Carter's Inc (CRI) 2009 Q4 法說會逐字稿

Welcome to Carter's fourth quarter and fiscal 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 fourth quarter and fiscal 2009 earnings press release today before the market opened. The text for the release appears at Carter's website at www.carters.com under the press release section. Additionally, presentation materials for today's earnings conference can be accessed on the Company's website by clicking on the Investor Relations tab and choosing conference calls and webcasts on the left side of the screen.

Before we begin, let me remind you that statements made on this conference call and in the Company's press release, other than those concerning historical information, should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the Company's most recent annual report filed with the Securities & 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.

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

Thank you very much. Good morning, everybody. Thanks for joining us. We have a presentation on our 2009 results, and that presentation is available on the Web site. Before we walk you through that presentation, I would like to share some thoughts with you.

Our 2009 results were exceptionally good. This time last year there was a lot of uncertainty in the economy, we felt at the time that we had taken steps to strengthen our product offerings, and we built a margin of safety by reigning in spending and reducing our inventory risks where possible. Based on our 2009 results, I would say we weathered the storm quite well.

We're very fortunate to be competing in the young children's apparel market. We believe children's apparel is more resilient to other economic downturns than other apparel categories. It is a less discretionary purchase.

You and I may put off buying a new spring wardrobe, but if you are having a child, especially your first child, you'll be out shopping. And as your child grows, you'll need to shop for their clothing. And when you do shop, you'll see your Carter's and OshKosh brands well presented on the floor. Our brands define the young children's apparel category. We have a broad reach to consumers at all income levels. Our brands are sold in over 15,000 doors. According to recent NPD data, we own the largest share of the $23 billion young children's apparel market, and our share of that market grew from 11.7% to 12.5% in 2009.

Last year, we invested in consumer research to refresh our understanding of the consumer's perceptions about our brands. We asked over 1,600 consumers which brands they trusted most for quality and value in young children's apparel. They ranked Carter's number one in ages newborn to 7. OshKosh ranked number two or three for quality and value, depending on the age, up to a 10-year-old child. This perception has been established over multiple generations of families. There are many companies in the young children's apparel space, but few have the brand awareness and the emotional connection we've established with the consumer.

We have five key priorities for 2010. Our first priority is to further strengthen the value of our product offerings. Our brands have a well-earned reputation for value and quality, and we're working hard to earn that reputation every day.

Second, we plan to refresh our brand presentation at the floor where needed. We made good progress with the Carter's brand last year. Good initiatives are underway with our OshKosh and Just One Year brands that we'll share with you later this year.

Third, we want to extend the reach of our brands. We plan to connect with even more consumers by launching e-commerce capabilities this year. We have built a good database of loyal customers, and we plan to use that data to more effectively market to our consumers.

Our fourth priority is to improve OshKosh's performance. We significantly improved its profitability in 2009. We strengthened the OshKosh merchandising and design teams this past year and will begin to see the results of their work later this year. In the meantime, I'm happy to tell you that spring 2010 is off to a good start at OshKosh.

And fifth, we plan to improve our operating margin through better product performance, a higher mix of retail sales, lower mix of mass channel sales, better inventory management, and supply chain efficiencies. As the year evolves, we'll update you on the progress with each of the opportunities for improvement.

Given the strength of our brands, our trends in performance, and our broad reach to consumers, we're planning good growth for 2010. We currently expect sales to grow about 5%. Adjusted earnings should grow about 10%. We expect our growth in sales will be led by our retail segments. The consumer has responded very positively to our store formats, the scope and presentation of our product offerings, the clarity in price, and convenience of our store locations. We're planning high single-digit growth in sales for both retail segments.

In our Carter's wholesale segment, the largest and most profitable part of our business, we expect mid-single-digit growth in sales in 2010. Our Carter's brand is a traffic driver for the top retailers in the country, and we delivered very good performance for them in 2009. If you read their advertising in your Sunday newspaper, you'll often see our brands prominently displayed. Our wholesale customers target the young mom in their marketing, because they know she needs to be out shopping for her children on a regular basis.

In our mass channel, our performance at Target continues to be exceptionally good. We're expecting high single-digit growth with our Just One Year brand. In December we launched another brand at Target called Precious First. It's a beautifully packaged layette offering focused on the gift giver. I encourage you to visit Target to see it.

The outlook for our Child of Mine at Wal-Mart is less robust. As we discussed over the past year, Wal-Mart is testing alternative product offerings, featuring their entry level private-label brands. At Wal-Mart we're testing an expanded newborn infant apparel offering for spring 2010. It's beautifully done. It shipped 100% complete and on time to 50 Wal-Mart stores last week. Selling begins early March, and we'll be in a position to update you on how the product is performing on our next call in April.

For 2010, we expect the sales growth in our Just One Year brand will be offset by product scope reductions in Child of Mine. Mass channel sales are currently expected to be down about 3% this year. The forecast will be updated on our next call in April.

There's no shortage of opportunities to improve our performance. We're very fortunate to have the best-known brands in young children's apparel. The fundamentals of our business are strong. Children's apparel is a less discretionary purchase. We're the largest supplier of children's apparel to the largest retailers in the country. We have the largest share of the market. And our share of that market continues to improve. The demographics continue to be favorable. People are still having children and spending money on them. And we have the financial resources to invest in our growth initiatives to help deliver good returns for our shareholders.

At this time Richard and Jim will walk you through the presentation on the Web site, and we'll start with Richard.

Thanks, Mike. Good morning, everyone. On page 2 of this morning's presentation, we have some highlights regarding our fourth quarter performance. Overall we had a very good fourth quarter, and in general our results came in a bit better than we had projected on our last call about month ago. As I'll cover more in a minute, we had good gross margin and expense performance in the quarter, and an improvement in adjusted EPS of 30%.

Turning to page 3, consistent with what we shared with you last month, consolidated net sales for the fourth quarter were comparable with the year ago, in that we posted an increase of about 1%. There were two primary factors which drove the lower fourth quarter revenue growth rate as compared to the higher growth we experienced earlier in 2009.

First, 2008's fourth quarter included an extra week of retail sales. Adjusting for this extra week, revenues increased 4% in the quarter. Note that the comparable store sales metrics reflected on this page, 6.4% for Carter's and essentially flat for OshKosh, have been adjusted to reflect a comparable number of weeks in each period.

Second, in the Carter's wholesale channel sales were flat compared to a year ago, reflecting earlier demand for fall shipments, which fell in the third quarter this year.

For the full second half, sales in this channel were up 6%, which is consistent with the growth we achieved in the first half of 2009. We had a 7% decline in mass channel revenue in the fourth quarter. Sales of Just One Year at Target were up 4%, while Child of Mine sales were down 21%, reflecting the timing of shipments and the reduction of brand wall selling space, which resulted from the merchandising assortment changes made by Wal-Mart. I will provide a few more comments on the wholesale and mass businesses in a moment.

Our fourth quarter P&L is on page 4. Once again this quarter, very good performance throughout the P&L. We saw a nice increase in gross profit in the fourth quarter. In rate terms gross margin improved 250 basis points over a year ago. This performance was driven by a few factors. As has been the case throughout the past year, strong product performance led the way to improving the overall profitability of our sales, with improved margins in our wholesale and retail businesses under both brands. Margins also benefited from a higher mix of retail sales and lower mass channel sales.

At a high level, expenses were basically flat to last year, but down 30 basis points in rate terms. Royalty income increased 6%, driven by growth in OshKosh international royalties and growth in Carter's domestic licensing income as a result of expansion of the bedding and gear categories. Our interest cost continues to be lower than a year ago, reflecting lower market interest rates. From a bottom line perspective, our reported earnings per share were $0.56 versus $0.47 last year. Adjusted earnings per share in the fourth quarter were $0.61, an increase of 30%.

On page 5, we have additional detail on the increases and improvements in SG&A for the quarter. Overall we achieved 30 basis points of leverage on essentially flat top-line results. There are lots of puts and takes in SG&A, but one of the most significant increases versus last year includes higher-performance-based compensation expense. Unlike the previous quarters of the year, retail store expenses were not a big driver of increased SG&A, as we began to lap some of the store openings which occurred in the fourth quarter of last year. We saw good performance in distribution and freight costs, which declined year-on-year on flat revenues, due to the Barnesville distribution center closure, supply chain efficiencies and lower fuel costs. We have continued to control discretionary spending well across our other spending categories.

The next page is our usual housekeeping slide to reconcile from our reported or GAAP results to our as-adjusted basis of presentation. In the fourth quarter this year, as we previous discussed, we incurred approximately $6 million in professional fees associated with the investigation into customer margin support. We also had a small gain on the sale of our OshKosh, Wisconsin, facility that we had written down earlier this year. We had no adjusting items in the fourth quarter of last year. So, again, the adjusted EPS comparison for the fourth quarter is $0.61 per share this year, versus $0.47 in last year's fourth quarter.

Page 7 summarizes our business 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 operating income in nearly all of our business segments. The Carter's businesses grew $13 million, representing a 360 basis point improvement in its total operating margin led by improved profitability in both the Carter's retail and wholesale businesses, due largely to better product margins.

Despite the decline in revenue with Wal-Mart, mass channel operating income was up slightly in the quarter due to growth with Target, supply chain efficiencies and lower excess inventory costs. Consistent with what we saw in the third quarter, OshKosh wholesale and retail also delivered solid earnings improvement. Our consolidated operating margin improved substantially to 14.5% in the fourth quarter.

Turning to page 9, we have a few pages which summarize our full-year 2009 performance. It's worth highlighting a few aspects of what turned out to be a very successful year for us. We drove very solid top-line performance in 2009, with consolidated sales growth of 6% in a market where most of our peers struggled. This growth came from both our core Carter's wholesale business and our retail businesses, again, in a very tough environment. The profitability over all of our business improved considerably in the year. While we're pleased with this performance, it is worth noting the Company had not grown earnings in a couple of years, so in some respects we're making up some of the ground which had been lost.

For the year, our reported diluted EPS is $1.97, up 48% to last year, and on an adjusted basis diluted EPS was $2.15, an increase of 52% to last year. Our balance sheet is in great shape. Quality of our inventories is very good. And we ended the year with record levels of operating cash flow and cash on hand.

Page 10 recaps our full-year sales performance. Growth in 2009 sales was led by our Carter's brand in both the retail and wholesale channels. Full-year Carter's retail comps increased 6.4%, and Carter's wholesale finished the year up 7%. We also had very good growth of our Just One Year at Target, with an increase of 8%.

At OshKosh retail, as Jim will review with you in a minute, our focus has been on improving profitability, which we achieved in addition to driving a nearly 2% comp on a full-year basis. Sales of our Child of Mine brand at Wal-Mart were down 16% for the year. While disappointing, this result is better than what we had originally projected. I think it also speaks to the strength of our multi-channel model that we were able to drive a 6% increase in our top line while absorbing a more than $20 million decline in this one component of our business.

Our full year P&L is on the next page. Overall, very strong performance last year across the board. The increase in gross profit was nearly triple the growth we had in sales. In rate terms, gross margin increased 330 basis points over a year ago. This performance was driven by improved margins at retail, exceptional performance managing inventories, lower loss rates on off-price sales, and a higher mix of retail sales. The increase in SG&A was driven by retail store growth and increased performance-based compensation. In rate terms we had a 10 basis point decline in SG&A.

Royalty income increased 8%, led by the Carter's brand with the expanded categories I mentioned earlier, as well as higher OshKosh international royalties. Interest costs declined significantly to last year, reflecting the decline in market interest rates. Again, overall, adjusted earnings per share increase 52% to $2.15.

Page 12 reflects our full-year business segment performance, and I draw your attention to the bottom right-hand corner of this page. Our adjusted operating margin for the year was 13.4%, up 350 basis points. One of our five key areas of focus that we had established last year was to get back to a 12% operating margin by 2010. We have obviously exceeded this goal on an earlier time frame than we had originally envisioned, and as shown in the middle of the page, we had growth in operating income in virtually all of our segments, with meaningful growth in both Carter's and OshKosh.

Page 13 is included just for your reference. It includes the various adjustments to our reported results on a full-year basis.

On page 14. As I mentioned earlier, we ended the year with an exceptionally strong balance sheet and a cash position of $335 million. Inventories were up modestly year-over-year, largely reflecting inventory to support the first quarter sales growth and a greater number of retail stores versus a year ago. Qualify of our inventory at year-end was excellent. Very low levels of excess inventories on hand. 2009 was a record year for operating cash flow. Fully supporting our investment programs during the year, as well as leading to the significantly improved position in our overall liquidity.

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 15. As I mentioned earlier sales in the fourth quarter were flat due to the earlier demand for fall products in the third quarter. For the year we achieved sales growth of 7% in Carter's wholesale, which represented very strong performance in an overall difficult retail environment. I think this year's performance at wholesale reinforcements the strong regard for the Carter's brand on the part of our wholesale customers, and the enduring appeal that it holds with customers.

Second half sales in the Carter's wholesale segment increased 6%. Driving this performance has been continued good performance of our products. In addition to having the product designs, color, and quality that consumers find compelling, 2009 was also an important year of investment behind improving the way our products and brands are presented on our customer's sales floors. It's also important to note that fall 2008 was a very successful season for us at wholesale, with double-digit sales increases. So we had a challenging comparison to go up against, but we were able to successfully anniversary that strong performance this year. For 2010 our order file suggests mid-single-digit increases in net sales in both spring and fall.

Turning to the mass channel on page 16, we have already covered the specific performance metrics at Target and Wal-Mart for the quarter and the year, but to provide just a few more highlights. In the fourth quarter at Wal-Mart the overall decline in revenue was largely due to the timing of product shipments, which fell into January, 2010, versus December a year ago, as well as the ongoing effect of the reduction of the brand wall business.

As Mike mentioned, Wal-Mart is currently testing an expanded assortment of Child of Mine product in 50 stores. We'll know more about the results of this test later in the spring. Right now we're planning Child of Mine sales down for 2010 reflecting the reductions to the brand wall portion of the business that we mentioned previously.

Just One Year at Target increased 4% in the fourth quarter and 8% for the full year. Over-the-counter performance was very strong for fall, and initial spring 2010 selling is very encouraging. We feel very good about the momentum of our business at Target. For 2010, we'll be rolling out several new initiatives, including expanding 18- and 24-month sizes on the existing newborn fixtures, as well as the introduction of our new Precious First assortment, which is a great-looking gift-oriented layette line which we designed specifically for Target. We think these programs will driver nice future sales growth, and we'll update you on the progress of these initiatives as 2010 progresses.

On the next page is an example of a Target baby catalog, which will feature Precious First, so I invite you to take a look at that.

Moving to page 18 in OshKosh wholesale, sales increased 6% in the fourth quarter. Consistent with what we said on our last call, full-year sales were essentially flat to last year. For the entire fall season, over-the-counter sales were roughly flat with last year, and in general the boys assortment for fall performed better than girls. We achieved our primary objective for OshKosh wholesale this year, which was to improve the profitability of this business. We do need to continue to work on the consistency of the OshKosh product performance as a foundation for growing the top line of this segment going forward.

And with that I'll turn it over to Jim for some comments on the retail businesses.

Thanks, Richard. Good morning, everyone. Both Carter's and OshKosh retail stores had a strong year. Revenue and operating margin in both brands shared significant improved despite an otherwise difficult retail environment.

Carter's ended the year 16% in revenue and 45% in operating margin, while OshKosh increases 3% in revenue and over 100% in operating margin. Increases in sales and operating margin were driven throughout the year by effective execution of our merchandising strategies, inventory management and marketing initiatives.

Or confident in our retail model is strong. We have focused on our core competencies of our business, such as great product, great value, in-store execution, and successful communication with the consumer. As a result, we have gained market share and strengthened our retail business. As customers remain somewhat price sensitive, we have continued our emphasis on offering high-quality merchandise at a great value. We believe our in-store signage and collateral has provided a clear price message for our customers, while creating an inviting shopping experience.

Turning to page 19, as it relates to the Carter's brand. Carter's continued to outperform industry trends during the fourth quarter, achieving its 12th straight quarter of positive comparable store sales. Comp store sales were up 6% for both the quarter and the year. Again, earnings for the year were up 45%. Results were achieved through strong product performance across all major categories, as well as an increase in transactions in the number of units sold.

In particular, our boys and girls play clothes business had a great year, with double-digit revenue increases and substantial margin expansion in sizes 2T through size 7. The improvement in gross margin quality trends continued through the fourth quarter, reflecting our focus on opening price point programs, inventory management, and our allocation strategies. As we entered 2010, we believe our inventory is well positioned, and that we have the proper seasonal mix with average inventory up around 3% per door.

Initial results on spring product are good. We feel our design and merchandising teams continue to lead the industry in creative design, quality and value. On page 20, you will find a picture of Carter's spring floor set, which highlights the great product, the color and art, as well as the use of in-store signage and collateral.

Moving to the OshKosh brand on page 21, our focus has been and will continue to be on improving the profitability of this brand. The fourth quarter and annual results reflect continued improvement in this area. Operating margin for the fourth quarter increased 250 basis points in growth, and operating income was up 19%. The increase was driven by effective promotional strategies, improved inventory management, and a strong marketing message.

OshKosh comparable store sales were flat during the fourth quarter. As stated on a previous call, sales trends accelerated during the quarter, with December comps better than November. Overall performance in 2009 resulted in a year-end comparable store sales increase of 2% and over 100% increase in operating income. This is the second consecutive year of positive comps for this brand.

Inventory ended the year well positioned, down 10% with a better mix of in-season product. 2009 increased -- OshKosh increased in operating margin by $12.4 million over 2008. This progress establishes the brand as being meaningfully accretive to the retail model. With the onboarding of our new brand leader and design team, we feel confident that we will see continued improvement in the results of the OshKosh brand. Despite the challenging weather that has occurred recently, the OshKosh brand is off to a good start, with strong spring selling in both girls and boys compared to last year.

Before moving on to some closing thoughts, on page 22 is a picture of our OshKosh Paramus, New Jersey, store, which opened in November of 2009. It is located in the Bergen Town Center and is off to a great start. I encourage those of you located in this area to visit this new location.

As we move into 2010, our outlook is good. We are planning for low single-digit comps in both brands, with continued operating margin expansion. Building upon our successes in 2009, we plan to open roughly 25 new Carter's and 10 to 15 new OshKosh stores. The new stores we opened in 2009 for both brands outperformed our historical trends and pro forma expectations. Both brands realized strong first-year revenue and operating margin trends.

We will also continue to leverage our CRM database. About 80% of consumers who transact with us share their information so we can communicate with them on a continuous basis. Based on my experience, this capture rate is very high when compared to industry standards. The database we have of consumer's names has more than doubled in 2009. We will continue to focus on growing this database as well as improving the effectiveness of our marketing collateral to include catazines, postcards and emails.

During 2010 we expect to realize the benefits associated with the investments we have made in our planning and allocation systems. Benefits will include a reduction in markdowns, an increase in in-stocks, and increased inventory turns. We're encouraged by our progress and results, and our outlook for 2010 is good. Now I'll turn it back over to Richard.

Thanks, Jim. In terms of our outlook for 2010, on page 23, the macro environment continues to be highly uncertain. Most of the forecasts we've seen indicate unemployment will continue to be high over the next year even if economic activity begins to rebound a bit. Consumer confidence is also very volatile right now, so it continues to be difficult to project a business that we're likely to do in the coming year.

As Mike said earlier, our forecasts indicate top-line growth of approximately 5% for the year. We expect that that growth will be led by retail store sales, Carter's wholesale and Just One Year. Our forecast also incorporates the launch of our e-commerce initiative in the first half of the year. We're planning for continued gross margin expansion in 2010, although at lower pace than we achieved in 2009.

In terms of the bottom line, we expect diluted earnings per share growth of approximately 10%, compared to 2009's adjusted EPS result of $2.15. We're expecting that the first and second half will roughly approximate the same 5% top line and 10% bottom line growth that we are projecting for the full year. In terms of the first half specifically, we do see first quarter shaping up above 10% earnings growth and second quarter below this.

We expect CapEx for the year will be approximately $45 million, as we continue to fund new retail store growth, investments in fixturing and branding in our wholesale segments and in technology improvements. And with that I think we're ready to take your questions.

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (Operator instructions). And for our first question we go to Margaret Whitfield with Sterne Agee.

Good morning, and congratulations on the quarter.

Thanks, good morning.

Morning. And since you surpassed your operating margin goal for 2009, I wondered if you could give us your thoughts on where margins could get to in the forward period?

Well, it is better than we expected. We had set a goal for ourselves in 2009 to get back to our level of performance that we had achieved in 2006. We -- our operating margin was around 12.5% in 2006. We lost some ground to that over the past couple of years. 2007, 2008, we lost some ground, and it was less than 10% in 2008. So internally we set a goal for -- to get back to that level of performance by 2010, so we are better than we expected, and we're pleased with that.

We had very good execution across the board this past year. We had growth in every component of our business but for our Child of Mine brand. Going forward, we haven't set a limit on where we think we can be. The objective is to be better every year. We have an increasing mix of sales in our retail segment. We have a decreasing mix in mass channel sales, so that will assist with the margins. The focus is always on exceptional product performance. That's what we saw in 2009. I think that's the thing that drove most of the margin improvement, that together with inventory management. We're seeing some good supply-chain efficiencies. The objective every year is to make that operating margin better by at least 25 to 50 basis points, and I think we have opportunities to do that.

Okay. And for Jim, I wondered if you could comment on what you are going to be doing with e-commerce. When that might launch, and your marketing plans for 2010. And I didn't hear any comment as to how the first quarter had started out for Carter's in terms of same-store sales.

Why don't you take the (inaudible -- multiple speakers) portion, and I'll take the e-commerce.

I'll address the second part of that question, and leave the e-commerce piece to Mike, Margaret. As it relates to our marketing plans for this year, I'll hit on that one first. Our plans are to anniversary, everything we did last year from a mailing and email perspective. However, our focus is on improving the quality of the collateral, which we're quite pleased with, and the depth in our mailing. As I stated in the script, we have seen nice growth, very nice growth, in our CRM database in total this year versus last year. So now we have got an opportunity to kind of utilize the depth of the database and the improved quality of the database. So I think that speaks to that component of it.

As it relates to the Carter's piece, as I said we had a very strong fourth quarter last year. In fact if you look at the Carter's performance across the year, it was strong and consistent throughout the year, and we feel very good going into this year. January continued the momentum that we carried with us through the fourth quarter, and obviously February has been somewhat challenging with the weather. However, we're faring quite well, and we're off to a good start with our spring product. Our merchants and design team have done a spectacular job. If you just visit our stores, the product is outstanding, the color, et cetera, has been really wonderful. So we're in a good place.

Thank you.

Margaret, on your question on e-commerce, it's on track to launch in the first half of this year. The inventory is in place. It's ready to start shipping to consumers once we start getting the orders. It was interesting to us to see how strong the e-commerce business was for our customers, our wholesale customers, retailers in the young kids space. I'm sure you are familiar with that. I think this past market week, when I met with our customers -- I don't recall our customers ever talking as much as they talked about the importance of e-commerce to their business. So we're certainly on the right track.

We have lined ourselves up with some very good third-party service providers. We have looked at the Web content. It's beautifully done. All of the imagery attached to the Carter's and OshKosh brand, so we're excited about the launch. We'll have more to share with you in April. I think you know, it's -- out of the $23 billion young children's apparel market, e-commerce represents over $1 billion. And we have 12.5% share of the total market, so just, a benchmark. We would like to think at some point over the next five years or so, we could have at least 10% share of that e-commerce market. That would be $100 million in sales to us at some portion of a 10% operating margin. So it's a rich opportunity for us, and we're pretty excited about it.

Just one quick question for Richard then. I didn't hear any commentary on the outlook for SG&A. What are your thoughts, Richard, on where you might be in the key components that were in the handout?

Well, I think terms of overall SG&A markets there are a lot of puts and takes. We had some actions, as you know, on the productivity front a year ago that were more cost avoidance than pure elimination of cost, so we are planning for some higher compensation expenses this year. We will get a bit of a benefit in the sense that we're not going to plan performance-based compensation quite as high as the 2009 result that is coming out. On balance, we're planning overall SG&A roughly in line with sales for where the forecast is right now. We'd hoped to do a bit better than that.

Okay. Thank you.

For our next question we go to Scott Krasik with BB&T Capital Markets.

Hey, gentlemen, can you hear me?

Yes, sure can.

Okay. Good. You gave color around spring, Mike. How are your retailers now planning the children's category? Have they started to get more positive overall? And also, what can you tell us about the fall backlog prebookings, anything early on?

Sure. Fortunately the kids space generally has done better for them than most parts of their business, and we have delivered very good performance for them in 2009. So spring is up some portion of 5% or more. The selling has been good. We're starting to get good visibility on fall demand. We're expecting fall orders to be up some portion of 4% or 5%. So generally speaking business is good. Business is good.

At wholesale it was particularly good in 2009. We came off of a very good performance in the second half of '08. So that was going to be to us the bigger challenge in '09. How could we comp up against very strong performance in the second half of '08, which we did. And just a number of things we have done on product innovation, strengthening the product offering, making sure we're competitively priced relative to private label. We have delivered very good sell-throughs for our wholesale customers, so the outlook for that component of our business is good.

And just the comments from retailers over the last few months of the year, where they cited children's as actually being a weak category. You think that was more just because they didn't have the inventory? Versus sell-through?

Well, inventory has been the hot topic. As you know most companies, including Carter's, have run lean. And the view was we would rather run lean and miss a sale than run fat and be stuck with a lot of success inventory. But you heard some talk about that they didn't have enough clearance product on the floor, especially around the holidays. And that put some pressure on top-line sales. The consumer, particularly in kids space is looking for a deal, so I think most retailers felt as though they didn't have enough clearance. That's always a balance to be managed. But I can't speak to their other components of their kid's space. All I can speak to is ours, and our performance for them has been particularly good.

No, that's helpful. Jim, tremendous job again, especially getting pricing relatively flat with all the introduction of new opening price point product. What is your feeling about pricing in 2010? Are you going to push opening price point product further? Can you get -- is pricing now going to anniversary and start to go up again?

I don't think anybody is looking to take prices up, Scott. I do believe that we have found a good sweet spot from what percentage of our overall assortment we support with our opening price point vehicles. So I would expect to see pricing comparable, out the door pricing per unit comparable with what we saw in 2009.

At least in terms of your percentage of opening price point product, is that going to continue to increase? Or that's --

No, we think we have found a good sweet spot with it. So, no, I don't expect for it to increase over and above where it is. We feel very good with the mix right now.

Good. And I think this is the first time you said 10 to 15 stores for OshKosh. In the past it had been 10. Is that because you are feeling better about the concept and the productivity? And could that even accelerate further at some point in the next few quarters?

I don't see the number accelerating for OshKosh this year. I speak to 10 to 15 because we feel comfortable with that, and also because we need to get that in the pipeline, and we have already clearly been working on that. But the OshKosh brand -- our focus has been on profitability, and we have seen dramatic improvements. And we're relatively saturated in the outlet arena. And our growth vehicle, and the beauty of that brand is as we see the performance from an operating income perspective improve, it opens up the opportunities for real estate for us.

So our plan is to get it out there, align it in centers where we know we're productive, because we do have that path already cut with the Carter's model. And to further prove the runway in front of us for increased store expansion. So this year is going to be very much about driving that OshKosh model, figuring it out in totality. We're very excited with our new brand leader on board, and the design team in New York. The difference in the quality of talent, and the processes and disciplines that exist in that office are wonderful. And it's time to push forward a little bit.

Okay. Good. And then, Richard, any -- is there any prepayment penalties on the debt? And is that something that you would consider paying early if you can, given probably the negative carrier, and nothing on the cash now?

We are able to prepay the debt, Scott, should we choose to do so. And this is a topic we're spending a good deal of time on. The alternatives for the cash are largely what you would expect. It's investing behind the business first and foremost, which we think we're pretty fully supporting right now. Debt paydown and share repurchase are also alternatives, and I think we're strike the appropriate balance among all of those activities. But it's not our intention to have excess cash building indefinitely on the balance sheet.

Okay. Well, great job, guys, and talk to you soon. Thanks.

(Operator instructions). We go next to Susan Sansbury with Miller Tabak.

Hi, yes, thanks. Wonderful year.

Thank you.

A few analyst-type questions. First for Richard. In your 2010 forecast, can you share with us what you assumed for incremental audit or legal fees? And can you share with us whether you expect your launch of e-commerce will be unprofitable or profitable for the year? And then I have one for Mike.

Okay. Sure. On the professional fee front, the audit fees that we're anticipating for 2010 will not be meaningfully different than 2009. Legal fees, we have baked in a modest uptick to our normal run rate on legal fees, and if for some reason that turns out to be more significant than what we are planning, that would be something that we would discretely break out and share with you all.

E-commerce, we're not planning on that being material one way or another in terms of the bottom line. I'd say right now it is modestly dilutive, but based on a relatively modest volume estimate for the year.

Okay. Great. Mike, in terms of the competitive environment, Gap has revitalized, or spent a lot of work trying to revitalize Gap Baby, Gap Kids. Any comments? Or is it too early to gauge what impact they may or may not have? Also your shop-in-shop performance has been excellent. How many more do we have left for 2010?

The -- in terms of Baby Gap, they have been consistently good over the years in my opinion. Even when Gap had its issues, I think Baby Gap was doing a very nice job presenting their brand. So we're always mindful of where the competition is. Over the years we have had a lot of people come into this space. Some are hot and cold, some are more consistent performers like Baby Gap. That's a higher ticket -- much higher ticket brand than we are.

Right.

So we focus on mainstream pricing, the big volume, reaching more consumers, and I think we have done an effective job over that, despite the fact that a lot of people have come into this space. So we feel good about the path we're on. Very good about it. I think we were able to demonstrate in 2009, in a miserable consumer environment, the strength of our brands. Even though we had some challenges, significant challenges last year, we delivered very solid performance for our shareholders. In terms of the number of shops, how many more? Is that your question?

Yes.

Susan, we implemented about 1,000 shops over the course of 2009, which brought the total to about 1,500. In 2010 I would say we're probably going to take a more targeted approach, with some fixturing and branding investments across our wholesale doors, probably touching another 1,500 doors or so. But less of the full-blown shops and more of targeted investments here and there, which will allow us to touch more doors than if we were concentrating on the full-shop concept.

Okay. Mike, going back, there is an opinion developing on the street that value is -- will give way to moving up distribution channels. Back to the mall, back to the department store or what not. Are you or Jim or is anybody seeing any change in trading up or trading down?

I think value is going to be important for the foreseeable future. Again, we have always been known for very good value. That's what the research confirmed for us last year. Again, it may -- that may have some impact on adult apparel, but as it relates to kids, value is always important. Because you have to buy so many garments for a young child. I don't see that at least in the kids space things are going to be going higher end.

And if people are going back to the malls, that's good, because we're doing business with retailers who are in the mall. That's the beauty of our business. We have got the market covered. So I was actually surprised when I asked, how many doors are we in? And if you take all of our customers combined, it's over 15,000 doors. We have broad reach at multiple levels. Wherever you are shopping for a young child, you are going to see our brands well presented on the floor. So, wherever they're shopping, we'll capture them.

Okay. That's great. Thanks ever so much. Keep up the good work. I'm sure you will.

Thanks.

And we go next to Gerrick Johnson with BMO Capital Markets.

Thank you, good morning. I had two questions. First, on royalty income, that line has been growing faster than sales. Can you talk more in detail about your outlook for that line? I know you had some programs there on the bedding side. Can you continue to drive that faster than sales?

And then second question, correct me if I'm wrong, but in January you gave fourth quarter guidance of $0.56, excluding items, and you report $0.61. So what changed in the last month that give you that extra nickel?

Well, Gerrick, in terms of where the earnings came out, recall we were on January 15th. That's extraordinarily early in the fourth quarter close process. There's a lot that happens as we move through the year-end normal kind of close-the-books process, so valuing the inventories, determining where accommodations come out for the year and so forth. So that was our best guess at the time. Revenue came in largely where we had expected, and then below that our ending performance on gross margin and expenses primarily were better than we had anticipated.

Okay. In regard to that, was there any benefit from booking appropriate accruals for retail support in the quarter, compared to how they were being booked in the last few quarters?

I would say overall accommodations were relatively consistent year-over-year. Particularly on the Carter's side. They were a bit more favorable on the OshKosh side as we finished the year.

Okay.

On your question on licensed products, if you look, we have a long history of growing royalty income at a rate faster than top line. And a lot of success last year extending the scope of our brands to things like the nursery furniture. Babies "R" Us got behind our crib business and some other nursery furniture in a big way. We'll have some success in 2010 gaining some space with some of our customers, and things they used to do with others, more gift-oriented items.

We're not planning the royalty business up much higher than top line this year. Some of the things we used to do, like underwear, were we licensed our underwear, we have brought that in-house. We're not doing that through a licensee, so what we don't get in the royalties, we'll pick up that, and then hopefully some more in temples of profitability by bringing some of those previously licensed products in-house. And that's actually a nice opportunity going forward. As we do that, we'll share more with you. But the royalty business, the licensing business has been particularly good for us.

Okay. Great. Thank you very much.

You're welcome.

We go next to Jim Chartier with Monness, Crespi, and Hardt.

Good morning. First question, you mentioned Precious First, but also some additional initiatives at Target. Could you share what some of those other initiatives are?

In general, Jim, we're looking to expand some of the bigger-size sleepwear and playwear products across what has been typically more of a newborn-oriented business. That, in addition to Precious First, is driving the incremental growth for us.

And we have had some success this past year, extending -- improving the productivity of some fixtures that used to go up to only 12 months, up to 18 and 24 months.

Great. And then on Wal-Mart, could you talk about how the hanging apparel performed in 2009, and what risk you see to that business going away in the medium or near term?

Yes, there's two parts of the business. The brand wall, which has been under pressure, and then hanging. Just in round numbers we do about $15 million on the brand wall and another $100 million or so on the hanging products. The brand wall is the area that is at risk. And we have got -- we went from about 8 feet of apparel down to about 2.5 feet. The 2.5 feet that we have is actually doing quite well, and actually doing better than planned.

Hanging programs generally have been good. Just one example of that, the blanket sleepers, which is a key item for us. We will double the unit volume on blanket sleepers for fall 2010. So generally speaking, hanging has been good. Brand wall has been tough, because Wal-Mart has been testing some alternative components on the brand wall. We have been supporting them with that effort. We shipped to 50 doors last week a beautiful collection of every-day essentials priced from $6 to $8, and we'll start to see some selling on that beginning next week. And we'll have more to share about that when we have our next call in April.

Great. And then for Jim, could you talk about the remodeling program for OshKosh? How many stores you have touched so far, what the performance was, and what the outlook is for 2010?

Sure. I'll give you what I can, Jim. It's still early, so the quantity of stores is -- for 2009 we remodeled 15 stores in to our new prototype, which is what we call our Locus Grove prototype. And the Locus Grove prototype ended the year with mid-teen digit comp increase, so the performance continued very well on the Locus Grove store in particular. We also -- any new stores that we open we'll be opening and have opened in that look, and the feedback from customers and staff has been extremely positive. I think it is a much better showcase for the brand.

As relates to the 15 remodels, we remodeled them very late in the year, went in to holiday and then in to the first quarter of this year, and obviously ran into some of the weather issues. So it's a little bit early to comment on how they performed over all. I think we're happy with them. They are meeting expectations, but I'll hold off on commenting statistically how they are performing.

As it relates to what we need them to perform at, what we have done is an engineered remodel from a cost-effectiveness perspective. So it's a relatively modest investment, and we look to a roughly 6% comp over trend on a 2-year basis, and we're receiving payback on that type of a sales performance. And we'll just update you in the future as we continue to look at the results. We do have 20 -- slightly north of 20 remodel stores planned for later this year, and we'll keep you posted.

Great. And then the OshKosh new-store openings planned for 2010, are those primarily going to be brand stores, or are there any outlets in there?

There are three outlets in that number, and the balance of them will be brand stores.

And for your customer database, are you seeing any differences between the Carter's and OshKosh stores in terms of the people -- percentage of people willing to give up their information or the size of those databases?

No, and both of our businesses are performing pretty consistently in that roughly 80% -- slightly above 80% achievable rate in getting the customer data.

Okay. And then finally, Richard, the CapEx guidance you gave for the year, aside from new-store openings, and remodels, are there any other major investments in there?

The continued investment behind fixturing and branding in wholesale would be the next biggest category.

And then any systems upgrades or anything along those lines?

Well, we have continued to invest behind technology. As Jim as mentioned, the planning and allocation system, we have some continued spend against that. And the some ongoing investments behind distributions, and distribution centers and supply chain to improve our efficiency there.

Maintenance related.

Correct.

Great. Thanks a lot.

We go next to Margaret Whitfield with Sterne Agee.

Just one question for Jim. Last call you talked about some issues for OshKosh on the girls side. Not having, I think, was it plaids and skinny jeans? I wondered if you can give us an update on where your new brand and design people headed and when they can start to improve or influence the line in 2010 or '11?

Sure. Sure. Yes, we definitely had missed some trends in '09 in general, and in Q4. As we have gone into Q1, we're actually seeing -- and those misses, by the way, were predominantly in the girls side of the business. As we move into Q1 of this year, we're seeing some nice results, some positive results from a comp-store basis in our girls business.

So while that has not been impacted by the new design team, we invested a great deal of time and attention with some hands-on work with the Soho group this last year. My retail GMM spent a lot of time there, and obviously we improved things from a process perspective throughout this past year, and as a result we're seeing the benefits of them. The colors are much more on trend, and the girls fashion offerings -- and I don't mean fashion from a high-fashion perspective, but the relevance to the customer's desires are much more what the trends are calling for. So we're seeing progress now, and we'll see more progress late in this year.

The current design team really went after improving the process discipline and really validating that we have got the right offerings, in both the boys and particularly the girls side of the business, immediately. I have never seen anything take effect as quickly as I have seen this unfold, and there will be some slight improvements based on their work made in the back half of this year. And then we're very excited about spring of '11. We have already been through some of the creative processes, and it's very nice to see the brand evolve the way it is evolving. So I hope that gives you question, but we're seeing improvements now based on the work that was done this past year.

Okay. Thank you very much.

We go next to Omar Saad with Credit Suisse.

Thanks, good morning.

Good morning.

Two questions. First, I wanted to ask your updated views on the birthrates. There's this theory that people stopped having kids as much during a recession? And have you guys seen that in your business? And if you have, do you see a rebound coming as we come out of this recession? And then I have a follow-up question as well.

Sure. In terms of the birthrate I think you know in 2007, there were more children born in 2007 than any other year on record. So that's a nice pipeline of customers for us for the next five or six years or so. I think it's logical to assume that the birthrate will be off in 2009, given the economy. The most recent data I have seen is that they were assuming the number of births would be 2% lower in 2008. In different parts of the country -- I understand Florida is higher than that. But that's the most current information I have. And that doesn't concern me. We'll have to be 2% better someplace else. So we'll see.

I will tell you over the years, the number of births have been somewhere around 4 million a year plus or minus. I don't think we have ever entered that into our -- I don't think we're sharp enough to understand how is that overall going to be able to affect our business. We just focus on great product. So whatever children are being born, we're reaching them. And we have 12.5% of the market. There's plenty of opportunity to grow from there. So in a word, not concerned. Something to be aware of, to keep an eye on, but it's not something that we worry much about.

Okay. All right. Cool. Thanks that's helpful. And one follow-up. Obviously the business performed incredibly well. Very defensive during the downturn. How are you thinking about the strategy for the Company coming out of this as we get to the other side of this cyclical downturn that we have gone through? Strategies for growth, international, new stores, big picture? How do you want to position this Company for a more economic expansion area environment?

Well, I think there's plenty of room for growth. The growth will be lead by our retail segments. We have about 100 Carter's stores outside the outlet arena. We're the dominant player in the outlet centers. We have the number one and two brands there. To Jim's point, we're not envisioning that there's going to be a whole lot of growth in the outlets, but I think we have successfully extended that same-store model outside of that outlet arena, closer to the consumer in these strip-center locations.

We have 100 of those. By comparison to some other retailers in the kids space, we have a fraction of the stores that are possible. We don't plan to have 1,000 Carter's retail stores. That's not our plan at all. but there's plenty of room for growth to grow our retail segments by at least 10% a year for the foreseeable future, and -- so that's -- we've presented our plan to our Board. That takes us out for the next five years or so. And it will lean forward out of retail, but with that said, we don't -- we will still have some balance of about -- grow to some portion of 60%. Retail closer to, say, 30%. Wholesale, which will continue to be important to us.

We're doing business with the largest retailers in the country. Our brands are important to them. They are important to us. And the mass channel just is today about 15% of what we do for a living. It will probably be over -- grow closer to 10%, which actually will help us from a profitability standpoint.

So plenty of room for growth. People are still having children. This e-commerce opportunity we're excited about. It is a -- some things you are fortunate that you waited, because we waited. Now we have learned a lot, the model has been proven, and I think we're taking a step in the direction that we need to.

International is a component of what we do today, and we earned some portion of about, I guess $15 million or $16 million last year from international activities, largely related to OshKosh, but increasingly we're piggybacking Carter's onto existing relationships. I think that gives us some growth over time, and as we start to have some success there, we'll share it with you. We're very fortunate, I think we can do a lot with these brands, the brands that are top of mind with the consumer.

I have been with the Company nearly 20 years. I don't think there was any one year that we said growth was certain, yet you can see the type of growth that we have been able to deliver over a very extended period of time, despite the fact you have had a lot of people come into this space. So, we're pretty excited about what we have ahead of us.

Thanks, Mike, Richard. Good luck.

Thank you very much.

We go next to Scott Krasik, BB&T Capital Markets.

Yes, thanks. Jim, if you said it, I missed it, but you usually give some quarter-to-date update on how the comps are trending?

We actually don't give much quarter-to-date information. I will tell you this, though. We had good momentum in -- very strong momentum in the Carter's brand coming out of Q4, Scott, and the momentum continued very strong in January. And the same held true for the OshKosh brand. So we came into 2010 from a comp-store perspective in a very good place. Definitely meeting expectations. And things got a little tougher in February with the weather. That being said, we're confident in meeting our expectations on the quarter. For both of our brands March is the most important month of the quarter, meaning that it's 50% to 55% of the volume that we do in both of these brands is done in the month of March. And with Easter being slightly earlier this year, with a much more powerful direct-mail strategy, we feel as though we're going to wrap up the quarter in a good place.

Good. Good. Okay. Thanks, guys.

And ladies and gentlemen, this does conclude the question-and-answer period of our conference. I would now like to turn the conference back over to Mr. Casey for any closing remarks.

Okay, thank you very much. Thank you all for joining us this morning. We look forward to updating you again with our first quarter performance in April. Bye-bye.

And again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation.