased a bit as compared to last year due to a few factors. First we had a heavier mix of off-price sales which typically carry lower margins than regular sales. The real benefit of these higher off-price sales is that our inventories are in great shape with very little excess.

Margins in the Carter's wholesale segment were also affected by higher provisions for customer support and incremental costs associated with our wholesale fixturing and core service programs. This operating margins performance is not indicative of what we would expect for the year. Right now we expect nice expansion in operating margins in the segment above last year's 16.7% level.

A couple of other points here. At Oshkosh wholesale, we achieved improved profitability in the quarter due to a much cleaner mix and level of inventory compared to a year ago and lower levels of customer support. While we would like sales to be higher, we're more focused on improving the profitability of the business that we have today. Joe will provide some more color on this in a moment.

In the mass channel we managed to improve both operating income and operating margin performance despite the lower volume with Wal-Mart. This was due in part to lower excess inventory charges.

On the next page we have a recap of first-half performance. We clearly posted some strong numbers in the first half of 2009 although overall the business was weak a year ago.

To point out a couple of highlights, consolidated net sales increased $43 million in the first half, an increase of 6.8%. Consolidated operating income on an adjusted basis is up $27 million or 76% with improved profitability in almost every element of our business. In particular, we had meaningful profit improvement in both of our retail stores segments and in the Oshkosh brand overall.

Our consolidated operating margin has increased 360 basis points to 9.2% in the first six months of the year, again representing expansion across all of our businesses. On page 9 we have included a reconciliation of our first-half adjusted results to GAAP. We encourage all of you to take a look at that.

On page 10 we have summarized some data regarding our balance sheet and cash flow performance and in short we are in very good position. Our cash position continues to remain strong, $174 million as compared to $45 million a year ago. We continue to evaluate alternatives as it relates to the use of our cash. However, today we continue to feel very comfortable about keeping this level of cash on hand until we can see where the economy and the capital markets are heading.

As I just mentioned, inventories are in exceptionally good shape heading into the second half of the year, up 2%, which reflects our higher retail store base.

Cash flow from operations increased $3 million as compared to last year driven by our higher level of earnings. CapEx year-to-date was $16 million as compared to $7 million last year and this increase was driven primarily by our new retail store openings.

In terms of our outlook, on the next page, given our first-half performance we believe we are going to deliver good growth in sales and in earnings this year.

While we have had strong year-to-date performance it is important to acknowledge our first-half comparisons were reasonably easy given a number of issues in the business last year including managing through a significant amount of excess inventory. Our third and fourth quarters typically comprise the most significant portion of our annual revenue and earnings. So there is a lot of business yet to be done and we remain cautious about the retail landscape and the broader economy.

With that said, we are planning growth in the second half and while we are focused on delivering a solid second half and year, our focus is increasingly on 2010 and beyond and we are evaluating where we can invest further in establishing the right foundation for meaningful sales and earnings growth in the coming years.

Specifically as it relates to the third quarter, we expect low single digit growth in sales and mid-to high single-digit growth in adjusted earnings per share. We also expect continued good management of inventory, projecting year-end inventories to be flat to up low single digits. Finally, our full year forecast for CapEx has ticked up slightly to around $40 million as we have identified some opportunities to accelerate investment in the business. And with that I will turn it over to Joe.

Thanks Richard. Good morning. I will review our wholesale results for the second quarter and the half and then discuss the focus behind the product and marketing strategies. After this, Jim will walk you through the performance of our retail stores. I will start by discussing Carter's wholesale results which are found on page 12.

For Carter's wholesale we achieved sales growth of 6% for the second quarter and 5% for the first half. We had planned conservatively, expecting to be flat in the quarter with strong product performance and better than expected replenishment orders helped us exceed plan. In addition to topline sales growth, we are pleased with our 9% income growth in the first half for Carter's wholesale, which is the most profitable segment of our business.

In regards to our customers' performance, the product value and presentation strategies we implemented in spring paid off as we saw growth in over the counter sales across all three of our product markets. In total, spring over the counter sales increased 8%. As a result, our customers' inventories finished the season flat to last year which allowed us to launch all on time. The majority of our fall programs began shipping the last week of June and we [were able to lead] a successful transition between seasons is key to profitability.

For fall 2009 we are continuing the strategies that proved successful over the past year. These include, number one, product leadership. We're bringing better product to market each season. This includes an increase in benefits and stronger creative on our core programs as well as the introduction of one to two innovations in each product market.

Second, we're continuing to offer great value to consumers through an even greater mix of everyday low pricing, more opening price points in our mix and a greater percentage of the mix at a singular price point. And lastly, we are strengthening our brand presentation. We installed newborn to 24 month shops in over 450 total account doors in the first half and plan to install another 500 in the second half, which would bring our shop total to roughly 1500 doors. That is around 50% of the potential for the accounts we have targeted.

This initiative has continued to be a big win with both customers and consumers. We are pleased with the shop's performance and the way it differentiates us from the competition. In addition to shops, for the first time we are rolling out a marketing/signing package designed specifically for non-shop doors. We're also continuing to expand our floor service program which now covers over 1000 doors.

Most importantly, we continue to invest in our marketing initiatives that we believe will lead to sales growth and the market share gains. We're only a few weeks into the fall season but the initial reads on selling are encouraging. Looking at the full year we continue to be conservative in light of the environment and the challenging second half comparisons from last fall where our customers' over-the-counter performance was up double-digit. However, based on our first-half performance we do believe that Carter's also will achieve growth in 2009.

If you want to turn to the mass channel on page 13, consolidated sales for the quarter and the first half were down as we have guided. The good news is that we saw positive trends in regards to over the counter selling at both Target and Wal-Mart, which contributed to a better first half than we had originally projected. We also saw significant growth in operating margins as a result of our positive product performance and better inventory management.

For Just One Year, our brand at Target, sales increased in both the second quarter and the first half. Spring product performed well over the counter and early reads on fall are positive. We are confident we will have growth in Just One Year in 2009.

As we have discussed on previous calls, we continue to project the total mass channel to be down in 2009 due to Wal-Mart's merchandising and inventory initiatives. However, based on our current trends and the order [pile], we expect some favorability to our original forecast. As we continue to strengthen the product offerings in these two businesses we believe that the mass channel will return to a growth business.

Turning to page 14, talk about Oshkosh wholesale. After a sales increase of 16% in the first quarter which we viewed as a result of timing of shipment, the second quarter came in down, in line with plan. The important number is the half and that's where Oshkosh sales grew about 2%.

Retailers' spring Oshkosh over the counter sales increased over last year. However, their performance was below our expectations. At the same time, spring performance was very good in our retail stores and Jim will share with you numbers in a minute.

As we look back on the spring performance at wholesale, we would attribute the results to too narrow of a product assortment which we believe we have addressed for spring 2010. On a positive note, we continue to be encouraged by the good results we are getting with our (inaudible) core products like the bib overall where sales were up 30% in spring.

For Oshkosh wholesale we have had two main objectives. These are to improve profitability and our product performance. We have made progress with product performance. We had a very strong fall holiday 2008. Spring 2009 was just okay. But at the same time we have had significant progress in profitability and we are projecting the wholesale segment to add positive operating margin this year.

We are looking forward to seeing the performance of our new fall product on the floor over the next two quarters. We had a great fall 2008 season and I'm looking for fall 2009 to build on this success. Early reads on fall 2009 performance thus far have been good.

In closing I would like to share a few final thoughts on our overall business. Our overall business is strong and we continue to consistently drive momentum. I believe this can be attributed to our constant focus on driving product improvements and improved value by investing in marketing, presentation and branding strategies. Our balanced portfolio of brands and distribution channels continues to be a strong competitive advantage.

Carter's is balanced with respect to brands and channels but is singularly focused on the young children's space. Because of this focus, we are the market share leaders in zero to seven, along with the knowledge leaders. We will continue to lead the way in research, innovation and investment across each of our businesses in order to drive sales and gain market share. I will now turn the call over to Jim Petty for an overview of our retail business.

Thanks Joe. Good morning everyone. As indicated by the results on pages 15 and 16, both Carter's and Oshkosh retail stores had a strong second quarter resulting in positive comparable store sales for each brand. In addition to positive comparable store sales increases, revenue growth was attained with significant improvement in operating margin. Positive transaction growth and strong product performance drove double-digit earnings increases (technical difficulty) [in] growth.

As it relates to the Carter's brand, business remains strong through the second quarter. This is best indicated by a comparable store sales increase of 8%. Regional performance was positive throughout the country, including the East which experienced unseasonably cool and rainy weather throughout the quarter. The strength of the Carter's brand, strong product assortment and value equation has contributed to 10 straight quarters of comparable store sales increases.

Our second quarter comparable store sales were driven by increases in transactions and units per transaction with the consumer responding well to all apparel product categories. Merchandising segments focused on outfitting and opening price points were well received.

As a result of improved inventory management and product mix, gross margin quality has improved. As we enter into the third quarter, inventory is well-positioned. We are clean with average inventory per door down 5%. The outlook for the third 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 onto Oshkosh, the second quarter results reflected continued improvement for the retail business highlighted by a substantial operating income increase, a comparable store sales increase of 3% and gross margin improvement over last year. Comparable store sales were driven primarily by an increase in transactions. We attribute the continued turnaround which has resulted in positive comparable store sales for the past four quarters to strong customer acceptance of product, in-store execution and improved inventory management.

Also we believe strong opening price points on basics and the introduction of the Genuine deal which updated every two weeks and offers a compelling can't pass it up value have been well received. Inventory on a per door basis ended the quarter down 9% with a better mix of in season product which puts us in good position to continue to focus on gross margin performance.

Overall as we enter into the third quarter we are encouraged by progress and results. We will continue to focus on inventory management, in-store execution, acquiring and leveraging customer data and communicating a strong value equation for the consumer.

During the first half of 2009 both brands successfully introduced our first catazine. Building on this success, we intend to issue two additional catazines for the balance of this year, one positioned around back-to-school and the other during the holiday season. While we feel confident in the momentum of our retail business we must remain guarded due to both the continued uncertainty in the economic environment as well as the tougher second half comparisons we are up against from last year. Now I will turn it back over to Mike.

Thanks Jim. In summary, we had a very strong first half. It is important to keep in mind the larger and more challenging portion of our year is still ahead of us. That said, we feel good about the strength of our product offerings heading into the second half and we believe we're on track to deliver solid performance for our shareholders this year. More importantly, we are well positioned to continue investing in our business to build on this strong performance. At this time, we will open up the call to your questions.

(Operator Instructions) Omar Saeed, Credit Suisse.

This is [Spencer Hill] at Credit Suisse on Omar Saeed's team, good morning everyone. We were hoping you could decompose for us, just looking at the strong performance in the Carter's retail business, the market share gain versus performance of the category overall? And then thinking about productivity levels of the Carter's stores, how about that compares to historical peaks and whether there is scope for further improvement over the next couple of years?

As it relates to market share gain, with our increases as significantly as they have been we're clearly picking up market share. It is hard to quantify exactly what that means with any industry but we are confident with both our comp and our total sales increases we're gaining traction overall.

I think the results were reflected in the fact we are very well positioned. We did not have to change our strategy given the changes in the economy. This has been our consistent go to market strategy, making sure we have good value every day for the consumer. I think we have shared with prior calls probably 80% of the products we sell in our stores sell at a ticket less than $10.

So it is a very affordable purchase. The brands have been known for quality, good value for generations of consumers in the United States. So, we don't get interim market share data but I think the results would suggest that our formula is working and we're taking share from competitors.

The only thing I would add to that, Spencer, is the key metric of transactions being positive is a very strong indicator.

Great, thanks very much. You mentioned the desire to evaluate potential opportunities [to do] long-term growth. We're hoping you can discuss kind of the scope for international playing into that whether it's expand further licensing agreements or expand programs with current licensees?

This is Joe. Regarding international, with the Oshkosh acquisition we picked up a nice business. It is a very profitable licensing business along with some export. It is about $200 million in sales right now, about $8 million royalties. We are in about 30 countries. We have 128 freestanding Oshkosh the stores as well as over 500 shop-in-shops.

Oshkosh international has really achieved close to about 10% annual sales growth and about double that in profit over the past three years. So our average partnership relationship is 10 years, so we feel good business with steady growth from the Oshkosh side.

In regard to Carter's, our strategy for Carter's really is to leverage our existing Oshkosh partnerships and with the experienced international team to build demand for the Carter's brand. So Carter's really had very little, if any, international business.

So we started a Carter's initiative by opening some co-branded stores in both Canada and the Middle East and now we are starting to look at the China market. We have made some presentations there. So I think you will see some good growth in Carter's probably starting in 2010 in new markets.

Great, thanks very much everyone.

Margaret Whitfield, Sterne Agee.

Good morning everyone. A few questions. First for Jim, I wonder if you could discuss how the Carter's comps performed during the quarter and provide us an update as to how to July is tracking for both Oshkosh and Carter's? That is the first question.

Well, we don't quote specifics. I can give you a flavor for it. Carter's started out a little bit slower, positive but slower on the quarter and gained momentum throughout the quarter. Oshkosh was kind of the opposite of that. We had extremely strong performance as Mike indicated with introduction of our catazine and we move through product quite honestly more aggressively than we had planned. And the results overall were positive; however, slightly declining on the Oshkosh side.

As it relates to July, we're in a very good inventory position and the Carter's business is strong and has continued momentum, and we are feeling confident about what we are seeing in the sales of our overall fall assortment. On the Oshkosh side of that we have continued to move through the tail end of our spring/summer assortment. However, the initial reads on fall also our strong.

And the catazine circulation for back-to-school and holiday versus the first one?

It is going to be, as I said, for back-to-school and then for holiday. And both of those editions of the catazine will be in larger quantities than we initially distributed earlier this year.

Can you quantify the percentage increase or give us some magnitude of the increase versus the first?

I would rather not say specifics but it is significant.

And for Joe, could you comment on how babies' sleepwear and playwear performed during the period? And could you be a little more specific as to why you believe the second half for Wal-Mart will be improved? And how did that trend? As you broke it out for Target could you break it out for Wal-Mart in Q2?

As far as baby playwear and sleepwear, they were all positive. Baby and sleepwear were the two best by far. But all three ended up positive for the quarter and the half. Your second question was regarding (multiple speakers)

You said Just One Year was up 8% in Q1 and 1% for the half. What was it at Wal-Mart in Q2?

We are getting specific Wal-Mart (multiple speakers)

I think your question was more what makes us think the second half at Wal-Mart will be improving. The business at Wal-Mart we will be down in the second half year-over-year, but we are performing well on the reduced space. Wal-Mart will weigh down the mass channel sales this year.

And you don't have a specific number for Q2's performance for Wal-Mart?

(multiple speakers) It was down.

We know that, yes. So are you improving in the hanging apparel or in the brand wall? And what is the outlook for next year? You must have gotten some signals on how you will be placed next year.

We're still finalizing spring. But our over the counter, we actually had a very strong spring season with positive sales with a lot less inventory. And fall's off to a good start. Our over the counter performance is good. We can't make up for the brand wall this year. But the hanging business, I would say, is performing better than our expectations and that is why we are guiding a little bit more favorable.

Finally for Mike, you mentioned investments several times. We heard about international just now. Could you highlight some key areas of focus for the future in terms of investment?

Sure, the focus is always our product. Just make sure our products are competitive. We could do a very good job studying the market, making sure that we continue to lead the market in product value because you know we have been spending money on improving the presentation of our brands on the floor. I would give ourselves very high marks at Carter's. I think there's more work that needs to be done.

On Oshkosh the research we have done with consumers continues to tell us that they love the brand, they have a hard time finding it. So between improving presentation of brand on the floor and also the investment in e-commerce I think we're going to do a better job raising the awareness of the brand, where the brand can be purchased.

We're going to continue to invest in our stores. We have done some good work remodeling some stores, particularly the Oshkosh stores. We're very encouraged by the performance of those -- the new look particularly in the Oshkosh store.

And the other big investment is technology. We will spend a couple of million dollars this year on new planning and allocation systems that -- I would characterize it as phase 1. As we move into next year, I think we will be building on those new systems to do more markdown optimization initiatives. And so I would say that is the short list of the focus of our investment.

Thank you very much.

You're welcome.

Benjamin Rowbotham, Goldman Sachs.

This is actually [Scott Kelpman-Ross] pinch hitting for Benjamin Rowbotham.

With regards to the zero to 24 store within a store, you had mentioned they were -- been a game changer. I'm wondering if you could just remind us what kind of revenue disparity you are seeing in those shops.

We model -- we're giving over a 10% ROI on the shops. Bottom line in the accounts we are doing, we're probably generating twice the comps in the shop doors versus non-shop doors, but both of those happen to be positive.

And I think really Carter's is the only brand that can put in a zero to 24 shop, because we -- that's the middle of the children's department so it really gives us strong competitive positioning and then we also have people that service those shops. So we keep our shop full of product and looking good. And in these times with people cutting back on expenses, we really think it's something that nobody else can bring to the market in kids.

Great, thanks. And also, regarding the fall rollout of the signing package, what kind of disparity do you expect there? Do you expect similar disparity, muted or what are you expecting?

I don't think we have -- that it will be a game changer right off the bat. But anything you can do to improve brand presentation will help you and will distinguish us from the competition. We're just starting that. I think we have so much focused on the shops but we are saying what about all of the other doors that it's in. Now we have a program for that. And it will happen August, September. We will share if we see any significant results, but it is more making our brand look strong to the consumer on the floor.

Okay, great. Thanks. Congrats. (multiple speakers)

Scott Krasik, CL King.

Great job. Joe I guess the first question, you mentioned coming into this year that retailers were generally cautious but planning the category flat to slightly up. Maybe talk about -- the performance has been good for them this year -- how they are viewing 2010, the category and also your brand?

The category? I would still say it's the best of all categories, but I would say still people are being very cautious. The good news is, because of our investment in shops where we have proven we can generate the sales and they get a proven return, we're getting increases in those doors. And I think we are definitely doing better than the market. So, that is our outlook. Everybody is still cautious.

The good news is we're ending every season with much cleaner inventories, starting the next season on time and that really to me will drive profitability. And we showed you in the second quarter we actually picked up some replenishment orders. So -- based on that performance. What really helps us is better sell-throughs, better performance, cleaner inventories which helps us with off price and excess goods. So, that is the benefit we see. But everybody is being conservative.

And was it just one retailer that led you to increase your shop in shop target from 1300 to 1500 or was it a little bit or several?

Several.

Okay and then your comment about 50% of potential, it's early obviously in the planning stages, but 2010 do you have a sense of how many shop in shops you could install?

No, we have not finalized it. We're kind of approaching it customer by customer and breaking out the first step. We are in the process right now. We present these to our accounts as part of our spring 2010 or first-half financial plan. So, the good news is we have the ability to invest depending on the return we get.

Are they receptive, do you expect to build more in 2010?

I would say they love them. We're just taking it slow and sure and making sure we continue to get the returns and learn from each one of the shops.

Excellent, excellent. Jim, again, I know it is early, but do you have a sense of how many stores you will could look to open in 2010, Carter's and Oshkosh?

Keeping in line with the comment I made on the last call, we are targeting 20 to 25 Carter's stores for next year and we will do 5 to 10 Oshkosh stores for next year.

And then what do you see as the biggest barrier of meaningfully getting to a double-digit operating margin in Oshkosh retail? Obviously directionally you're doing a great job, but double-digit operating margin does not seem unrealistic.

We would agree. It is not unrealistic. That's one reason why we believe so strongly in the brand.

I think there is a couple of key components. It always starts with the product and it is continuing to fine tune the assortment, and understanding what is important to the child and the mom, and nailing that as close to the bull's-eye as we can as we are developing the assortment. That is number one.

Number two is continuing to work on the merchandiser gross margin of the playwear assortment and those are our key focuses. As I mentioned consistently in the past year or so, these stores do significant volume on average store basis. So as we get the product better and better, and we continue to focus on the margin, there is scale that will drive operating income significantly.

Excellent. Mike, I always ask this question. We're getting closer to e-commerce. Can you give some idea or framework of what it is going to look like? And then you look at some of your, not exactly competitors but huge retailers, they are doing north of 15% of their sales on their websites. Maybe talk to that.

Again they've been at it longer. I would say we are behind the curve on e-commerce. We've hired a first-class team. We're in the final stages of evaluating our outsourcing partners who will do the heavy lifting. There are good people who will help us with that.

Based on the research, e-commerce could contribute some portion of 5% of our total volume. Time will tell. The research we have done, people love the website but they want it to be more transactional. They're disappointed they cannot buy the essentials online.

The site will also serve as a customer relationship building tool as much as it will be an earnings contributor. And so we are heading down a path. I still -- I think I shared with you last time, I don't see this meaningfully contributing to sales or earnings I would say in the next 12 months to 2010.

Our focus right now is to get it off the blocks strong, make sure we have the right people, the right partner and do it right. We have done well for many years without e-commerce. But, we have moved into the short list of the things that are important for us to do and I think as 2010 evolves we will have more to share with you.

It does seem, though, based on where you stand, unless you take a step back, it should rollout more quickly than fourth quarter of 2010 which is what you said in the past.

Time will tell. We're not managing any deadlines we just one make sure we get it right, do it right.

Okay. Great. Good luck guys.

Thank you very much.

Susan Sansbury, Miller Tabak.

I love these great results. You are to be commended. Staying on e-commerce, so the rollout doesn't change or going live would have to wait until the fourth quarter of 2010. Any incremental costs (multiple speakers) above and beyond your plans so far?

Oh no. The costs are very manageable. It is a meaningful investment for us and -- but it is worked into our estimates.

Any thought of sharing what meaningful investment is?

No.

That's fair. Going back on mass channel, did you or have you changed your forecast for the sales decline in mass channel, which I believe was 15 to 20% given the second quarter or first-half performance? And if you have not, what has changed about the back half outlook?

The decline had been forecasted to be about 15%. The performance on the reduced space at Wal-Mart has been particularly good. So we are encouraged by that. The business with Target is good and that business is growing. So, that is why our current view is that we expect we will be a bit better than our previous forecast.

And your margin or EBIT performance in this business astonished me in terms of -- I equated the huge margin compression at Wal-Mart, I guess justifiably so because you planned for it, but what about mass channel profitability for the year?

It was particularly good. You have to keep in mind second quarter is the lightest quarter of the year so that could throw you off, but the performance there is expected to be good. The beauty of the mass channel business and the reason why we got into it is because you can leverage the Carter's business. And so, Carter's is the premium brand.

And what we have done is taken in a good subset of the full scope of the Carter's brand and put a beautiful assortment together for this Child of Mine and Just One Year brands but you did not have to build an entirely new and different team. So when the business is working well, there is a very nice flow through to profitability. Our focus is to continue to improve even on lower volume; focus on making sure that we deliver some good profitability on that lower volume.

And one for Richard. The charges over the balance of the year, any changes relative to what you have already discussed?

We continue to effect the reduction in force we had announced last quarter, and that is a complex exercise as it relates to consolidating the operations we have in Wisconsin. I would say on balance some of the transaction and transition expenses we had been forecasting, we are trending a bit lower than that initial estimate.

And were there any costs -- were there any cost savings that flowed through the P&L in the second quarter. And if so, were they meaningful?

We've had a [bet]. I think it is difficult to isolate exactly how much is coming from productivity but we are getting some benefits from the activities we have undertaken.

Okay, great, appreciate it. Stick to your guns. You are doing a great job.

Jim Chartier, Monness, Crespi, Hardt & Co.

Good morning, great job. First question, did the Easter shift have any impact on your second-quarter comps?

Not in a meaningful way. As the result indicated, it was strong so I wouldn't say so.

Okay. And I'm surprised to see average prices down for both Oshkosh and Carter's retail given the lower discounting in the stores. Is that just to reflect your change in mix for opening price points?

Predominantly, yes. Exactly it is a slightly greater shift to the opening price points that have been so successful.

Can you quantify what percentage of the mix was an opening price point last year and what that has come to this year?

Each of the businesses are up 200 to 300 basis points over last year in opening price points.

And then should we expect kind of a similar change as we go throughout the balance of the second half of the year?

Yes.

And then any update on how the new Oshkosh retail prototypes are performing?

Yes. We are happy with them. We have a handful of them out there right now. As you all know, we converted Locust Grove and the results there have been very positive. Since then, we have opened up a couple more prototypes and they are meeting our expectations fully.

In addition to that, in the back half of this year we will be converting roughly 20 stores, and this will be done by the fourth quarter, to a facelifted version of the Locust Grove prototype as we label it. So, the result has been positive and we continue to watch them closely, obviously, but the consumer is responding well.

Great. And then for the Oshkosh wholesale business, it sounded like too narrow an assortment that was the problem for spring. Is that going to be a problem for fall this year as well?

This is Joe. You have to remember we had a very good fall 2008. So we kind of built off of that. Denim is more relative in fall, so, no, I think we will be fine for fall. The initial numbers look okay. So we are -- I feel pretty good about fall.

Great, thank you.

Howard Tubin, RBC Capital Markets.

Hey guys. Thanks a lot. Two questions on the wholesale side. What is your sense in inventories at -- in the retail channel? And do you think you will see some fill-in orders during the fall season? And do you have -- can you fulfill fill-in orders later on this year?

I would say inventories are very low out there. They came in low in our product. So -- and we are picking up replenishment orders as we go, had a good second quarter. We will see how the third quarter goes, but we think there is some potential there.

The way, really, once you book fall goods -- we use a lot of common inventory; there's always a chance to maximize that. And what I think it does, it reduces cancellations, it makes sure you ship goods on time, so you get more time on the selling floor, all of those things which -- we have less excess goods. All of that kind of contributes to profitability.

It is hard to say there is a lot of sales gain except for replenishment. But I do think we held our order files much better for the spring season and we expect to do that through fall also.

All right, that's great. Thanks.

[Dennis Rosenberg, DFR Advisors].

Good morning. Nice results. Had a few questions about the SG&A. You talked about incentive compensation being up this quarter. Could you talk to -- could you quantify that and give us some indication as to how that is derived?

I think the page on SG&A indicated that it is about a $1.5 million of increased expense year-over-year in the second quarter. In short, we were not providing for full incentives a year ago and the performance this year has allowed us to put a little bit more away for that. And it is all performance-based. So the management team is incented on growth in sales earnings and earnings per share.

Okay, so that increase, could you give us an indication as to what that would translate into your expected EPS given you are able to accrue that number?

I think it is preliminary. More of the accrual is taken in the second half of the year, consistent with the proportion of earnings that we earn in the second half. So if it is material to the full-year results we will comment on it.

Okay. And the second quarter new store opening expenses were heavier versus last year. You said last year it was mostly fourth quarter. So does this mean your fourth quarter SG&A will benefit significantly from the absence or the reduction in those costs?

Well, we have a little bit of an anniversary affect that would benefit us in the fourth quarter. However, you do have higher expenses just in general from the new stores we have opened this year. So it is tough to be precise on that.

And the increase investment spending that you were talking about, can you quantify that, how much that will be up in the second half and how much of that comes in SG&A?

The majority would come through SG&A. We are actually in the process of quantifying it now. It would not be material but it is something we're looking at now. If it is significant we will call it out for you, Dennis.

Okay, thanks.

Susan Sansbury, Miller Tabak.

The question is fall backlogs, are they booked and can we discuss trend -- up, down, sideways?

(inaudible) June is a big month for us. As we said before, because we cleared spring earlier, we got a really good start [on the fall. A lot of people because of clean inventories out there are actually requesting -- and better product performance -- are requesting earlier shipments than we originally planned. So, we have always been a year of really taking out orders very cleanly from our customers and we see that trend continuing in the second half.

Okay. But are they -- so I can presume that backlogs are positive for both Carter's and Oshkosh?

Yes.

And no order of magnitude? (multiple speakers) I'm sorry I don't know the business very well. How big is the replenishment business versus the booked order business in the second half?

Replenishment is about 20% of the business overall on the wholesale side, 20 to 25%.

That is for the year. Is it bigger in the back half?

No, the baby business is really pretty consistent. That's really -- replenishment is in baby. That is the beauty of our model is that baby is pretty consistent business all year.

Okay, thank you so much.

Scott Krasik, CL King.

Richard you say that the lower level of liquidation sales was a driver of gross margin improvement in the quarter. I think it was in the second half of last year when you had all of those liquidation sales related to the customer bankruptcies. So maybe you could talk about how that should impact gross margins in the second half of this year. And also I wouldn't think the product cost should be materially lower year-over-year?

The gross margin performance I would not anticipate to be at the same level we had in the first half because of the comparisons being a bit more challenging in the second half. We should have some benefit from non-anniversarying some of those -- the items that you mentioned, Scott, the liquidation costs of the inventory we have procured for bankrupt customers and such.

There are lots of puts and takes, though, on balance. We're going to lose some earnings as it relates to the Wal-Mart volume being lower. The incentive issue as it relates to our accruing a bit more year over year, that's going to put some pressure on absolute level of earnings.

We should have good gross margin performance. I don't anticipate it being as strong given the momentum of the business that really started to accelerate in the second half of last year. So those comparisons do become a bit more challenging.

Okay. But they should be up. I mean, the two things you called out were not gross margin issues, right, because the Wal-Mart would be the lowest gross margin business. The mix should actually benefit gross margin.

We should have a bit of a mix benefit as well.

Okay, great. Good luck.

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

Thank you all for joining us this morning for the call. We look forward to updating you again in October.

Ladies and gentlemen this does conclude today's conference. Thank you for your participation.