Carter's Inc (CRI) 2010 Q1 法說會逐字稿

Ladies and gentlemen, please stand by. We are about to begin. Good day everyone and welcome top Carter's, Inc. Welcome to Carter's first quarter 2010 earnings conference call. On the call today are Mike Casey, Chief Executive Officer, Richard Westenberger, Executive Vice President and Chief Financial Officer and Jim Petty, President of Retail Stores. After today's prepared remarks, we'll take questions as time allows.

Carter's issued its first quarter earnings press release today before the market opened. The text of the release appeared at Carter's, Inc. website at www.carters.com under the Press Release section. Additionally, presentation materials for today's earning conference can be accessed on the Company's website by clicking on the Investor Relations tab and choosing the conference calls and webcasts on the left side of the screen. Before we begin, let me remind you that statements made on this conference call and in the Company's press release other than those concerning historical information should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the Company's most recent annual report filed with the Securities and Exchange Commission. Also on this call, the Company will reference various non-GAAP financial measurements. A reconciliation of these nonGAAP financials measurements to the GAAP financials 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. Thank for joining us. We've prepared an update on our first quarter results that's available on our website. Before we walk you through that presentation, I'd like to share some thoughts with you. We're off to a great start this year. We had strength in product performance across the board building on the sales momentum we saw in 2009. Similar to what we experienced last year, our wholesale and mass channel customers are lean on inventories, and the strong sell through of our products triggered earlier than planned demand. In addition to strong product performance, the overall quality of our business continued to improve. Our inventories are in great shape and our margins are better.

With respect to first quarter growth, it's important to know that we believe about half of the growth in sales reflect earlier than planned demand in the timing of the Easter holiday. You shouldn't expect our first quarter growth rates to continue for the balance of the year. With that said we're now forecasting higher growth for the first half and the year. Richard will review our latest projections with you this morning.

We're forecasting growth in every segment of our business this year, including the mass channel, despite the space reduction at Wal-Mart. Our business with Target has been very good, and is now expected to offset the decline in sales at Wal-Mart. This spring Wal-Mart gave our Child of Mine Brand more space in 50 stores to compare our productivity to other brands. That test is now completed and Wal-Mart is evaluating the results.

We out performed our expectations for productivity on the expanded space and Wal-Mart indicated that they were also very pleased with our performance. We expect to hear soon whether we'll regain some of the space lost on that frame of wall.

As a reminder we have five key priorities for 2010. Our first priority is to lead the market in product value. Value matters especially in this economy, and our brands have a well earned reputation for great value. Second, we continue to strengthen our brand presentation. Presentation also matters. Our brands have very high consumer awareness, and we want to look sharp on the floor wherever mom is shopping. We made good progress improving Carter's brand presentation last year. And given our progress with Oshkosh our customers are now beginning to support our efforts to improve the presentation of Oshkosh in their stores. Third, we're focused on extending the reach of our brands. Given the trends in our retail store performance, we plan to increase our store openings for 2010 and 2011. Jim will review those plans with you this morning.

Over the past few years, we've strengthened our database of customers. Last year we launched a very successful direct marketing initiative and we're building on that initiative this year. We're now reaching more consumers with the launch of our Carters and OshKosh B'Gosh websites which went live five weeks ago. We've shipped about $1 million in e-commerce orders to date. That's better than we had planned. Just as a reminder, NPD, estimates that the e-commerce market for sizes newborn to seven to be about $1 billion. We hope to achieve at least 10% shares of that segment of the market or $100 million given our 12.5% share of the total $23 billion young children's apparel market. It will certainly take time to ramp up to that level of sales but our early results are very encouraging.

Our fourth priority is to strengthen Oshkosh's performance. In 2009, we improve the operating margin from 4% to over 9%, doubling the annual earnings contribution from $14 million to over $30 million. First quarter earnings have improved significantly over the first quarter of 2009. For 2010, we expect the operating margin to be over 10%. Longer term say within five years, we expect Oshkosh sales to be about $500 million, and the operating margin to be at least 12%. or operating income of $60 million double the contribution in 2009.

Earlier this year, we invested in new leadership over the merchandising and design teams for Oshkosh which we expect will help build on the progress we're currently making. And our fifth priority is to improve profitability through better product performance, a higher mix of retail sales, better inventory management, and supply chain efficiencies. As the year evolves we'll update you on our progress with each of our business priorities.

In summary, we're off to a great start and we're projecting good growth in sales and earnings this year much better than we had previously expected. We are a market leader in young children's apparel and our brands continue to out perform general market trends. Our brands are sold in over 15,000 doors throughout the country, in international markets and now through our own e-commerce websites. We feel well positioned for growth, with two of the best known brands in young children's apparel and with a broader reach to consumers than any other company in our business. At this time, Richard and Jim will walk you through the presentation on our website, and we'll start with Richard.

Thanks Mike, good morning, everyone. On page two of this morning's presentation we have some overall highlights of our first quarter performance. As Mike mentioned we're very pleased that we are off to such a strong start to the year. We had planned for a reasonably strong first quarter but these results have exceeded our expectations. The underlying momentum of the business in the first quarter was very strong. We had very good gross margin and expense performance in the quarter and posted a substantial improvement in profitability.

Turning to page three in our overall revenue performance for the quarter, we have sales growth in nearly all of our segments most notably in our Carter's brands which represented about 80% of first quarter sales. Carter's wholesale sales increased $24 million or 20% driven largely by improved product performance and customer demand which came earlier than last year and earlier in the year than we had planned. Sell throughs of spring product at our top wholesale customers have been very strong. Carter's retail stores increased $16 million driven by an 8% comp store sale increase, new door growth and the earlier Easter holiday. This performance built on the 5% comp increase achieved last year.

Oshkosh retail comps increased 3.5% on top of an 11% comp increase a year ago. Mass channel sales grew 15%, driven by increased sales with Target which were up 25%. Sales of our Child of Mine Brand increased 8% and were driven by favorable timing of shipments resulting from earlier demand. Child of Mine sales for the first half of 2010 are expected to be down approximately 20%, due entirely to the reduction of selling space which we have discussed previously.

Overall, consolidated net sales for the first quarter increased 15%, compared to last year. I'll provide a few more comments on the wholesale and mass businesses in a minute.

Our first quarter P&L is on page four. Overall, very strong performance in the quarter throughout the P&L. As I mentioned, we saw substantial increase in gross profit in the first quarter. In rate terms, gross margin improved 500 basis points over a year ago driven by improved product margins in all of our segments, lower levels of wholesale order cancellations and better inventory management. At a high level, expenses increased 6% to last year, but were down about 210 basis points in rate terms, due to leveraging the strong sales growth in the quarter, and overall good control over spending. Royalty income increased 10% in the quarter driven by Carter's domestic licensing income, as a result of growth in the bedding, gear and shoe categories. Oshkosh domestic royalties also increased as a result of growth in shoes and swimwear.

Our interest cost continue to be lower than a year ago reflecting lower market interest rates. From the bottom line perspective, our earnings per share more than doubled to $0.71 from $0.28 a year ago. And on an adjusted basis, earning per share increased nearly 90%.

Page five is a recap of our SG&A. Overall, SG&A was up about $6 million versus a year ago or 6%. Higher retail store expenses associated with new door growth and cost related to our e-commerce business drove the majority of this increase. The quarter also included higher performance based compensation expense driven by our improved profitability. We've continued to control discretionary spending well across our other spending categories.

The next page is included for your reference. We had no adjusting items in the first quarter of this year. Last year's first quarter included about $9 million in charges related to our corporate workforce reduction and facility closures. So again I'll draw your attention to the adjusted EPS comparison for the quarter, which is $0.71 per share this year, versus $0.38 in last year's first quarter.

Page seven summarizes our business segment performance for the first quarter. Given the strong revenue performance in the quarter, particularly in the Carter's wholesale and retail businesses, and the strong gross margin performance across the Company, overall profitability and operating margins were up significantly. The profitability of our Carter's businesses including the mass channel increased $31 million representing a 690 basis point improvement in total operating margin for the brand lead by improved profitability in both the Carter's wholesale and retail businesses.

Mass channel operating income was up in the quarter due to the sales growth with both Target and Wal-Mart. Again, the Wal-Mart increase was due to earlier than planned shipments. Also contributing were improved product margins and expense leverage resulting from the strong sales increase in the quarter.

Building on last year's progress, Oshkosh wholesale and retail also delivered solid earnings improvement, increasing operating income by nearly $5 million. The 580 basis point improvement in operating margin was lead by improved product margins at retail and lower levels of excess inventory and lower off price sales in the wholesale channel. Our consolidated operating margin improved substantially to 17.4%.

Turning to page eight. Our balance sheet continues to be in great shape. We ended the quarter with $366 million in cash. Despite the improvement in net income year over year, operating cash flow of $23 million was down to last year, due to higher working capital requirements. This was largely a result of higher accounts receivable balances due to the higher shipments in the wholesale toward the end of the quarter as compared to last year. Inventories were down year over year largely reflecting timing and inventory utilized to support the higher than expected first quarter 2010 sales growth. The quality of our inventory at this end of the first quarter continues to be outstanding. We continue to make progress and evaluating the various alternatives for our cash balance and for our capital structure overall. As we reach conclusions on these issues, we'll provide you with an update.

Turning now to a few more details on the wholesale and mass channel businesses. First in our Carter's wholesale business which is summarized on page nine. As I mentioned earlier, sales in the first quarter increased 20%, due to a number of factors. Product performance continue to be quite strong as indicated by solid consumer demand and over the counter performance, which lead to the earlier than planned demand that we cited. We also had increased replenishment activity, lower levels of order cancellations and lower off price sales. Spring season to date demand for our products in our top accounts has been very strong, up nearly 20%, with all categories running double digit increases.

In Q2 of this year we're enhancing and expanding our very successful Carter's Starters Newborn Essentials program, which will will be re-branded as Carter's Little Layette. We're excited about the potential of this product initiative. Our objective is to reinforcement Carters as the destination for newborn essentials.

We believe we've improved the esthetics of these products overall, and in expanding the assortment we've included updated styling and a broader color pallet. New products in the assortment include new multi-pack sets and gift oriented item. We also believe we've elevated the brand presentation through improved packaging which includes new hang tags, ribbons and mesh bags. We're also investing in additional fixtures for Little Layette which we plan to deploy to over 1,000 doors. For the first half we expect net sales in the Carter's wholesale business to be up about 10%. We have good visibility now to our fall and holiday order file, which indicates mid to high single digit increases in net sales for the second half of the year which is a bit better than what we had previously estimated.

The next couple of pages includes some photos of our wholesale product presentation, including the Little Layette fixturing and branding on page ten. Page 11 is an example of our Mix, Match and Play product. All of the product visible here is Carters. And I think this photo gives you a good sense of how dominant our assortment can look at wholesale.

Turning to the mass channel on page 12. In general over-the-counter performance has been very strong across both brands and as a result our outlook for the mass channel for 2010 has improved somewhat relative to our last call. At Target the Joy brand continues to out perform plan across the newborn, infant and toddler product categories. As we said on our previously call, we recently launch a new brand, Precious First, which is a new gift oriented layout assortment that we developed specifically for Target. The initial performance for these products has exceeded our expectations. The gross outlook for the year with Target remains very positive and should be driven by increased productivity of existing programs and adding new products such as 18 and 24-month sizes to the newborn fixtures and the introduction of Precious First.

At Wal-Mart over-the-counter performance has been very strong for spring as well which generated earlier demand for goods that we had originally planned would ship in the second quarter. For the year, we're forecasting the Wal-Mart business to be down about 15% due to the loss of space on the brand wall that began in the second quarter of last year. As Mike mentioned, we believe the performance of the expanded Child of Mine brand wall assortment in the 50 test stores was quite good. We're continuing our dialog with Wal-Mart and they're continuing to evaluate the results of test. We would hope to have more to share on the outlook on this portion of business on our next call. For the mass channel in total, we now anticipate net sales for the year to be flat to slightly positive.

Moving to page 13 in Oshkosh wholesale. Sales decreased 5% in the first quarter, due mostly to lower sales in the off price channel. We've seen some very positive over-the-counter performance, particularly in boys, but also in infant and toddler girl in the spring assortment. As noted on the business segment performance page, we continue to make good progress in improving the profitability of Oshkosh wholesale. We're planning sales in this channel to be flat for the year.

Our next good data point will be spring 2011 orders, which we should have some visibility to on our next earnings call. Our hope is begin to see some acceleration of top line in the Oshkosh wholesale segment. building on the improved consistency and performance of the spring 2010 assortment. Importantly some of our larger wholesale customers have begun to upgrade the presentation of the OshKosh brand on their sales floors. Page 14 is a photo of a back wall presentation of Oshkosh in a BaunTaun store and we think it looks terrific. And with that I'll turn it over to Jim with some comments on our retail business.

Thanks Richard, good morning, everyone. Both Carter's and OshKosh retails stores had a great first quarter, with significant increases in revenue and operating margin over last year. Building upon our performance in 2009, we continue to win with our strategy as a high velocity promotional specialty store retailer. Our strategy for success starts with two of the most trusted and recognized brands in the Children's apparel business. We lead with great product that is well merchandised and supported by a compelling marketing message. In addition, we enter 2010 with three key initiatives. They are to drive traffic through effective communication with our customers, increase store productivity, and new store growth. We believe these initiatives will deliver success in 2010 and provide a strong foundation for the future. I'll speak about our initiatives in more detail in a minute but first I'll discuss the first quarter performance as it relates to the Carter's Brand.

Turning to page 15. Carter's total sales were up nearly 16% with an increase in operating income of 58%. The strength and consistency of Carter's performance is highlighted by Q1 comparable store sales of 8% on a positive 5% comp from last year and 13 straight quarters of positive comps. These results were achieved through strong product performance across all categories as well as an increase in all our key performance indicators. Revenue growth was accompanied by gross margin expansion in all major categories.

A few highlights from the assortment are as follows. First, we saw strong sales in our Sleep and Play, which is a key item in our zero to nine-month core business. We had strong increases in body suits due to their appeal in our gift giving business. Also, girls dresses and our new boys mix and match program in the play clothes business performed well above our expectations. As it pertains to our marketing initiatives during the first quarter, our active CRM database continued to grow, doubling over the prior year. This has been accomplished through our now POS system and better field execution.

Our improved database contributed to a very successful catazine campaign during the first quarter resulting in strong response rates. Our new store expansion initiative is underway with five new stores open in the first quarter. Finally as a result of our improved inventory management and allocation strategies, we believe our inventory is in a good position with the appropriate seasonal mix. Average inventory ended the quarter down about 5% per door.

Moving to the Oshkosh Brand on page 16. Total sales were up 6%, with a comparable store sales increase of 4% on a positive 11% comp in the first quarter of last year. As indicated on previous calls, our focus continues to be on improving the profitability of this brand.

Our operating income went from a slight loss in first quarter of 2009 to earnings of over $2 million in Q1 of 2010. First quarter business improved due to a better product assortment driven in part by our girls business, which included much better fashion and color. Successful items included woven dresses, tank tops, skirts and opening price point fashion T's. Other areas that exceed our expectations were our spring layette mix and match programs and the boys active polo assortments.

As with Carter's, CRM continues to be a major focus, the Oshkosh catazine results also experienced strong redemption rates and positive customer feedback.

During first quarter of 2010, we opened two new Oshkosh stores. The effective management of our inventory contributed to first quarter margin growth and full price sell through. Average inventory ended the quarter well positioned down 8%, with a better mix of end season product.

As we move into the second quarter, our outlook is good. However, due to the timing of the Easter holiday as compared to last year and the timing of spring breaks, it is important to look at the business on a first half basis. As we expected, April traffic has slowed and due to the above mentioned shifts. And we are projecting second quarter comparable store sales to be in the low single digit range. As I mentioned earlier, the retail team will continue to focus on our key initiatives that I will now take you through in more detail.

We plan to continue to drive customer traffic and increasing the conversion rate in our stores through effective marketing collateral and communication with our consumers. While still in the early stages, we're encouraged with the fact that roughly 60% of e-commerce customers are new to our CRM data base, giving us an additional resource to increase the size and quality of our database. I'll speak to e-commerce in more, in just a moment.

During the first quarter, our coupon redemption increased over last year, highlighting the effectiveness of our direct mail strategies. A picture of our latest catazine can be seen on pages 17 and 18.

We continue to focus on retail store productivity through initiatives such as inventory management with the implementation of our allocation system that went live in Q1. By having the right product in the right store at the right time we should be able to improve productivity with better on floor in-stocks, full price sell through reduced mark downs and improved backroom efficiencies. And finally, building upon our improved real estate process and disciplines that we established in 2009, we plan to open a total of 30 Carter's and 15 Oshkosh stores in 2010 up from our original estimate of 25 and 10. We're also underway approving real estate sights for 2011 with our present plans to open roughly 55 retail stores.

It's important to remember that the majority of our stores are located in the outlet arena. Due to this fact our opportunity for growth in a more conventional non-outlet retail environment is significant. We have now 38% of our Carter's stores in the brand store format which are outside the outlet centers. These stores are making an accretive contribution to the profitability of the retail segment. We're encouraged by our progress and results and our outlook for 2010 is good.

Before turning it back over to Richard, a few brief comments regarding e-commerce. As Mike alluded to you, our e-commerce business went live towards the end of the first quarter. Results thus far are encouraging. Our brands both benefit from significant recognition and awareness. Period to date, the e-commerce exceeded our expectations.

We deliberately launched these business with a narrow assortment of product representing approximately 50% of the total assortment. We expect to increase the offering closer to 80% of the total assortment in the second half of the year, and 100% for spring 2011, and are optimistic regarding growth potential. Examples of the splash pages as well as in-store marketing can be found on pages 19, 20, and 21 of this morning's presentation. Now I'll turn it back over to Richard.

Thanks Jim. The strong performance in the first quarter which included a number of timing shifts makes calling our second quarter performance more challenging. Given the strength of wholesale and mass channel shipments in the first quarter, we're now forecasting the net sales for the second quarter will be up low single digits and earnings per share will be flat to down a bit to last years adjusted EPS results of $0.32 per share. Recall the second quarter is historically our lightest quarter of year but overall we're expecting to have a very successful first half of the year. As Mike mentioned earlier, our forecast do not extrapolate the increase in earnings that we achieved in the first quarter to the rest of the year. Recall that the second half the year represents a a substantially larger base of earnings than the first half.

Additionally, we are expecting year over year expansion of gross margin will flatten out somewhat in the second half. Product costs will likely be more favorable in the first half of the year than in the second in part due to additional product benefits added to the fall 2010 assortment.

Our out look for the second half also reflects our expectation that spring 2011 product costs will likely be higher. Recall that we've typically had some amount of our spring assortment which ships in the latter part of the fourth quarter. As many of you have no doubt read the particular areas of concern relate to cotton and transportation costs, our sourcing teams will be in Asia over the next 45 days or so negotiating Spring 2011 costs. So, we'll have a better line of sight to the outlook then. For the full year, our outlook has improved. Our current forecasts reflect sales growth in the mid to high single digit range. Earnings per share are expected to be up approximately 15% to 20% over last year's adjusted EPS results of $2.15. 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'll go to Anya Andreva with JPMorgan.

Hi great. Thanks so much, good morning, guys. Congrats on a great quarter. I was hoping you could quantify the Easter shift impact on the first quarter by division? And what are you expecting for negative Easter impact in the second quarter? And I don't know if you've mentioned any comments on month to date. I think you said the April traffic softened so far. With those securities, what is your guidance for comps by divisions for second quarter?

Hi Anya, with regard to the Easter ship, that was probably more of an effect on our retail business than we saw in wholesale. It's probably a point or two at a very high level in terms of impact on the comps that we reported. The bigger issue in term of our overall reported revenue was the shift forward in earlier demand in our wholesale segment. Analytically, we've assessed that to be about a decrease from the reported revenue of roughly 15% down to 8% or 9%. So it was significant amount of volume that shifted forward. In terms of ours comp store sales forecast going forward, we continue to plan to the business in that low single digit range. So, 2% to 3% comp store increase is our consistent forecast posture on the business.

Okay. For the second quarter, you're thinking 2% to 3% for OshKosh as well? It just looks like you guys will be lapping significantly easier comparisons in the second quarter. So even with the Easter impact, looks like that guidance is pretty conservative.

Well again consistently, we plan the business to be in that low single digit range. If we could out perform that, we certainly would be happy to do that.

Okay. Okay. That's great. I didn't hear any comments on your outlook for SG&A. And we saw pretty nice leverage here in the first quarter. I guess was there anything unusual in that number? And Richard, how should we think about SG&A for the rest of the year?

Sure. The outlook for SG&A is very much as it has been, largely being driven by our new store growth. So the door expansion will drive the absolute level of SG&A up. Still planning to have something in the range of a mid single digit increase in SG&A. Again, we'd like that to be a bit lower than our sales growth in total.

Okay. Okay. That's perfect. And finally, your cash cushion keeps building. And I believe you said in the past there are no pre-payment penalties on the term loan. Could you maybe talk about your plans for cash use this year and how do you balance that between maybe debt repayment and share buy backs.

Sure. Well that's the evaluation we're going through at the moment. The overall issue is looking at the capital structure in total, which I think starts with what's an appropriate amount of debt for the Company to carry. What are the appropriate structures and financing vehicles that exist in the marketplace? On balance, the credit market continues to improve. So we think we would have a broad range of alternatives to refinance our debt. You are correct that the current debt we have is, is fully pre-payable. So that is an option available for us is to de- leverage a bit. But we also are considering the other distribution options for the cash, which would be share re-purchase. We would evaluate M&A. I can't say that that's on our short less of options but certainly looking at opportunities to grow and accelerate the growth of our business is something that we'll evaluate as well.

Okay. Okay. Perfect thanks so much.

We go next to Margaret Whitfield with Stern Agee.

Good morning and congratulations on a strong start to the year. I guess first question for Jim, I wondered if you could comment on your month to date comps because you did mention that because of the timing of the calendar, it had started off slowly. If you could give us the comp trends for each brand that would be great. Also, what would be, what's your current thought on, on your productivity per square foot in your stores in terms in terms of the brand stores? Where is it now, and where is it likely to go? I know you gave the target number for the year. What kind of decline are you looking for at Wal-Mart? And finally the tax rate, is the first quarter rate indicative for the year, or slightly elevated to what I had projected?

We'll try to keep track of those questions Margaret. So Jim will have to deal with them, in April.

Sure I'm jump into. I think you're you're looking for a bit of color on trend, Margaret. For the first quarter, we started out very strong in both businesses for January. February's weather definitely impacted us due to most of our locations being in, in outdoor spaces. And then we rallied in, in a very strong way for, for March. And then as I said, in my script, we planned for April to, to decelerate slightly with a shift of business into the first quarter. And as you know, we don't project comps on a forward looking basis. But in general, we can say that we're looking at, to round out low single digit comps for the second quarter.

And when will that summer catazine which is incremental be mailed? Is that out now?

Yes, it is in home as we speak, and feedback so far has been, has been very positive. And we think it's probably one of our, our best efforts from a creative perspective.

And the circulation is that up nicely?

Circulation is up. Yes, compared to last year.

And the question on the store productivity?

Store productivity for brands for us is, the Carter's Brand Stores are roughly in the $350 square foot range, and the Oshkosh stores, which are only a hand full of them are below that.

And where do you think Carter's could get to since Oshkosh is small?

The thing we continue to see, with this model is a nice year over year comp. So, you can do the math, but we look at, single digit comps on a year over year basis for the first couple of years to be very achievable.

Okay and I noticed for Oshkosh there was significant increase in units, but transactions were flattish. Is that he a trend that we might expect in Q2?

Transactions in Q2 so far, again, due to the shift, are down for April. We anticipate that number balancing out as we progress into the quarter. If you remember last year, we had our first catazine, and we really had not planned to buy into that catazine last year. This year, we're in a better inventory position with the items that we're featured. So, we think that overall we're on a better inventory position to be able to convert our customers, and we're hopeful as the quarter transpires that the negative that we're seeing in April will balance itself out through the quarter.

Okay. And then the other questions were on the tax rate and Wal-Mart in terms of the yearly plan.

Yes, Margaret in terms of tax rate, it is appropriate to project that high 37% tax rate going forward. It was a little lower last year as I recall, due to some, the settlement of some audit issues. So something in the high 37% range going forward would be appropriate.

Okay.

And Wal-Mart, Margaret, we are forecasting the business with Wal-Mart lower this year. Business at Target continues to be extremely good. So, I think on our last update, we were planning the business with the mass channel to be flat to down a bit. We're now planning that to be slightly up given the strength at Target. As you know, at Wal-Mart we went through a test this spring at 50 doors. The results of the tests from our analysis, extremely good. We met with Wal-Mart recently. They also indicated they were very pleased with the performance. They are still analyzing the results of our performance and other things in the baby space. And we're hopeful to hear soon whether or not we regain some of the space. We're not planning on that in our assumption so than would be potential upside in the second half. By the time we ship in more products if we are fortunate enough to do that. Probably won't be particularly meaningful, second half this year, would potentially be more meaningful next year.

Thank you.

You're welcome.

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

Hi, good morning guys.

Good morning.

Mike, you usually give a specific Carter's, over-the-counter selling number.

Yes.

Did you give that?

I think Richard commented on it.

It was up about 19% spring, spring product in Carter's. It's about up 18% for Oshkosh, Scott.

What we're seeing, Scott, because the retailers are running so lean on inventory, they're selling the product at very good margins. They're selling a higher percentage of the spring season earlier. And that's why we continue to, similar to what we saw last year, we see that there's earlier demand for the product. So as they run lean and the selling's very good, we continue to see move up the second or third delivery within spring, similar to what we saw in the fourth quarter last year. We're not planning that they'll want fall earlier. There's some indication that some customers may want this new baby launch of Little Layette a bit earlier. But the fall season, seasonal product, nobody wants long sleeve and long pant in April and May. So, we're assuming that most of that will be shipped in June, but what we're encouraged by is higher percentage of the spring season is being sold earlier. So it's a very good quality business for the retailer and for us.

Are they chasing product. i.e., do you have inventory to refill to replenish?

To some extent we do. The baby business, I'm talking about Carter's wholesale now, the baby business is about almost 50% of what we do. And then the replenishment component of babies is fairly higher percentage, actually higher than analysis, it's somewhere around 40% to 45% of the baby business. And that's where we carry safety stock. That's the body suits, wash clothes, towels. The every day essentials. So, that business we're making year-round. Little Layet has a life span of about a year. It's a less seasonal component of what we do for a living. And so we have people making that product year-round. So we carry 6 to 8 weeks of safety stock. So when demand picks up when demand comes earlier we can dip into those safety stock levels. Send a signal to the plant to speed up production, and then rebuild the safety stock levels. And the feedback from our customers on that component of the business, they've been very appreciative of our efforts to help them stay lean on inventory and chase. So some components of our business we can chase. It's largely in the baby business, which is good for the retailer, good for us. Because that's the higher margin component of our business. Our business and theirs.

If the sell through rates stay consistent, though, it doesn't appear that you're guidance accounts for that replenishment in Carter's wholesale.

Well, keep in mind, we're sharing what percentage, what are the sell throughs so far to date. Those sell through will slow downs as the spring season tales off. Keep in mine, when we say spring, most of what we say in spring is seasonal. So it's Tshirts and shorts. Once that's done, the only opportunity you have is some, if early deliveries of fall move up we're not baking that into our assumptions. The seasonal portion of our business is more book and ship. That's a component of our business that we're less able to chase.

Don't you think retailers were sitting last year, I know JCPenney in particular were sitting there with with out of stocks, probably feel like they left a lot of sales on the table, though.

Well, I can't comment on JCPenney. I think by and large that was the case with most of our customers is that they ran lean. I think the environment we were in last year and I think to some degree still this year. They'd rather run lean and run out than back up with inventory. Given the uncertainty around demand. The arrow is pointing more upward right now in terms of consumer demand. Time will tell whether that's got legs to it. But I think by and large, staying lean on inventories is good for the retailer and actually good for us. Richard commented on it. Our level of off price sales selling to TJMax, Ross Stores, Marshalls, those counts of excess inventory is a fraction of what it was a year ago. Our excess inventories as a business and by excess, that means as defined. We ordered more and there wasn't demand for it, So we have to go out and create demand for it, typically at big discounts. I think our level of the excess inventory at the end of the first quarter was half of what it was a year ago. It's a third of what it was two years ago. So that's, if you look at the quality of our business, look, very fortunate to have the top line growth that we're having, but look at the improvement in gross margin. It has very little to do with cost cutting. That has more to do with better product performance, better inventory management, higher quality of sales. And so the performance of the business is exceptionally good. And we continue to invest in the business. So, we're not achieving this performance by cutting back, cutting back. We did some good things last year, but it's largely being driven by high demand for the product and a higher quality business for both the retailer and for us.

I guess. Thanks, Mike. I guess that leads to the last question then. Richard can you attribute how much of the gross margin improvement or operating margin improvement of Carter's wholesale was from the pull forward of orders, the incremental flow through margin on the higher sales versus the less off price and the better merchandise margins overall?

Yes. It's all those factors combined, Scott. We had incredible demand for the product that was consistent throughout the quarter. We've not had the level of discounts. We've not had the level of order cancellations that we've had historically. Those are the things that tend to translate to reduced margins on the product. So, it's just been a good balance of those factors. Certainly off price is a component of that. I won't say it's a largest component, but it's certainly contributing.

But just to try and get to you a sustainable run rate margin. Would it be half the increase or ?

I don't know that I want to be that specific about it. To Mike's point. Off price sales are down considerably in the year. Something like 70%, 80% over last year. I mentioned revenue was up 15% in the quarter, analytically that goes down to 8% or 9% when you consider the timing shifts and the pull forward of demand. We're still generating good solid revenue increases despite having that off price number going in the wrong direction. So, it's negatively impacting our top line but it's certainly helping margin.

No, I was speaking specifically to the pull forward, how much that benefited the margins?

Yes. I don't know that I can break that out specifically for you, Scott. Certainly the higher volume helped, but all the demand we've been seeing has been good strong, full price sales for us.

Perhaps a better way to think about it Scott as we did the analysis, what was the earnings impact of that. And we've estimated it was some portion of $0.08 or $0.09. So that might be a better what I to think about it. And that will impact the second quarter. I think it's important for you to look at the first half. We're going to have very good first half performance. I think the sales will be up some portion of 8% or 9%. Earnings will be up significantly. Some portion of what we picked up in the first quarter, clearly will come out of the second quarter. In terms of best analysis we've done to date.

No, that's helpful. Thanks, guys.

You're welcome

We go next to Susan Sansberry with Miller Debeck.

Thanks very much. Not to sound like a broken record, but this quarter's performance was outstanding. You're to be congratulated. Staying on the inventory front, though, when you look at the sequential decline in inventory quarter to quarter not quarter over quarter, it was significant. How long will it take you? Or, two questions I guess, what's your inventory projection at the end the first half and for the year? And, roughly what's your cycle time? How long will it take you to rebuild your inventories if that is in point, in fact, what you want to do to satisfy current trends of demand and order rates on the part of retailers? I mean, presumably by the end of the year, they will want to restock if demand continues to improve.

Susan, we are in the point in time where we begin to build inventories a bit in support of the shipment of fall product. Right now, I would expect that we'll finish the second quarter up 6% or 7% in inventory. As we finish the full fiscal year, I would say something in that same zone. Maybe 5% or so up year over year would be our projection.

Okay.

Just a second.

I'm sorry go ahead.

Susan in terms of second portion of your question, how long would it take us to rebuild. I would actually say we're servicing the demand from our customers right now. So again, it's a seasonal portion of the business that's how they're planning it. It's not as if they're coming coming hey, we can go a whole lot more spring product if only we could ship it. We're satisfying the orders that they have placed. And where there's higher demand for baby, we're also servicing that demand. So I don't feel as though our business is being limited in any way by not being able to service the demand.

So you're happy with chasing?

Very happy. I think it's, much better mode to be in as a business rather than be in a consumer pull position than backing up with inventory.

Part of that decline, Susan in first quarter inventory is that down 7% is really a factor of having pulled forward some of that demand in the first quarter. So in Mike's point this was in response to our customers coming to us, asking for that inventory earlier than we had planned to ship. And, it's driving down the overall inventory metric a bit more than would be normal.

OK. I didn't intend to ask this other question, but on sourcing if you're business, if you're chasing and your business is very strong, when would you have discussions with your, with your factories, or with your network of suppliers, (inaudible) and what not, don't we have some negotiating room here?

Oh, certainly. Always.

Always.

Always. Sure. Okay. And then, Jim Petty, I'm sorry, could you just repeat number of stores for each brand that you intend to open this year? I think I missed it.

Yes, Susan, for the Carter's brand it will be 30, which is up from our original estimates of 25. And for the OshKosh business, we will open 15.

Okay. And can you tell me the split between the outlook, the, how much of these 30 stores will be in outlet as opposed to street location and ditto for Oshkosh?

Sure the number is very heavily weighted to non-outlet environments. We're just, I'll call it a handful of outlets, because we're very saturated in the outlet arena. So, you can really say that the majority of them will be non-outlets.

Okay. In both cases for Carter's and OshKosh?

That's correct.

Okay. Perfect. Best of luck.

Thank you.

You are doing a wonderful job. We all think it's wonderful. Thanks.

Thank you.

(Operator Instructions) We go next to Jim Chartier with Monness, Crespi, Hardt.

Good morning.

Good morning.

First question on the guidance. Full year guidance implies, I guess a lower second half expectation than we previously led. I think you said previously 10% EPS growth in both the first and second half. So I'm curious what changed?

Yes, I think maybe a modest decline, Jim, relative to what we were looking at before. Keep in mind, my comment around part of our spring 2011 shipments will fall in the fourth quarter. Expecting that to be a slightly lower margins than perhaps what we have been calling previously. But still pretty substantial increase over, over the earnings base for the full second half.

Is part of it just being conservative as well?

Well, I think that's always an aspect of how we look at the business. Sitting here near the first of May, it's much harder to call what the second half is going to look like. So this is our best look at the business today. Certainly hope to give you a better look at it as we get more towards mid year.

Okay. And then, in terms of sourcing, I know you guys always want to kind of keep pricing flat, but if costs are going up for everyone in the industry, have you thought about trying to pass on some of the costs?

It's always an opportunity. I think Jim and his team have done a nice job of testing higher price points to see the tolerance, and that's been done with success. So that's part of evaluation. Price increases will be on the list. I wouldn't put it at the top of the list but it's certainly something we'll evaluate.

Okay. And then Jim, can you talk about what impact e-commerce has had on building your CRM database and what you expect from that going forward?

Sure. It's still very early, so we're a little bit cautious in quoting numbers but I'll give you a little direction. Approximately 60% as I think I mentioned of the customers that transact on the e-commerce or in the e-commerce channel are not currently in our database. Or were not until their point of transaction. So that we see it's a very rich way to improve the overall database. And so that's about as directionally specific as I can be right now. It's still very early, but when you consider we're really exceeding our expectations from a sales perspective. So the activity is quite robust and the increase of the data and quality of data is a nice add.

Great. And then for, going forward, what are the plans to expand circulation of the direct mailing pieces?

We are going to for the most part from this point forward be mirroring the number of different issuances that we had last year. However, we will increase the depth of the mailings to a larger base. And in addition to that, which is in some ways more exciting, the quality of the data has improved significantly. So we've really been able to clean out unproductive customers and are mailing more strategically into the customer base that we do have and in return response rates are very positive.

Right. And then can you talk about some of the specific benefits you're getting the planning and allocation system?

It's really a couple fold. In the past, our stores, because we are high unit, high velocity business, were really packed with goods that didn't need to be there. And when your average store is between 4,000 and 4,500 square feet, and they're there heavily packed, it make it very difficult to know quite frankly what's on the floor and what's not on the floor. Our field organization did a really nice job even prior to the implementation of our allocation systems in tackling that and that being said, this process of disciplines that exist in all our stores to make sure that our in floor audits are frequent and meaningful.

Now, adding to that process and discipline, the fact that we distribute to stores based on their needs based on sales makes it much more manageable on the store level. That then translates into being able to satisfy the customers by having the product in the store and then the opportunity for full price sell through by having the right amount of product in the right stores based on the inventory we bought. So across those fronts, it's definitely a benefit. Should result in margin opportunity.

Are you merchandising by climate, by sizing, things like that yet?

We are not there yet. Those are opportunities that exists for us in the future. So, there's still fine tuning I'll call it opportunity to better enhance our allocation strategies go forward.

Great. And then the Little Layette program, did you guys test that at some point?

Well I think just to be clear, part of it a re-branding.

Okay.

Our bread and butter, the way we've made a good living for a very long time is in the baby business. Previously we referred to it as Carter's Starters. And the whole focus is simply a re-branding, make it more tasteful. Expand the offering to include more gift giving items, responding to the things the consumer asked for from the Company. So I wouldn't view this as something significantly different from what we've done for many years. Simply a better offering for the every day essentials for the consumer and better presentation on the floor. So that will, you'll be able to see that sometime probably mid July at the latest, at our largest customers.

Okay. And then you said that there's an $0.08 to $0.09 benefit from the pull forward of demand, was that just for the wholesale business?

No all in. All in. Total company.

Okay. Great. All right. Thanks a lot.

You're welcome

We go next to Howard Tubin with RBC Capital Markets.

Oh, hey thanks, guys. Glad to hear you're ramping up your store opening going foward. Is there an opportunity for you to start thinking about going into just regular enclosed malls going forward? Is that an opportunity for you guys?

It's one of the things that we, we will continue to look at. At this point, we don't have any major initiative to, in fact, do that. But because of the greenfield that exists for us in total outside of the outlet arena, we're evaluating all options very closely, and developing models around what is the best way to lever these brands from a real estate perspective.

That's great. That's all I have, thanks.

And with a follow-up question, we return to Susan Sansbury with Miller Taback.

This is will really trivia. But on this e-commerce site, which I've been getting people to, young mother's with children who have never shopped the brand to use with great success.

Good. Thank you.

They're just thrilled. Oh, I bought eight dresses and it was less than $10 a dress. Things like that. Richard, this may sound silly, but can you tell me how much above expectations this e-commerce launch is running, and should we continue to think that the dilution should be, there should be dilution in this year's number?

Well, I'll hold off on commenting on a specific number relative to our plan. To Mike's earlier comment it is ahead of our expectations. There might be some modest dilutions to earnings for the year. But we don't think it will be significant. If it turns out to be more substantial than we're projecting, we'll break that out for you, but pretty modest impact on the full year financials.

Okay. And then any change in the outlook for international or new licenses?

No, generally forecasting continued growth there. The objective this year is to continue to leverage our existing relationships with our Oshkosh international licensees, and hopefully introduce the Carter's brand in a few markets. Hopefully the United Kingdom and also in China this year.

Okay. Great. Thanks you ever so much. Speak to you soon .

Thank you. Bye bye

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

Okay. Thank you. Thank you all for joining us this morning. We look forward to updating you again with our second quarter results in July.

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