Carter's Inc (CRI) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to Carter's second 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 second 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 measurements is provided in the Company's earnings release.

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

Thanks very much. Good morning, everyone. Thanks for joining us on today's call. We've prepared a good update on our business, which is available on the website. Before we walk you through that presentation, I'd like to share some thoughts with you.

We exceeded our sales and earnings goals in the second quarter and achieved sales growth in every segment of our business. Consumers are clearly responding to the strong value inherent in our brands. We've driven exceptional top line growth in the second quarter, extended the reach of our brands to more consumers, and gained market share. Since our last update, we launched our new fall product offerings, we gained visibility on Spring 2012 demand, we saw a significant decline in cotton prices, and we acquired our largest international licensee.

As a reminder, fall shipments for both Carter's and OshKosh are expected to be up about 8% this year. For Carter's, that growth includes introducing our baby and sleeper product offerings at Dillard's. Over the next few weeks, many retailers will complete their fall floor sets in preparation for back to school shopping. Most of the fall selling will occur over the next two months so it's a bit too early to have a good read on the consumer's response to our fall product offerings. Given the unusually hot weather in recent weeks, most consumers are still taking advantage of the end of summer clearance sales.

To support our second half growth plan, we've invested more in marketing for both brands. We're leveraging our expanded customer list to increase the circulation of beautiful direct marketing mailers, which will be in homes early August. We've strengthened our marketing messages this fall, which will be consistent across all channels of distribution. Our Carter's marketing is focused on the baby essentials, fall playwear, our new sleepwear shops, and Halloween. Our OshKosh marketing is focused on denim, B'gosh Basics, great outfits for back to school including school uniforms.

We believe we're well positioned on pricing for the second half. Our average out the door prices for both brands are planned up 10%, which is less than $1 per unit. We believe our brands will continue to be a very affordable purchase. About 70% of our product offerings sell for less than $10. As we prepare for 2011, we're very thoughtful about the consumer's tolerance for higher prices. We made a strategic decision to stay very competitive on pricing. We did not pass through all of our cost increase to consumers. Our objective was to maintain the same relative pricing to private label brands and other competitors to enable our continued top line momentum. From what we've seen to date, we believe our price increases are in line with our competitors.

As we shared with you earlier this year, due to the abnormal spike in cotton prices, we will have a short-term step back in profitability this year. Since our last call, however, cotton prices have dropped to about $1.07 a pound from a peak of over $2 a pound earlier this year. That said, cotton prices today are still about 30% higher than last year. Experts predicted that we'd see a demand driven recovery. Many retailers and wholesalers are raising prices and planning units flat to down from last year.

Worldwide, production of cotton is up. Demand for cotton in the United States is down and supply and demand are coming back into balance. Since our last call, we've gained visibility on Spring 2012 product cost increases as costs are expected to be higher than Spring 2011. But the increases are not expected to be as significant as those we saw for Fall 2011. Given the recent decline in cotton prices, we may see some improvement in our current cost estimates for Spring 2012. We don't expect to see the full benefit of lower cotton prices until Fall 2012.

In June, we announced the acquisition of Bonnie Togs, a Canadian based retailer of young children's apparel. We've been evaluating this growth opportunity over the past year. Bonnie Togs met all of our acquisition criteria. It is led by a first-class management team with a track record of growth in children's apparel. Their expertise enables us to enter a new market, which would have otherwise taken us years to develop. This investment will be immediately accretive to earnings and based on extensive consumer research and other diligence, we believe it provides a meaningful opportunity for growth.

Bonnie Togs has been a licensee since 2007. In terms of royalty income, Bonnie Togs was our largest international licensee in 2010. Its sales over the past 12 months were about $100 million and they earned a mid-teen operating margin. We believe we can double its sales and earnings over the next five years. Today, Bonnie Togs is operating 60 stores, including 20 Carter's OshKosh cobranded stores. Bonnie Togs has about 5% share of the Canadian children's wear market and we believe it can grow to about 10% of the market over the next five years. The Bonnie Togs management team has done a beautiful job executing this cobranded store format, which is generating high sales productivity and earnings. We look forward to working with them.

The acquisition of Bonnie Togs should help us accelerate our growth in the Canadian market and provides another avenue for growth. We consider ourselves very fortunate to be the largest supplier of children's wear to the largest retailers in the United States. Our brands are sold in over 15,000 doors nationwide. We work hard every day to help our wholesale customers strengthen their young children's apparel businesses and the feedback they provided during recent market week meetings was excellent. We now have visibility on Spring 2012 demand. The bookings for our spring product offerings, which should begin shipping in the fourth quarter this year are up 8% for Carter's and 3% for OshKosh.

In terms of other key areas of focus, we're extending the reach of our brands through our retail store and E-commerce growth initiatives. We're on track to open 60 stores this year and our E-commerce business is ramping up faster than we had planned. Earlier this year, we strengthened the leadership over our international business to support growth outside the United States. We're currently doing business in more than 40 countries. Our focus near term is to pursue new growth opportunities in Canada and we're exploring longer-term opportunities for growth in China and Brazil. We're also focused on improving the profitability of our business, pursuing every meaningful opportunity to mitigate the near term and we believe short-term impact of cotton prices.

In summary, we believe we're well positioned heading into the second half. We have a strong product offering, very competitively priced, and beautifully presented in stores, online, and in direct marketing. We expect top line growth will continue to be robust and given the current trend in cotton prices, we believe that within the next 18 months we'll begin to show progress improving our operating margin.

At this time, Rich will walk you through our second quarter results and our outlook for the third quarter.

Thank you, Mike. Good morning everyone. Before we jump into the results for the quarter, I want to welcome Sean McHugh as our new Vice President of Investor Relations. We're glad to have Sean with us and his contact information is included with today's press release. As usual, my comments this morning will track along with the presentation, which is posted to the investor relations portions of our website.

On page two of the presentation, we summarized some highlights of our performance in the second quarter. Overall, we delivered strong top line performance with net sales increasing 21% over last year. Our results were better than we had forecasted, in part due to about $11 million of fall product shipments, which we had planned to occur in the third quarter but moved into the second quarter at our customers' request. These sales were in the Carter's wholesale and mass channel segments. Excluding the benefit of these sales, revenue growth was still extremely strong in the quarter. We've estimated these earlier shipments contributed approximately $0.04 to earnings in the quarter.

We've also continued to see better E-commerce sales than our forecast, as consumer traffic to our websites continues to build. Gross margin was also somewhat better than we had thought, in part due to the higher than expected revenue and more favorable sourcing and freight costs. As anticipated, our earnings continued to be negatively affected by higher product costs. Our reported earnings per share for the quarter were down 31% versus last year. As Mike noted, we have completed the acquisition of Bonnie Togs. We incurred about $1 million in pre-tax charges related to the acquisition in the quarter. Excluding these charges, adjusted earnings per share for the quarter were down $0.23 per share -- were $0.23 per share, a decline of 28% over last year. Again, these better earnings results were driven by above forecast sales and gross margin performance.

Turning to page three, we have a summary of the components of our sales growth in the second quarter. Carter's retail segment sales increased $29 million in the quarter, driven by new door growth, solid retail brick and mortar store comps of 8.1% and strong growth in our E-commerce business. Carter's wholesale sales increased $17 million or about 15% in the quarter.

Mass channel sales in the quarter were up $12 million, or 30% to last year. This growth was driven by solid Child of Mine sales growth, reflecting additional floor space and door growth, as well as earlier customer demand. Just One You sales were down slightly in the quarter to a year ago mainly due the timing of customer demand. OshKosh sales in total increased by nearly $10 million or 15% with growth in both the retail and wholesale segments. OshKosh wholesale sales increased $4 million or 38%. This improvement reflects sales increased from our major wholesale customers as well as higher off-price channel sales. OskKosh retail segment sales increased $5 million, up 10%. This improvement was due to new doors and E-commerce sales growth, as well as positive retail store comp of 2.2%.

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

Our second quarter P&L is on page four. Gross margin in the quarter was down 560 basis points versus last year, driven primarily by higher product costs. As we previously noted, Spring 2011 product costs were up approximately 11% and costs for fall products, which began to ship to our wholesale customers in the second quarter increased about 25%. These higher costs have been driven by the extraordinary increase in cotton and other production costs in Asia. The negative impact of higher product costs on our gross margin is forecasted to continue through Spring 2012.

SG&A increased approximately $15 million or 15% over last year, with about 150 basis points of leverage, given our strong top line in the quarter. I'll provide some additional color on SG&A in a moment. Royalty income increased 8% in the second quarter, mostly due to the growth in our international licensing businesses in Canada and Mexico, as well as domestically with Genuine Kids at Target. Interest expense in the quarter was down about 43% from last year due to carrying less debt on our balance sheet along with lower effective interest rates. Recall that last year we repaid $100 million of outstanding borrowings. Again, our second quarter adjusted earnings per share of $0.23 were down 28% from second quarter 2010 earnings of $0.32 per share.

Slide five summarizes the key drivers for SG&A in the quarter. As you can see, most of the 15% increase in SG&A over last year was incurred in support of our growth businesses, namely retail and E-commerce. At the second quarter, we operate about 40 more retail stores than we did a year ago and as mentioned earlier, the ramp up in our E-commerce business has been dramatic. We also invested a bit more in marketing in the quarter. We've controlled spending well in the rest of our business and that other expenses netted out roughly flat with a year ago.

On page six, we summarized our business segment performance for the second quarter. Overall adjusted operating income declined about $10 million in the quarter with our consolidated operating margin declining to 5.9%. At a high level, the decline in our consolidated operating margin and the margins of our operating businesses reflect the impact of higher product costs. The decline in Carter's wholesale operating margin was driven by higher product costs and to a lesser extent by a higher sales mix of off-price channel business than a year ago. Also impacting the profitability of the OshKosh businesses has been higher SG&A related to the new stores we opened last year and investments in the OshKosh merchandising, design, and creative teams.

The next several pages summarize our performance for the first half. I won't spend a lot of time on this information, but to highlight a few things on our first half P&L on page seven. We've had very strong first half sales growth at 17%. This reflects nearly 20% growth in the Carter's businesses led by Carter's wholesale and retail. OshKosh brand net sales are up about 7%. The detail by business is on page eight.

This strong growth in our top line has helped us offset the negative impact of a 650 basis point decline in gross margin, which is the result of higher product costs, as previously discussed. First half adjusted earnings per share declined 23% to $0.79 per share compared to $1.03 in the first half of last year.

Page nine provides you with a reconciliation of our GAAP results to our adjusted earnings for both the second quarter and the first half of 2011. Transaction expenses related to the acquisition of Bonnie Togs were approximately $1 million in the first quarter and about $2 million for the first half. We do expect additional adjusting items in the second half related to purchase accounting for Bonnie Togs, primarily related to the step up valuation of inventory and possibly other nonrecurring items as well.

Turning to page 10, we've recapped a few key balance sheet and cash flow metrics. Cash on hand at the end of the quarter was approximately $90 million, down from last year's quarter-end position, reflecting the build in fall inventories and the acquisition of Bonnie Togs. Accounts receivables were up $25 million due to higher sales and the timing of shipments this year to our wholesale and mass channel customers. Inventories at the end of the second quarter were up significantly over a year ago, approximately $197 million. I'll cover some more perspective on inventory in a moment.

Cash flow used in operations was $86 million for the first six months compared to cash flow from operations of $15 million last year. This decline was due to increased inventory and lower earnings. CapEx year to date is down about $5 million, which mostly reflects higher spending on new Carter's retail stores in the current year and higher facility and wholesale fixture investments in the prior year. Our forecast suggests that operating cash flow for the full year will be in the range of $80 million to $100 million.

Turning to page 11, in general our inventories are higher than we'd like at the moment. There are a number of factors, which have contributed to our higher inventory position. In looking at this year's inventory position, it's important to look at where we were a year ago when we would say our inventories were well below what we would have liked to had on hand to service the business. You may recall last year we were experiencing some reasonably significant disruptions in our supply chain. At that time, our factories on time shipment rates to us were about 42%. These vendors were experiencing significant issues such as the availability of cotton and labor shortages. Products were also taking longer to transit the Pacific given capacity issues in the transportation industry. We've seen a dramatic improvement in the performance of our supply chain this year with our factories now achieving on time deliveries about 85% of the time.

Second, fall product costs have increased about 25% over last year. This has driven up the absolute value of our investment in inventory. Excluding Canada, our unit inventory increase is about 31%, which is obviously much closer to the growth rate in sales that we've been generating. We also took a number of steps over the past year to help mitigate the unusual volatility in our product costs. Our actions included earlier buys to secure favorable terms and factory capacity. We also further diversified our country sourcing mix. These steps benefited us in terms of the first cost of inventory, but have led us to receive and hold inventory longer than we have historically.

Business growth has also contributed to the year-over-year inventory increase, with US retail stores expansion and E-commerce being primary drivers and obviously, Canada was added to our quarter end inventory on the balance sheet. Overall, the quality of our inventory continues to be very high. We've characterized about 5% of our inventory as excess, a consistent proportion of total inventory as a year ago, and we've reserved for the expected losses on these items. Importantly, we expect to work down our inventory position throughout the second half. Approximately 80% of our on hand units at the end of the second quarter are expected to be sold through the end of September as we move through our peak wholesale shipping period. Excluding Canada, we expect inventory units at the end of the year to be up slightly with a year ago with dollars higher reflecting the ongoing impact of higher product costs.

Now, I'd like to cover the second quarter business results in more detail, turning to Carter's wholesale on page 12. As I mentioned, sales in the second quarter were up about 15% to last year due to strong demand from our major national wholesale customers. Higher sales in the off-price channel also contributed to growth in the second quarter, but in a far less meaningful way than we saw in the first quarter. We continue to be pleased with the performance of our spring assortments. Season to date, Spring 2011 over-the-counter sales at our top customers are up about 7% over Spring 2010 with particular strength in baby and playwear. Our Spring 2012 bookings are planned up in the high single digit range.

Turning to the Carter's mass channel segment on page 13, we had very strong growth in the mass channel in the quarter posting an increase of 30% over a year ago. Child of Mine drove this increase through expanded door growth and additional floor space as well as earlier customer demand. For the Fall 2011 season, we anticipate the new Child of Mine brand wall will be deployed to 3,600 doors, up from 1,800 currently. Sales of Just One You were down slightly in the quarter, principally due to timing of customer orders. First half sales are in line with our plan and we're planning good growth with this brand again this year.

On page 14, we have some key metrics for Carter's retail. Retail store sales were up nearly 19% in the quarter. We delivered a strong comp store sales increase of 8.1% compared to a comp decline of 4.3% in Q2 last year. The comp strength was broad based in the quarter with all regions posting gains, with particular strength in our South and East regions. Our in-store execution was very strong with solid increases in nearly all key metrics and we achieved an AUR increase of about 4% in the quarter. By store format, our brand stores delivered comp growth of about 9% in the second quarter. Brand stores now represent approximately 40% of the Carter's store base. Our future store growth plans are focused on the Carter's brand format and we opened 14 new brand stores in the quarter, closing to bringing our year-to-date net store openings to 22 locations.

Now, turning to our OshKosh businesses, we summarized some details for OshKosh wholesale on page 15. Second quarter sales grew 38%, driven by growth of several key wholesale customers, along with increased off-price channel sales. For the first half, sales were up about 16%, driven primarily by off-price channel sales. Full price sales are up approximately 4% year-to-date. We continue to see better performance of boy's products in this channel than girl's. Broadly speaking, our improved product assortment continues to be well received by our wholesale customers, continue to post bookings increases, which for Spring 2012 are up low single digits.

Turning to page 16 and the performance of OshKosh retail in the quarter, OshKosh retail store sales grew about 5.5% in the second quarter, reflecting a contribution of new stores, which we opened last year, and a 2.2% increase in comparable store sales. The brand stores delivered the strongest comp growth in the quarter, similar to Carter's, a roughly 9% comp. But unlike Carter's, the OshKosh brand stores represent a smaller portion of the comp mix at 11%, with most of the store base concentrated in the outlets. The decline in average prices in the quarter was influenced by increased promotional activity, particularly in June, as we worked to clear through spring inventory. We believe we are in a very good inventory position heading into Q3.

Now to our E-commerce results on page 17. Our E-commerce business continues to be a particularly bright spot in our performance. We've now anniversaried the launch of this business, which was at the end of March last year. In the second quarter, E-commerce revenues were nearly $14 million, $11 million from Carter's products and $3 million from OshKosh. These second quarter E-commerce sales represent 7% of retail store sales. Year-to-date we've generated nearly $25 million in revenue from our websites.

We continue to believe that our E-commerce sites are introducing new customers to our brands with our analysis indicating that about half of our online shoppers are new to our house file. We continue to make improvements to the websites themselves to add new product categories and to enhance site experience. We launched the re-design OshKosh site in July, which features dedicated product shops for denim, B'gosh Basics, and school uniform. We're planning on bringing additional products and capabilities online later this fall. We've also continued to ramp up our efforts in terms of acquiring and interacting with new customers through social media sites like Facebook and through search and affiliate marketing.

Turning to page 19 and our acquisition of Bonnie Togs, we're very pleased to have completed this acquisition, which we announced last month. Strategically, this acquisition makes a lot of sense for us. Canada is a growing and attractive market. The market is under-stored relative to the US and consumers there have similar tastes and preferences to Americans. Bonnie Togs has been our most significant international licensee in terms of royalty and comps. Our licensing relationship dates back to 2007, although the company has had involvement with the OshKosh brand for a number of years before that. We see an opportunity to open about 20 new retail stores a year for the next several years over and above the current 60 store base. We believe this will allow us to generate revenues in Canada of over $200 million by 2015.

In addition to retail stores, we also see potential to develop wholesale, mass channel, and E-commerce businesses in Canada over time. Recent performance trends in the business have been good. In the second quarter, Bonnie Togs delivered comparable store sales in the high single digits. As we said earlier, our adjusted results are expected to benefit from the inclusion of Bonnie Togs beginning in the third quarter. We expect that Bonnie Togs net sales will be approximately $30 million in the third quarter with a contribution to our EPS in the range of $0.03 to $0.05 before the impact of purchase accounting and any other nonrecurring items.

In last year's third quarter, Bonnie Togs generated approximately $1 million of royalty income for us across both the Carter's and OshKosh brands. Continuing to look ahead, we expect to open six stores in Canada in the second half of 2011 with an additional 18 to 20 stores in 2012.

Turning now to our outlook on page 21, we continue to focus our guidance to the current quarter given continued limited visibility to consumer sentiment and behavior in the second half. We're expecting continued good revenue growth in the third quarter, an increase of 16% to 19% over third quarter of last year, which we expect will be led by continued growth in the Carter's wholesale and Carter's retail segments along with the expected contribution of Canadian revenues from Bonnie Togs.

We expect mass channel sales will decline in the third quarter because of the timing shift of revenue into the second quarter. We expect that adjusted earnings per share will be in the range of $0.50 to $0.60 per share compared to $0.83 last year. A principal driver of year-over-year earnings in the third quarter is higher product cost. We've also moderated our forecast recently for our retail businesses, particularly OshKosh given the weakness we've seen so far in July. We'll continue our store opening activity in the second half as summarized on page 21. A majority of new store openings will be Carter's brand stores.

As I said earlier, we're expecting that the year-over-year growth in inventories will moderate as we move through the second half. Our forecast for CapEx for the year is now about $55 million, up slightly from our previous forecast. And as I mentioned earlier, we're expecting good operating cash flow for the year, between $80 million and $100 million.

And with that, we're ready to take your questions.

Thank you. (Operator Instructions) We'll take our first question from Margaret Whitfield with Sterne Agee.

Good morning and congratulations. First question I guess is for Jim. I know many of your OshKosh stores are in outlet centers. Could you comment on how the outlet comps were in Q2 and I guess you mentioned comps in July overall for OshKosh were not that strong. Can you give us an update on July for both brands.

Yes, just as it relates to comps for Q2 in the outlet world, they weren't quite as strong as the brand stores. Our brand stores, Margaret, have been performing at the top of the group from a comp perspective. But for the Carter's brand we comped up close to 8% for the quarter and for OshKosh close to 2% for the quarter in the outlet world. As it relates to comps for July, July is a little bit difficult. We'd expect it to be with the way the weather was across the country, extremely hot, as you know.

So we believe that that made July somewhat more difficult, although that being said I will tell you that the Carter's business is rallying very nicely currently. But the other thing that impacted July, we believe, is that we opted not to repeat a promotion that we engaged in last year, that while it drove top line sales did not drive profitability the way we would have liked it to. So it was a conscious decision to do that.

So that being said, as Richard indicated, for Q2 business in the Carter's brand really was very, very solid in both brand and outlet environments, and we really succeeded across pretty much all business categories. It was very, very positive. So I hope that answers your question.

Okay, and I was a little disappointed by the order flow for OshKosh in wholesale, up 3% for spring of next year. What's been some of the feedback on the line?

Feedback, generally, Margaret, has been good. There are certain retailers that are doing really well with the brand, some others not as well, seeing some inconsistency in performance. But I was encouraged by the feedback during the recent June market week and I think the national retailers continue to be very supportive of the brand. As you know, we haven't had consistency in leadership. We strengthened the leadership team about a year and a half ago both over merchandising and design. They in turn are strengthening the teams that support them.

So I continue to believe OshKosh is a terrific brand. It's got good growth ahead of it. I think a lot of the improvements we've made to strengthen that brand haven't shown up in the results yet. But 3% growth for Spring 2012, I'm not disappointed in that. They booked up 8% for fall, second half of this year, booked up 3% for spring. We don't give customer level detail, but there are retailers that are doing very well with the brand and supporting the brand. Some others are going to take a more cautious outlook for Spring '12 given the environment and given some inconsistency that they've had in its performance over the year.

Final question. You mentioned product costs up 25% in the fall. Can you give us some estimate as to what you think costs might be up for Spring '12?

Well, we're still in the process of finalizing all of our costs for the spring season, Margaret. They will be up, we expect, above the Spring 2011 level. It's a fairly dynamic situation right now. Costs are coming down, cotton in particular. So we're going to see what we can't do to, particularly in the later delivers, do a bit better than what we forecasted. But we don't want to be precise today on that.

Any thoughts on the new leader in sourcing, if he could influence to some extent the Spring '12 situation?

We're hopeful for that, yes.

Changes in countries of origin? Other agents?

All that. The focus near term is to revisit the Spring '12 costs given the change in cotton prices. We're going to take advantage of the drop in cotton prices to do what we would refer to as some physical hedges, lock into certain Fall 2012 commitments at very favorable prices. Chris Rork, Head of Supply Chain, is focused on improving the inventory management disciplines, which we think will be helpful for us beginning next year. And with respect to the country mix, around 50% of our products still come from China. That percentage will move down over time, I wouldn't say dramatically. China is still a very good place to source a number of our products given the criteria we have for [soft] countries for production.

Okay, thank you very much. Best of luck.

You're welcome, Margaret. Thank you.

And we go next to Susan Anderson with Citi.

Good morning, everyone. Congrats on a great quarter. I guess maybe can you talk a little bit about any resistance you're seeing from the consumer on projects where you have increased the prices and maybe just how this is trending versus your expectation?

I would say it's too early to say how consumers are going to respond. Given the weather, a lot of folks are still buying a lot of the summer product, a lot of the transitional product. I think what's important to know for beginning with fall, our prices have gone up about 10%. That's less than $1 a unit. From the store business, we've done over the past several weeks, our prices are in line with the market.

So our focus is to make sure that the relative pricing of our brands to private label and other competitors stay the same. And so I would say the early read is good. The early selling that we have is being done at higher prices. So most of the business for Fall gets done in August and September. July is a transitional month. It's a mix of end of summer, early fall. Only about 25% of the quarter gets done in July. But the early read is good. Not seeing any meaningful resistance to prices at this time.

Okay, great. And then in terms of bookings for fall and then spring next year, it sounds like retailers are maybe even ordering dollars down. Is that a function of product or is it a function of retailers being cautious? Or maybe if you could just add a little bit more color on that.

Well, when you think about Carter's, fall is up. The bookings are up 8%. Spring '12 bookings are up 8%. So I think they're continuing to -- we're continuing to see good growth with the Carter's brand. For OshKosh, I think it's logical, especially when you look at the customer mix that we have. Some are, you're placing bets for Spring '12, and the safer bet today continues to be Carter's. So they're allocating their inventory dollars to where they've seen consistency in performance for many years. We're not disappointed at all in the 3% booking for Spring '12. But sufficed to say in this environment, everyone is being cautious until you see how the balance of this year plays out.

Okay, great. And then one last question in the mass channel. The just one new product, I guess when is the last time that growth was down and is it just a function of timing or is there something else there maybe that's driving that?

Well, it's largely a factor of timing as it relates to the Q2 numbers. I don't recall the last time specifically we had a decline, but we can add some lumpiness as it relates to when we recognized that revenue depending upon when they've asked for those shipments. We had extraordinary growth last year with Just One You and expect good growth again this year.

Okay, great. Thanks, you guys.

And we go next to Scott Krasik with BB&T Capital Markets.

Thanks. Good morning, everyone. Mike, it doesn't appear that the retailers cut back on units at all relative to your price increase. Were you surprised by the relative lack of elasticity for fall?

I'm not sure I follow your question, Scott.

Well, it just seems based on 10% price increases and generally where you're guiding to for sales, it doesn't seem like they cut back on units to offset the prices like we've seen from some other categories?

If we're assuming 8% growth in sales and the prices are up 10%, so they've cut back units [of debt]. I don't know what your expectations were, but across the board, folks are planning units more conservatively going into the second half.

Okay, I mean I guess it's just a little less than some others. But that's a positive. And then Richard, let's talk about gross margin. Can you talk about the impact that the off-price channel sales to the off-price channel had either on the quarter or how it's going to be for the rest of the year? Will it be more than in the first half of the year? And also, what impact the higher product cost from pulling fall orders forward has on gross margin?

Yes, difficult to parse out all those details, Scott. In the first half, I'd say we've had the lion's share of our off-price channel sales. We had some excess inventory coming out of last year. We made good progress in working that down. So it's been a much more pronounced impact. If you recall, the first quarter Carter's wholesale, results were up nearly 30%. Off price activity was a big influencer in that number. Far less significant in the second quarter, we reported 15% growth in Carter's wholesale. That's still something like 10% when you strip out the off price activity.

So my guess is it will moderate significantly as we move through the second half and a good portion of the decline in gross margin still continues to be just the higher product cost, which was a more pronounced effect obviously with the fall products beginning to ship for us in second quarter.

So as I think about the gross margin potential declines in the back half of the year, less off price relative to the first half would be a positive, but the net difference in the product cost increases would derive the decline?

The impact of product cost increases are going to continue to be a significant drag on our gross margin. I'd anticipate that in Q3 we probably have a bit more deterioration relative to what we showed in Q2, with some potential to show improvement after that. If you recall, last year we had some extraordinary costs related to excess inventory charges, which we're not planning again this year. We had a significant amount of airfreight expenses. We were (inaudible) product from Asia. We're not planning on repeating those costs. So those are some potential up sides for us as well.

Okay, excellent. And then any other specific initiatives on the international side, Mike, that you could talk about that your new international team is looking at that define strategy, timing, anything of that nature?

Well, business in the international markets continues to be good and contributed about $3.5 million to second quarter earnings. It's about 15% of the consolidated earnings. So business there is good. Today, we're doing business in over 40 countries. The new leader would characterize our business as a low touch model. It's heavily weighted to licensing arrangements and those licensing arrangements have been very profitable for us. We think with a more focused selling effort we can do more in Canada near term. We're leveraging existing relationships that we've had for many years to explore some growth opportunities in China. And based on the demand that we're seeing on line from Brazil, we think that that's another opportunity.

So when you're doing the kind of business we're doing in 40 countries, I would actually say we're spread thin. The focus right now is to pick a few of those 40 countries and see if we can't do more business with a bit more of an aggressive selling effort. So it's a nice business, growing nicely. We strengthened the team over it and we have more specifics about Canada near term and the other two countries longer term. We'll share those with you.

So just the other countries, this is, do we realize something in Spring '12 or it's further out than that?

I'd rather not comment on the timing yet, but near term you'll see more done in Canada and I think we might be able to share a little bit more with you certainly by February on the plans that we have for China.

Okay, thanks guys.

You're welcome.

We go next to Helena Tse with Bank of America.

Hey, guys. Just a quick follow-up in regards to the Carter's wholesale. I know you guys mentioned that fall order books are up 8%. You have that last quarter. How has retailer sentiment, if anything, changed over the last few months just sort of given the testing, and their private label, and also I guess the performance that you've seen in your businesses? I know in your presentation, ESPs were up nicely for that segment, I think up 4%.

Is your overall question how -- what are we seeing in wholesale in terms of selling?

Yes, how -- can you just sort of comment in terms of their recent -- the testing. I know that a couple of the key retailers tested private label increases and seeing private label increases in the baby section. Can you just sort of comment in terms of, has that performance changed just in general the retailer sentiment going into fall? Is it more cautiously optimistic or is it still relatively conservative just given the performance in the baby category?

I'd say generally it's -- generally speaking, it's early. First half of this year everyone was testing higher prices and because the cost increases for the second half were more meaningful for everyone, I think what you'll see is whatever was 2 for 10 will be 2 for 12 consistently in the second half. So because it's still early, I would say that everyone has set their pricing strategies for the second half and that is the pricing strategy. And they're going to do their best to pass those costs along to the consumer.

And so whatever was in the test mode is now in an execution mode for the second half.

Got it. And then just to clarify, your order books of 8%, is that pricing up 10 units, down 2?

That's directionally correct, yes.

And does that include the off price channel?

No, that's just the regular price business.

Great. And then is the off price channel, did you say that it was down year-over-year or just down quarter-over-quarter?

No, our price will be up meaningfully this year. Year-over-year, I think it's important to just put some context to the off price business. Historically, the off price mix to our total business has been somewhat in the range of 2% to 3%, not particularly significant. This year, it will be higher than that historical range. Last year, it was significantly below that historical range. So it's still, for this year, Richard, some portion of -- ?

3% or 4% of revenue.

3% or 4% of our total business. So we have no concerns. We came into this year with more excess inventory than we would have liked for a number of reasons, particularly on supply chain disruptions we saw last year and some of the transition issues we had with Wal-Mart getting the Child of Mine business back into a growth mode. And we cleared a good portion of that inventory in the first half this year and that's driven that up. So in terms of absolute dollars in the second half this year, you'll see off price sales lower than the first half.

Great, thanks.

You're welcome.

And then a quick question in terms of Bonnie Togs. I know you mentioned it's a 3% to 5% accretion for this year. Can you maybe just give more color in terms of the margins you sort of see in that business and sort of your plans going forward?

It's a good gross margin business and beyond that we're just not going to provide a lot of specifics today, Helena.

Okay, and then one last question in terms of your comp. I know Jim talked a little bit about July sort of trends. Can you maybe give more color in terms of what your comps guidance is that's embedded in your third quarter outlook?

I'd say low single digit for Carter's and flat to up slightly for OshKosh.

Great, thanks.

And for our next question, we go to Steve Marotta with CL King.

Good morning, everybody. You've already spoken about fall costs up about 25% and pricing up 10%, which is more aggressive than you were in Spring '11 and I know you're reticent to speaking directly to what cost increases will be in the Spring of '12. But can you talk about how aggressive you anticipate being in Spring '12 on pricing?

Right now, we're planning prices for Spring '12 up another 10%.

So again, by extension, if the increase then in Spring '12 is by a cost standpoint less than fall, it's considered then more aggressive pass through?

I wouldn't characterize it that way. We're trying to thoughtfully move our prices up. In the Spring '11, we did it selectively. We passed along less than half of the cost increases for fall to the consumer, and then for Spring '12 we'll do our best to step the prices up again what we know on Spring '12 costs today. I wouldn't characterize what we're doing on pricing as aggressive at all.

Okay. You mentioned you're going to increase marketing expend in the second half. Can you talk what that was in the third and fourth quarter of last year and what do you expect it to be in the third and fourth quarter of this year?

I won't be precise on the actual dollar estimate, Steve. We continue to invest in building up our capabilities in marketing in general. We haven't had much of an organization historically. So Greg Foglesong and his team have come on board, particularly around building capabilities in public relations and CRM, direct to consumer marketing. We have a little bit more organizational spend as it relates to putting that team together. We have continued to develop new direct mail programs that have increased circulation, additional page counts. Those will be brought to bear for the second half of the year.

Okay, and lastly, you mentioned that Carter's wholesale in the second quarter would have been up 10% ex off price as opposed to 15%, which it was up. Can you speak to OshKosh?

Yes, OshKosh wholesale would have been up about 24% without the off price activity in the quarter.

Excellent. Thank you. That's it.

(Operator Instructions) And we go next to Susan Sansbury with Miller Tabak.

Hi, yes, thanks. Mike and the rest of the team, I think you're to be congratulated. I think you're doing a great job in a very difficult environment. No one said that, but I will.

Thank you, Susan.

As usual, you've been so thorough I don't have a lot of questions but just some -- on this off price issue, can you remind me whether how much of the off price business was actual clearance versus are you doing products specifically for the distribution channel?

You should view most of the activity this year as clearance.

Okay. Going forward, do you anticipate creating a separate product line for the off price?

No.

And then finally, on E-commerce, Richard, can you update us on what you expect to do in E-commerce this year?

Well, we've raised our forecast internally. I don't think we'll revise -- give you a new data point on that, but it is moving up meaningfully relative to our initial expectations coming into the year. So we feel very good about how that business is ramping.

Okay, and any comment about profitability?

Business has been profitable for the last couple of quarters.

And then finally, Mike, because you shop a lot, generally speaking can you make a comment about retail inventories on the floor?

We've seen in some cases retailers are carrying a bit more summer goods, which given the recent weather I think in some cases smart move, and have moved some of the fall sets to the right. And the more transitional product, more new fall deliveries, but short sleeve, short pant are doing better than more fall forward products, which I think is logical. I think you'll get a good read probably over the next three weeks in terms of how everybody looks on the floor. We set our fall floor sets within the past couple of weeks. So if you go into our stores, my opinion, I'm biased, obviously, I don't think we've ever looked better. I think our stores, both brands I think look extremely good. And so we're prepared to do some good business in the second half.

Okay, great. Best of luck. Thanks.

Thanks, Susan.

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

Okay, thanks very much. We appreciate you joining us this morning, appreciate all your questions and your support. We look forward to updating you again on our progress in October.

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