Carter's Inc (CRI) 2011 Q1 法說會逐字稿

Ladies and gentlemen, please stand by. We are about to begin.

Good day, everyone, and welcome to the Carter's first quarter 2011 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 first quarter 2011 earnings press release today before the market opened. A copy of the release, as well as additional presentation materials for today's earnings conference call, have been posted on the Company's website at www.carters.com. Click on the investor relations section, then news and events 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 non-GAAP financial measurements to the GAAP financial measurement is provided in the Company's earnings release. Please note also that today's call is being recorded.

And now, I would like to turn the call over to Mr. Casey. Please continue, sir.

Thank you very much. Good morning, everyone. Thanks for joining us on the call. An update on our business is available at -- on our website. Before we walk you through that update, I'd like to share some thoughts with you.

Generally speaking, our business is trending a bit better than we had planned. The strength of our business continues to be driven by our Carter's brands, which in the first quarter represented about 85% of our total sales and 100% of our profitability. Every component of our Carter's business exceeded sales plan with the exception of our Child of Mine brand. Sales from our Carter's brands grew 18% in the first quarter with good growth in both the wholesale and retail segments. The feedback from our wholesale customers continues to be very positive. We're helping them drive growth in their kids' apparel business.

Today we haven't seen any significant price increases by our wholesale customers in children's apparel, but we do expect to see more meaningful price increases in the fall. Fall shipments are scheduled to begin in a few weeks, and those shipments are planned up about 8% for the year. If you have a chance to visit the National Retailers, our Carter's stores, or go online to Carters.com, you'll see an absolutely beautiful product offering and great values. In recent years, we've invested in our merchandising and design teams to strengthen our Carter's product offering, and they've done an outstanding job bringing consistency to the performance of the Carter's business.

Our OshKosh brand sales in the first quarter were comparable to last year. Unfortunately, the results don't reflect the progress I believe we're making with this great brand. A year ago, we invested in a new brand leader and a new head of design for OshKosh. They joined us in time to have some impact on the spring product offering. Together, they helped us launch a new component of the product line called "B'gosh Basics," which has performed well in its first season. Our number one objective for OshKosh is to improve its profitability. This is a $350.0 million business with nearly 80% of its sales generated by our retail segment. With this channel mix, we should be able to earn at least a 10% operating margin. I'm hopeful with strength and consistency in leadership and with better execution across all functions supporting this brand, we'll see meaningfully better performance by OshKosh over the next couple of years.

In terms of other noteworthy updates on our business since our last call, our eCommerce business is growing faster than we expected. We recently celebrated our first year selling online, and during the past year we attracted new consumers to our brands. Our data suggests that nearly 70% of first-time online consumers are new to our database. Our online shoppers spend more than those who shop in our stores. We're seeing an average order value online that is twice what we achieve in our stores. We now believe our eCommerce sales will grow to over $100.0 million within the next couple of years. At that level, online sales would be about 10% of our retail store sales.

We find it very interesting that nearly 25% of the demand for our brands online is being paid for with international credit cards, with the largest number of purchases coming from Brazil. Our eCommerce team will be working with our new International leader to explore opportunities to accelerate our growth outside the United States. We have a well-established but underdeveloped international business. We recently hired a new senior vice president to help strengthen our international growth plan. Last year about 7% of our operating income was from international operations. This year, we expect it to contribute about 12% of our operating income. We'll share more about our international growth plans with you later this year.

Earlier today, we announced that we have a new supply chain leader. Chris Rork was most recently with Levi Strauss and based in Hong Kong. He has a rich background in supply chain operations that support both wholesale and retail businesses, and that was important to us in the recruiting process. Charlie Whetzel, our current supply chain executive, is retiring this year. Charlie's done an exceptional job over the past 19 years, helping the Company to grow from a $200.0 million domestic manufacturer to a nearly $2.0 billion global sourcing company. Chris Rork's near-term goals are to build on the cost-savings initiatives that Charlie currently has in place and to help accelerate some of those initiatives, particularly shifting our sourcing mix to lower-cost countries and pursuing more direct sourcing opportunities. Chris has lived in Asia for the past 10 years. During that time, he has built close relationships with many different sourcing agents and suppliers. Chris has already begun to work with Charlie and the supply chain team to insure a smooth transition.

In terms of our outlook on product costs, we're encouraged that cotton prices have dropped 10% since our last call. The best information we have today suggests that product costs should begin to improve in the second half of 2012. Our supply chain team is currently in Asia negotiating spring 2012 costs. We don't know how much higher those costs will be relative to spring 2011, but we know cotton prices have more than doubled since last year. We'll have more clarity on spring 2012 costs on our next call. In the meantime, we're doing what we believe is prudent and possible to achieve a good operating margin this year. We are raising our prices. We are improving our pricing and inventory management strategies. We're accelerating our growth in high-margin businesses -- retail, eCommerce, and international -- and we're excited about the initiatives underway in the supply chain.

In summary, we are focused on driving top line growth and gaining market share, and we are focused on delivering the most compelling product offering in young children's apparel. We expect to take a step back in profitability this year, but we are absolutely committed to building back to our 14% operating margin over time.

Richard will now walk you through the presentation on the website.

Thank you, Mike. Good morning everyone. We've posted our usual supplemental materials to the investor relations section of our website. We'll use these slides to walk through our first quarter performance, as well as our expectations for the second quarter.

On page 2 of the presentation, we summarize some highlights of our performance in the first quarter. Overall, we had a strong top line performance with net sales increasing 15% over last year. We had a terrific first quarter a year ago, both in sales and earnings, so we feel good about the topline growth, which we delivered this year versus a tough comparison. Our net sales results were a bit better than we had expected and were led by the strength of our Carter's wholesale and retail businesses, including eCommerce. As expected, our earnings were negatively affected by higher product costs. EPS for the quarter was down 23% versus last year, which, again, was somewhat better than we had forecasted. Some of this upside represents favorable timing of revenue and SG&A. Our balance sheet continues to be very strong and should provide us with a lot of flexibility as we continue to manage through this period of higher product costs.

Turning to page 3, we have a summary of the components of our sales growth in the first quarter. As I mentioned, the strong growth in sales was led by our Carter's brand wholesale and retail businesses, and the acceleration of our eCommerce business which launched at the end of Q1 last year. Carter's wholesale sales increased $42.0 million or about 28% in the quarter. Carter's retail sales increased $20.0 million in the quarter, driven by new door growth and a comp store sales increase of just over 1% and from the strong contribution of eCommerce sales.

Mass channel sales in the quarter were down approximately $1.0 million, or 2% to last year. In the first quarter, Child of Mine sales were down somewhat, reflecting largely a difference in the timing of shipments this year and some seasonal transition issues in the business. Just One You had solid growth in the quarter. OshKosh sales in total were comparable to a year ago. OskKosh retail sales decreased $1.0 million, down 2%. This decrease was due to a comp store sales decline of 9.8%, partially offset by the benefit of new doors and eCommerce sales.

I'll speak a little bit more about our business segment results in a moment.

Our first quarter P&L is on page 4. As expected, growth margin in the quarter was down 720 basis points versus last year, driven primarily by higher product costs and some additional provisions for excess inventory. As we have discussed previously, spring 2011 product costs are up approximately 12% over last year, driven by higher cotton and other production costs in Asia. The negative impact of higher product costs on our gross margin is expected to continue throughout fiscal 2011. As we told you on our last call, the impact of higher product costs will be more pronounced in the fall, where costs are expected to be up about 25%. In response to these higher costs, we have planned for more significant price increases in the second half of this year. As Mike indicated, our fall products begin shipping to our wholesale customers at the end of May.

SG&A increased approximately $8.0 million or 8% over last year, with about 150 basis points of leverage, given our strong top line in the quarter. Royalty income was down a bit due largely to our Child of Mine licensing business, which had been cut back as part of the changes we experienced with the brand [law.] Excluding Child of Mine, royalty income increased approximately 3% over last year. Interest expense in the quarter was down about 25% from last year, due to carrying less debt on the balance sheet. As a reminder, last year we repaid $100.0 million of outstanding borrowings. From an earnings standpoint, first quarter earnings per share of $0.55 were down 23% from first quarter 2010 earnings of $0.71. Again, keep in mind our tremendous earnings performance in last year's first quarter and the tough comparison that it represented for us this year.

The next few slides provide some additional color on our business segment performance in the quarter. I'll start with our Carter's brand businesses on page 5. As I mentioned earlier, sales in the first quarter were up about 28% to last year. A significant portion of the growth in this segment was due to higher sales through the off-price channel. We've had consistently strong demand from these customers for our products. Sales were also higher in this channel as we worked to move through excess inventory in the quarter. Off-price sales were unusually low a year ago, reflecting the overall strength of the business and our overall low inventory levels.

We also had very good performance in sales to our traditional wholesale customers. Sales to these customers were up about 9% in the quarter. This is on top of the 27% increase we posted in the first quarter of last year. We've generally been pleased with the performance of our spring assortments. Season to date spring over-the-counter sales at our top customers is up 6.4% over spring 2010, with particular strength in baby and playwear. We now have good visibility to our fall order file and fall seasonal bookings are up high single digits.

Returning to the Carter's mass segment channel on page 6, mass channel sales in total declined in the quarter with sales of Child of Mine down and sales of Just One You up in the quarter. We continue to work through some transition issues related to expanding our Child of Mine business, but are pleased that the mass channel is back in a growth position again with growth planned for both mass channel customers in 2011.

On page 7, we have some of the key metrics for Carter's retail. We delivered a comp increase of about 1% for the quarter, which compares to an 8% comp in the first quarter of last year. With our first quarter performance, we were up against a comparison to an earlier Easter holiday last year, and all quarter we faced very tough winter weather conditions throughout the nation. Obviously, such conditions are not conducive to young moms and grandmothers to be out shopping for our products, particularly if they have their kids with them. As a result of the shift in the holiday and the challenging weather, customer traffic was down overall for the quarter, impacting our comp store sales performance.

In terms of regional performance, we comped positively in all regions except for the East where the business was most impacted by weather. Despite the traffic decline, however, our in-store execution continued to be very good, as units per transaction increased and contributed to the positive comp for the quarter. Average unit retails were down 1.4%. We did see an increase in the AUR for our spring assortments for the quarter, but it wasn't enough to counter the heavier discounting on fall product which was required as a result of the traffic declines experienced earlier in the quarter. We are very encouraged by our more recent performance, particularly in geographies where more consistent spring weather has arrived. Obviously, the Easter shift also had a significant impact on the results we were reporting for the quarter. On a year-to-date basis, our comps are up nearly 4% which we believe is very good performance given the environment.

We opened 10 new Carter's brand stores in the quarter, and we remain on track to open 55 new locations in total this year. On page 8, we have a photo of the Carter's store in Locust Grove, Georgia, which is just south of Atlanta. This is a new store and reflects some of our latest thinking on store design for Carter's brand stores.

Now, turning to our OshKosh businesses, we summarized some details for OshKosh wholesale on page 9. Overall, we're generally pleased with the performance of OshKosh at wholesale. The reaction of our wholesale customers to our improved product assortment has been good, and we continue to evaluate ways to accelerate this channel of growth for the OskKosh brand. In terms of the spring assortment specifically, boys products continue to perform better than girls. Our fall seasonal bookings for OshKosh wholesales are up high single digits.

Turning to page 10 in the performance of OshKosh retail in the quarter, we're obviously disappointed with the performance of this part of our business, but we do think we have our arms around the factors which most significantly contributed to these results. Traffic in our OshKosh retail stores was down in the quarter, although much more significantly than what we experienced in Carter's. Here again, we believe weather was a significant issue throughout the quarter. Unlike Carter's, which now has nearly 40% of its stores in brand store locations, OshKosh remains primarily concentrated in outlet centers. We believe these locations are inherently more susceptible to traffic declines when weather is poor. Additionally, we think that rising gas prices could be incenting some consumers to shop closer to home versus driving further out to the outlets.

Encouraging to us has been a trend of continuing improvement in our in-store performance metrics like conversion. We believe customers are beginning to recognize the overall improvements in the OshKosh product which Lisa Fitzgerald and her team have made. AUR's were down slightly in total for the quarter by about 1%. Similar to Carter's, this reflects the discounting activity to move through inventory, particularly fall product, as a result of the lower customer traffic trends. For the quarter, AUR and spring product did increase about 4% which we feel good about. Similar to Carter's, we have been very encouraged by our more recent performance. April comps month-to-date are up about 6%.

On the next couple of pages, we have included photos of two of our OshKosh mall test stores, one in Cincinnati and the other in the Denver area. We'd encourage you to visit these stores if you have a chance and give us your feedback.

On the next page, a particular bright spot in the quarter was the performance of our eCommerce business. We launched this business just over a year ago, and it's off to a great start. In Q1 eCommerce revenues were nearly $11.0 million, the majority of which were from sales of Carter's products. As Mike mentioned, our data suggested many of those purchasing on our website are new customers. We are continuing to work on developing our multi-channel strategy but think that having our website will be an important way of extending and deepening our relationships with customers over time.

On page 14, we summarized our business segment performance for the first quarter. Overall operating income declined about $18.0 million in the quarter with our consolidated operating margin declining 600 basis points to 11.4%. At a high level, the decline in our operating income was due to lower gross margins, which reflect the impact of higher product costs as we have discussed and higher SG&A.

In our Carter's wholesale segment, in addition to the impact of higher product costs, the operating margin was weighed down a bit by the increase in sales to the off-price channel as compared to a year ago. In the mass channel, in addition to higher product costs, the operating margin was negatively impacted by some additional excess inventory provisions which we've taken as we continue to work through some transition issues in the Child of Mine business.

In OshKosh retail, higher product costs, the negative comp-store sales performance, and higher SG&A expense driven by investments in the business, such as the new stores opened last year, all contributed to the decline in this business's operating margin. The first quarter decline in OshKosh profitability was about $2.0 million worse than we had planned, largely due to the negative comp result for the quarter.

On page 15, we have a recap of SG&A expense in the quarter. As I indicated earlier, SG&A was up about 8%, most notably due to additional retail stores, higher retail admin, and eCommerce operational expenses. We have also continued to invest behind additional marketing, primarily direct mail. As we're forecasting lower full-year earnings, we're also providing significantly less for performance-based compensation. These expenses were down about $4.0 million year over year in the quarter.

Turning to page 16, we have a recap of a few key balance sheet and cash flow metrics. The balance sheet continues to be very strong. Cash on hand at the end of the quarter was approximately $250.0 million, down from last year's quarter-end position as a result of our debt repayment and share repurchase activity in 2010. Accounts receivables were up $41.0 million, reflecting higher sales and the timing of shipments this year to our wholesale customers. As planned, inventories at the end of the first quarter were up approximately $75.0 million or 52%. This increase was driven by higher spring and fall 2011 product costs, incremental inventory to support business growth, including new retail doors and eCommerce, and longer product lead times. Overall, we believe the quality of our inventory is excellent. Operating cash flow for the first three months was down approximately $14.0 million compared to last year due to the decrease in earnings and changes in working capital. CapEx year to date was about $7.0 million, which mostly represents spending on new retail stores.

Turning to our outlook on page 18, similar to last quarter, we're going to limit most of our comments today to the current quarter. We are expecting good revenue growth in the second quarter, an increase of 16% to 19% over the second quarter of last year. We expect that earnings per share will be in the range of $0.10 to $0.14. This implies first half earnings in the range of $0.65 to $0.69, a decrease of about 30% versus last year. Keep in mind that the second quarter is the smallest of the year. Relatively small movements in earnings can represent relatively significant percentage variances. The principal driver of our projected lower year-over-year earnings in the second quarter are higher product costs. We have also moderated our forecast for OshKosh retail given our recent performance experience, and we do expect that some of the revenue and expense favorability which we saw in the first quarter will reverse in the second quarter.

Our visibility to the second half continues to be challenging. While we've locked down our fall product costs, we've not yet completed our sourcing work for spring 2012 products which will begin shipping in the fourth quarter of this year. Additionally, we have planned more significant price increases on a broader portion of our assortments than in the first half. We won't have a good read on the consumer and competitive reaction to these actions until later in the year. At a high level, however, we continue to plan good top line growth across our businesses in 2011. At this point, we're planning revenue growth in each of our businesses for the full year. Overall, we're tracking slightly above our plan for full-year earnings. We expect that inventories will continue to be higher throughout the balance of the year. By year end, we expect inventory units to be roughly comparable to a year ago with the overall increase in net inventories being driven by higher product costs. We're still tracking to a CapEx forecast of about $50.0 million as we continue to roll out new stores.

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. (Operation instructions) And for our first question, we go to Anna Andreeva with JP Morgan.

I had a couple of questions. First, was wondering if you could talk about maybe some of the price increases that you've implemented so far. Just what kind of customer reaction are you seeing to those, either in the retail channel or your wholesale channel?

For spring, the -- I'd characterize the price increase as modest. I'd say, low to mid single digits for spring in our retail stores. I'd say low single digits with Carter's, mid single digits with the OshKosh brand. On the wholesale side, not seeing meaningful price increases yet in spring, but that was expected. I -- all the insight we had, I don't think many companies saw significant cost increases in the first half of this year. I think the general theme for the second half of the year is most have seen meaningful price -- cost increases, so the price increases will be more meaningful in the second half of the year.

Okay. And what kind of consumer acceptance have you seen so far to higher prices in your own stores?

I'd say, some. I'd say -- yes, where we've tried to raise them, I'd say some. But again, they haven't been particularly meaningful.

Hi, Anna. It's Jim. I can give you a couple of points of view about it. Overall, again, is -- our efforts have been somewhat modest but ramping up. Most recently, I can cite the fact that our current promotion, for example, mirrors a promotion that we had last year. Last year we had a $5, $7, $9 sale. This year we have a $6, $8, $10 sale on the Carter's brand, and results have been actually very positive. So that's a bit more meaningful of a price increase than we've moved towards earlier in the year, but initial results are indicating that there is some price tolerance.

And we start to ship fall in a few weeks. So by the July earnings call, we'll start to get a read on how they're reacting to those higher prices.

Okay. No, that's great to see. And I was hoping to just get a little bit more color on OshKosh, just what drove the negative 9 comps in the quarter. I understand the weather and the outlet exposure of the business, and great to hear that -- sounds like April trend has improved. But maybe more color, just what drove the decline and any initial response on the Basics program so far?

Sure. To give you a little color around it -- and you hit on what I would say are the two biggest reasons for the decline. And clearly traffic was down, and that was due -- in large part due to weather but also with the shift in Easter. And we do believe that that shift in Easter impacts the OshKosh business a little bit more than it does the Carter's business. That being said, positive indicators are that our -- our conversion rate in the business was actually up. So the customers that did come in converted at a higher level than they did last year, which we think is a positive.

The other things that were perhaps somewhat self-induced is the delivery of the product. We delivered our spring assortment a little bit lighter from a seasonality perspective than we would've liked to have, and going forward, we're going to rectify that. That being said, our fall product, while inventory in the fall side of the business, which you can refer to as carryover, was down compared to last year, actually we had a over 20% comp in that side of the business. So customer reaction, once they came in, was positive along the lines of the product acceptance. We continue to struggle in girls as was mentioned, but we actually saw positive comps on a year-to-date basis in the boys side of the business, the swim side of the business, the outerwear side of the business and the sleep side of the business. So there are some positive indicators going on. As it relates to the acceptance of B'gosh Basics, the acceptance has been there. We would have like to have delivered a lower penetration of the overall assortment as early as we did, and again, we have plans to rectify that for spring 2012.

Okay. And finally, just quickly looking on the SG&A line, much more leverage than what we expected, and I understand looking forward the gross margin, there's not a lot of visibility there. But could we expect a similar tight management of SG&A line in the next couple of quarters?

Well, we're continuing to manage expenses and discretionary spending, in particular, Anna, but are continuing to invest where we need to and where it's proven to be a very good investment for us, and that would be our retail stores, eCommerce. So SG&A will continue to be up year over year as we move through the year, but we certainly are taking steps to control discretionary spending wherever we can.

Okay. Well, thanks so much guys and best of luck.

Thank you.

And for our next question, we go to Helena Faye with Bank of America Merrill Lynch.

Hi. Good morning, guys. In regards to your gross margin decline in the first quarter, it's like around 700 basis points, can you help break out what percent was really the product costs and what percent might've been sort of the performance related to OshKosh retail business and maybe any other impacts, whether it be shipping and whatnot? And then the second part is, how are you planning that OshKosh retail profitability to go forward in 2Q and beyond, and what's your comp sales guidance for both Carter's and OshKosh? Thanks.

Helena, as it relates to gross margin, the vast majority of the decline in gross margin would be due to higher product costs. Year over year, we had about $3.0 million higher of provisions that we took for excess inventory, but the balance would be largely related to just higher production costs moving to the P&L. OshKosh profitability, we're going to continue probably to forecast down over the balance of the year. That, as well, is also driven mostly by a product cost increases. In our sourcing work, the play clothes category probably had the highest increases in sourcing costs that we saw as we put the year together. And we are very modest in our comp store sale expectation for the balance of the year. For the second quarter, it's a low single digit comp for OshKosh that we're forecasting.

Great. And then, in regards to your wholesale order books, can you help break out what percent is price increase versus units, and how are you guys planning the off-price channel to go forward year over year?

Generally speaking, first half of the year, the growth will largely be unit volume driven. Second half of the year will be more price driven.

And the -- okay.

The off-price business is planned up this year. Some of that was -- we had planned to do a bit more business with some of these customers, and we do have a bit more inventory that we are working through relative to past years. The last couple of years have been historically low in terms of excess inventory generation and activity actually in the off-price channel. Historically, it's not been a big proportion of what we do. It's a low single digit percentage of total revenue.

Great. Thanks, guys.

You're welcome.

We go next to Steve Marotta with C. L. King.

Good morning. Thanks for taking my call. Can you go over the inventory a little bit in more detail? It's up 52%. Can you quantify what is costing there and units?

Steve, I don't know if we have all those details right here. Again, the majority, I would say, is driven by product cost increases -- actually, a balance, product cost increases and just good solid growth in the business. We didn't have the eCommerce business a year ago. We have a significant increase in the number of retail stores that we have. It would be a mix of those, more on the product cost side if I had to weight it.

And aged inventory is not a concern?

It's not. We've provided for the pieces of the inventory that we think are problematic. The rest of the inventory is in very good shape.

Okay. And I know that you guys don't position cotton, but can you talk a little bit about how spot cotton -- how long that takes to flow through your particular sourcing chain?

That's a difficult question to answer, because our suppliers are buying cotton at all different points on the time continuum. We do think, though, that the forward price information that's in the market place is -- is encouraging. That will be the cotton that we'll use to make our products for 2012. Exactly the time that that bleeds in and improves our margins is a little tough to say at the moment. The decrease in the spot price right now in the marketplace, we think, is more indicated by folks who've already procured what they need for producing the near term products, as we have as well. So that's probably not a huge source of benefit near term for us.

Okay, great. Thank you.

For our next question, we go to Gerrick Johnson with BMO Capital Markets.

Hi. Good morning. I was hoping you could talk a little bit more about your plans at Walmart, what's going on there, as well as the mall store initiatives. Thank you.

On Walmart, we had a meeting with the head apparel merchant, a couple of weeks ago, and the tone at the top continues to be very good. They're working hard to strengthen the apparel component of their business. They've done a nice job strengthening their organization to try to implement new strategies, and we're helping them with those strategies. Later this year, we're going to be rolling out the brand wall to 3,600 doors. We're currently in 1,800 doors. So we'll start to see the benefit of that tail end of this year, more significant next year. So we're very encouraged by the path that we're on with Walmart. That business has not grown over the last couple of years. It was the only component of our business that didn't grow, and we had strength in every other component of our business, and -- but we've been working with them over the last couple of years, and I think we've -- they've been very transparent about the issues that they're having with their business. That certainly has had an impact on our component of our business with them. But we're very encouraged by the path that they're on. And this year we're expecting growth with Child of Mine, and we're forecasting good growth for the next several years with them as well.

On -- this is Jim. On the mall stores, we're learning a lot, and I want to reiterate that this is something that we're testing the waters on. But overall, we're pleased with the results. Also, we have three stores currently open. They're all trending above $1.0 million in sales, and we highly recommend that you go see them. We're very proud of them. Again, they're at Southshore outside of Boston, Park Meadows outside of Denver area, and Kenwood outside of Cincinnati, all great malls. And, again, they do the brand quite proud. As it relates to what we're learning, we're learning that maybe we can be a little bit smaller in square footage, and we've got some initiatives under way there. We're also very much focusing on the correct components of the business and are laying the correct resources on how we can best optimize sales and profitability in these locations. So short way of saying it, overall, we're satisfied so far. It's still a test in progress, and we'll keep you posted going forward.

Okay. None of those malls are near me, so I'm not sure if they have a Macy's or a JC Penney or any of your wholesale partners in there. How has the reaction been, say, from some of those partners and how do you think it impacts their business?

You know, it's one of those things -- remember, these are OshKosh stores. And as Richard -- or Mike stated at the beginning of the call, that 80% of our volume in OshKosh is done in our own stores. So our penetration in wholesale is still somewhat modest. So we really don't have any issue, per se. Now, I will tell you that all of those retailers that you mentioned are in these malls. These are very good malls that we're in but really has been absolutely no issue, and, quite honestly, we don't anticipate any.

Okay, great. Thank you.

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

Going back to your inventories, if I may, can you split the increase or somehow parse the increase in inventory between retail and wholesale? And can you also comment about what you -- how you feel about your inventory position on retail wholesale floors?

I'll comment in total and I'll ask Jim to comment on retail inventories. In total, we're comfortable. These are big percentages relative to where we've been in the business, but they do support significant growth in the business. We have very good growth, really, across all channels of the Company for the first half of the year. And then you layer on rather significant product cost increases, as we said, 12% for spring, 25% for fall, and obviously a lot of that fall product is starting to arrive now for delivery to our customers in the next 60 days or so. So in total, comfortable with the position. They are bigger percentages than the business has run recently, but we feel good about the quality. And the small pockets where we have some excess inventory, we've actually made very good progress moving through that.

Can you -- I don't mean to interrupt. But how big is the fall component of the inventory?

Don't have that right in front of me, Susan.

Okay.

That would not be the biggest piece of our inventory at the end of the first quarter.

In retail, Susan, the quarter, we ended very modestly incremental to last year. So, for example, Carter's we ended up about 2.6%, had on an average store basis in units compared to last year, and in OshKosh closer to 1.0% increase to last year. So we feel very good about our inventory positions to date and on a go-forward basis.

Okay, that's great. Now, I heard you say that you -- somebody indicated what the OshKosh comp performance, April month to date was, which was encouraging. Did you mention something for Carter's? Did I miss it?

I'm not sure if you missed it or not, but April we are running positive as well with a -- I'll call it a high teen or mid teen increase to LY, roughly 13%. So we're -- we're running very strong in April and a very good trend on a Mar-pril basis, which is the March-April combination, which you really have to look at for us, because of the way our quarters break --

Sure.

-- and how Easter falls. So strong Mar-pril overall and a strong April.

All right. So this mention of some consumer resistance, it's to higher prices, it would suggest, at least so far, the resistance has been -- I don't want to put words in your mouth -- but modest?

Yes, I would say -- I would actually the price increases have been modest. You got to keep in mind our average price points are less than $8.

Right. Okay.

So increased price about 8 -- 5% or so, that's rounding. So it's -- I'd say they've been modest. So I think the more significant test is going to be in the second half of the year.

Right.

What we're trying to do is just walk the prices up and we're trying to walk them up some portion of a dollar at a time. We've had the benefit of cost decreases for the past 10 years, and with what we've -- what we're dealing with in terms of this abnormal spike in product costs, I think it's unrealistic to expect that we could recover all that in a season or two. So the second half of the year, we said our fall costs are up 25%. I think if we tried to take those prices up 25%, we would see an impact on the top line. So our strategy is to keep that top line growing strong and keep on gaining share, and I think that strategy is working for us.

Okay. Just one final question for you, Mike. Generally, it seems that there has been no effective movement on out-the-door price so far in part because of all the clearance inventory that was around, you know, the other promotional activity. When you look in the second half, you know what you're going to try to do in terms of walking prices up. Any insights in terms of what your primary competitors are doing, meaning the private labels in your wholesale accounts and/or other -- other, say, specialty -- children's specialty retailers?

I believe the common theme from what I've read about, things that they've said publicly, is everyone is testing higher price points. If you look at the Sunday circulars, in your Sunday newspaper, you'll see that what was $4.99 a year ago at times are $5.99. What was two for $10, is two for $12. So I think everyone's trying to test higher price points. I wouldn't say those prices have -- that that level of pricing is consistent from week to week, but certainly every retailer is testing higher price points, and so have we. And I think the reality of the second half of the year, everyone's costs have gone up more meaningfully than the first half of this year. So everyone is going to be raising prices, including us. So our objective is to stay competitive. And if you were to -- every season we put all of our competitors' products, including private label, up on a wall and we see how we stack up. And if you have the lower priced things to the left and the higher priced things to the right, we're certainly at the right end of that spectrum. So we lead the market on pricing. We'll continue to lead the market on pricing. But our overall objective is to be competitive and not try to cover this abnormal spike in product costs.

Okay.

At least not near term.

Very helpful. Best of luck.

Thanks. Thanks, Susan.

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

Hey guys. Thanks. Maybe you just -- could you update us on any different kind of marketing plans you might have this year for the back-to-school season relative to last year, whether it's in store or online or anything like that?

Hi, Howard. It's Jim. We have a -- I'll call it a relatively aggressive marketing strategy planned. Our direct -- I'll call it, pieces that will be going out -- I won't get into specifics about the quantities of individual pieces, but we're planning two more mailed vehicles this year than we had last year. And the results of our mail vehicles to date have been very positive. So in addition to that, we really have been focusing on cleaning up the quality of our database and growing our database, which we continue to do at a pretty good clip. So a larger database, a couple more -- two more mailed vehicles going out. We also continue to focus from a marketing perspective on the use of our email file and growing that email file, and then the type and effectiveness of the emails that we actually do send out. In addition to that, we focus very heavily on how our eCommerce business, which is growing to be perhaps our strongest form of marketing, I mean, how that also is a catalyst for the retail business.

Guys, sounds good. Thanks.

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 very much. We appreciate you joining us this morning. We look forward to updating you again on our next call in July.

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