Carter's Inc (CRI) 2010 Q4 法說會逐字稿

Welcome to Carter's fourth quarter and fiscal 2010 earnings conference call. On the call today are Michael 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 will take questions as time allows. Carter's issued its fourth quarter and fiscal 2010 earnings press release today before the market opened. The text of the release appears on the Company's website at www.carters.com. Click on the Investor Relations section, then News & Events on the left side of the screen.

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

Also on this call, the Company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the Company's earnings release. And now, I'd like to turn the call over to Mr. Casey.

Thank you very much. Good morning, everyone. Thanks for joining us on the call. We have an update on our business, which is available on our website. Before we walk you through that update, I would like to share some thoughts with you. We achieved our goals in the fourth quarter and for the year, we achieved another record level of sales and profitability. We had sales growth in every business segment. We increased our share of the young children's apparel market from newborn to size 7, from 12.5% to 14%. Our growth was led by our Carter's business segments, which represent about 80% of our consolidated sales, and over 90% of our operating profit. The strongest component of our business last year was in our wholesale segment, with sales up 15%. We have 3 major product markets -- baby, sleepwear, playwear, and we had good growth in each of those markets last year.

In our Carter's retail segment, our sales grew 12%. We opened 30 stores last year, mostly in strip center locations. We're seeing good returns from our retail store model. We ended the year with 130 stores and strip centers and feel very comfortable increasing the pace of door growth in 2011. With respect to our mass channel segment in 2010, we gained additional space in Wal-Mart for our Child of Mine brand.Wal-Mart was the only component of our business that didn't grow over the past couple years. Wal-Mart is strengthening their merchandising strategies and we're expecting sales growth from them this year. We're very excited about the performance of our new eCommerce business, which we launched last year. ECommerce sales in 2010 were nearly $20 million. ECommerce sales for the recent President's Day week were over $1 million. That's the third best week we've had since the launch behind the Black Friday and Cyber Monday weeks last year.

Sales of our OshKosh brand grew 3% last year, driven largely by the retail segment. Our OshKosh business is being strengthened by the new leaders who joined us last year. Spring selling at OshKosh is off to a good start and we've received good bookings for fall 2011.

The most significant challenge in our business continues to be rising product costs, driven by an imbalance in the supply and demand for cotton, rising labor costs in Asia, and higher freight costs. We first raised our concerns about rising costs last April and there's been no improvement in the outlook for product costs since that call. In fact, since our most recent call with you last October, cotton prices have increased by nearly 60%, far beyond what most had expected.

Since our last update, we have better visibility on product costs through fall 2011. Our fall 2011 costs are expected to be up approximately 25%. To help mitigate these cost increases, we're raising our prices. We're not raising our prices 25%, however. We believe doing so would slow top line growth. Our strategy is to walk our prices up thoughtfully at rates we believe will be supported by consumers. We're committed to regain our peak operating margin of 14% over time. We expect to have a better sense for consumer acceptance of higher prices later this year, when we know more about the success of our price increases, we'll have a better sense for the timing of margin recovery. At this time, Richard will walking through the presentation on our website.

Thank you, Mike. Good morning, everyone. Presentation materials that we've posted on our website this morning summarize our fourth quarter and full-year 2010 results and our expectations for the first quarter of fiscal 2011. We'll start on page 5 of the materials where we summarize some key metrics of our performance in the fourth quarter. Overall, we had a strong quarter in terms of growth in net sales, which increased 17% over last year. Overall, these results were in line with our expectations. The strong growth in sales was led by our businesses under the Carter's brand. Carter's wholesale sales increased $32 million or 25% in the fourth quarter, with growth in all of our core product markets -- baby, sleepwear, and playwear. We continue to experience strong replenishment demand for our Little Layette product, as well as strong demand for spring 2011 product from our major wholesale customers. As we told you on our last call, we booked spring 2011 for Carter's wholesale up in the high teens and the shipments of this product in the fourth quarter were up over 25% versus last year.

Mass channel sales in the quarter were up 23% led by strong performance and earlier spring shipments of our Just One You brand to Target. Sales to Target were up 27% in the fourth quarter. These earlier spring shipments are expected to negatively impact sales to Target in the first quarter of 2011.

Sales to Wal-Mart of our Child of Mine product in the fourth quarter increased 18%, driven largely by additional brand wall space, which as we told you on our last call, we've won back in about 1,800 Wal-Mart doors.

Carter's retail sales in the fourth quarter increased $24 million. New doors contributed about $10 million of this sales growth. ECommerce contributed $7 million and a comparable store sales increase of 4.7% drove the balance. We've had a very successful quarter overall at Carter's retail, with all of the fundamental operating metrics summarized on page 4 trending up.

OshKosh retail sales in the quarter were comparable to last year, up 1%. While we generated $3 million of incremental sales from new doors and about $3 million from eCommerce sales, these gains were largely offset by comp store sales decline of 6%. Our comp store sales at OshKosh retail were down throughout the fourth quarter, driven by overall declines in customer traffic, particularly in the month of December. We believe that winter storm disruptions had a significant negative impact on December sales. Keep in mind also that the OshKosh store base, as compared to Carter's, is much more heavily weighted towards outlet centers, where we saw the largest declines in customer traffic. More recently, with the arrival of more seasonal spring weather, we've seen a nice uptick in OshKosh comps, with particularly good reaction to spring, including the new B'Gosh Basics products.

Our fourth quarter P&L is on page 6. Gross margin in the quarter was down 200 basis points versus last year. This decline was driven by several factors, including the impact of higher spring 2011 product costs, which, as Mike said, are up about 12%, higher provisions for excess inventory and higher freight expense. The negative impact of higher product costs on our gross margin is expected to continue throughout fiscal 2011. As now well covered in the financial media, there have been a number of factors driving the dramatic increase in the cost of raw cotton. But fundamentally, demand is currently outpacing available supply in the world cotton market. In the appendix to today's presentation, we've included some additional information regarding our product costs and some directional maps to illustrate the potential impact of inflation on various components of our product costs.

SG&A increased 18% in Q4 over last year, due to retail door growth, eCommerce expenses and increased distribution costs, resulting from higher unit volume in the quarter. We also had higher provisions for performance-based compensation in the quarter. Excluding these factors, SG&A was essentially flat with last year's fourth quarter. Interest expense was comparable to a year ago. As I mentioned on our last call, we have refinanced our credit facility, included in interest expense in the fourth quarter was about $1 million of debt issuance cost associated with this former credit facility. Underlying interest expense was lower in the quarter, reflecting the lower amount of debt we are carrying versus a year ago. From an earnings standpoint, fourth quarter earnings per share of $0.60 were down a $0.01 compared to last year's adjusted 2009 earnings per share, up $0.61.

The next few pages summarize our full year 2010 performance. On page 8, we have a recap of 2010 revenue. Consolidated revenues increased 10%, again, largely driven by our Carter's brand businesses, which grew 12%, or $150 million last year, net of the decline in sales to Wal-Mart. OshKosh sales grew 3%, or $9 million, driven by retail door growth and eCommerce sales. Our full year P&L is on page 9. Gross margin increased 50 basis points over last year, driven by improved product margins in most channels earlier in the year, partially offset by higher freight costs, higher spring 2011 product costs, and higher provisions for excess inventory in the second half of the year.

SG&A was $468 million in 2010, up 9%, or slightly less than the overall growth rate in sales for the year. From a bottom line perspective, our diluted earnings per share increased 14% to $2.46 over last year's adjusted EPS result of $2.15. This strong performance builds on the roughly 50% growth in adjusted EPS that we achieved in 2009. Page 10 provides some additional detail on the increase in SG&A for the year. The full year increase in SG&A of approximately $40 million was driven mostly by retail door growth and eCommerce and distribution expenses. On a rate basis, we improved 10 basis points, given our solid top line growth for the year.

On Page 11, we've summarized our business segment performance for fiscal 2010. Our consolidated operating margin increased 50 basis points over last year to nearly 14%. We had excellent performance and operating margin expansion across our Carter's businesses, particularly Carter's wholesale and Carter's retail. We took a step backwards in 2010 in the profitability of OshKosh, largely because of the decrease in comp store sales at retail and the carrying costs of the 12 new stores, which we opened during the year. We've included the next page just for your reference. There were no adjusting items in the fourth quarter or in fiscal 2010. Last year's fourth quarter included about $6 million in charges related to the Company's accommodations investigation and fiscal 2009 included approximately $17 million of charges related to restructuring activities and the investigation expenses.

Turning to Page 13, we have a recap of a few key balance sheet and cash flow metrics. Overall, our balance sheet continues to be very strong. Our year-end cash position was approximately $250 million, down from last year and as a result of our $100 million debt paydown and $50 million of share repurchases completed earlier in the year. Working capital increased at the end of the year due to higher accounts receivable balances and higher levels of inventory. Accounts receivable were up $39 million, reflecting heavy shipments to our wholesale customers in the month of December, in order to meet their earlier demand for spring 2011. Inventories at the end of the year were up $85 million, or 39%. This increase was due to higher spring 2011 product costs, incremental inventory to support strong planned business growth, including new retail doors, eCommerce, and strong first half 2011 wholesale and mass channel sales growth.

Lead times, although improved from what we experienced in the second half of last year, continued to be elevated, requiring us to bring product in ahead of demand. We believe the overall quality of our inventory remains high and pockets of inventory that we've identified as slow moving have been fully reserved for. Operating cash flow for the year is down approximately $100 million compared to last year despite the increase in our earnings. The decrease in cash flow is largely attributable to the increased inventory and accounts receivable balances, as I just highlighted.

CapEx for the year was approximately $40 million, half of which was spent in support of our growing retail businesses. Other significant spend in the year related to continued development of our branding and fixturing programs at wholesale and construction of a new Company IT and operations facility.

Turning to guidance on page 15; as reflected in this morning's press release, today we're providing guidance on the first quarter of fiscal 2011. We're expecting good revenue growth in the first quarter, an increase of 10% to 12% over the first quarter of last year. We expect the earnings per share will be in the range of $0.45 to $0.50, which is down versus last year's record first quarter performance of $0.71 per share. Last year's first quarter was unusually strong with solid growth across every part of our business, in part driven by an earlier Easter. And of course, this year's first quarter will be negatively impacted by higher product costs. While we obviously have a good sense of January and February performance at this point, March represents the bigger share of first quarter profitability, so there's still a lot of business to be done.

For the full year, we're expecting that higher product costs will negatively impact our profitability. Since our last call, we've locked in our cost assumptions for our fall assortments and these costs are expected to be up approximately 25%. At this point, we do not have good visibility to costs for our spring 2011 -- excuse me, spring 2012 products, which will begin shipping later this year. So that remains an important open element of our outlook for the year. In response to the dramatic increase in product costs, we have raised prices. We did so selectively on spring 2011 products, and more comprehensively for the fall. For competitive reasons, we're not going to be precise on the magnitude of our price increases.

We believe the pricing action we've taken and which we plan to take is prudent and balances our desire to continue to grow our revenue and market share with offsetting product cost increases. But as we've said previously, these pricing actions will not fully offset the inflation we're presently experiencing in product costs. It remains early in the year and as of yet, we've not had a sufficient read on consumers' reaction to our higher prices, particularly the more significant increases planned for fall. So as a result, we're going to limit our projections today to just the current quarter, where we think we have reasonable line of sight to how things are going to finish.

We have provided a few full-year highlights though on page 15. Namely, we're planning good top line growth across our businesses in 2011. We previously highlighted the good growth in bookings for spring, which we posted in both Carter's and OshKosh wholesale. For fall, our bookings for Carter's wholesale are up high single digits and up low double digits for OshKosh wholesale. As Mike mentioned, our eCommerce business is off to a strong start and we've tasked ourselves with doubling this business in 2011. We're planning good growth in our store base, driven by Carter's with over [50] new stores planned. We plan to open a handful of OshKosh stores, as we continue to test the mall store concepts. We expect that inventories will run higher throughout the year, driven by higher product costs and planned business growth, and we expect that CapEx will be approximately $50 million. With that, I'll turn it back to Mike.

Thanks, Richard. Despite the near-term margin pressures, we believe the fundamentals of our business are very strong. Our business model has enabled us to grow in one of the weakest retail environments in the past 20 years. Since the recession began in 2007, our sales have grown $345 million, or 25%.

Before we break for your questions, I would like to comment on our 4 key priorities and some of the growth we believe is possible over the next 5 years. Our first priority is to lead the market in product value. We are a leader in young children's apparel. We own the largest share of the newborn to size 7 young children's apparel market. We have continued to gain share and believe there's plenty of room for growth. Our brands have a well-earned reputation for great value. Consumers choose our brands more than any other brand, because we have the most compelling product offerings. We will continue to strengthen our value proposition, striking the right balance between product benefits and consumer prices.

Our second priority is to strengthen our brand presentation. We own 2 of the most recognized brand names in young children's apparel. Both Carter's and OshKosh B'Gosh have high brand awareness and strong reputations for quality, age-appropriate style and great value. We have earned the trust and loyalty of generations of consumers. Our net promoter scores, which measure the likelihood that consumers will recommend our brand to others, rank with the best brands in any category or industry. We plan to continue investing in fixturing point of sale branding and our websites to strengthen our brand presence in the market, better present our products, and further differentiate us from competitors.

Our third priority is to extend the reach of our brands. Over the past 10 years, we've successfully extended our retail store model beyond the outlet centers. We believe our stores will offer the best value in young children's apparel. In 2011, we plan to open 60 stores, largely in retail strip centers. These are our brand stores. The returns on these stores have been very good. Today, we have 150 brand stores and we believe over time we can have at least 600 of these stores, 300 for each brand. We believe this represents a $600 million sales growth opportunity for us.

We're also extending the reach of our brands through eCommerce and international markets. Our eCommerce business is off to a great start. We expect to double our eCommerce sales this year and believe this is more than $100 million sales opportunity for us by 2015. We believe it's a great way to strengthen our relationships with consumers and a meaningful growth opportunity for us.

We have an established, but underdeveloped international business. Our brands are sold in more than 40 countries, largely through licensing arrangements. We also ship directly to international markets. Our international sales in 2010 were $35 million, up 25%. The operating income from these sales and international royalties was $17 million last year, up nearly 50%.

Our fourth priority is to improve profitability. In 2010, we achieved an operating margin of nearly 14%, exceptional performance in our space. We achieved that level of profitability on a record level of sales after funding significant investments to strengthen our leadership team, improve our product offerings, expand our store base, and to launch our new eCommerce business. Due to the abnormal spike in product costs, we expect to see a meaningful decline in our operating margin this year, but we are absolutely committed to driving a higher margin business.

In summary, we're fortunate to be managing a business with so many levers to enable growth. We'll work to get through this spike in product costs and will stay focused on driving top line growth, gaining market share, and restoring our margins over time. At this time, we'll open up the call to your questions.

(Operator Instructions) For our first question we go to Scott Krasik with BB&T Capital Markets.

Hi, good morning guys.

Morning, Scott.

I guess a bunch of questions. The first one though on the quarter and what that means in terms of ongoing profitability, your Carter's mass operating margin declined significantly. Is that the cost of doing business now with Wal-Mart? Was there something specific going on there and how do you view that margin in 2011?

Scott, the decline in mass profitability in the fourth quarter, I would say was largely a couple of issues. It was some continued higher transportation costs in bringing the product in. As you know, those orders came in a bit late for us, so we were -- we've been in a position of expediting products from Asia to get Wal-Mart back in stock on the [brand] wall. Costs are higher, so the actual cost to produce that product are elevated year-over-year. And we did take some excess inventory charges related to the mass channel in the fourth quarter, but that's what's impacting the segment numbers you're seeing.

And the excess inventory was from product at Target that wasn't selling or Wal-Mart?

It's largely related to Wal-Mart product.

Okay, and then in terms of how -- I know you're not giving full year '11 EPS guidance, but clearly your product costs would disproportionately affect that if you can't price there. So how do you view the margins in that business in 2011?

Well, I think they are going to be lower going forward, just over the near term as it relates to just higher product costs flowing through. That will be true for the wholesale channel; it will be true for the mass channel as well.

Consistent with what we saw in the fourth quarter or better than that?

I think too early to project full-year margins, but we're expecting them to be down year-over-year.

Okay, and then Mike, appreciate all this additional insight into the -- your costs. Why -- I haven't heard from anybody else that they are seeing 19%, 20% increases in freight, duty and agency fees. I mean, why are you seeing those types of increases and is there some way to improve that?

I think, Scott, we've included some illustrative math in the back. We have seen some increases, obviously, in the cost of cotton. The next biggest bucket of increases would be in the manufacturing costs, labor specifically. We haven't seen that dramatic of increase -- freight, I should say, is a smaller component overall of the mix of product costs, but we have seen elevated costs there. So we're just -- we're providing you just the [conceptual] math to think through how those pieces may be moving in concert with one another, leading to the overall increase that we're seeing in product cost.

Okay, but the deterioration that you refer to is really hypothetical, because you're not seeing this type of increase?

Well, we are certainly in the fabric cost. The overall product cost will be up for 2011 excluding -- we don't have enough information on spring '12 but the overall cost will be up about 20%, largely driven by cotton, followed by labor, and we have seen increases in freight costs.

Okay, and then maybe talk a little bit about -- I know you don't want to get into specific pricing, but I know you're testing in both wholesale and retail. I guess you've already [put] through some in wholesale. So what's the feedback right now in terms of, are you seeing a dynamic where unit velocity slows down?

Well, we're expecting that most of our customers will buy units flat to down. I think most of the increases they are expecting will be driven by higher prices, similar to our own business; on a per store basis, we're planning our units flat, flat to down. The visibility we have so far, we only have two months of business in. What we're seeing so far is pricing in our own stores for spring is up over 5%, thereabouts, so we're walking the prices up. I will tell you, Scott, I have not seen anybody yet in spring step out on prices. We expect everybody will have more price increases in the second half of this year, but today, we just went through a competitive review with the Carter's brand and OshKosh next week, but we have not seen anybody step out meaningfully on prices yet.

In terms of how you'll position yourselves in pricing, I mean, is it still important to maintain that, the ratio to the private label that you don't want to just get too expensive there?

Yes, it's a good question. I think relative pricing is important. We're typically priced a $1 or $2 above private label when we've seen that spread, our business has done well relative to private label. The other important thing for you to keep in mind, we have three tiers in pricing; we have pricing for the flagship brands, Carter's and OshKosh. We have slightly lower pricing for our brands at Target, and then the lowest pricing we have is for our brand at Wal-Mart. So when you step up one, you have to be thoughtful about how you step the others up as well.

So we've seen not only in our industry, but in other industries in recent years where people have stepped out aggressively on pricing. People have traded down to private label. And so we're mindful of that risk, so we're walking the prices up. We're pricing our products where we think. We will continue to drive top line growth and gain market share. That's our pricing strategy is largely designed to be competitive in the marketplace and to keep on driving growth. We're not going to be overly aggressive on pricing to deal with what we hope is a short-term spike in product costs, given what's going on with cotton.

Is the retailer giving you good visibility on how they are approaching the pricing in your category?

Yes, well, I don't think it would be appropriate to comment on their pricing strategy, so I'll hold off on doing that.

But are they even talking to you about it?

Typically we don't. We -- you shouldn't be collaborating with customers on pricing.

Okay, and then just last, Richard, is the new store number, is that a net number, or do you have closings as well?

We have a handful of closings, Scott, but nothing significant; probably one or two for both brands over the course of the year.

Okay. Thanks, guys.

Sure, Scott.

And for our next question, we go to Anna Andreeva with JPMorgan.

Great, thanks. Good morning, guys.

Good morning.

Just a follow-up on first quarter guidance; it looks like you're guiding for better top line growth, [with] pretty significant gross margin degradation. How much of that impact is later Easter versus last year versus sourcing pressure that you're experiencing on gross margins? Just hoping to understand that 600 basis point, 700 basis point deterioration in gross margin for 1Q.

Well, there's probably one point or two points of comp store revenue that we would expect is going to shift from March into April. The balance on it would be deterioration in the gross margin line from the [higher] product costs.

Okay, and just to follow up on price increases. You said 5% in your own stores. Were you able to pass through any of the increases to your wholesale partners as well?

Just to be clear, what I'm sharing with you is over the counter selling so far in our stores for spring is up about 5%, and in for -- with respect to our wholesale customers, we selectively raised prices for spring 2011. It will be more comprehensive price increases for fall.

And was it in a similar 5% area?

Yes, we're -- we would prefer not to comment specifically on price increases. What we will share with you, Anna, is what we're seeing so far. What we track on a weekly basis is whether or not the average unit retail prices are moving up. So we do have goals that we're trying to achieve, so we're tracking our performance relative to those goals.

Hi, Anna. This is Jim. As Mike was saying, in the stores that where we have obviously most control, we have moved price up specifically on the spring assortment. And once we got past some weather issues, obviously that impacted everybody's business earlier in the quarter, we've seen a nice response in large part due to the assortment. If you've been in our stores, looks wonderful. I would say spectacular in the Carter's stores and much, much improved and focused in the OshKosh stores and the customer is voting pretty positively in both environments.

We've been able to command roughly a 5% increase in our AUR on our spring assortment with both brands and that's been very, very well reflected in the trends in the business. And on that note, I mean, if you -- if we look at the trend on the quarter, really beginning in large part with President's Day, which we just had a banner weekend on a comp basis, producing around a 30% increase over [LY] and that momentum's continued. So with the right product and a stepped-up pricing AUR strategy, we are commanding a higher AUR and very acceptable throughput on the units. So I don't know if that helps a lot, but that's what we're seeing in our stores.

No, that's great to hear. I think the stores do look terrific, so congratulations. Congratulations there. Just hoping to understand SG&A a little more as well. Should we expect a pick-up in SG&A for the year, just given the higher store openings?

SG&A will grow in dollar terms on a -- largely driven by the factors that have been pushing SG&A up consistently over the last number of quarters. So we'll open more retail stores. We'll have a full year of operational expenses related to eCommerce. We will have some higher distribution expenses. So we are planning SG&A to be up in dollar terms. We pretty consistently try and plan that to grow less than our growth rate in sales and we are planning for some SG&A leverage this year.

Okay. And just finally, just hoping to extrapolate the inventory increase a little more?I think you guys were guiding for inventories up 25% at the end of the fourth quarter. They came in a little heavier than that. Just maybe help us understand that, and maybe quantify some of the increases going forward for the next few quarters?

Sure. What we did finish the year a bit above our forecast in terms of inventory. A portion of that is just due to better performance from our factories. We just started to see better delivery performance than perhaps what we had baked into our forecast. So we were a bit up relative to that forecast. We're planning for inventory to be up across the quarters of the year by the time we get to the end of the year; it's more driven by just the pure product cost increases. Units are planned roughly flat by the end of the year. For first quarter, we're probably planning up between 40% and 50% relative to last year. A good portion of that is driven by just the comparison to first quarter of last year, which was such a strong quarter; we ended first quarter probably abnormally low on inventory. So when you layer in the shift in the business and the impact of higher product cost, you get up to a relatively big percentage increase year over year that we're forecasting.

Okay. Thanks so much guys.

Thank you.

We'll go next to Helena Tse with Bank of America Merrill Lynch.

Hi, guys. I don't know if I missed this, but did you guys comment on your fall 2011 order books by channel?

We did. Carter's is up in the high single digits. OshKosh is up low double digits.

And then, so you didn't break out between wholesale, mass at all?

We've not commented on mass channel, no. Just the traditional wholesale channel, Helena.

Got it. And then just a little more clarification in terms of product costs. I know you guys aren't talking about retail ticket pricing strategy, but [say] for fall 2011, units are going to be planned flat to down, or is that full year?

We've planned in our retail stores across the year some loss in velocity on a comp store basis in terms of the units, but we are planning overall door growth, which is the overall number of units up a bit.

And Helena, we're happy to talk about the pricing strategy. Again, the pricing strategy, particularly in our retail stores, is to be more aggressive on pricing, to test price tolerance. So that's something the retail team has done very successfully in recent years and oftentimes, you'll go into our stores and you'll see our product priced a bit higher. So that's the beauty of having 50% of our business now in retail. We can more effectively test price tolerance. So Jim and his team are going to test how high we can go on pricing and to date, we're seeing some success with that.

Helena, just -- more specifically on that, as product costs have -- are going to go up on the back half versus the first half of the year, as well our pricing strategies in our stores, we also -- and Mike commented on this earlier in his opening comments, I believe, about what we're seeing in the marketplace. We're not seeing a tremendous amount of competitive price movement. We're seeing some, but not a tremendous amount. So I think our strategy is a good one to walk up our prices as the level of the water rises a little bit in the competition. So that's been our strategy. So you'll see our prices go up as the year transpires. We're going to accomplish that through a more effective in-store signage package that we have tested and rolled out. We've been overall very satisfied with the results and the customer responses coming into this year. We didn't approach this lightly.

We had the opportunity to break out a number of sales of stores, and really -- and be thoughtful about how we can communicate our price message more effectively and in turn, be able to maintain a high level of transaction quality. So that's been our strategy. And as it relates to the inventory levels in our stores, we have planned our inventories in our stores down low to mid-single digits in -- on the year from a unit perspective, and we've opted to do that. And we feel as though we're well positioned. I know we're hearing a lot of other retailers are being more aggressive on that. We think that it's -- we are a go-to business for young children. They need clothes. They grow at rapid paces, and we want to make sure that we protect the market share that we've been able to really obtain over the years of growing this business, so that's been the strategy.

Great, and then maybe just perhaps a little more color on the wholesale side. I know -- can you maybe give us some color in terms of how your wholesale partners are just planning the overall dollars for the category for fall 2011?

Well, I think, generally speaking, they view the young children's space as a growth business for them. And I think, generally speaking, most people are being cautious on the units. So it's planning the units more conservatively and planning to get the growth largely through price increases.

Got it, and then for spring 2012, I know the costs are still TBD, but can you maybe give us some color in terms -- you mentioned elevated lead times. When do you actually need to purchase your goods for spring 2012?

In the next couple of months, Helena. We have our teams over in Asia now who are working on that.

Got it, and then your 4Q inventory levels, how much of that is carry-over, and then how much would that -- of that would be just receiving goods early?

I wouldn't say the carry-over inventory is a big component of it. It's largely to support the planned growth that we have for the top line in the first half of the year.

Okay, and then -- sorry, one final question. In terms of your Carter's wholesale business, and you saw really nice fourth quarter number here. Can you maybe comment in terms of how much of that is increased floor spacing; provide some color in terms of any incremental opportunities you might see for the Little Layette program heading into 2011 or any square footage increase in terms of category penetration, whether it's sleepwear or playwear that should drive wholesale growth for 2011?

I would say the growth we saw in 2010 largely driven by strong product performance and more floor space gets allocated to the brands that are performing well. So we've just had a -- at least a couple, few, very good years back to back in terms of Carter's product performance. So that's where the retailers are placing their bets in terms of inventory to the brands that are performing well and we're -- they were expecting good growth in 2011 as well. So that business is particularly strong.

It was the strongest component of growth in our business at very strong margins, and so that business is very healthy. One noteworthy thing in terms of additional growth, we will be launching with Dillard's this year. So we've been working with them over the past six months. That was -- has been asked over the years, are there any other major retailers that we would love to do business with? Dillard's was always on the short list and we'll be launching with them this fall.

And is that all doors?

Yes, it is.

Great. Thanks guys.

You're welcome.

And we go next to Margaret Whitfield with Sterne Agee.

Good morning. I wondered if you could tell us what your comp trends have been quarter to date for both OshKosh and Carter's, recognizing, of course, that March is the big month?

As you know, we don't give specific in-quarter comp numbers specifically, Margaret, but I can definitely give you a little bit of flavor around it. Directionally, the trend started out a little bit tougher in the quarter. They were tied very much to weather, where weather was tough, which was, as we all know, a large part of the country; traffic was down and it did hurt our comps early in the quarter. However, as the weather has improved and as our floor sets and as our marketing has taken hold, the trends have really improved very, very nicely. And we've got good momentum in both of our businesses, really having gone through the first two months of our quarter. So we're feeling very confident about it.

Now, March is our largest month of the quarter, but overall, we feel quite good. Both brands are moving through the spring assortment and it's being received by the customer very well. So recent trends are exciting. I mentioned the comps that we had on President's Day weekend for a reason, because they were -- they -- I don't want to say they were a turning point, but they were absolutely a nice catalyst for the quarter to that period and that was not short-lived. Things have -- the momentum in the business has continued along quite nicely.

So both brands are comping positive quarter to date?

Yes, we're in good shape. I would rather not comp specifically -- or comment specifically about that, but we're in good shape and we're forecasting -- I will give you this. When you combine the March and April number, it's really got to be done, especially because of the shift in Easter this year. We are anticipating positive comps over what we refer to as [Marpril], a March-April combined number and we are anticipating projected positive comps for that period of time, for both brands.

And how has been the response of the new Basics line at OshKosh?

Well, it's good. I mean it's -- this has been an underserved component of our business. All kids need those Basics at great quality, great styling, and a really strong value. We set the floor and, again, though we got hit with some really rough weather, so it was a little bit quiet in the beginning. But since then, it's taken off nicely. And in recent weeks, have been right on plan in sell-through of our Basics, and so we're really pleased with that strategy and the new brand leadership and design leadership has done a wonderful job. If you have visited our stores in OshKosh, you'll see a new way of presenting the goods. It's much more understandable.

I think in the past we struggled with making what I would say clear product statements. You can go into our store and see a great B'Gosh Basics statement, a great value trend in our [drive aisle], a great Americana statement, great casual statement, and I just think that the design team really is on in making sense about how we're doing it. And then in following, we're also, I think, setting our stores more effectively and our marketing has been evolving and is being received at this point quite well in addition to that.

Could you give us the timing of the store openings, will it be front-end loaded? And also talk about the OshKosh stores inside malls. I take it that will be several stores this year?

I'll hit on both pieces. It will be front-end loaded and more in the first half than in the second half. This is -- Rough and Tough, we're looking at about 30 -- 32 stores, 33 stores in the first half of the year and with Carter's in the balance in the second half, and we're trying to be as done with that by the end of the third quarter. I would anticipate in the fourth quarter to have five stores or six stores left to open in the Carter's business. And on the Carter's business, I just really have to say that we've got a model that's working extremely well. This past year, we opened 30 stores and the stores have performed very well from a pro forma or model expectation, not only in top line, but from a four-wall contribution perspective. I've been doing this a long time and this is about as rich a year one model as I've seen in opening stores.

So therefore, we have confidence in taking that number up in 2011 and beyond for that matter. It's a very meaningful growth platform for us. As Mike mentioned, the strip centers, the shopping destinations of choice for these moms, the locations, or the opportunity for locations is significant and we've got a plan and a team very capable of executing that for the three years, five years, seven years in front of us. So that's great news. On OshKosh -- the OshKosh business has always been a story of -- and I've said it since I've been talking to you all, and that is, it's not a volume issue in these stores. We actually do quite significant volume, at about 1.5 million in our average store and that's meaningful. It's really been a conversion issue. So the primary reason of moving into malls has been with traffic and to maintain conversion. When I say conversion, the conversion in OshKosh is actually very strong as well. It's mid-20%, and that is good by anybody's standards.

So we went into these malls and we said, "okay, if we can, in a more dedicated traffic pattern that a mall provides, maintain that conversion, do we have a growth vehicle?" And it's still very early. It's test. It's still very early to say, but overall, we're very pleased with what we're seeing. We've got three stores open to date; we're going to open three more stores the back half of this year and initial results are good. The customers are receiving it very well and we think we need a niche in the malls that really no one else is doing, and that is a great American brand that is sweet, innocent, and relevant in nature, and the customers responding quite well. I would love you all to visit these stores. The three stores that we have are in -- South Shore mall, which is outside Boston; Park Meadows, which is outside of Denver; and Kenwood, which is outside of Cincinnati. They are all really, really good malls. So I hope that answers your question, Margaret.

Thank you, and for Richard or Mike, it looks like your guidance implies gross margins in Q1 around 34%. Would that be a high-water mark? Is there anything else we should consider in modeling the rest of the year in terms of margins?

Margaret, we won't be specific on parsing out the details of the P&L. We certainly will have a significant degradation of gross margin because of the impact of product costs.

And in terms of spring '12, when do you think you might get a better handle on that? I mean certainly cotton isn't -- it doesn't seem to be cooperating here.

No, not yet, but the -- we have a call in a couple of months. We'll have a call at the end of April to talk about first quarter results. We'll have a better sense for what our folks in Asia are hearing on spring '12 costs.

Thank you.

You're welcome.

And for our next question, we go to Susan Sansbury with Miller Tabak.

Yes, thanks very much. I think no one has congratulated you, but I think you did a good job, particularly in the fourth quarter.

Thank you Susan. Thank you very much.

All right. Two questions. First, Mike, I know you've been working on increasing your international business. Can you give us an update on any decisions or refreshed commentary about strategy, when we might see you go more aggressively outside, and for Richard -- outside the United States, Canada or wherever?And for Richard, on this 40% increase in inventory, did you make any opportunistic buys? Are you bringing in goods early, if you will, to blunt, to get the best costs you can on -- at least on Basic goods? And you implied that we should expect -- how much of this inventory increase was actual increase in unit cost? Thanks.

I'll answer the inventory question first. A good portion of the inventory increase at year end was the product costs. There were other significant chunks of it that do relate to just growth in the business. We're back in business on the brand wall at Wal-Mart. We obviously didn't have the eCommerce business a year ago. We've got at year end, 40 more retail stores than we had a year ago, so there is a good portion of the overall increase. So it's just growth in the base business. I wouldn't say necessarily we were opportunistic on anything. There were some issues around lead times, as you recall from last year, so we've leaned forward a little bit to bring product in to make sure that we have it here to meet our wholesale customers' demand. We did bring some product in early in relation to the B'Gosh Basics program just to make sure that we had that available for early launch in our own retail stores.

Susan, with respect to international, I think you caught the performance; the sales were up meaningfully. The earnings were up meaningfully. I think the contribution to earnings from international activities is about 7% of our operating income. So we've got a nice business there. I would not say that, that's been on our short list in recent years of things that we had focused in on when we acquired OshKosh; it had a well established international business. We piggybacked Carter's onto some of those relationships to determine what the Carter's brand means outside the United States, and we've done that with success.

We've got a good licensed -- licensee partner up in Canada who helped open up co-branded stores and tested co-branded stores initially, so the mom can pull right up to the front door and get the very best of the Carter's and OshKosh brands in one store location. They have over 15 of those stores now doing really good business, so we're interested in that store model. Other major components of where the business is being done is in Japan, both in children and in adult. So we are in over 40 countries and when you're earning about $17 million in 40 countries, that seems to me we're spread thin. We're doing a little bit of business in a lot of different parts of the world, so what we're trying to do is concentrate our focus in fewer countries -- Canada would be one; China would be another; Brazil would be the third.

To help us realize the potential of those three markets, we've beefed up the leadership of our international group and I'll share more with you after (inaudible) that's going to be joining us next month. But we felt as though we needed some additional resources, expertise in the international business, so we've engaged someone who was responsible for developing business in Asia and in Europe for Disney and when -- got to give them an opportunity to assess what the potential of the international business is. And probably in April, I'll give you a little bit more color on what we think is possible.

Okay, thank you. And just one other housekeeping, one for Richard. The inventory write-down, is there a number that you can share with us?

It was an increase of about $5 million year-over-year in terms of our normal provisions for excess inventory, Susan. That was the increase year-over-year.

And then, I'm sorry, but lots of people have taken their time. Mike, on the Wal-Mart, the margins were, or the mass channel business, the margins were much lower, I think, than most people had anticipated in the fourth quarter. Wal-Mart's on record saying that they are going to lead with price. So the assumption is, is there's no reason to assume that won't -- that your mass channel margins will improve.

I have a different view. Wal-Mart has always led on price. Their business got out of balance in recent years because of some merchandising strategies that didn't work well for them. Wal-Mart, we launched that in 2003. It quickly became about $150 million business for us at very good margins because we were leveraging off the rest of our Company to develop an exclusive brand for them. So for us it had been a high margin business. Some of the things that we saw in 2010 were largely due to the disruption caused by some of their merchandising strategies. They were editing brands, scaling back our brand. We did a test in the spring and that test went extremely well that enabled us to gain more floor space back at Wal-Mart. Some of the transition issues didn't go as well as Wal-Mart had expected or we had expected, and so we had more inventory than we felt as though we needed at the end of the year.

So we stepped up and made some meaningful, and I would say, abnormal provisions, for the Child of Mine brand. And we would expect going forward, when the dust settles at Wal-Mart, and they strengthen some of the things that they are working on, that this will be a good margin business for us. I would be disappointed -- hard to give you some sense for what we think it will be in '11, given the spike in product costs. But I think even when the product costs settle down, I would be disappointed that if -- for the mass channel in general that, that's not earning over 10% operating margin.

Okay. So you expect the Wal-Mart business, at least top line, to go up in 2011?

Yes, that is our plan. Gaining that brand wall space back will enable us to get Wal-Mart back on a growth track. I'm hopeful, over the next four years or five years, we get back to a level of sales equal to what we did in 2008, which was about $145 million in sales. So we think directionally, it will be -- go from around $112 million to over $120 million this year.

Okay, great. Well, good luck.

Thank you, Susan.

For our next question, we go to Jim Chartier with Monness, Crespi & Hardt.

Good morning.

Good morning, Jim.

First, for Richard, you guys didn't get a ton of -- you guys didn't get much SG&A leverage in fourth quarter, despite the big revenue growth. Are there opportunities to get better leverage in 2011? Any areas you're looking to control costs that you could talk about?

Sure. There's always opportunity on the SG&A line. With the dramatic increase in the number of stores, though, it has been difficult to achieve leverage, as both stores come online and become more productive. We would certainly hope to get leverage out of those stores, but given the environment we're in, we're certainly taking actions to scrub back through our SG&A, structure -- our cost structure just to make sure that there aren't opportunities to further scale things back. But we're holding on discretionary spending across the organization, travel's down, hiring is down, all the things that you would do in an environment where you're planning earnings to be down, we're in the process of doing. We've taken some very good structural action over the last couple of years in terms of SG&A in terms of closing facilities. We did have a reduction in force a year or so ago. We -- the opportunity for the Company really is to improve gross margin and revenue and that's probably the lion's share of our efforts are focused at the moment.

Okay. And then OshKosh wholesale operating margin was down pretty dramatically in fourth quarter and it looks like the average price was down about 15%. So could you just talk about what happened there and then how you see that playing out in 2011?

Really small business, Jim. You can have differences in timing of shipments and such over the course of the year with that business. So there's nothing really dramatic to report on OshKosh wholesale.

I think the important thing to know about OshKosh, generally in wholesale specifically, the conversations we've had with our largest customers, they continue to be very supportive of the brand. All they have asked us to do is focus on more consistency in the product performance. I feel as though since we've owned it, we've had far too much turnover in the merchandising and design teams. As you know, last year, we brought on a new brand leader for OshKosh. I think it's the strongest level of talent we've ever had on the brand. We brought in a new design leader for the brand.

Their first work was spring 2011, where we're seeing very good selling now, and I would actually say by the time they joined us earlier in 2010, they had probably two months out of a three-month development process to help strengthen the brand. So I'm very happy with the progress that we're making with OshKosh and I'm happy that our wholesale customers continue to be patient with us, as we strengthen the brand. So the spring bookings were good. The fall bookings are better. So we continue to do our best to try to strengthen the brand and realize its potential.

Jim, we did have some slightly elevated levels of customer support around some co-op programs with our wholesale customers in the fourth quarter that's likely causing some of the drop in margin that you're seeing.

Okay, and then is Dillard's a meaningful part of the [backlog] increase, or the bookings increase for fall 2011?

Well, it's a component of it, but given the level of business we'll do this year, because we're not launching with the full line. We're starting with the strength of the brand, which is in baby and then we'll build that over time. So the short answer is, happy to have those orders, I wouldn't say in the context of the size of the overall wholesale business. It's moving the growth numbers significantly, not this year. But hopefully over time, it will.

Right, and could you talk about the gains you've had in the wholesale channel at your existing customers over the last couple of years; how many percentage points of market share do you think you've taken and what the opportunity is going forward?

Generally speaking, I don't have those specifics in front of me, Jim, but all I would say is that if you walked in any major retailer and you see the space they are devoting, particularly to Carter's brand, you could see the emphasis they are placing on the brand. So because of its strong performance, because of its consistency, particularly, on the Carter's brand, its consistency of performance, they have allocated more floor space to it. I would say actually in every major product market -- baby, sleepwear, and playwear. So they've been very supportive of the investments we've wanted to make in terms of strengthening the presentation on the floor.

And just what we've seen over a very long period of time, these small tertiary brands continue to be edited out and we gain that floor space. So the big initiatives our wholesale customers have had in recent years strengthening their private label brands to focus on the more value-oriented consumer. I think they have done a beautiful job with that. Private label has become particularly good in recent years and so have we. So it's -- it gives the consumer a good choice when they shop for young children's apparel.

Thanks. And then finally for Jim, can you tell us what the impact of the Easter shift will have on your first quarter comps?

Yes, we're looking at just a couple points of comp, nothing extraordinary. And again, with the current trends, Jim, when you look at the blended average between the two months where we're feeling very good that we're going to comp positive overall.

Great. Best of luck.

Thanks.

And we go next to Howard Tubin with RBC Capital Markets.

Thanks, guys. Just two quick ones here. In terms of your guidance for the first quarter, does it assume that you have passed on any price increase, or does it assume pricing constant with where it's been?

It does assume that we have raised prices.

It does, okay. And then maybe just big picture theoretical question on cotton. As you plan business long term, is your view, we're at a new level for price -- cotton pricing, or do you think it steps down over time?

There's two folks [locally] that I would characterize as cotton experts, people who are -- have made a good living following the cotton market. And their view is that we're dealing with generational, what they have described as generational highs, abnormally high due to a lot of things that did not go well, like flooding in Pakistan and speculative trading pushing the prices up; and third world countries -- Pakistan, India, not honoring certain contracts, which forces parts of the world like China to go to other parts of the world to find cotton. So you're dealing with an abnormal situation right now and so we do expect cotton prices will come down and the question is just how long? And the prices are much higher than anybody would have ever anticipated and so the question is how quickly will they come down, as it's highly weather-dependent. So there are a number of variables that you can't predict, but no one expects the cotton to stay at these prices.

Got it. Okay, great. Thanks.

And ladies and gentlemen, with that, we will close our question-and-answer session. Mr. Casey, I'll turn the conference back over to you for any closing remarks.

Okay. Thanks very much. Thank you all for joining us this morning. We appreciate your support, your understanding of what we're working through right now. Certainly appreciate your interest in our business and we look forward to updating you again on our next call in April.

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