Carter's Inc (CRI) 2009 Q3 法說會逐字稿

Welcome to Carter's third-quarter 2009 earnings conference call. On the call today are Michael Casey, Chief Executive Officer; 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 third-quarter earnings release today before the market opened. The text of the release appears on Carter's website at www.Carters.com under the press release section. Additionally, presentation materials for today's earnings conference can be accessed on the Company's website by clicking on the investor relations tab and choosing conference calls and webcast 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 forward-looking statements, please refer to the Company's most recent annual report filed by the Securities and Exchange Commission.

Also on the call the Company will reference various non-GAAP financial measurements; and reconciliation of those non-GAAP financial measurements to the GAAP financial measurements is provided in the Company's earnings release.

I would now like to turn the call over to Mr. Casey.

Thank you very much. Good morning, everybody. Thanks for joining us this morning.

We had planned on reviewing our third-quarter results with you back in October. As you know, we spotted a problem shortly before that schedule call, and it's taken the past 12 weeks or so to thoroughly address it. We apologize for the delay.

We regret that the actions of a few people have reflected negatively on our Company, which has always prided itself on doing the right thing.

In short, certain commitments were made to our wholesale customers that were not disclosed to our finance group. Margin support is a customary practice in our industry. The commitments were settled in the normal course of business; but the provisions for that support should have been made in prior periods.

We're fortunate that we spotted the problem and that its impact on our financial statements was not more significant. I want to acknowledge and thank a number of people who have worked day and night seven days a week over the past few months to help us address this issue.

We also had very good people outside the Company helping us, including our Audit Committee, who worked with us to be sure this investigation was thorough and professional and that appropriate changes were made. This has been a bad experience for a very good Company, but some good will come from this.

We are putting in place better controls and procedures to strengthen this part of our business. And we have a new team of people who are committed to regain the ground lost over the restatement.

With respect to our performance, I believe the growth achieved in the third quarter is more meaningful than the growth achieved in the first half. Keep in mind the third quarter is the largest quarter of the year in terms of sales and earnings contribution.

Third-quarter comparisons were more challenging and reflect the fundamental strength of our business. In a period of low to no growth for many companies in our space, we achieved a sales and earnings growth in all five business segments.

Our Carter's retail stores led our business segments in growth. If you have been to our stores this past year, I think you will see how well the brand experience is executed. The consumer has clearly responded to the strength of our product offering.

Jim Petty and his team have sharpened their focus on inventory management, in-store execution, and real estate. We believe this component of our business has a long runway for growth and the potential to deliver solid performance for a number of years.

Our Carter's wholesale segment also delivered solid growth in the third quarter. This past year we've seen a healthier wholesale business, with more conservative inventory models, more consumer pull, chasing demand as opposed to backing up with inventories. That is a far better model for our wholesale customers and for us.

I expect that near-term our customers will continue to be cautious on increasing inventories until the economy and consumer traffic improves. Until the economy improves, the drivers of our wholesale business will include building on our product strength this past year; continued investments in fixturing, branding, co-op marketing and retail marketers; and continued focus on inventory management.

Our spring orders support mid-single-digit sales growth compared to last year. Over the next couple months, we will get visibility on the fall orders; and we'll update you on how the fall orders are coming in on our next call.

We had growth in the mass channel in the third quarter. Earlier this year we had forecasted that mass channel sales for 2009 would be down about 15%. We now expect the decrease to be about 6%, with better performance at both Walmart and Target. As we have discussed on previous calls, Walmart has been testing new merchandising assortments, and the impact of those tests has affected our business. We're not the entry-level brand at Walmart; and greater emphasis has been given to their entry-level brands, given the economy. I believe our strategy of providing a better brand is consistent with their efforts to build a broader consumer base and retain those consumers when the economy improves.

We are well prepared to execute a 50-door test this spring with Walmart which involves an expanded offering of our Child of Mine brand. We'll update you on the results of that spring test in April.

Business continues to be very good at Target. We improved the productivity of our space with better product performance and product mix. We're projecting growth with Target in 2010. That growth will partially offset the decreases expected at Walmart.

At OshKosh, consistent with prior quarters, third-quarter performance was better at retail than wholesale. In our retail stores, the scope of the product offering is more appealing to the consumer. It's a broader assortment; it's well presented and supported by very effective direct marketing initiatives.

The boys product continues to be better than girls. Girls is always tougher, and we've made changes to strengthen the offering. Our focus in 2009 was to meaningfully improve the profitability of OshKosh, and that goal has been achieved.

We've made progress this past year, more so at retail than wholesale. Our wholesale customers have been very supportive of the brand, but they need to see better performance and consistency before they get behind the brand in a bigger way. That's very understandable, especially in this economy.

We've made some changes this past year to strengthen our design and merchandising teams at OshKosh. That's not a quick fix, but we do expect continued improvement at OshKosh in 2010.

The gaps in performance between Carter's and OshKosh continue to be significant. Those gaps provide a nice opportunity for us to improve OshKosh's results over the next few years.

With respect to profitability, we've delivered very good growth in earnings in 2009. The drivers of that growth have been the strength of the product offering; investments in brand presentation; very good inventory management; and good progress on controlling costs.

There is still room for improvement. We have regained the ground lost in operating margin over the past couple years and are now well positioned to build on this performance.

I believe 2010 will be another year of growth. We currently expect modest top-line growth, with profitability growing at a rate at least equal to top-line growth.

We'll have another call at the end of February when we wrap up our 2009 results. We will share more about our progress in 2009 and our outlook for 2010 on that call.

I appreciate all the support our shareholders have given us, especially over the past few months. We're committed to delivering better performance for you in 2010.

I'll turn the call over to Richard. He will walk you through the accommodations review and our third-quarter results.

Thanks, Mike. Good morning, everyone. I'll cover just a few pages on the accommodations issue. So on page 3 of this morning's presentation.

I think by now most everyone has a good understanding of what accommodations are, but just to level-set, providing accommodations is a very standard practice in the industry. In our case, we provide support to our wholesale customers for a variety of reasons, such as to assist with inventory liquidations or in promotions. But bottom line, we partner with our customers in helping them to achieve their margin performance objectives.

Our policy has been to treat accommodations as a reduction to revenue, the accounting principle being to recognize as revenue what we expect to ultimately realize from the sales transaction.

As you all know, as we were preparing to issue our third-quarter earnings last October, some information came to Mike's and my attention which required us to take a look at our historical accounting for accommodations. In order to execute this review, our Audit Committee engaged expert third-party resources to lead the effort. So the review was independent and objective, as you would want in a situation like this.

This review was also extensive. The team has reviewed accommodations transactions back through 2004, so we feel very comfortable that the review has identified the root causes of this situation and will allow us to take some important steps to improve our business model in this area going forward.

As expected, there are some regulatory inquiries which are underway into this issue, and the Company will continue to cooperate fully. But as it relates to the Audit Committee's review, that part of this process has been concluded at this point.

As we indicated in this morning's press release, we have completed the restatement of our historical financial statements and have made the necessary amended filings with the SEC. So as of today we are again current with our public filings.

On page 4, in terms of what the review identified, as we discussed in the 8-K filing we made just before Christmas, the review determined that the Company had recorded various customer accommodations in incorrect fiscal periods. Essentially this was the result of accommodations being deferred, generally into later fiscal periods than the periods to which they related.

The result was that earnings were overstated in some periods, and understated in others. As part of our normal accounting practices, we endeavor to achieve a good matching between our revenues and any accommodations that might relate to those revenues.

Perhaps most disappointing has been that the review, which again was conducted by outside resources, determined that certain members of the Company's sales organization intentionally failed to disclose accommodations arrangements with customers and in some cases purposely provided inaccurate and misleading documentation and explanations to the Company's finance organization.

As discussed in our previous filings, we have concluded that we have material weaknesses in our internal controls over this area of the business. The result of all this are the restatement adjustments which we disclosed a few weeks ago.

In total, the restatement resulted in a $7.5 million cumulative adjustment or a reduction of about 3% to retained earnings as of the end of the second quarter of 2009. Of this $7.5 million, $4.4 million relates to the five and a half year period from 2004 through the first half of 2009. The remaining $3 million relates to periods prior to 2004.

The specific adjustments to reported net income and earnings per share are summarized at the bottom of page 4.

The majority of the restatements affected the Carter's wholesale segment. On page 5 we have summarized the impact of the restatement adjustments on this component of our business. As you can see, 2006 and 2007 were the periods adjusted most significantly.

It's important to note that the restatement adjustments do not negate the underlying improvement in the operating margin of our core wholesale business that has occurred since 2008.

On the next page we have summarized the impact of the restatement on the operating margin of the OshKosh wholesale segment. Overall, the effect of the restatements was to improve the operating margin of this business, as the amount of accommodations on a restated basis is lower than originally reported.

On the next page, as we've articulated in our previous announcements and reiterated in our restated filings made today, there are a number of steps we have taken and are taking to improve controls over this particular component of the business.

Listed on page 7 is our remediation plan, which we are currently working on. I won't read these points, but Mike and I are comfortable that these are the right steps to take for the business going forward.

So with that, I'll transition to talking a bit about our third-quarter results. On page 9 of the presentation, as Mike said earlier, we are late in releasing our third-quarter results, which is a shame, in no small part because the Company's performance in the third quarter was outstanding.

I will go through the details, but at a high level our revenue performance in terms of growth versus last year was the best we've delivered all year. We continued to deliver meaningful improvement in both gross margin and operating margin. Expenses have been well controlled, and our balance sheet and overall liquidity remain strong.

Turning to page 10, our consolidated revenues grew 11% in the quarter. This was driven by an over 20% increase in Carter's retail revenues, driven by new store growth and a 6.1% comp increase. Note that this comp increase is on top of a 6% increase in last year's third quarter.

OshKosh retail had a negative comp in the quarter, but this business was up against a comp increase of 13.2% a year ago. Our wholesale businesses grew nicely in the quarter, both Carter's and OshKosh. Revenues in the mass channel business were up 2% for the quarter. I will provide a few more comments on the wholesale and mass businesses in a moment.

Our third-quarter P&L is on the next page. Overall, a very good performance throughout the P&L. Gross profit increased at roughly double the rate that sales grew. In rate terms, gross margin improved 330 basis points over a year ago.

Consistent with the earlier quarters of the year, this performance has been driven by strong product performance, better recoveries on off-price sales, lower levels of excess inventory, and a higher mix of retail sales at improving margins. I'll go through the drivers of SG&A in a moment, but expenses were up about 10%, but down 10 basis points in rate terms given the strong revenue performance in the quarter.

Royalty income increased by 11%, driven by growth in the Carter's brand, which was up 15%. Expansion of the bedding, furniture, and gear categories were the key drivers of this growth.

Our interest costs continued to be lower than a year ago, reflecting lower market interest rates.

From a bottom-line perspective, adjusted earnings per share in the third quarter were $0.84. This compares to $0.58 a year ago on an adjusted and restated basis, or an increase of 45%.

On page 12 we have additional detail on the drivers of the increase in SG&A in the quarter. Consistent with the earlier periods of the year, the increase in expenses is almost entirely due to the higher number of retail stores year over year and higher performance-based compensation expense than a year ago.

We have continued to control discretionary spending well, which has allowed us to invest behind some of our marketing and branding initiatives as well as in our e-commerce capabilities for 2010.

The next page is our usual housekeeping slide to reconcile from our reported or GAAP results to our as-adjusted basis of presentation. We had no adjusting items in the third quarter of this year. In the prior-year period, the only item related to the writedown of the carrying value of one of our facilities, which has been subsequently sold.

So again, the adjusted EPS comparison for the quarter is $0.84 versus $0.58 in last year's third quarter.

Page 14 summarizes our segment performance for the quarter. There are a lot of numbers on this page, so let me just highlight a few things.

First, overall, as shown in the highlighted growth column, we had growth in adjusted operating income in virtually all of our businesses segments. The Carter's businesses grew $24 million, representing a 450 basis point improvement in total operating margin, led by improved profitability in both the Carter's retail and wholesale businesses.

Despite the decline in revenue with Walmart, our mass business grew operating income in the quarter, reflecting lower excess inventory costs and improved product margins. OshKosh also delivered solid profit improvement, driven by the wholesale business.

As Mike said earlier, the fundamentals of our business remain quite strong. This may be best seen in the 340 basis point improvement in our consolidated operating margin versus last year.

I won't cover the next page in detail, which summarizes our business segment performance for the nine month year-to-date period. But overall, we have had a very solid performance in all of our businesses this year, including a substantial improvement in the profitability of the OshKosh brand.

On a consolidated basis, our adjusted operating margin -- which is a key metric for us -- has improved by 380 basis points to 13%.

Page 16 is the year-to-date reconciliation of our reported results showing the various adjustments. Most of the 2009 adjustments reflect the restructuring initiatives which we executed earlier this year. On a bottom-line basis, adjusted EPS for the nine-month year-to-date period is $1.54, an increase of 64%.

On the next page, as I mentioned earlier we ended the third quarter with an exceptionally strong balance sheet. Our cash position at the end of the third quarter was $214 million. Our cash position continued to build through the end of the fiscal year; so we continue to be in a very strong liquidity position.

Inventories were up modestly year-over-year at the end of the third quarter, reflecting largely the greater number of retail stores versus a year ago. We expect that year-end inventories will be up in the high single digit range. Overall, the quality of our inventory continues to be excellent, with very little excess or unproductive stock.

Cash flow also continues to be very strong and has fully supported our investment program this year.

Turning now to a few more details on the wholesale and mass channel businesses, first in the Carter's wholesale business, which is summarized on page 18. We achieved sales growth of 10% over last year in the third quarter, which brings us to growth of 9% year to date.

Driving this performance has been continued good performance of our products. We believe we continue to lead in the areas which we think mean the most to consumers. That includes design, color, art, and our reputation for quality.

In the third quarter, we experienced strong demand for our fall products, resulting in the acceleration of some revenue which we had planned to occur in the fourth quarter. This was the result of generally lean inventory levels on the part of our wholesale customers and continued strong sellthrough on the sales floor.

It is important to note that fall 2008 was a very successful season for us at wholesale, so we had a challenging comparison to go up against. But we were able to anniversary this strong performance again this year.

This year's fall product performance built on the product value and presentation strategies which were put in place a year ago. And we achieved over-the-counter sales growth across all three of our product categories -- baby, playwear, and sleepwear. In total, fall over-the-counter sales for our top six customers increased 7% in the third quarter.

In the second half of this year we also continued to make meaningful progress in our brand presentation initiatives. As of the end of the year, we had approximately 1,500 newborn to 24-month shops in place. This initiative has continued to be a big win with both customers and consumers, and we believe these efforts differentiate us from the competition.

We've also invest behind improved marketing and signage packages designed specifically for our non-shop doors. In total, our in-store shop and signage initiatives were deployed across roughly 80% of our wholesale doors in 2009, improving the overall look and presentation of the Carter's brand.

We continue to believe that an important element of our branding efforts and a competitive advantage is our floor service program, which now covers over 1,000 doors.

We're encouraged by our fall performance at wholesale and believe the momentum will continue into 2010. As Mike said, based on our spring order file, we're projecting wholesale revenues to increase modestly in the spring season. We will have better insight as to our fall 2010 orders by the time we hold our year-end earnings call.

The next few pages of the presentation include some photos of a few of our in-store shops; so I encourage you all to take a look at those.

Turning to the mass channel on page 23, as you know the mass channel for us consists of our Just One Year brand at Target and the Child of Mine brand at Walmart. Total mass channel sales for the quarter were up 2% and are down 5% year-to-date.

Overall, our results for the segment are better than we anticipated, reflecting stronger than planned revenues at Target and less of a decline in our business at Walmart than had been expected.

Just One Year sales at Target increased 24% in the third quarter, and we expect mid single-digit growth for the full year. Over-the-counter performance was very strong for fall, and initial spring 2010 selling is encouraging.

We feel very good about the momentum of our business with Target. For 2010, we will be rolling out several new initiatives, which we think will drive some nice future growth. We'll update you on these as 2010 progresses.

Turning to Child of Mine at Walmart, sales were down 10% in the third quarter and down 14% year to date. Our full-year outlook for Child of Mine has improved from our original 2009 projections, but is still projected down 16% due to the assortment changes which Walmart has made.

As we have said on our previous calls, the decrease in Child of Mine business is primarily due to Walmart's decision to reduce apparel in their brand wall business in order to devote more space to gift categories. This space reduction was partially offset by an increase in other categories, specifically sleepwear and playwear for fall.

As Mike said earlier, Walmart is in the process of testing a number of initiatives in apparel, and we are participating. We will know more about the results of this test later in the spring.

Moving to page 23 and OshKosh wholesale, sales increased 11% in the third quarter. Consistent with what we said on our last call, we are projecting full-year sales to be flat with last year. For the entire fall season, over-the-counter sales were comparable with last year. In general, the boys [of] summer for fall has performed better than girls.

As we have stated previously, we have two primary objectives for OshKosh wholesale. We're focused on improving profitability and continuing to improve the product in order to achieve more consistency in the performance of this business.

2009 has been a good year on both of these fronts, but the wholesale side of OshKosh continues to be a work in progress. And with that, I'll turn it over to Jim for some comments on our retail business.

Thanks, Richard. Good morning, everyone. As indicated by the results, both the Carter's and OshKosh retail sales stores had a strong third quarter. In particular, the operating margin in both brands showed continued improvement.

Increases in sales and operating margin were driven through effective execution of our merchandising strategies, inventory management, and marketing initiatives. Overall performance during the third quarter, including the back-to-school time period, was strong and has continued its momentum through the fourth quarter.

Results for the Black Friday promotional time frame met expectations and kicked off a successful holiday period. Traffic in both brands was driven through effective direct marketing, including a back-to-school and holiday catazine.

Despite the difficult economic environment and challenging prior-year comparisons, revenue growth was attained, with continued improvement in gross margin.

As it relates to the Carter's brand, Carter's continues to outperform industry trends with 12 straight quarters of positive comparable store sales. Carter's retail during the second half of the year has had strong momentum. This is highlighted by a positive comp of 6% in both the third and fourth quarters. On an annual basis, Carter's was up 6% in 2009.

Earnings for the first nine months of the year were up over 50%. Positive results were achieved through strong product performance across all major categories, as well as an increase in transactions and the number of units sold.

Performance increased nationally in each of our four regions, highlighting the broad product acceptance. Gross margin quality has continued to improve, reflecting our focus on opening price point programs, inventory management, and our allocation strategies.

As we enter 2010, we believe our inventory is well positioned and that we have the proper seasonal mix, with average inventory up at around 3% on a per-door basis.

Moving on to OshKosh, our focus has been and will continue to be on improving the profitability of this brand. The third-quarter results reflect continued improvement in this area.

Operating margin for Q3 increased 100 basis points, and growth in operating income is up 10%. The increase was driven by effective promotional strategies, improved inventory management, and a strong marketing message.

OshKosh comps decreased 2% for the quarter, which was slightly below our expectation. We attribute this decline to strong last-year comparisons and identifiable product challenges.

We reacted in a timely manner, taking the necessary markdowns to clear slow-moving merchandise. And as a result, we believe inventory is well positioned on a per-door basis.

In the fourth quarter, OshKosh sales trends accelerated, with December comps better than November. This resulted in a flat comp in Q4, up against a positive 4% from last year.

Inventory ended the year down 10%, with a better mix of in-season product.

Customer acceptance and interest in this brand remains strong. Average weekly store sales during peak weeks, through back-to-school and holiday sales periods, were comparable with Carter's.

Also, with the onboarding of our new OshKosh brand leader, we look for improved product performance. Our confidence in the OshKosh brand remains strong.

Overall performance in 2009 has resulted in a year-end comparable store sales increase of 2% with a significant increase in operating income. Again, we will give more details on our fourth-quarter call.

In conclusion, we are encouraged by our progress and results. We will continue to focus on offering great product, inventory management, in-store execution, and effective marketing strategies. Our outlook for growth in 2010 is good.

Now I'll turn it back over to Richard.

Thanks, Jim. Our review of third-quarter results today is obviously unusually timed. While our fiscal year has ended, we have not yet finished our normal year-end closing process. That is under way now, and we will report our fourth-quarter and full-year results in the normal time frame at the end of February.

That said, we have obviously have a reasonably good line of sight for where we expect to finish. Based on what we know currently, total net sales for the fourth quarter will be comparable with last year. In part, this reflects the absence of the 53rd week this year; the higher level of wholesale fall shipments in Q3; and the decline in revenue with Walmart.

Our preliminary results indicate consolidated net sales for the full second half will be up in the mid single-digit range.

In terms of the balance sheet we expect that inventories will end the year up high single digits, reflecting strong shipments planned for January.

We expect that final CapEx for the year will be somewhat lower than what we have been projecting, around $35 million. About half of this spend in 2009 represented retail store growth.

The fourth quarter will include significant comps related to the accommodations review. Right now, we're estimating that those expenses will be approximately $6 million.

At this point, subject to the finalization of our results, we expect that full-year adjusted earnings per share, adjusting for the items that have been discussed in this presentation and for the costs related to the accommodations review, will be approximately $2.10.

With that, I think we're ready to take questions.

(Operator Instructions) Omar Saad, Credit Suisse.

Thanks. Good morning. I wanted to follow up on everything that's happened with the review, the accommodations, and everything that you guys have gone through. It sounds like there has been some sales force turnover. Can you help us understand the impact, if any, that you've seen on the business and some of the moves that you're going to need to make with your sales force and how that is organized?

Have there been any customers who have had a response to the situation or have kind of changed their relationship with you as a result of it, or a result of losing some of those sales people? Can you help us kind of understand what's going on there?

Okay. Good question. Fortunately, I had a chance to be with almost every one of our larger customers this past week in New York. This was Market Week for us.

I will tell you the tone at the top is very positive. The conversations we've had with our customers about this matter over the past few months indicated no concerns whatsoever.

So they've been well served, and they will continue to be well served. We delivered very good performance for them in 2009. They are planning growth with our brands in 2010.

We're fortunate that we have a lot of experience with the sales force that remains. And we will fill those gaps near term.

So I have no concerns at all, and they've expressed no concerns whatsoever.

Okay. So as I look at the trends in the wholesale side of the business, it looks like from third quarter to fourth quarter -- I know this all came to light in the fourth quarter. It looks like the wholesale business decelerated from the third quarter to the fourth quarter, whereas the retail business it looks like the comps actually are pretty good in the fourth quarter.

Yes, I think a better way to look at it is -- when you think about our business, fall, the fall season, starts to ship at the tail end of June, continues through the third quarter, tails off in the fourth quarter. And then spring starts to ship in December.

So I think what we have seen is that demand for fall came earlier into the third quarter; and spring shipped when it normally ships, at the end of December.

So I think a better way to look at it -- Rich, I don't know if you have the second-half wholesale increases year-over-year, but I think that's a better way to look at the business.

It would be up in the mid single-digit range for the entire fall season.

So fall got pulled forward some, but the spring didn't get pulled forward as much? Is that what you're saying?

No, it did not. No, it did not.

Thank you.

Scott Krasik, C.L. King.

Yes, hey, guys. Good job on a strong third quarter.

Thank you.

I think the wholesale also looks a little low relative to that extra week in the fourth quarter last year. Do you have how much that impacted wholesale sales last --?

The extra week would have been in the November time frame. That particular week is not a big week for wholesale shipments, so we don't think the impact was as pronounced as it is in the retail segment.

Okay. Okay. Then the Carter's wholesale sellthrough, usually you give a percent there.

It was a nice, I think, sort of 7% increase at our top customers at wholesale in the third quarter, Scott.

Okay. Okay, that's fine. Your visibility on spring orders, the comment that supports mid single-digit growth, is that generally where it comes out? I'm sure there is probably -- especially if you have a good first quarter of sellthrough, that should actually accelerate. How would you look at that right now?

We're encouraged. I think we've -- we're seeing some good demand for spring product. We're seeing some good momentum heading into 2010. We're getting a good early reaction to the fall product that we are showing.

We'll have more visibility on fall in our next call. We expect those orders to come in over the next month or so. So we view it very positively.

Okay. Then on the gross margins, obviously retail is a higher percentage of the mix. But it looks like based on your guidance we're getting to sort of flat gross margin year-over-year.

Is that just because of a lower gross margin from the wholesale contribution?

I'm not sure what period you are speaking to, Scott.

For Q4 '09 versus --?

We are still anticipating gross margin expansion in the fourth quarter. Not at the pace that we saw in Q3, but we still will show year-over-year improvement.

Right, I'm looking at sequential improvement, I guess, from Q3.

Don't have a lot of perspective on the sequential movement. We're going to have nice year-over-year margin expansion in the fourth quarter.

Okay. Then any thoughts in terms of the moving parts on SG&A in 2010 relative to the cost-reduction initiatives that you took? Will we see some of that dollar flow through actually in 2010 despite the new stores?

Well, we're working on our specific 2010 plans now. SG&A is going to have lots of puts and takes with it.

We do feel good that we will get the run rate savings of the initiatives that we executed earlier this year. We will have higher SG&A due to increased stores.

Some of the initiatives that we had earlier in the year were more cost-avoidance steps in terms of merit raises not being given, 401(k) matching and so forth. So there will be lots of ins and outs, and we will try and give you some good visibility as those plans come together.

But at least on a percentage basis it should be much less than a year ago?

I think too early to be specific on it, Scott. We will give you some data once the plans are completed.

Okay. Thanks, guys. Good luck.

Jim Chartier, Monness, Crespi, Hardt.

Good morning. Just curious, on the shop-in-shops, are you still seeing the returns that you saw initially on those?

And then the fresh sign packages was kind of new for second half of the year. How is that impacting the performance?

We continue to see some nice sales lifts from the initiatives. I think the purity of the comparisons becomes a bit more challenging the more time that those have been in place. It's hard to keep all the variables constant on a retail sales floor.

And the performance has varied a bit across the customers, but in general still pleased with the investments.

Then the sign packages, did you see a nice lift there in sales also?

We have.

Then for Jim, can you talk about how 2010 direct mailings, how you are planning that? And are you still seeing strong returns from that program?

Yes, hi, this is Jim. I'll answer the second part of that question first. And yes, we're still seeing strong results from the program and a nice build in the database quality, which obviously gives us an opportunity to lever that as it relates to our direct marketing programs.

As it relates to 2010, I'll get into that a little bit more on the next call. But as we have looked into the first half of the year, we're planning the direct-mail pieces up accordingly, as we feel it makes sense based on the individual peak periods of the first half of the year. And we will obviously adhere to that same strategy in the second half of the year.

Then for OshKosh retail, how is the new prototype performing? Any idea of what the store opening plan for OshKosh will look like for 2010?

Sure, again, I can give you more specifics on the next call. But in general, we're very pleased with the new store prototype. It's performing nicely, and we are getting the expected or better than expected results in both top line and, importantly, from margin in that store.

We also remodeled 15 of our stores late in the -- mid to late in the fourth quarter. We're a little bit early on talking about the results of that, but initial indications are that they are positive as well.

From a 2010 perspective, we will open in the ballpark of 10 new OshKosh stores in the year.

Then are you -- now that the profitability of the OshKosh store has improved a little bit, are you going to go more aggressively after comp performance with those stores?

Well, you know, the focus has been on profitability and it will continue to be on profitability. We are excited about our new brand leader joining us, and we feel good about what she is going to bring to the business from a product development perspective.

But we are always focused on profitability here. With that however, obviously, comes as much of a comp performance as we can get. That being said, we're not going to put ourselves in any risk from an inventory perspective.

So we will be moderately conservative on our top-line growth perspective and a continued focus on the operating margin improvement of the business.

Great. Thank you.

Susan Sansbury, Miller Tabak.

Hi, yes, congratulations. Really good quarter.

Thank you, Susan.

When I look at this 2010 forward projection, my assumption is that you guys are being as usual very conservative. Embedded in this outlook, can you share with us what you expect your audits and legal fees are going to be in 2010 or on a run rate basis? And how long do you expect to continue to incur legal and audit fees related to the accommodations?

As it relates to the $2.10 projection today, that is our best guess based on where we stand in the closed process, Susan. We're working through the detail plans for 2010. I do expect that we're going to have some measure of higher legal costs and compliance costs going forward. We are working through that.

The only visibility that we have currently is what we have incurred here in the fourth quarter, which is probably the heaviest part of the actual investigation expenses. But as we go forward with the litigation and such we will have some higher costs next year.

Okay, but -- so are the costs, though, going to be smaller than they were 2009? Is that sort of an intuitive conclusion we can all draw?

I think that's probably reasonable, but we just don't know yet. That's obviously been a very intense period for the last three months with a lot of resources brought to bear in a very short time period in order to get through this exercise. But we will have some higher cost in terms of ongoing efforts.

Okay. With respect to the regulatory inquiries, or inquiry from the US Attorney General, is there anything that you can talk about?

Well, from what I understand it that is just --

Shed light on?

Well, from what I understand, that's just part of the normal process. So the SEC will be working with our attorneys, and the SEC will be working with the Department of Justice. That is just part of the normal process when you have something like this happen.

Okay, all right. Congratulations again and best of luck. Thanks.

Thank you very much.

Margaret Whitfield, Sterne, Agee.

Good morning, and I'll add my congratulations. I wondered if, Richard, you could break out the impact of the extra week last year on revenues and bottom line.

Then I have a few more. I heard the OshKosh comp number for Q4, but I didn't hear the Carter's. Also I heard the Carter spring order but I didn't hear the OshKosh spring order; if you could provide that, please.

Margaret, the estimate of the impact of the 53rd week is probably $13 million or $14 million of revenue in the fourth quarter, translating down to a few pennies of EPS.

Okay.

In terms of the spring order file for OshKosh, I think those orders are down slightly for the spring season at this point.

And the comps for Carter's?

Yes, the comps for Carter's were 6%, slightly above 6% for Q4. I think that was the question, Margaret?

Okay. And Jim, while I have you, what were some of the product issues that you faced at OshKosh?

And with your new brand leader on board, what time frame can she influence?

You know, the product issues -- the good news is they are, I think, highly identifiable. Some of them just were misses; and I think those were probably the most apparent ones, Margaret.

This past year the tunic and legging trends have been very important on the girls side of the business; and really the misses were predominantly in the girls side of the business. We didn't participate at the level that we should have in that trend. So tunics and leggings.

We also had a clear miss in capturing the skinny jean trends that have been out there and are important to our young girl customers. So those I would say were probably the biggest, and they were significant.

As it relates to the onboarding of the new brand leader, it's going to take some time for her to obviously get up to speed and running. But we're very optimistic based on the time we've spent with her and her grasp for the sensibility of where we are taking this brand.

That being said, we were not at all idle over this past year, past six, eight months in our focus on improving the sensibility of the product from a color, from a offering, for the trends, etc. And I feel good about the improvement that will see in spring and in fall of 2010 based on what I've witnessed from the product development perspective.

We feel with very early reads -- and it's a little bit too early to draw any good conclusions -- but spring is off to a nice start, which would hopefully validate the point of view I just gave you.

Okay. Any comments on plans for e-commerce, Jim? Or overall the Company's plans to develop the international market for both brands?

I'm going to let Mike speak to both those topics.

Margaret, e-commerce, we're on track to launch e-commerce in the first half of this year. So that's going well. We'll update you more when we get underway.

Again as I shared with you in the past, my sense is that near term that won't have a particularly meaningful impact on our business from a sales or earnings standpoint. More importantly, I think it's going to enable us to get a lot closer to the consumer, develop a better connection with them, hear more of what they have to say about our brands, where we can serve them better.

But probably the next update, meaningful update we can give you about that will be in April.

And international, any thoughts there?

Well, that's going well. Again that is not a new part of a business. That is a well-established component of OshKosh, and we've seen some good growth in international this past year.

The stores in Canada are doing well. I think their growth last year in terms of earnings contribution was up over 10%, so that business is going well.

That is a good long-term play. There is no intent to accelerate anything there. We struck an agreement recently with Debenhams in the UK. We're pursuing some licensing opportunities in China.

But as those things develop and become more meaningful, we will share those with you.

Finally, Mike, if you could elaborate on what is involved in the test at Walmart, what is the nature of the expanded product line that you referenced earlier?

It was an expanded scope of the products. Some things that we normally were not including in our line that were carried by other brands.

So we have been given more space in those 50 doors. It's on the brand wall. The best way to describe it is the everyday essentials, the things that mom has to load up on, on a frequent basis.

That actually starts shipping out to Walmart next week. If you are interested, love to take you to one of those 50 doors and show you what we're doing. But we will probably have better visibility on how that test is going, again, in April.

Okay, great.

But we're pretty excited about it. We're putting our best foot forward and we will continue to help Walmart every way we can with what they are trying to test.

So this might bring you back to where you were on the brand wall if it's successful, or even capture greater share of that area?

Yes, I would rather wait to see how the test goes. It's really unknown.

Yes, Walmart is testing a number of different things. Some things we can control, some things we can't; so I will wait to see how the test shakes out before I comment further.

Okay. Best of luck.

Thanks, Margaret.

It appears we have no further questions in queue. I would like to turn the conference back over to Mr. Casey for any additional or closing remarks.

Okay. Thanks very much. We appreciate you joining us this morning. We appreciate all the support you've given us.

We look forward to updating you again after we finalize our fourth-quarter results. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, once again, that does conclude today's conference. We thank you for your participation.