Carter's Inc (CRI) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to Carter's fourth quarter and fiscal 2011 earnings conference call. On the call today are Michael Casey, Chief Executive Officer, Richard Westenberger, Executive Vice President and Chief Financial Officer, Jim Petty, President of Retail Stores, and Sean McHugh, Vice President of Investor Relations and Treasury. After today's prepared remarks, we will take questions as time allows. Carter's issued it's fourth quarter and fiscal 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 on News and Events on the left side of the screen.

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 would like to turn the call over to Mr. Casey.

Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I would like to share some highlights in our business with you. We had a very strong fourth quarter, driven by higher demand for our brands in all channels of distribution. For the year, our sales grew 21% to over $2 billion. We achieved sales growth in every segment of our business. We increased our US market share to 16%, more than 3 times the share of our nearest competitor, and shareholder value increased 35%.

The big challenge for us this past year was managing our business through a significant increase in product costs, driven by the spike in cotton prices. Our product costs increased about 20% last year. We absorbed about half of that cost increase by raising prices. We decided not to be more aggressive on pricing, mindful that consumers are struggling in this tough economy. In retrospect, we believe we made the right decision on pricing. We remained very competitive in our product offerings and gained significant market share. Our outlook on product costs has improved since our last update. Cotton prices have dropped over 50% in the past 12 months, though still higher than 2010 levels. We expect to begin seeing the benefits from lower cotton prices beginning in the third quarter this year.

Despite the higher cotton prices, we achieved a very respectable adjusted operating margin of 9.5% in 2011. We expect to improve on that performance this year. We now have visibility on fall product costs, which are down about 10% compared to fall 2011. If we are successful maintaining our pricing, our operating margin should improve meaningfully in the second half this year.

I would like to share some thoughts on our Carter's and OshKosh US businesses, as well as our new international segment. Our Carter's US business is very healthy, with sales growth of 17% last year. It's share of the US market increased to 14%. Our Carter's wholesale segment continues to be the largest component of our business. We are the largest supplier of young children's apparel to the largest retailers in the country. The relationships with our retail partners are excellent. It was clear to me, based on their feedback at our January market week meetings, that Carter's is helping them drive higher sales in their kids apparel business.

Since our last update, we've received fall 2012 bookings. The strongest bookings are in our baby and playwear product markets. Sleepwear bookings are planned down for fall. Sleepwear was a tough market across the industry last year. Excluding the impact of a significant decrease planned in off-price sales, we expect low to mid single digit growth in Carter's wholesale sales this year.

Sales in our Carter's retail segment grew 23% last year. Store sales grew 16%, and Carter's eCommerce sales quadrupled. We feel good about the pace of our store openings. We opened 56 Carter's stores last year. Collectively, those stores achieved their sales and earnings plans. At the end of 2011, we had 360 Carter's stores. Half of those stores are in specialty store shopping centers. The balance of the stores are in outlet centers. Our plan is to open up approximately 300 stores over the next five years, 60 new stores a year on average. That would bring our specialty stores to about 480 stores by 2016.

Consumer demand for our brands online has been extraordinary. Our eCommerce sales continue to ramp up at an accelerated pace, increasing to total sales of over $70 million in it's first full year of business. We now expect eCommerce sales to exceed $100 million in 2012. To support the acceleration demand for our brands online, we plan to build internal capabilities for fulfillment later this year. We expect this new strategy will better support consumer demand, and enable a higher operating margin from our eCommerce activities over time.

We're seeing a better trend in our OshKosh business, with US sales up 7% last year. We had the strongest comps in the fourth quarter, with growth in every region of the country. With 2 months into this year, we continue to achieve positive comps and better pricing in our OshKosh stores, driven by the strength of the improved product offerings. We expect OshKosh's growth near-term will continue to be driven by our stores in the United States and Canada, and online. Our online sales of OshKosh more than tripled last year.

For 2012, we're projecting modest growth in OshKosh sales, choosing to focus on improving profitability. OshKosh profits are planned down in the first half, due to higher product costs. We expect improvement in profitability for the second half and for the year. Our goal over the next 5 years is to grow OshKosh sales to $500 million, with a 10% to 12% operating margin, compared to the 8.5% operating margin it achieved in 2010. We're encouraged by the current trends with OshKosh, which has achieved 6 consecutive months of comp store growth. Our challenge and opportunity is to deliver consistently good product performance at higher margins over time.

Our new international segment contributed over 6% of our consolidated sales last year, and nearly 20% of our adjusted operating income.

The best way to understand this component of our business is reviewing it's three components which are retail, wholesale, and licensing. The retail component is comprised of our former Canadian licensee, which we acquired last summer. The business is led by a very talented team. Their performance in the second half of 2011 was in line with our expectations, and the integration has been going well. We expect this business to grow to over $200 million in sales over the next 5 years, supported by 20 door openings on average a year.

Our international wholesale business is supported by large and long-tenured business partners. One partner has broad global reach. Two others focus on specific regions of the world, one in Central and South America, the other in the Middle East. We're preparing for the launch of our brands with Target Canada, which are scheduled to begin shipping early next year. We hope to replicate the success we've enjoyed with Target here in the United States, with our Just One You, Precious Firsts, Genuine Kids brands designed exclusively for Target's guests.

Our international licensing business is comprised of several partners throughout the world representing our brands. Our largest licensees are in Japan, South Korea, Mexico, and Australia. The capabilities and execution of our licensing partners vary by country. We are working with them to strengthen their execution of our brand strategies, and we have been leveraging our merchandising and supply chain capabilities to help them achieve their growth objectives. In total, we're expecting about 50% growth in sales, and 15% to 20% growth in earnings from international activities this year, driven by a full year benefit from the Canadian acquisition and growth in other international markets.

In summary, we've made significant progress this past year, strengthening our position as the leader in young children's apparel. We own the largest share of the $22 billion young children's apparel market in the United States, and we've been gaining share, and have plenty of room for organic growth. We plan to continue extending the reach of our brands with the support of our national retail partners, through our own stores, online, and in international markets. Our brands are sold in over 17,000 doors in the United States. No other Company has our brand reach in children's apparel. We see multiple opportunities to expand our operating margin, which include lowering our product costs, accelerating our high margin retail, eCommerce, and international businesses, building direct sourcing capabilities, improving inventory management disciplines, and improving our distribution capabilities.

The outlook for our business is very good. We have a very talented organization that has demonstrated it's ability to deliver exceptional value to consumers in this challenging economy. We're very encouraged by the current trends in our business, and our potential for growth this year and for many years to come.

At this time, Richard will walk you through the presentation on our website.

Thank you, Mike. Good morning, everyone. My comments this morning will track along with the presentation materials, which are available on the Investor Relations portion of our website.

To begin with on page 3, as Mike said, we delivered a very good fourth quarter. We posted strong revenue growth north of 20%, on top of 17% growth in the fourth quarter of last year. I'll cover the components of our growth in a moment, but we had very broad-based strength in the quarter with solid growth in our Carter's and OshKosh businesses and in international, reflecting in part the strong contribution of our new business in Canada, which we acquired last summer. Fourth quarter earnings were better than we had anticipated, driven by stronger than planned net sales. Adjusted operating income was roughly comparable with a year ago, and we achieved a 9.6% adjusted operating margin, despite the meaningful impact of higher product costs. Adjusted earnings per share increased 5% to $0.63 in the fourth quarter.

The next few pages provide some highlights of our fourth quarter performance. Starting on page 4 in our US Carter's businesses. Our Carter's retail stores delivered terrific top line performance in the fourth quarter, with a comp store sales increase of over 7%. We had good strength in sales across the nation, and across all of our different store types. Averaging unit retail prices or AURs, increased nearly 9%. Carter's retail store inventories ended the year in very good shape, with units down nearly 6% on a comp store basis. Our eCommerce business has continued to grow at an extremely rapid pace, led by sales of our Carter's-branded products, which reached $20 million in the quarter, and $55 million for the full-year. Net sales in our Carter's wholesale segment increased 5% in the quarter, reflecting good growth across the Carter's, Just One You and Child of Mine brands. We saw good over-the-counter performance in the wholesale channel in the quarter, reflecting the solid performance of fall seasonal product, and strong replenishment demand. Our wholesale customers also successfully raised AURs on Carter's-branded products in the quarter.

Turning to OshKosh, on Page 5, our OshKosh retail stores also delivered a great quarter, with comparable store sales increasing nearly 7%. Similar to Carter's, we saw sales gains in all regions of the country, and particular strength in the Play clothes category, including Girls. As we've discussed previously, Girls performance had been lagging behind the progress we've begun to see in the rest of the assortment. So we were pleased to see the upswing in this important part of the OshKosh business. As part of our efforts to improve the overall profitability of the OshKosh brand, we closed six under performing stores in the quarter, bringing the number of closures for the full-year to 13. These stores were in declining centers, with little hope for improved performance over the long run. We plan to close an additional 13 stores in 2012. We believe that this will help us to focus our efforts more efficiently on the most productive stores in the OshKosh portfolio, those which represent a disproportionate share of net sales and profitability.

OshKosh also performed well online in the quarter, with sales of $7 million. For the year, OshKosh net sales were $18 million in the online channel, or about 25% of our total eCommerce sales for the year. In OshKosh wholesale, fall seasonal product over-the-counter sales to major accounts were up 3% in the quarter. Like Carter's, our wholesale customers also successfully raised AURs on OshKosh product in the fourth quarter.

On page 6, we've summarized the components of our international operations for the fourth quarter. The retail data summarized here represents the results of our retail stores in Canada. As a reminder, we purchased this business in June of 2011, so it was obviously a strong year-over-year contribution from the addition of this business. We continue to be pleased with our performance in Canada. Same-store sales there for the fourth quarter increased 5%. Interesting and encouraging to us, has been the performance of OshKosh product in our Canadian stores, which delivered a 24% comp in the fourth quarter, and represented the strongest performing part of the assortment in those stores.

International wholesale sales were also strong in the quarter, and more than doubled compared to last year. This growth reflects the addition of our Canadian business, and strong sales to US-based multi-national retailers and Middle East retail partners. International royalty income declined by approximately $1 million versus last year, driven by the loss of royalties from our former licensee in Canada.

Our consolidated P&L for the fourth quarter is on page 7. Results on this page exclude approximately $3 million in costs related to the acquisition earlier in the year. These items are detailed in a reconciliation to our GAAP P&L on page 12 of the presentation. Adjusted gross margin in the quarter was down 300 basis points versus last year, reflecting meaningfully higher product costs, which were only partially offset by price increases. Our fourth quarter performance represented the smallest year-over-year decline in gross margin that we experienced all year. Adjusted SG&A increased approximately $24 million, or 17% over last year. We achieved 110 basis points of leverage given our strong top line in the quarter. Q4 spending was driven by the addition of our Canadian business, new door growth in Carter's retail and higher eCommerce volumes. Interest expense in the quarter was lower than a year ago, due to debt refinance expenses incurred in the fourth quarter of fiscal 2010. So on a bottom line basis, adjusted earnings per share for the quarter were $0.63, up 5% compared to $0.60 last year.

The next few pages summarize our full-year 2011 results. Page 9 recaps our net sales performance for the full-year. As you can see, there's a lot of green on this chart, reflecting the growth we've had across all of our businesses. We're fortunate to have such broad-based momentum. Growth is not being driven by only a component or two of our business portfolio. In the US, Carter's net sales were up 17%, and OshKosh increased 7%. And we had a strong year in international, and our wholesale business and with the addition of Canada.

Our full year P&L is on page 10. We achieved an important milestone this year, reaching over $2 billion in net sales, a record level for our Company. As discussed previously, growth in net sales was strong at plus 21%. Canada contributed approximately 5 percentage points of growth to sales in 2011. Adjusted gross margin declined 540 basis points, reflecting the impact of higher product costs, which we partially offset with price increases. For the full-year, US product costs increased about 20%, or approximately $200 million. Adjusted SG&A was $535 million, up 14% over 2010. Given our strong sales performance and cost control initiatives, we achieved 140 basis points of leverage for the year.

Contributing to the increase in SG&A were higher US retail store and admin costs related to the expansion of our store base, higher eCommerce operational expenses, and the addition of the new retail business in Canada. Royalty income was comparable to last year. Growth in our domestic and international licensing business almost entirely offset the loss of royalty income from Canada due to the acquisition. When excluding the contribution of royalty income from Canada in both years, royalty income grew 8% in 2011, compared to 2010. Our adjusted earnings per share, which exclude the items mentioned related to our acquisitions in Canada were $2.09, compared to $2.46 in 2010. This result was better than we had planned coming into the year, and reflects our better than expected sales performance across our businesses, the contribution of Canada, and the effective management of our cost structure throughout the year.

On page 11, we've included a reconciliation of our GAAP results to the adjusted basis of presentation. This information is included for your reference. On page 13, we've recapped our business segment performance for the full-year. As you can see, the operating margin of all of our business segments declined for the full-year versus 2010, reflecting primarily the negative impact of higher product costs. OshKosh retail margins were further impacted by the carrying costs of new stores. During the year, we also invested in our merchandising, design, and creative teams to strengthen the capabilities of the brand. As Mike noted, we're pleased with the current trend line for OshKosh, and the brand is off to a very good start for 2012.

Our international results reflect the addition of our Canadian retail business in 2011, versus the segment being more weighted towards licensing income a year ago. In 2011, our international segment comprised 6% of our consolidated sales, and 18% of our adjusted operating income. These results compared to international representing 2% of consolidated net sales and 7% of operating income in 2010. We realized lower corporate expenses than a year ago, reflecting primarily the benefit of lower performance-based compensation and legal expenses. Overall, our consolidated adjusted operating margin for the year was 9.5%, down from last year's record 13.9%, but we think very respectable, given the magnitude of the challenge we faced with product costs during the year.

Turning now to page 14, we've recapped a few balance sheet and cash flow metrics. After seeing our working capital requirements increase pretty significantly during the year, due to higher product costs and higher inventory levels, we ended the year with strong liquidity and a balance sheet, which I would characterize overall as very strong. Cash on hand at the end of the year was approximately $233 million, down only somewhat from a year ago, despite lower earnings and the approximately $60 million initial payment for the acquisition in Canada. The increase in accounts receivable at year-end reflects higher sales levels. Ending inventories were up 16% over a year ago. We are in a substantially improved inventory position, as compared to our peak levels earlier this year. Cash flow from operations was $81 million, down a bit from a year ago. And we spent about $45 million in CapEx this year. Most of our 2011 investment spending related to US retail store growth. Other significant spending in the year related to facilities and information technology projects.

On page 15, we've summarized some additional information on inventory. The majority of the increase in overall inventory is attributable to the addition of Canada, which is non-comparable to last year, and to higher product costs. The US inventory dollars increased 8%, and units declined 5% compared to the end of last year. The overall quality of our inventory remains excellent. Excess inventory has declined compared to a year ago, and represents a lower proportion of total inventory. Inventory management and productivity will continue to be areas of focus for us going forward.

Turning now to our outlook for 2012 on page 17, as Mike mentioned, we're planning very good growth in both net sales and earnings for the year. For the full-year, we expect net sales will increase 8% to 10%, and adjusted earnings per share will increase 15% to 20% over this year's adjusted result of $2.09. First half of the year earnings will continue to be under pressure as a result of higher product costs which we expect to be up about 15% over the first half of 2011. Recall also that spring 2011 costs increased approximately 12%. We're expecting the majority of our improvement in profitability will come in the second half of the year, as a result of product costs which are expected to decline approximately 10% over 2011, as we begin to benefit from the decline in cotton costs.

2012 will represent a step-up in our investment spending versus recent years. This spending will be in support of our growth agenda, including continuing to open new stores, both in the US and in Canada, as summarized on page 17. And in upgrading key elements of our infrastructure, such as distribution capabilities and information technology. In 2012, we expect our total CapEx to be in the range of $90 million to $100 million, which we expect to fund from strong cash flow from operations. For the first quarter, which is one of our lighter volume periods, we're expecting good revenue growth in the range of 11% to 13% over the first quarter of last year. We expect this growth to be led by Canada, Carter's retail, and eCommerce. Carter's wholesale sales are expected to be comparable to last year, as we're forecasting a meaningful reduction in off-price channel sales. We expect that adjusted earnings per share for the first quarter will be in the range of approximately $0.38 to $0.43, compared to an adjusted $0.56 last year.

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

Thank you, sir. (Operator Instructions). And for our first question, we go to Scott Krasik with BB&T Capital Markets.

Hi, good morning. Congratulations.

Good morning, Scott. Thank you.

Just a question about your assumptions around pricing in your full-year guidance, particularly in the back half of the year. And just going forward, since some of your big wholesale customers appear to be competing a little bit more on price going forward, how does that impact your decisions around pricing in your own retail stores?

The plan in the first half of this year, pricing will be up about 10% year over year. Second half, the pricing is planned to be comparable year over year, fall to fall pricing will be comparable. And I wouldn't say, there's much new about what's going on going forward. I think in 2011, everybody was competing on price as well. It was a very promotional environment. We were very thoughtful about our pricing, and I think that served us well last year, in terms of driving top line growth. But we're prepared to be very competitive in the market, this year as we were last year.

And that's helpful. And if pricing is sort of planned flat for the back half of the year, but you guided to Carter's wholesale being up low to mid, so you're assuming that the units then will recover to be positive in the back half of the year?

They are up slightly, Scott, in the second half.

Okay. Okay. Thanks very much.

You're welcome.

We go next to Margaret Whitfield with Sterne Agee.

Yes, wondered if you could comment on off-price activity in the year just ended, and your thoughts? It sounds like it's going to be a lot less. And secondarily, how that ties into your planning for inventories, both at the end of Q1 and the end of the year? And finally, if you could give us an update on your plans for sourcing changes, in terms of moving to more of a direct model?

Sure, Margaret. As it relates to off-price activity, it was a significant increase in sales through that channel in 2011. We entered 2011 with more inventory than we had wanted, some excess that we needed to work through. So it was up significantly. It was about 4% of sales in total for the year. That's a marked increase over where we've been the last couple of years. Was not much of a factor in the fourth quarter, basically comparable levels of off-price activity year over year in Q4. And so, we're planning a pretty significantly lower level of off-price channel activity in 2012. So that will affect some of our reported metrics for the Carter's wholesale segment in particular, but should be very beneficial to gross margin. As it relates to inventory, we are planning inventory more modestly, I would say for 2012. We do have some timing shifts in first quarter. You've got the addition of Canada, which is still non-comparable in the first quarter, and a couple programs in wholesale that are moving up timing-wise. So at this point, we're expecting inventory dollars to be up about 30% at the end of first quarter. That should be the peak level year over year, and should moderate after that.

And Margaret, with respect to direct -- the direct sourcing initiative, we're moving forward with that strategy. We hope to have an office open in the second half of this year. We are recruiting people to help us with that office. As you know, today about 95% of our product is sourced through agents. They have done an exceptional job for us. We feel as though, to create a more competitive environment for our business, we think there's over time, we would like to have a balance between agent-sourced product and direct-sourced product. That will take us some time to achieve that objective, and might take us as much as five years. But over five years, what we are trying to do, is move that mix to more of a 50/50, a more balanced approach to sourcing our products. But that initiative is moving forward.

On wholesale, you say some of the business is moved up, do you mean some of it's shifting into Q2? Could you clarify?

We have some programs that are moving up just launch-wise, in terms of the timing with our wholesale partners. So the inventory is here, a little earlier than it was a year ago, and the product should be on the sales floor earlier than it was as well, versus last year.

Earlier, meaning it will be more in Q1?

Correct.

Thank you.

We go next to Susan Anderson with Citi.

Good morning, and congrats on a great quarter.

Thank you.

I was wondering if you can give us an update on your retail strategy for OshKosh. It looks like you're still being pretty conservative on the store openings for '12. So just your thoughts on that strategy. And then how your mall-based stores are performing, and where do you think those go in the future?

Hi, Susan. This is Jim. The strategy remains consistent with what we spoke about on the last call, and it is to focus on profitability. So we are, again, planning comps to be relatively conservative on the year, roughly flat on the year, and we're focusing on continuing to improve our assortment offerings. Very encouraging in the fourth quarter is, that we saw the business improve in Playwear overall, and very encouraging in the side of the business that we have been struggling, which is Girls. It actually outpaced Boys Playwear. So we're seeing some really nice traction in the business. As Mike mentioned in his opening comments, if you go back to September, we've had six straight months of positive comps. And as we move into this year, we're seeing traction continuing, so we're very encouraged. As it relates to the mall stores, mall stores, we currently have three of them open. They are performing well, and from a top line perspective, and we're focusing on profitability there. Also very encouraging is our average unit retail in our mall stores is meaningfully outpacing our average unit retail in chain, which tells us that there is price elasticity upward for our mall-based customer. We have plans to open another three mall stores this year, and we're continuing aggressively, and building a team to support growth in that arena.

Great. That's really helpful. And then just one last question on the international side in Canada, if you could maybe just give some more color on the performance of the OshKosh brand versus the Carter's brand? And also which brand you feel you have the most opportunity to expand going forward, in terms of both top line and margin?

The business in Canada has been terrific. It has been a wonderful experience so far. Again, what we're encouraged by, for most of the second half of 2011, OshKosh comps were stronger than Carter's. And there's not much stronger in the market than Carter's. So for OshKosh to be outperforming Carter's, says a lot about how that's being executed up in Canada. I think there's potential for growth with both brands. And their -- because of the sourcing capabilities they now have by joining our Company, they will be able to introduce certain components of our product offering that was not accessible to them before at good margins.

One example that comes to mind, are the Carter's Playwear separates. So they introduced that part of our offering for spring and the performance has been good. They have four brands. They have the Carter's, OshKosh, they have Tangerine and Woodlands, their own brands. The Carter's and OshKosh brands have been outperforming their own private label brands. But overall, the business has been very good. We'll see some really good growth with the business this year. And over time with some very reasonable store opening assumptions, we expect that business to contribute well over $200 million to our sales.

Okay, great. Thanks, and congrats again.

Thank you.

We go next to Stephen Marotta with CL King & Associates.

Good morning, everybody. Going back to the direct sourcing initiative, can you talk a little bit about where you believe that percentage of the mix will be by year-end this year? And roughly what's the savings per unit?

Yes, we're not -- it will be, it will be a small percentage of our business, I believe by the end of this year. We're not in a rush to get this done. We're going to do it thoughtfully. We will ramp up to 50% over time. And I think it's too early to quote what the costs savings per unit will be. I think the better way to think about our business -- we achieved about a 14% operating margin in 2010, extremely good for our space. It was our best performance ever. We took a step back this year, because of the spike in cotton prices to 9.5%. Still, very respectable for our space, but not where we want to be. And our objective with all of our initiatives, is to regain that 14% operating margin over time. Direct sourcing is only one component of what we can do.

Mike, you've teed me up quite nicely for my next question. How long do you think it will take to get back to 14% operating margins?

Well, we look out over a five-year period. I would hope over the next five years, we're back to where we were, just a couple of years ago.

Okay. The last question, it relates to eCommerce fulfillment, can you talk a little bit about the timing of that initiative, and again, potential savings?

We're scoping it out right now. And so, I think we'll have more to share with you on our July update. But I think it's important for you to know today, that's a path we're going down. When we originally went down this path with eCommerce, quite frankly, we didn't know how good it could be. So we thought over time it would grow from some portion of a $15 million business to maybe $150 million. And we were pretty excited about that. Now, the growth has been far greater than we expected. We thought in 2011, the sales would be around $40 million. They were well over $70 million. So we're just planning ahead. We just know that over time, it's probably going to be better to have that business in-house. And so, we're starting to scope out how to best do that. So, again, it's early, but just want to let you know that that's a path we're going down. And probably the best update, we'll be able to give you is on the July call.

I'll look forward to it. Thank you.

Okay. Thank you.

We go next to Nicole Shevins with Goldman Sachs.

Hi, good morning, everybody. I wanted to see if you could talk about how sales trends are tracking for 1Q so far, particularly at retail stores? And also, with 1Q guidance, it looks like you're implying more margin degradation in 1Q versus what we saw in 4Q, even though product costs aren't up as much. So just wanted to see if you could elaborate on that a little bit. Thanks.

Sure, Nicole. As far as retail sales go, as I mentioned earlier, we had really strong traction at the end of Q4, really throughout Q4. And the traction in the business, in both brands has continued. So with two months in, without quoting the specifics, we're encouraged, and the momentum continues.

Nicole, as it relates to gross margin, obviously, the first quarter and the fourth quarter are very different, in terms of the complexion of the business. We have less of a contribution from the retail business than we have in the fourth quarter. The biggest driver to pressure on gross margin continues to be the product cost situation that we're not fully covering with price increases. So we start to get a little bit more of a benefit, as we move into second quarter. We start to ship that fall product, which will be at lower cost. That's a benefit in margin to the second quarter, but we don't have that benefit in Q1.

Okay. Thanks. That's really helpful.

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

Hi, good morning. I was hoping you could talk about the impact of weather, the generally warmer weather on your business, not just fourth quarter, but continuing into 1Q? And in particular, both the impact on mix of what customers are buying, as well as how it impacts the traffic to your outlet and strip centers? Thank you.

Okay. The weather has not been an issue for us. It wasn't an issue for us in the fourth quarter, and it's not an issue for us today, due to the outdoor nature of our, much of our offering of stores. It really makes it that much more attainable for the customer to get to us. So in as far as our offerings, our offerings are consistent with what they have been in the past years, as it relates to overall seasonality of the business. And the beauty of our business is that we don't play too heavily on things like outerwear and truly seasonally-based offerings, being a Playwear business, with the OshKosh brand, and principally a younger business. And the Carter's brand, it's about the daily needs of the customer. So weather has not been an issue for us.

Okay. I kind of thought it would have been a help to you at the outlet and strip centers. So I -- (Multiple Speakers).

Sure, yes -- (Multiple Speakers).

Weather has been terrific.

Yes. Secondarily, can you quickly talk about perhaps the gross margin assumption that's embedded in your 2012 guidance?

Well, the assumption is that we're under pressure in the first half. And we have relatively significant expansion in the second half, as product costs decline. And we're assuming that the pricing increases that we have achieved, we are largely able to hold onto in the second half.

Okay. So you're not willing to give us a goal post of say, 34%, 35%, 36%, something like that?

I'm not.

Okay. All right. Thanks.

We go next to Howard Tubin with RBC Capital Markets.

Thanks. Great quarter. On the product cost front for fall 2012, cotton is down. Can you comment, maybe just generally on your other product costs? Are they decreasing as well, or are they flat or up versus last year?

Howard, I would say in general, we see the most relief in cotton, and then the other dimensions are continuing to show inflationary pressures. So labor in particular, across the Asian economies continues to be up in the double digits, so we're continuing to face that.

Got it. Okay, thanks. And maybe some just general commentary on kind of marketing plans, promotional mailings, catalogs this spring season versus last spring?

I think everything we're doing in marketing, I think is better than it was a year ago. So I don't know -- if you're not on the mailing list, I would encourage you to get on the mailing list, so you can see it firsthand. But we just launched the baby sale mailer for Carter's, and we've got a beautiful Playwear mailer for OshKosh B'gosh, beautifully done, mailed separately, taking advantage of the expanded customer database. We've strengthened our CRM system this past year. We're doing a nice job on consumer segmentation. We can identify the more super-loyal customers to reach out to them, and be more effective in our marketing efforts, doing a beautiful job with e-mails, pinging people on a regular basis, making sure that our brands are top of mind. I just think everything that we're doing, in terms of prospecting, tag teaming with some other companies that are in our space to reach out to consumers, I think has been extremely well done.

Just one other thing that will add to that. We continue to grow the size of the database. Database at year-end '11 was up roughly 28%, compared to last year. So data acquisition continues to be a strength.

That's great. Thanks very much.

We go next to Robbie Ohmes with Bank of America Merrill Lynch.

Hi. This is Helena Tse calling in -- on -- how much is the extra week worth, in EPS and revenue?

Extra week - from when?

Is there, is there an extra week this year, a 53rd week?

We do not have a 53rd week.

Not for us, but -- (Laughter).

If you could find a way to get it for us, Helena, that would be terrific. (Laughter).

No, a 52 week year.

Got it. And then, in terms of SG&A, can you elaborate on sort of how you think about the full-year SG&A on a run rate basis this year versus last year?

Sure. We're planning for a fairly healthy increase in SG&A this year. And that's in support of our growth initiatives, adding more retail stores, the projected increase in the eCommerce business which is a very SG&A-intensive business for us. That will drive some increases in SG&A. We're also providing more fully for some provision of -- provisions of compensation, which had been down over the last year with the lower profitability. So in general, we're planning SG&A growth, in excess of what net sales are projected to grow.

Great. And then last question, in terms of your international strategy, maybe outside of Canada, I know that you hired someone recently. Can you maybe discuss the timing of any expansion in other regions?

Well, it's ongoing. I think our focus right now, the heavy lifting is going to be on the licensing component of our business, contributes a nice portion of profitability to the Company. And what we have found with the efforts of the new team that we've assembled, is that these licensees need our help. These are small retailers by and large. Their execution in some cases has been really good, and other cases not as good, not consistent with the way we're trying to manage the brands here in the United States, in terms of the beauty of the presentation, the focus of the product offering. So we're helping them with that. And so the wholesale business is good. Again, it's long-tenured relationships, these are very good business partners, doing a nice job expanding our presence in the world.

But near-term, near-term our biggest focus is making sure that these licensees have the benefit of our merchandising expertise, our supply chain expertise. A lot of these folks are sourcing the product on their own, which is -- I don't think it's best for them. I think they could -- they are not taking advantage of the scale that our Company has to source this product at a better cost for them. We're -- part of what we're doing this year as well, is having an Asia-based distribution center. It's interesting to me, over the years we would actually take product from Asia, source it from Asia, bring it all the way to California, bring it to Stockbridge, Georgia. Then ship it all the way back to Asia again, which doesn't make a lot of sense. So we've got folks working with third-party logistics provider, so that product is sourced in Asia, it goes to this third-party distribution center, and then goes right to our international partners based in Asia. So we've got some good initiatives underway. Suffice it to say, this past year, we put international on the short list. We've broke it out as a separate component of our business. We've got a fraction of the market outside the United States. We have the largest share of the market in the United States. We hope over time, that we have a much larger share of the big market outside of the United States. But we've got some very talented people on it. It's on the short list of things that we focus on as a Company. I think you're going to see good growth it from that component of our business over time.

Okay. Thanks.

You're welcome.

We go next to Stephen Carlson with Highland.

Hi, thanks for taking the question, and congrats on the great quarter. Just a definitional question to start. By product costs, are you using that interchangeably with COGS, or is that a portion of COGS?

Well, it's a portion, but it's the vast majority of cost of goods sold.

Okay. So like over 75% or something?

Over 90%.

Okay. And then just cotton, as a percentage of COGS, what is that, like in the 15% or so range?

Probably a bit more than that. We like to think of the components of product costs being about 80% fabric, of which cotton would be the most significant component. 20% or so relates to the manufacturing and conversion process, and then 20% is kind of all other, duty, freight, agent fees and such.

Okay. So cotton might be like 20% or so, for this year going forward?

Yes, directionally.

Okay. And then how much -- you mentioned the labor going up in Asian countries. How much is labor, you said?

Well, the labor and manufacturing is about 20%. Labor would be a component of that 20% slice of the pie.

Okay, okay. And then on the cotton -- this is hard to predict obviously, but on the cotton side, when you see those tail winds coming through in the second half, what do you anticipate that the pricing response in the space to be? Do you think folks will try to give some of that back to consumer, or do you think people will be disciplined, and be able to keep most of that?

We hope the latter.

Obviously.

I would actually say, I would actually say the consistent message we heard, in January market week, people are hoping to maintain pricing. What we've done with our own business, is we've taken some portion of that cost savings, and strengthened the benefits of our products. I think it was noticed by our customers, when we met with them in January, how we strengthened our product offering. Over time, I think it's fair to say, over time, costs will be going up. So we'll have the benefit of cotton prices dropping significantly this past year. But these cotton prices are still higher than they were in 2010. Labor costs are going up. It's too early to call, in terms of what the impact of fuel is going to be. I think the jury's out in terms of how that's all going to settle. But some portion of our product line is polyester-based, it is oil-based. So over time, costs will go up for us. They will go up for our customers. They will go up for our competitors. So I think everybody, I think the general message I heard is, everybody's figuring out a way how to maintain those pricing -- prices, that we were able to get in the second half of the last year. I don't think anybody's looking at a meaningful way to be lowering the prices.

Okay, great. And then just last, quick question was, if you look at the price points across your different offerings, any noticeably performing better than others? Is it like kind of the, the higher price point stuff performing better, or lower price point, or any trends you're noticing there?

I think across the board, we were pleased with our progress with price increases. Probably the tougher of, probably the more price-sensitive component of our product line was in Sleepwear. And so we had very good growth in Sleepwear last year. We're taking some steps this year to right-size it. But if I had to say, across all the things we do as a Company, I would probably say the toughest place we saw to raise those prices was in Sleepwear so. And we're addressing that.

Great. Thanks again so much.

You're welcome.

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

Hi. Thanks for taking the follow-up. So just a few. Are you benefiting from any additional programs or selling to Walmart in the 2012 guidance, or are you now fully penetrated?

I would say we're continuing to build that business back, Scott, so we have good growth planned, with that customer this year.

Okay. So the --

And that -- (Multiple Speakers) -- reflected in our guidance, that's included.

Yes, the arrow is pointing up with Walmart, Scott. That business, yes, we have the potential to get back to our all-time high of volume with them, that we achieved back in 2008. It's been -- it had been declining in recent years, and so they strengthened their merchandising teams. We're working with the folks in Bentonville. The relationship at the top is very good. And so they're --they have been very, very supportive of our Child of Mine brand.

Okay. And then have you continued to be able to grow your market share? And then how has private label been as a competitor, and what's your expectation in 2012?

Our market share has grown this past year. We got this information about a week or so ago. The market share has improved, now 16%. The information we had a year ago was about 14%. And as we look out, as we look at who is losing share, you could almost take out a point out of some of the specialty retailers. You could probably take at least a point or more out of the smaller marginal players. If you were to see the sheet of the folks who are in the young children space, it's quite lengthy.

Walk through any one of our retail partners, and you'll see some brands on the floor, that the names aren't as recognizable as Carter's and OshKosh. So smaller, smaller players continue to struggle in this environment, as they become fewer and larger retailers, they are looking for fewer and larger suppliers to support their needs. The big focus in recent years has been private label. Private label has been extremely good. I would say across the board with our national retail partners, they have done an exceptional job with private label, and that's really our competition. And so we do our best to make sure that when their customers come in, they have got a good choice between our brands and the private label offerings. But I would say, that private label has been good.

Are you hearing though, that your retailers are going to be more price aggressive with their private label?

I don't -- I think on balance, I would say the answer is no. There's not to say, there is not exceptions to that. But I would say on balance, yes, I think our private label got paid more for what they were doing last year. I think over time, that will continue to be their objective. I don't think it's a good strategy over time to get paid less for what you're doing.

Fair. And then just lastly, a lot of moving parts international. After we anniversary Canada, how do you expect that business to grow in the second half of the year, and in 2013 and beyond?

My guess is they will have good comps. We always plan our business to have a low single-digit comp, and we hope to outperform that. But that's how we plan the business. And then they are going to open up some portion of 20 stores a year, so I think it's going to be at least a 10% growth business for us going forward.

Any other big markets you expect to accelerate, or just solid growth across the board?

I think just good growth across the board. Again, our focus right now is making sure we support these licensee partners, and I think there's good opportunity there. I'll tell you over time, what I would love to do with these licensee partners is, convert them to wholesale relationships. It doesn't make sense to me, some of these smaller licensee partners sourcing the product on their own. So this year, and hopefully what we'll do is, we'll update you over in time the progress that we're making there, is that we help them grow bigger businesses, with our support. They grow nicely. They can accelerate their growth in the different markets that they are in. They can grow more profitably, and we'll grow more profitably with them.

Okay. Oh Richard, just despite the increase in CapEx and retail, it seems like there's still excess cash, particularly with the inventory coming down after this quarter, thoughts around share buybacks in 2012?

Well, our first priority is to invest in the business and the investment needs are at a higher level than they have been for the last two years. So we'll first and foremost, get through that. To the extent, we have cash in excess of our needs, it's not our intention to have it sit on the balance sheet forever. So we'll evaluate and continue to evaluate the mechanisms for distribution. Share repurchase would be high on that list.

Okay. And current authorization right now?

We have about $60 million remaining under our current authorization.

Okay. Thanks.

Thanks, Scott.

Ladies and gentlemen, this does conclude the question and answer session of the conference. Mr. Casey, I would now like to turn the conference back over to you for any closing remarks.

Okay. Well, thanks. Thanks very much for joining us this morning. We appreciate your questions, your support of our Company this past year. Look forward to updating you again, with our first quarter results in April.

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