Carter's Inc (CRI) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to Carter's fourth-quarter and fiscal 2012 earnings conference call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President; 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 its fourth quarter and fiscal 2012 earnings press release today before the market opened. A copy of the release and 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. Also, today's call is being recorded.

And now, your host for today's call, Mr. Casey. Please go ahead, Sir.

Thanks very much. Good morning, everyone. Thanks for joining us on the call.

Before we walk you through the presentation on our website, I'd like to share some thoughts in our Business with you. We had a very strong finish to the year with fourth-quarter sales up 14%, adjusted earnings per shares up 41%. For the year, we achieved a record level of sales and profitability. It was our 24th consecutive year of sales growth. We increased are US market share to 16.5%, nearly twice the share of our nearest competitor. We generated about $200 million in free cash flow, and shareholder value increased 40% last year. Sales growth in the fourth quarter was driven by our Carter's and International segments. Profits in the quarter grew in all business segments, Carter's and OshKosh, and reflect the strength of our product offerings, success of our growth initiatives and lower product costs.

Our Carter's business segments provided the largest contribution to our growth in the fourth quarter with solid growth in all three channels of distribution, retail, eCommerce, and wholesale. Our Carter's retail stores had strong comps for the quarter and the year. Our new stores achieved their growth objectives. We've built a very profitable store model for our Carter's brand. We plan to open 60 stores a year over the next five years, which should enable us to grow this component of our business by 10% a year on average during that timeframe.

We're pleased with the effectiveness of our marketing efforts in the fourth quarter, especially the national brand campaign, Count on Carter's, which aired early November through Christmas. The campaign was beautifully executed, and we believe drove a meaningful lift in sales. You should see more of the Count on Carter's brand marketing in 2013. Our analysis suggests it favorably impacted the consumer's perception of the Carter's brand in all age ranges, particularly the older segment of our zero-to-seven, growth-to-bus target market.

Carter's eCommerce sales, nearly doubled in the fourth quarter and grew to 18% of our store sales, compared to 11% in the fourth quarter last year. The consumer clearly loves the convenience of shopping for our brands online. We expect our eCommerce sales to grow to nearly $200 million this year, and believe eCommerce sales can double to over $300 million within the next five years.

We met with our largest wholesale customers in January to review our performance with them through the holidays, and we reviewed our joint business plans for 2013. Their feedback suggest we helped deliver good performance for them last year. We now have visibility into the second half of 2013 will fall bookings, which we expect will support good growth in Carter's wholesale sales this year.

The second largest contributor to our sales growth in the fourth quarter was our International segment. The growth was driven largely by our Canadian operations. The sales contribution from Canada nearly doubled last year, reflecting the full-year benefit from this acquisition in 2011. We expect our sales from Canada to more than double over the next five years. We expect this growth will be driven by thoughtful door growth, about 20 co-branded stores a year and by extending the reach of our brands through our global wholesale partners.

We recently began shipping to Target Canada. We hope to replicate the success we've enjoyed with Target here in the United States with our Just One You, Precious Firsts and Genuine Kids brands designed exclusively for Target's guests. We are preparing to launch our Child of Mine brand with Walmart Canada in Spring 2014.

In our press release this morning, we reported the acquisition of our licensee in Japan. This investment enabled us to assume control over nearly 100 points of distribution in Japan, which produced about $20 million in annual sales. Japan is the third-largest children's apparel market in the world. We have estimated the size of our target market to be about $8 billion.

Near term, we don't expect the sales contribution for this new initiative to be meaningful to our results. We do expect Japan will be dilutive to earnings this year as we build the infrastructure needed to support this new business. Overtime, we believe Japan has the potential to contribute more meaningfully to our growth objectives. We'll keep you informed about this new initiative as it evolves.

With respect OshKosh, it achieved its sales objectives in 2012 and exceeded its profit objectives. Our focus in 2012 was to improve its profitability. Profits increased significantly in the fourth quarter and more than doubled in the second half. This past year, we strengthened OshKosh's product offering and marketing, reduced unprofitable sales, began testing a new store format and built direct sourcing capabilities. These initiatives will continue to be our focus in 2013.

We're expecting good growth in sales and profitability with OshKosh this year. We've built a very talented team to support the brand, and we continue to see good progress because of their efforts.

By 2017, we expect total sales from OshKosh from all segments to grow to at least $600 million in sales with an operating margin of 10% to 12%. We've made good progress improving our supply chain capabilities in 2012. We're excited about the potential of our new sourcing operations in Hong Kong. We expect to shift the mix of our direct sourcing from less than 10% last year to at least 50% over the next five years. We expect about 20% of our fall 2013 products will be sourced directly.

Another big step forward in our supply chain this past year was the investment in our new million-square-foot, multi-channel distribution center. 100% of our eCommerce demand is being shipped at a lower cost from this new facility, as performance was outstanding in the fourth quarter. In 2013 we plan to build the capabilities needed to support our retail and wholesale operations for the new distribution center. The expected benefits from this initiative include providing a higher level of service to our customers and reducing the costs of distribution. We believe our supply chain initiatives will be an important part of our efforts to mitigate the risk of product cost inflation.

2012 was a good year for our Company. We expect 2013 will be an even better one for us. We're forecasting good growth in sales and earnings this year. We are planning a significant level of investments to fund several initiatives, which we believe will enable good growth for many years to come. The focus of those investments include consolidating our base of operations in our new headquarters here in Atlanta, building out our new multi-channel distribution center, integrating our new operations in Japan, and strengthening are IT systems to enable our growth initiatives.

With respect to current business trends, I'd say 2013 is off to a slower start in our stores then we'd like. Our stores are comping negatively year to date. January was a good month for us. February was tougher. The snowstorms in February may have kept shoppers closer to home. The number of store closures was up significantly compared to last February. As you'd expect the storms have not impacted eCommerce demand. Comps for both Carter's and OshKosh online our up about 60% year to date.

Historically, January and February are the lightest months of our year in terms of store sales contributions. Our stores typically sell more in March than January and February combined. Easter comes early this year, so we hope to see more positive trends in our stores in March.

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 $21 billion young children's apparel market in the United States. We gained share and we believe we have plenty of room for organic growth. We plan to continue extending the reach of our brands with the support of our national wholesale partners, through our own stores, online, and in international markets.

Our brands are sold in nearly 18,000 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 growing our high margin retail, eCommerce, and International businesses, strengthening our supply chain capabilities, improving inventory management disciplines, and improving OshKosh profitability. We consider ourselves very fortunate to have so many ways to grow and improve our Business. We have an extraordinarily talented and engaged organization focused on achieving our growth objectives. I'm grateful for the performance they made possible for our shareholders this past year.

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

Thank you, Mike. Good morning, everyone.

I will start on page 3 of the materials with some overall highlights for the quarter. Please note that my comments this morning will speak to our performance on an as adjusted basis, which excludes certain items that we believe our non-representative of our underlying business performance.

As Mike noted, we delivered a strong finish to a very good year. Fourth-quarter net sales grew 14%, which builds on growth of 22% in the fourth quarter of last year. Our revenue performance was broad based with our US Carter's retail stores, eCommerce, and International operations making the largest contributions to growth. Significant year-over-year gross margin expansion was a principal driver of improved overall profitability. As a result of this solid top line in gross margin performance, adjusted operating income and adjusted EPS in the fourth quarter, both grew over 40%.

Page 4 provides a detailed view of our fourth-quarter sales performance. In the US, total Carter's sales grew nearly 17%, reflecting particularly strong growth in our retail store and eCommerce businesses. Carter's retail store comparable sales increased approximately 5%. Our US Carter's wholesale business grew nearly 11% in the fourth quarter, exceeding our expectations.

Total US OshKosh sales declined about 2%. We saw strong demand for OshKosh online in the quarter, but segment revenue declined due to the decline in comparable store sales and the lower store count as a result of pruning underperforming stores from the portfolio. Despite lower revenues, OshKosh's profit contribution increased significantly in the fourth quarter.

International sales grew nearly 20% in the fourth quarter, driven by our Canadian retail business. Fourth-quarter International sales contributed over 9% of our consolidated sales, up 50 basis points over the fourth quarter of last year. I'll provide a little bit more detail on our business segment results in a moment.

Our fourth-quarter P&L is on page 5. We have covered net sales, so beginning with gross margin. Fourth-quarter adjusted gross margin increased by nearly 800 basis points over last year. This increase was driven by lower product costs as well as the benefit of our successful pricing and promotional strategies, a higher mix of sales from our direct-to-consumer businesses, and lower inventory related expenses.

Adjusted SG&A increased by 490 basis points over last year. I'll provide more detail on this in a moment. Adjusted operating margin improved by nearly 300 basis points to 12.5%, which represents our strongest fourth quarter since 2009. The bottom line adjusted earnings per share for the fourth quarter grew over 40% to $0.89.

Turning to page 6, where we've summarized the drivers of adjusted SG&A for the fourth quarter. SG&A in the quarter was approximately $215 million. Much of the increase in spending is a result of the significant growth in our direct-to-consumer businesses. We're operating 69 more stores in the US and in Canada than we did one year ago.

Our eCommerce business has doubled in the last year. Distribution and freight costs were up in the quarter, driven by higher sales volume. We continue to be pleased with the in-sourcing of the distribution functions for eCommerce, which we completed in late August. Our fulfillment costs are meaningfully below what we were paying when these functions were outsourced and our daily shipment capacity is far greater.

The strength of our underlying business in 2012 and in the fourth quarter allowed us to invest some of our improved probability back into the business. Specifically, the increase in marketing on page 6 largely relates to the Count on Carter's brand marketing campaign, which we launched in the fourth quarter. Hopefully, many of you had an opportunity to see this work either on television, online, or in how we integrated these messages in store and in our direct mail marketing.

Given our strong earnings growth in 2012, we also provided for higher levels of performance based compensation for our employees. Finally, the All Other grouping contains several smaller items including Japan business development expenses, personnel cost and spending on technology initiatives.

Moving to page 8, which is a summary of our business segment financial performance, as I said, our consolidated adjusted operating margin increased about 300 basis points versus a year ago. Our business has posted strong improvements in profitability in the fourth quarter. Operating margins for our US Carter's businesses expanded by 450 basis points to 18.6%. We're especially pleased with the improvement in OshKosh's profitability, which was up substantially in the fourth quarter, and up over 100% for the second half of the year. Our International operations also continue to contribute strongly to overall Company profitability.

I'll now provide more details on our fourth quarter business segment results. Turning to Carter's wholesale on page 9, Carter's wholesale sales grew about 11% in the fourth quarter, reflecting growth across the Carter's brands. We saw very good replenishment volume in particular, which we think' s a good indication of the underlying demand from consumers' shopping with our wholesale customers during the fourth quarter.

Life to date through the end of December, our fall assortments delivered good over-the-counter sales growth across our major national customers, with improved AURs. Fall 2013 seasonal bookings are not completely finalized yet, but what we have in hand supports an increase of mid single-digit growth.

Moving onto Carter's retail on page 10. This segment delivered strong sales growth of nearly 24%, including a retail store comp sales increase of 5%. This compares to a 7% comp in the fourth quarter of last year. Both average transaction values and transaction counts increased in the quarter compared to last year.

We were pleased with the performance of our assortments at retail in the quarter with all product categories comping positively. During the fourth quarter we opened 16 Carter's stores and closed 1. We ended the quarter with 413 stores, a net increase of 54 stores compared to the fourth quarter last year. For the full year, we opened 63 Carter's stores. Carter's eCommerce sales in the fourth quarter nearly doubled to $39 million, up from $20 million in the fourth quarter last year.

Now turning to OshKosh retail, on page 11, fourth-quarter net sales for the OshKosh retail segment were comparable to last year, reflecting solid eCommerce growth that was offset by lower comparable store sales and the impact of the closure of 10 underperforming stores over the course of 2012. As we've mentioned in the past, our priority for OshKosh this year was to improve profitability, which we accomplished through delivering more compelling assortments to the consumer, lower product costs, and improved management of inventories and promotional activity.

During the fourth quarter, we opened 5 OshKosh stores and closed 4. We ended the quarter with 168 stores, a decrease of 2 stores compared to last year. We opened 8 OshKosh stores in 2012 and we plan to open about 15 new stores in 2013. OshKosh continues to perform very will online. Fourth-quarter eCommerce sales grew 84% to just over $13 million, with all key online performance metrics such as traffic, average order value, and other metrics improving nicely over last year.

Moving to OshKosh wholesale on page 12, sales declined about 11% in the fourth quarter, reflecting declines in both off-priced channel sales and lower up-front bookings in the promotional channels. While sales were down a bit in this portion of the business, profits were up nicely. Fall 2013 seasonal bookings for OshKosh wholesale are planned down about 12%. We've continued to scale back up-front bookings in the promotional channel, which are less-profitable sales, to pursue long term. We are also working with a couple specific customers who are currently booked down, but which are continuing to work through their merchandising strategies for the late fall time period.

Moving onto our International businesses on page 13, fourth quarter segment sales grew nearly 20%, driven by our Canadian retail store business. Canadian same-store sales declined slightly in the fourth quarter. The legacy Bonnie Togs stores comped down about 8%. Our Carter's and OshKosh co-branded stores comped up 10% on top of a 16% increase in last year's fourth quarter.

Sales in Canada were negatively effected by unusually warm weather with cold-weather categories such as outerwear posting sales declines. During the fourth quarter, we opened 4 new Carter's and OshKosh stores and closed 1, bringing our quarter-end Canadian store count to 82 locations. We continue to be pleased with our investment in Canada. We opened 18 co-branded stores in 2012, and plan to continue to expand our footprint in 2013, including, entering the province of Quebec for the first time.

International wholesale sales were roughly comparable with last year's fourth quarter. For the full-year 2012, our International Wholesale business grew 18%. Internationally eCommerce, which we define as orders on our US websites which ship to addresses outside of the US contributed approximately $1 million in sales in the fourth quarter with Russia, Canada, and Japan representing the top markets. Finally, International segment operating profit grew about 17% in the fourth quarter. Our margins in this segment we're negatively affected by a couple million dollars in Japan related expenses, reflected in this segment in the quarter.

On page 14, as we noted in this morning's press release, we've taken another important step in extending the reach of our brands outside of the United States. Earlier this year we initiated direct retail operations in Japan by acquiring certain assets from our former principle licensee in Japan. As Mike said, Japan's a significant children's apparel market and serves as a flagship market for consumers across Asia.

We're now operating approximately 100 points of distribution across Japan. The majority of these locations are shop-in-shop presentations within larger retail stores. We're also operating approximately 15 branded stand-alone retail stores. We see good growth potential in Japan over time.

Near term, we're focused on improving the execution of these operations, including applying our expertise in merchandising, brand presentation and sourcing. OshKosh comprises the majority of the business today, so we think Carter's represents a particular opportunity in the market. We've assemble a good management team in country, which is working closely with our new Head of International, Kevin Corning, and the rest of our organization.

For 2013 we're planning for sales in Japan of approximately $15 million to $17 million. As Mike said, we expect Japanese operations will be dilutive to 2013 adjusted earnings per share by about $0.10.

Page 16 is our full-year P&L for 2012. We achieved record sales in earnings in 2012. Sales grew 13% to nearly $2.4 billion, driven by the strength of our Carter's retail stores, our eCommerce businesses and International. With our improved profitability, we were able to invest meaningfully in our growth initiatives, in our infrastructure and in our employees in order to strengthen our long-term position and market leadership. Full-year adjusted earnings per share increased 36% to $2.85.

Turning ahead to page 17, we summarized several highlights from the balance sheet and cash flow statement. Our balance sheet and liquidity remain very strong. We ended the fourth quarter of cash on hand $382 million. Quarter-end inventories increased 1% compared to a year ago. Year-end inventory units are up about 9% versus last year, due to growth in the business and our expectations for good growth in the first half of 2013. Overall, we remain pleased with the levels and quality of our inventories.

Cash flow from operations for the year was nearly $280 million, a record level for the Company, driven by our higher earnings and lower working capital requirements. CapEx for the year was $83 million, up from $46 million last year, representing higher investments in our successful US and Canadian retail Store business, and in the initial spending for our new multi-channel distribution center here in Georgia.

Turning now to our outlook on page 19, planning another good year in terms of both growth in net sales and earnings. At a high level, our plans reflect growth in net sales of 8% to 10%, and growth in adjusted earnings per share of approximately 15%. At this point, we think that profit growth will be relatively balanced between the first and second half. We do think profit performance by quarter could be a little uneven given calendar differences year over year and differences in the timing and amount of spending.

Right now, we'd say the first and fourth quarters will show the greatest profit growth with more modest contributions in the second and third quarters. We expect broad-based sales growth in 2013 with growth in all of our major business segments.

This is a year of significant investment for our Company. First, we expect to open retail stores, continued to open our retail stores. For Carter's, we hope to add roughly 60 locations, consistent with our results in 2012. With OshKosh we're targeting about 15 locations, which will be a mix of both outlet and brand store locations. In Canada, we're planning about 20 new co-branded locations.

Second, we will continue to build out our new multi-channel distribution center and to invest in several significant technologies initiatives, which are intended to strengthen our core infrastructure and enable future growth, including outside the United States. We're planning for expenditures related to the previously announced consolidation of our Connecticut retail and finance operations and the relocation of our corporate headquarters here within Atlanta later this year. We're forecasting the capital expenditures will be approximately $200 million, which we expect to fund through the operating cash flow of the business.

For the first quarter, we expect net sales to grow approximately 5%, compared to the prior year, with adjusted earnings growth of approximately 15% to 20%. Our first-quarter net sales forecast reflects a sales decline overall in our Carter's Wholesale business related to shipping timing shifts across several major customers. We expect good growth in this part of our business in the second quarter.

With those remarks, I believe we're ready to take your questions.

(Operator Instructions)

Susan Anderson, Citi.

Good morning, and congrats on a great quarter.

Thanks, Susan.

I guess I wanted to ask some questions on the guidance, really quick. It seems like the first quarter, like you said, the profitability is up, but the top line is disproportionately low. Is that because of the wholesale deliveries later this year in the second quarter?

Susan, I'd say it's a couple of things. We did have such a strong finish in Carter's wholesale in the fourth quarter there's probably a bit of replenishment volume that went a little early. Our customers were asking us for that inventory to support the sales trends that they were seeing. A bit of that went earlier than perhaps we had originally planned.

Then, the balance would be, Carter's wholesale, we are planning down year over year in the first quarter. That's largely a calendar issues. Our calendar is different than our wholesale customers. So, some shipments that typically take place in the first quarter are slipping into the second quarter.

So, overall, it's more timing than anything. The other parts of our business, we're expecting good growth in the first quarter.

Okay. On the retail part you mentioned comps year-to-date were negative. Did that just turn in February? Or it's been negative so far through January, too?

In January, we had positive comps at Carter's, negative in February, and we're expecting good comps in March. I think we got hit with the storms. Understandably so. You've got to keep in mind where our consumers -- a mom with young children, if you've got bad weather, she's not going to head out to the stores.

The online business has been terrific. Demand online has been up 60% year to date. Obviously, not affected by weather. We were pleased with January performance. The comps were negative in February.

Okay. And then on the SG&A front, there was a huge increase this quarter. How should we think about it this year? Is the fourth quarter going to be the new face? And then also, the big jump in marketing -- was that just the new Carter's campaign? Is that going to be pretty consistent in terms of the level this year for those four quarters?

And then, also the spending on Japan -- is that going to be pretty consistent for the year?

With regard to SG&A, I wouldn't necessarily extrapolate the growth that we posted in the fourth quarter. That's not the new run rate. Given the performance of the business, in particular the performance-based compensation was outsized, I'd say, in the fourth quarter. So that's affecting those numbers a bit.

I would say, as we think about 2013, the growth rate I'm expecting in SG&A to slow a bit. Now, the base is larger than it has been. We'll continue to have higher SG&A in absolute dollar terms, but the growth rate that we've been seeing over recent quarters I don't think will be as significant.

We're going to continue to invest, though, in those portions of the business which carry higher cost structures; so, namely, continuing to open new retail stores both here in the US and in Canada, and now in Japan. Japan is an expensive place to do business. It is a high-cost environment. We do have some costs to stabilize the business in Japan, so we're in foreign investment mode there.

I would say that the amount of deleverage that we've seen over recent quarters, that will slow a bit. The absolute percentage increases in SG&A will slow a bit. We'll get some upside in terms of not planning the elements of performance-based compensation quite as significantly as we achieved this year.

On the marketing front, we're planning for a similar amount of spending on Count on Carter's; and that mostly will come, again, in the third and the fourth quarters as we are planning it today.

Okay. Great. That's really helpful.

So, should we expect the growth to be still above sales, though?

I'd say yes, modestly; and more of that growth will be in the first half as opposed to the second half.

Susan, another way to think about it -- what we're planning is on improving the operating margin by about 50 basis points this year. If you were to look at our defined peer group -- in the proxy we've showed the peer group of companies that we compare ourselves to. The peer group average for -- our performance relative to the peer group -- we rank, we're on the lower end of SG&A. So, what you should expect is that our operating margin continues to improve over time. The gross profit margin should improve. But SG&A, relative to the sales, will also increase.

I've got the peer group data in front of me. Peer group average for gross profit margin's around 42%; ours is 39%. SG&A relative to sales for the peer group is around 33%; we're about 29%. Operating margin for the peer group under 9%, and we were about 11.5%.

Our business is shifting. We're seeing a higher rate of growth in the direct-to-consumer businesses. That has a different business model, which produces a higher gross profit margin, but also runs at a higher level of SG&A relative to sales. Expect that SG&A will climb, but so will gross profit margin. And if we're successful with our growth plans, so will the operating margin improve.

Okay. Got it.

One last question on the cash -- you now have about $6 per share; are there any plans for the cash now that it seems like some of the investments be coming behind you?

We do have a significant cash position at the moment. Although, as we laid out in the materials, we have a very significant investment agenda ahead of us, with probably a record level of capital expenditures, nearly $200 million. Near term, I'm expecting that we're going to be a net consumer of our cash, particularly in the first six months of the year. Historically, the business generates most of its cash in the second half of the year. First and foremost, the priority is to invest in this full agenda of, I'd say, both growth and infrastructure projects which we have on the table.

Okay. Great. Thanks a lot, you guys, and congratulations.

Thank you.

Susan Sansbury, Miller Tabak.

You know, that was a surprise. I thought I was the last person who pushed the button. Congratulations.

Morning, Susan. Thank you.

A little bit off topic, Mike, if I could.

The subject is JCPenney. I was in a couple of stores over the weekend and noticed that -- well, my question is, are you going to have a hard shop? Or you will continue to have a soft shop within JCPenney? When do you expect your shops to be up?

We plan on having a beautiful shop. I'm not quite sure what you mean by hard or soft, but it will be beautiful. We had a good trip to see them just before the holidays last year. We've seen the full-scale model that they plan on rolling out. I won't comment on the timing of that rollout. I don't think they'd like me to say that.

Our relationship with JCPenney, I don't think has ever been better. We had very good performance with them last year. They're one of our larger customers. We're rooting for them. We love what they're doing with our brand. So, we're optimistic about the future of JCPenney.

We've seen the shop. It'll be beautifully done. When we get closer to the time that it actually gets launched, we will share that with you.

Okay. Right now, the only fixtures that I see in there are yours and then you're hanging on walls opposite their private label. So, you will actually have a designated hard shop separated from -- by itself?

Yes, we will. Yes, we sure will. We've seen it.

Are you comfortable with their new pricing strategy?

Yes. We know how to support all kinds of pricing strategies. We know how to support high level. We know how to support everyday pricing. Everyday pricing -- that's what you have a Target, Wal-Mart; to some extent you have it in our OshKosh mall stores. Our objective is to make sure that we're offering great value to the consumer every day, and there's lots of ways to do that.

Okay. Can you make a comment, broadly, on the promotional activity across the Kids landscape at this point?

Sure. I would say fourth quarter was as promotional as we expected it would be. I think the messaging has gotten very aggressive. The window messaging -- that's usually the hook to pull people in the stores. We do it. I think everybody does it.

You have to -- it's a promotional environment. I'm not quite sure it's any more promotional than it was a year ago, six months ago, nine months ago. It will continue to be a promotional environment. I think the consumer is strapped. I think they're looking for great value. Fortunately, our brands have always been known for great value. That's why we're putting up the kind of performance we are as a company. I would say, it is -- continues to be -- a very promotional environment.

Okay. And then, finally, should we be concerned about the decline in the OshKosh fall bookings?

No. Not at all. A lot of what you're seeing in terms of the decline in sales has been intentional. On the wholesale side of the business, we looked at some of the profits attached to some of the sales we were getting. Some of those sales were not as profitable as we'd like them to be. In some cases, the sales were unprofitable.

From my perspective, this is a beautiful $430 million business. That's a big business in the Kids space. It's not Carter's, but nothing is Carter's. So, it's $430 million; the sales grew last year. We achieved the sales plan.

We've edited out some sales that had very little profits attached to them. Even the comps that were running negative year to date, this time last year when I was looking at some of the sales we were getting and the margins attached to them, we consciously decided not to repeat some aggressive promotions that had little profits attached to them. We decided to focus more on good inventory management. Making sure that we had the right mix of product in the store at the right time. We still have some work to do on that.

I'm not concerned at all about the negative comp. I think for the year, OshKosh comped down about 2%. In light of everything that we accomplished, in light of all the profit improvement in the second half of the year and the quarter, we are pleased with OshKosh's performance.

Okay, great. Good job. And good luck for the balance of the year.

Thank you.

We'll chat later.

Courtney Willson, RBC.

Hey, this is Courtney in for Howard Tubin.

Can you just talk a little more about your marketing plans for 2013? And then, how you're planning inventories for spring?

Hello, Courtney; this is Brian.

In terms of marketing plans for this year, we're excited about how we're teed up for Spring. We've got catazines that are launching for both brands now. Beautiful Spring product out there, we think fantastic photography and strong compelling promotions as we go into the heat of the season here in March, with Easter being a week earlier than last year. We expect that, that's going to drive the business.

In Carter's, Richard touched on the Count on Carter's campaign. We launched that last October. Some folks referred to it as a television campaign, and we really saw it is a launch of a belief statement for the brand that's woven through all facets of the Company, not only for the customers that can count on us for quality and value and trust, but for our employee base to count on us for a great career and for our wholesale customers that can count on us for service. We do expect to weave that further into our business this year. We're working on advertising and promotional campaigns for fall with that, because we believe it does have a halo impact on the brand.

And talking on the inventory front, Courtney, we're expecting good inventory growth here in the first part of the year. A lot of that is timing-based for the end of the first quarter. From memory, inventories will be up between 15% and 20%. That has a lot to do with the forecasted growth in the second quarter. That inventory position, year over year, probably moderates over the balance of the year.

Okay. Just one more -- if you can give us a general idea on your plans for selling into the off-price channel for 2013?

I'd say relatively consistent year over year. We had a significant decline in that channel activity in 2012, and we're probably now at a more stable run rate going forward.

Okay. Great. Thanks a lot.

Anna Andreeva, FBR.

Great, thanks so much, guys. Congrats on a strong end to the year.

Thank you.

I had a couple of questions. I was hoping we could get some granularity around 1Q sales trends. Did you say both concepts, OshKosh and Carter's, are comping negatively thus far? Any way you could quantify for us January versus February results? I guess you did say January was positive, but just curious if you could quantify that?

Are you seeing any weakness in Canada, quarter to date as well? Also curious, you are guiding for acceleration in sales growth as we go through the year, so what's driving that acceleration?

There are a few parts there. In terms of year-to-date performance, Carter's comped positively in January, comped negative in February, comping slightly negative year to date. We're expecting a good March for the quarter.

I would say were expecting Carter's comps to be flat to slightly positive. OshKosh comped negative January, February, and we're expecting for the quarter it'll comp down, probably some portion of 5%, thereabouts. And then going forward, if we're successful with our plans, we would expect that we'd start to show better comp performance in the balance of the year. I think it is important to keep in mind, January and February -- lightest part of the year with respect to store sales.

Canada -- Canada's performance is terrific. Again, keep in mind, they're carrying the same product, the same pricing, same timing of delivery. Their performance, the co-branded stores, year to date, are comping up about 10%. Then the Bonnie Togs stores, I believe, are comping down.

We're start to convert some of the Bonnie Togs stores to co-branded stores this year. We did two last week, and certainly, too early to quote how they're doing. I think the early read is good, but time will tell. The plan is to convert all 30 of the Bonnie Togs stores to co-branded stores over the next five years, thereabouts. I've seen the before and after pictures -- before the conversion, after the conversion -- and the Canadian team did a beautiful job executing the first two.

I think there was a third part your question. In the third part of your question -- oh, in terms of what do we expected in terms of sales acceleration balance of the year? We're expecting about 8% to 10% growth this year. That's fully in line with what our annual growth objectives are.

First quarter's going to be a little lighter than that for the reasons that Richard shared with you. We're servicing -- about half our business is wholesale, and they went to a 53-week calendar last year. We're off about one week from their calendar. What would've otherwise gone in March will probably go the first week of April. That's fine. It'll all get captured in the annual plan.

We don't worry about one week to the next or one quarter to the next, but we will have good growth this year. We believe that we've got a good handle on the forecast. The first-quarter sales will be somewhat closer to 5% than 8% to 10%.

That's super helpful.

Did you guys quantify what is the impact of the calendar shift in the Carter's wholesale business from 1Q into 2Q? It sounds like you are expecting good growth there in the second quarter.

We've not quantified it externally. We certainly have internally.

Right.

It's enough to push the growth rate up for Carter's wholesale to more of a mid to high single-digit growth rate for the second quarter.

Okay. Got you.

And, Richard, I guess to you -- I think you mentioned earlier, earnings wise we should expect second quarter and the third quarter to be relatively weaker than 1Q and 4Q. I'm trying to understand what's driving there? Is that how some of the expense flow is going through the year? Is that some of the dilution from the Japan business? Just a little bit of color there would be great? Thanks.

There's a lot of components to the business, Anna, certainly the trend in top line revenue and the shifts between the quarters has an impact. I'd say on balance, though, it really is the pattern on spending. We do have some different timing envisioned for some of the marketing programs, particularly in the back half of the year. Some of that expense, likely, is moving a little earlier.

Fourth quarter expenses went up with significant provisions with performance-based compensation. We're not planning for as much this year as we have posted in 2012. I hope I prove wrong on that front. But that will benefit, in particular, the fourth quarter's profitability.

Okay. Got it.

Then just quickly remind us, what kind of AUC benefit are you guys still seeing in 1Q and 2Q? Because I would imagine your gross margins still have pretty nice upside in the first half.

Yes, we'd agree. We continue to see a benefit from lower product costs. We think that continues through the first part of the year. Product costs are planned down about 10% for the first half of the year and then up slightly in the second half.

Thanks so much. Best of luck, guys.

Thank you.

(Operator Instructions)

Jim Chartier, Monness, Crespi and Hardt.

Good morning. A few questions for you.

First, can you provide an update on the performance of the OshKosh mall stores, and how many of the new stores for 2013 will be mall-based?

Sure. We still have three, currently have three. We opened up the first one in September; the other two opened up just before the holidays. They're ramping up nicely. I think the last analysis I saw, they're within a couple hundred thousand dollars of their annual earnings plan.

We'll open up three more this year and we'll continue to evaluate whether or not that's a compelling growth vehicle for us. I would say the stores have been beautifully executed, getting good response from the consumer, very good response to the exclusive product offering in those stores. We have exclusive product design by the OshKosh team selling in those three stores and in Canada and in the international markets. It's meant to be a higher level of fashion, higher price point, higher profit per unit sold; and so far we're pleased with how the consumer is responding to the overall experience, but particularly, the exclusive product offering.

Great. Can you talk us through your thoughts on how you expect to grow the Japan business? Is there a wholesale component to that, or is it going to be strictly retail growth?

Yes. Near term it's retail. We'd like to lean a little bit more on the retail side. It's largely a retail business now. So, we've got both Carter's and OshKosh are launching in a better department store called Hankyu in a few weeks. I was over in Japan earlier this year, met with the leader of that mall, and they're excited about launching both brands.

There's an opportunity to move the distribution up for both brands. They also have outlet stores; we're working with Chelsea over there. What they have -- you may be familiar -- they have general merchandise stores, which is a more moderate tier of distributions. Both brands have a presence there. I think the business right now is a little bit more weighted to OshKosh than Carter's, but it's a wonderful opportunity to strengthen the retail presence of both brands. I'd actually say we're making progress sooner than we thought, selling into some of the better distribution.

Near term, largely, retail driven. Overtime, we hope to have a multi-channel model similar to what we have here in the United States -- retail, wholesale and eCommerce.

Great. And then you mentioned that your new distribution center's providing a cost benefit to the eCommerce business. When will retail and wholesale start shipping through that DC? Can you quantify the benefit for us? How should we think of the reinvestment of gross margin savings from both the DC and the shift to direct sourcing versus flowing through some of that savings?

Okay. Overall view -- with respect to the multi-channel distribution center, we'll complete the transition over the next 18 months. The heavy lifting will be done starting midyear through the balance of this year and it'll continue into the first half of next year. We're seeing a meaningful benefit on eCommerce. The eCommerce profitability for both brands improved meaningfully after transitioning to the new facility in the second half of last year. We'll start to see the benefit from the rest of the transition, starting balance of this year into next year.

Your other question with respect to the direct sourcing operations in Hong Kong -- we'll see that benefit as it ramps up. We're only doing about 20% of our sourcing direct right now. It'll ramp up to, we believe, at least 50% over the next five years.

The best way to think about how do you look at the financial benefit -- these are two significant components of our efforts to improve our operating margin from what was 11.5% last year to a little over 12% this year, and work it back up to 14% over the next five years. Those are two of many things that will help us improve the operating margin of the Company.

Great. Best of luck.

Thanks very much.

Scott Krasik, BB&T.

Hello guys; this is Kelly calling in for Scott.

I just wanted to dig a little bit deeper into the gross margin. Obviously, it was up very nicely in Q4. I think might have been your best gross margin ever. When we look at Q1, given that you got it to it being one of the more profitable, gross and profitability year over year. How do we view the gross margin now that you've given that the AUCs are down 10%?

I think we'll continue, Kelly, to have good gross margin performance. We will continue to have the benefit of lower product cost. It's tough to look at the business sequentially, as sometimes I know you and Scott do. We tend to look at it a little bit more year over year because the seasonality changes.

In the first quarter, I don't expect quite the absolute level of gross margin in performance that we had in the fourth quarter, because the direct-to-consumer businesses are a smaller portion of the overall mix than they are in the fourth quarter. Still, very healthy gross margins are included in our plans for the first half of the year.

I guess, to clarify -- I'm talking about the magnitude of growth year over year. So, you're up over 800 basis points in Q4. Should we expect that same level? How should we view that?

I wouldn't expect the same year-over-year magnitude that we saw in the fourth quarter.

Okay. And then, on Japan -- when are you expecting timing for Japan to become a profitable business? Or what does the size or scale you would have to get to in order to view Japan as a profitable business?

We'll expect to be dilutive this year. We just bought it. We just got full control of it. I think it's premature to give you a longer-term view.

We bought it because we think it's an enormous opportunity. It's doing some portion of $20 million in sales on an annual basis. Every point of market share is worth about $80 million. Directionally, love to think that over the next five years we're doing some portion of $80 million or more at a rich operating margin. Should be contributing $10 million or more in profitability over the next five years.

I think it's premature to tell you exactly when it'll start to generate profits. It's an investment. It wasn't meant to drive our performance this year, next year. We made the investment because we think it has potential to contribute significantly to our performance over a longer period of time.

Okay, great. And sorry just to jump around.

Real quickly back on Q1 -- you did talk about the shift in timing in the Carter's wholesale business. When we look at OshKosh wholesale, should we expect the same type of shift into 2Q -- down mid single-digits to Q1, and then for the remainder of the year expected sales to be up? How should we view that?

The comment specifically about the shift is much more significant, as is the overall wholesale business for Carter's. The comment was really directed mostly at the Carter's wholesale parts in the business. We are planning for OshKosh wholesale to be down somewhat in the first quarter, as well. That's the smallest portion of our business. Given the bookings we have in hand, my guess is that we are flattish to down for the full year as well.

Okay. Thanks.

Gerrick Johnson, BMO Capital Markets.

Good morning.

Richard -- accounts payable up 45%, but inventories flat. What explains that difference?

My guess is, just the timing of payment for inventory purchases, Gerrick. Nothing really unusual that I'm aware of in accounts payable, other than we do have accruals on the books related to incentive compensation, which are much higher year over year.

Okay. That's all I had, thanks.

Susan Sansbury, Miller Tabak.

Actually, I had another question about Japan, but I think it was answered previously.

How many other Asian licensees do you currently have outstanding? Do you have something in Korea?

Yes, China.

Singapore? Oh, China.

Australia, yes. Mexico, yes. Yes, we have a lot.

The opportunity here is to evaluate the full potential of each of these relationships. And then with our merchandising expertise, with our supply chain capabilities, how do we help some of these partners realize the full potential of their business? We're looking at every single one of them and we are sequencing it in a way that we think provides the best return to shareholders.

Okay. All right.

The message on Japan, if I interpreted the answer to the question, when it will break even, is -- or be accretive -- it's going to be several years before its accretive? Japan is a very expensive market to operate in, generally.

I wouldn't say -- I think it's premature to say several years. We just bought it. We know we have near-term visibility; that we have to make some investments. We've recruited a first-class team over the past year to help us evaluate it. They're ready to go and we retained most of the staff in the stores.

To give a multi-year view, right now -- my multi-year view would be, over time this should be significant to our business; given the size of the market, being the third largest economy in the world, the third largest Kids market in the world, should be significant. We've got a foot in the door and over time I feel as though we have all the resources we need to make the most of the opportunity.

All right. Sounds great. Best of luck. Thanks so much.

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. Thank you all for joining us on the call. We appreciate your questions, your interest in our business. Hope the update was helpful to you. We look forward to updating you again on our progress in April.

Goodbye.

Ladies and gentlemen, this will conclude today's conference. Thank you for your participation.