Carter's Inc (CRI) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Carter's fourth-quarter and fiscal 2013 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 and Treasurer. After today's prepared remarks we will take questions as time allows.

Carter's issued its fourth-quarter and fiscal 2013 earnings press release earlier this morning. A copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the Company's website at www.Carters.com.

Before we begin let me remind you that statements made on this conference call, and in the Company's presentation materials, about the Company's outlook, plans and future performance are forward-looking statements and actual results may differ materially from those projected.

For a 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 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 presentation materials. Also, today's call is being recorded. 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'd like to share some thoughts on our business with you.

Earlier today we announced a record level of sales and earnings for the fourth quarter and the year. This is our 25th consecutive year of sales growth, a significant year for our Company in many ways. Last year we strengthened our leadership position in the young children's apparel market, increasing our share from about 15% to over 16%.

Our total domestic wholesale and retail businesses each exceeded $1 billion in sales. We made significant investments to enable growth in our business with over $180 million in CapEx and we distributed nearly $500 million in capital to our shareholders through share repurchases and dividends.

We were focused on four key priorities in 2013 -- the first was to consolidate our operations in Georgia; the second was to improve our supply chain performance; the third was to strengthen our information systems; and the fourth was to integrate our retail operations in Japan.

With respect to the office consolidation, that initiative is now largely completed. In the fourth quarter we transitioned into a new headquarters in Atlanta, Georgia. Our retail, e-commerce and International teams are now based in Atlanta, which we believe is enabling greater efficiency, better collaboration and better decision-making. We've also consolidated our finance, IT and customer service teams in Atlanta to help us execute our growth initiatives.

With respect to improving our supply chain performance, our new multichannel distribution center supported a 46% increase in e-commerce sales last year in the fourth quarter for each of our Carter's and OshKosh B'gosh brands. We had record levels of demand for our brands on Black Friday and Cyber Monday; our distribution team did an outstanding job supporting that demand.

We expect to complete the final two milestones of building out our new distribution center in the first half this year, we are forecasting higher distribution costs in the first half as we complete the implementation of our new replenishment systems. We expect to see the benefits of the new automation including leverage of distribution costs beginning in the second half this year.

On-time deliveries from Asia improved in the fourth quarter. New systems have improved our visibility on spring production and shipments from our suppliers and we're expecting lower air freight charges this year. As we shared with you on our last update, we're expecting gross margin this year to be impacted by higher product costs. We expect more of an impact in the first half; we took more pricing actions and the second half with our fall 2014 product offering.

In addition to pricing we plan to mitigate the impact of higher product costs by controlling the growth in SG&A. We're planning good progress with SG&A leverage and operating margin expansion this year.

Our third priority for 2013 was to strengthen our information systems. We made significant investments in new technology last year to enable the growth in our e-commerce and International businesses.

The level of automation and sophistication of the systems in our new multichannel distribution center is unlike any capabilities we have had previously. These investments have helped us accelerate e-commerce sales and lower our fulfillment costs. We increased our e-commerce sales by nearly 50% last year and our fulfillment costs, which is the largest component of e-commerce overhead, grew less than 2%.

And our fourth priority last year was to integrate our new operations in Japan. This morning we announced our decision to exit those operations. Last year at this time we assumed control of former licensee operations in Japan. Those operations consisted of nearly 100 points of distribution, most were shop-in-shop locations.

The business was in a state of decline when we assumed control of it. Our vision was to leverage our merchandising expertise and our supply-chain capabilities to strengthen that business over time. We expected nominal losses in the first year, breakeven performance this year and profitability beginning next year.

Last year our retail operations in Japan produced $16 million in sales and $7 million in operating losses. Despite the good work by our International team and others in the Company supporting them we were not seeing the progress we had envisioned.

We revisited our forecasts and concluded that additional investments to strengthen those operations would not provide a good return for our shareholders. We decided it was best to reallocate our efforts and focus on opportunities we believed will be more profitable.

With respect to our outlook for 2014 we are planning good growth in sales and profitability this year including margin expansion. Our priorities this year are to lead the market in product innovation, determine the full potential of our new side-by-side store model in the United States, we plan to launch an e-commerce business in Canada, improve our supply chain performance, leverage SG&A and improve our operating margin.

We'll update you on our progress with each of these priorities as we move through the year.

Our plan for 2014 is in line with our long-term growth objectives. We believe our multichannel business model enables us to grow sales about 8% to 10% a year on average over the next five years, that is our planning horizon.

We plan to grow our sales to $4 billion by 2018. We are assuming low single-digit annual growth in Carter's wholesale sales, about 10% average annual growth in retail store sales. And closer to 20% average annual growth in e-commerce and International sales.

We are the largest supplier of young children's apparel for the largest retailers in the United States. Our brands are viewed as traffic drivers by the national retailers. We plan to support them with the best selection of our brands, providing a complementary offering to their private label brands.

We plan to more than double the number of Carter's and OshKosh brand stores over the next five years; these are stores located closer to the consumer, not in outlet centers. Today we have fewer than 300 Carter's brand stores and fewer than 30 OshKosh brand stores. We believe our stores provide the best value and experience in young children's apparel, and these stores are providing a good return for our shareholders.

We continue to strengthen our e-commerce capabilities. We are investing to provide a seamless brand experience for consumers in improving the convenience of shopping for our brands. Our vision is to be the world's favorite brand in young children's apparel.

Last year our International segment contributed about 10% of our total sales and 13% of our adjusted operating income, exclusive of Japan and corporate expenses. It is a margin accretive business for us. Over the next five years we expect our International segment to grow to about 15% of our total sales.

Our focus is to increase our market share in Canada by replicating the success of the multichannel business model we have built in the United States. We're also focused on realizing the full potential of distributors and licensees who currently sell our brands in over 60 countries.

We continue to see strong International demand for our brands online with over 40% of our domestic e-commerce sales coming from International consumers. We are encouraged by this level of global demand for our brands; we believe it provides a good view into new market opportunities for us.

With respect to profitability, we are planning our consolidated earnings to grow by more than sales over the next five years and we're committed to improve our operating margin.

With respect to current business trends with weather improving in many parts of the country sales trends are also improving. Despite the winter storms earlier this year we are achieving positive retail comps year to date and expecting good sales growth for the first quarter and the year.

We believe consumers are responding to the beauty and compelling value of our new spring product offerings. Inventories are in great shape as we move into March, which historically is a month with sales nearly as much as January and February sales combined.

In summary, we made significant progress last year strengthening our position as the leader in young children's apparel. We own the largest share of the $18 billion young children's apparel market and the United States, we have been gaining share and 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 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 improve our operating margin which include the shift in sales mix to our high-growth direct to consumer businesses, an increase in the mix of direct sourcing, leverage of distribution expenses, continued improvement in OshKosh profitability and better inventory management.

The outlook for our business is good, with a very talented organization that has demonstrated its ability to deliver exceptional value to consumers in this challenging economy. We are encouraged by the current trends in our business and our potential for growth this year and for many years to come. This time Richard will walk you through the presentation on our website.

Thanks, Mike, good morning, everyone. Today's presentation materials are available on the Investor Relations section of our web-site. I will highlight our fourth-quarter and full-year 2013 results and then outline our 2014 expectations for the first quarter and for the full year.

Note that our materials and my comments are on an as adjusted basis. A reconciliation to our GAAP results is provided in the appendix of today's presentation. I will begin on page 2 with some overall performance metrics for the fourth quarter.

We had a very good fourth quarter with strong sales and earnings growth which were in line with our previous guidance. Our consolidated net sales in the fourth quarter grew 12% over last year driven by the Carter's brand across all channels in the US and by our International business.

This 12% sales increase was driven by strong unit growth of 8% and an improvement in average prices of 4%. Adjusted earnings per share increased 14% to $1.02.

Page 3 highlights the drivers of our sales growth in the fourth quarter. Total Carter's domestic sales grew 10%. We delivered growth across all channels with particular contribution by our direct to consumer e-commerce and retail store businesses.

We had a good quarter at Carter's Wholesale with sales increasing 4% over last year. Demand for new spring seasonal product drove the growth in this part of our business. OshKosh sales in the US grew 8% in the fourth quarter compared to last year. Demand for OshKosh online continues to be very strong with e-commerce sales growing nearly 50% over last year.

International sales increased 33% in the fourth quarter driven by solid growth in our International Wholesale and Canadian retail store businesses. Japan represented approximately $4 million of the year-over-year increase in International segment sales. I will cover our business segment results in more detail in a moment.

Moving to page 4 and our fourth quarter P&L. Gross margin in the quarter was comparable to last year declining 10 basis points to 42%. This performance reflects the impact of product costs which were about 4% higher than last year also by a greater mix of direct to consumer sales. Overall we are pleased with our gross margin performance given the challenging retail environment during the fourth quarter.

Adjusted SG&A was 31% of sales, down 10 basis points versus last year. Adjusted operating income grew 10% and adjusted operating margin was 12.3% in Q4. Our fourth-quarter tax rate was favorable to last year reflecting a greater mix of profitable International operations with lower statutory rates than in the US.

Our average share count in the fourth quarter was a little over 8% lower than a year ago reflecting our significant share repurchase activity in 2013. 2013 share to repurchases net of higher interest expense related to last year's debt offering added an estimated $0.03 to EPS in the fourth quarter. So again on the bottom line are for quarter adjusted earnings per share grew 14% to $1.02.

Now turning to page 5 with a more detailed look at SG&A in the fourth quarter. Fourth-quarter adjusted SG&A increased 11 percent to $239 million. As expected, the year-over-year rate of growth in SG&A was lower in the fourth quarter than in previous quarters of 2013 principally due to lower year-over-year provisions for performance-based compensation.

Direct-to-consumer business expenses, which includes four wall retail store and administrative expenses for our US, Canadian and Japanese retail stores, as well as operational and administrative costs associated with our e-commerce business, increased to $20 million in the fourth quarter. The increase in this bucket of spending reflects the expansion of our store base, nearly 100 more locations versus a year ago, and 48% growth in e-commerce sales in the US.

We have a few consulting engagements underway right now which drove some higher professional fees in the fourth quarter and depreciation was $5 million higher than last year which reflects our investments over the past year across a number of meaningful growth and infrastructure investments. I expect we will see a comparable increase in depreciation in each of the next several quarters.

Turning to page 6, we expect to have a strong focus on productivity throughout 2014 as we deliver a number of in process initiatives and identify new ways to become more efficient across our business. There are five broad areas which represent our current focus.

First, distribution expenses. Distribution expenses in 2013 amounted to nearly $110 million, so obviously a significant area of spend for us. We intend to complete the construction and ramp up of our new multichannel distribution center in Braselton, Georgia this year.

Some of you have had a chance to see this impressive facility. Through state of the art material handling and warehouse management technology we expect to drive significant efficiencies across our distribution function, while also meaningfully increasing service to the customers at the center including our retail stores, e-commerce customers and our wholesale customers.

Right now we have a certain amount of inefficiency in our distribution operations related to the start-up of Braselton, which we expect to work through over the balance of this year.

Second, we're focused on the four wall productivity of our retail store base. We are targeting greater leverage on four wall expenses. We continue to see some pressure on the store expense leverage from factors such as the impact of new stores where we incur expenses while the stores are ramping and top-line revenue, higher rents and higher wages in some areas such as California due to increases in the minimum wage.

Our agenda in store is focused on optimizing store labor spend, reducing unnecessary or unproductive tasks, lowering operating costs and improving capital efficiency.

Third, as a Company we're embarking on a thorough review of indirect or non-merchandise spend. While we are thoughtful on how we spend money today, it is always useful to take a step back and take a comprehensive look at things and hopefully identify new ways to drive savings.

The next area is our organization. Over the past year we completed a significant initiative which we call Project Unity internally through which we brought together the majority of our operations into a single new headquarters facility here in Atlanta.

Now that we have everyone together we are reviewing our business processes. Work streams and our organizational structure to see where we might be able to drive greater efficiencies. We've already begun to see improved collaboration and coordination across our various teams and are realizing benefits such as lower travel expense.

Finally, we view technology as enabling every meaningful productivity opportunity. We have significant technology initiatives underway and support of the Braselton distribution center build out and transition, we are extending our retail and supply chain systems to Canada, upgrading our core order management systems and installing a new product lifecycle management system, which we believe will transform the end-to-end process of how our designers, merchants and supply-chain teams turn product concepts into our beautiful finished products.

Overall, in 2014 we are planning SG&A leverage for the full year with a lower growth rate in spending compared to 2013; even as our higher operating cost structure direct to consumer businesses continue to grow. Pages 7 through nine summarize our full-year 2013 performance and our full-year business segment results are summarized on page 9.

2013 was a very solid year for the Company as we delivered 11% growth and net sales and a 16% increase in operating income. We made good progress in expanding our consolidated adjusted operating margin, which grew 60 basis points over last year.

One notable area of progress to point out is the $12 million higher profit contribution from OshKosh in 2013.

Now turning to our balance sheet and cash flow on page 10. Our balance sheet and liquidity remain very strong. We ended the year with a cash position of $287 million with approximately another $180 million of availability on our revolver. Quarter end inventories increased 20% versus a year ago. This growth reflects the addition of nearly 100 new doors in North America over the past year for an increase of about 15% to our store base and our expectations for good sales growth in the first quarter.

We saw better performance in our supply chain as we exited the year which allowed us to take receipt of some spring inventory earlier than we did a ago. Higher product costs are also one of the drivers of our increased year-end inventory position versus last year.

We had solid cash flow from operations in 2013 of approximately $210 million. CapEx for the year was $183 million compared to $83 million in 2012, reflecting meaningful investments to support our planned growth agenda. Specific areas of investment included new retail stores in the US and in Canada, spending on the new multichannel distributional center, technology initiatives and the build-out of our new Atlanta global headquarters. We anticipate capital spending will return to a more normalized level in 2014.

2013 was also a significant year for us in terms of capital structure and return of capital initiatives. Last summer we took advantage of the favorable financing market to put some new long-term debt on the balance sheet. We issued $400 million of eight year senior notes at a fixed interest rate of 5.25%.

We utilized the proceeds of this financing plus cash on hand to complete $454 million in share repurchases in 2013. We retired a total of 5.4 million shares, 9% of shares which were outstanding at the beginning of the year.

Our Accelerated Share Repurchase transaction, which commenced in August of last year, was completed in January of this year. Under this transaction we repurchased a total of 5.6 million shares, 1 million of which were repurchased in January 2014 at an average price of approximately $71 per share. We have approximately $267 million remaining under our Board repurchase authorizations.

Also last year we initiated our first ever recurring dividend in the second quarter and paid out a total of $28 million in dividends over the course of the year. As noted in today's press release, I'm pleased to report our Board has authorized a 19% increase in our quarterly dividend from $0.16 to $0.19 per share beginning with our next dividend payment in March.

On page 12 we summarized our business segment performance for the fourth quarter. Our adjusted operating income growth was driven by improved profitability in our US Carter's businesses and International. These contributions were partially offset by higher unallocated expenses including higher professional fees, spending on technology and other administrative expenses.

I will cover our business segment results in more detail starting with Carter's wholesale on page 13. Carter's wholesale fourth-quarter sales grew 4% compared to last year principally driven by growth in the Carter's brand. We saw stronger-than-expected demand for spring seasonal product in the quarter offset by weaker replenishment sales.

For the full year Carter's wholesale grew over 5%, in-line with our plans. Season to date fall 2013 over-the-counter selling in our major national customers increased in the mid-single-digit range with prices up modestly to last year.

Carter's wholesale segment income grew 9% in the fourth quarter. This operating margin improvement reflects lower marketing spend and lower incentive provisions versus last year. Our spring 2014 seasonal bookings are up in the mid-single-digits. Fall 2014 bookings which remain in progress are estimated to be down mid-single-digits.

While we have good growth planned across most of our major customers, expected lower bookings with a particular large customer have affected the overall booking total for fall. For the full year were forecasting that Carter's wholesale segment net sales will grow in the low-single-digit range.

Turning to page 14 and the Carter's retail segment. US retail segment sales were very strong at plus 16% versus last year driven by the addition of 63 net new stores and terrific e-commerce sales growth. Our total direct-to-consumer comparable sales defined as the combination of retail store and e-commerce comparable sales increased 7% which we think is probably one of the better for the quarter results which will be reported in the industry.

Carter's retail store comp sales were roughly even with a year ago. Customer traffic to our stores was softer than expected throughout the quarter in part we believe due to some channel shifts to e-commerce.

Our best performing stores were the brand stores which are closer to the consumer population, these stores, comped positively in the quarter. The weakest performing stores were our drive to outlet locations likely impacted by unfavorable winter weather around the country.

We opened 21 new stores in the fourth quarter. The performance of our new brick-and-mortar stores continues to be very, very good. E-commerce was a bright spot in the quarter with sales growth of nearly 50% over last year which was ahead of our forecast.

Carter's retail segment profits grew 16% driven by top-line revenue growth and the improved operating margin profile of the e-commerce business. We are pleased with these results given the highly promotional retail environment in the fourth quarter.

Moving to the OshKosh retail segment on page 15. Fourth quarter OshKosh retail direct to consumer comparable sales grew 5% driven by e-commerce sales growth of 47% and a down 2% retail store comp. Like Carter's, consumer traffic to our OshKosh stores was down versus a year ago. Brand stores and indoor outlet mall stores comped positively.

Sales performance of the further out drive to outlets was the biggest driver of down comp store performance in the quarter. We have continued to open our new side-by-side format stores. We have several variants of this concept which feature adjacent Carters and OshKosh stores with an interior pass through between the stores.

Overall we are encouraged with the results of these stores although it is still too early to draw too many conclusions, many of the side-by-side stores opened in December or very late in the year. The consumers clearly seemed to like the convenience of shopping for both the great Carters and OshKosh products in the same visit.

At year end we have 24 side-by-side stores and plan to open another 24 locations in 2014. OshKosh retail segment operating margins were affected by higher cost associated with opening the new stores, and greater promotional activity within the quarter compared to a year ago. OshKosh e-commerce operating margins have continued to improve and benefit the overall OshKosh retail segment operating margins.

Moving to page 16 and OshKosh wholesale. Fourth-quarter sales grew 11%. For the full year, OshKosh wholesale sales declined about 7%. Segment income improved by nearly $1 million versus last year in the fourth quarter. And for the full year, operating income in this business improved by $6 million.

We continue to see retailers be conservative and making commitments to OshKosh on their sales force. Spring and fall seasonal bookings for 2014 are expected down in the mid-teens range. Our priority continues to be improving the profitability of this business, and we've adjusted our wholesale product offering to a more narrow assortment centered on the most iconic and unique OshKosh products. And we're also focused on improving the in-store presentation of the brand.

Our broader growth agenda for OshKosh in the US continues to center on growing sales in our own direct-to-consumer channel.

Turning to our International segment on page 17. Segment sales grew 33% in the fourth quarter, principally driven by the growth in our wholesale and Canadian retail store businesses. In the second half of the year, the Canadian dollar depreciated 5% versus the US dollar. This depreciation negatively impacted fourth-quarter International segment sales by $3.5 million.

We saw good growth in the wholesale portion of our business in Canada, driven by new business with Target and Walmart, as well as continued growth with other US-based retailers operating in Canada. We also experienced good growth with our wholesale partners in other regions of the world.

Canadian retail store comps were slightly positive in total, with the cobranded Carters and OshKosh stores comping up about 1%, and the legacy Bonnie Togs format stores even with a year ago. Canada has had a tough winter as well, and we saw lower traffic in our stores there in the fourth quarter. We opened a total of 20 net new stores in Canada in 2013, to bring our year-end store count to just over 100 locations. We have a national presence now across the Canadian market, with stores in all provinces.

At the end of the year, we had 69 Carter's and OshKosh cobranded stores and 33 legacy Bonnie Togs stores. We plan to convert the nameplates of the remaining Bonnie Togs stores to the cobranded format by midyear.

As Mike noted, in the fourth quarter we made the decision to exit our retail operations in Japan. In the fourth quarter we incurred $4 million in exit charges, which have been excluded from our adjusted results. We anticipate additional charges of approximately $3 million to $4 million in 2014, as we complete the wind-down of these operations.

Fourth-quarter International segment adjusted operating income increased 15% compared to last year. Segment margin was impacted by a $1 million operating loss from Japan in the quarter.

Now turning to our outlook on page 18. For the full year in 2014, we're expecting good growth in net sales and earnings. Net sales are expected to grow approximately 8% to 10%, with our Carter's US retail store and e-commerce businesses and our International retail segment contributing the most to our growth.

We expect full-year adjusted earnings per share growth in the range of 12% to 15% over 2013. From a pacing perspective we expect that our adjusted earnings growth will be back-end loaded this year with stronger gross margin and expense leverage planned in the second half of the year versus the first.

We're planning for another good year of store growth in the US and Canada with approximately 60 new Carter stores, 24 new OshKosh stores which will be in the side-by-side format and 22 new co-branded stores in Canada.

Capital spending as a percent of net sales is expected to return to more historical levels in 2014 in the range of $100 million to $110 million. Principle areas of investment include retail stores in the US and Canada as well as technology spending.

We're expecting a good year of operating cash flow again in the range of $225 million to $250 million. One important callout is that we expect first-half inventories to increase between 25% and 35% over last year as we bring in inventory early in anticipation of the transition to our new distribution center and the widely expected port strike on the West Coast, as well as due to the effect of higher product costs.

We expect second-half inventory increases to be at a much more modest level compared to the first half. And by year end we expect inventory growth will be roughly in line with projected sales growth.

Consistent with the capital allocation framework that we articulated last year, we anticipate targeting distribution of at least 50% of our projected free cash flow in 2014 to shareholders in the form of dividends and additional share repurchases.

Key risks that we are following include the overall macro environment and the health of the consumer; the trend in product costs, specifically labor in Asia; the devaluation of the Canadian dollar; and the potential West Coast port strike that I just mentioned.

Regarding the first quarter, business has been off to a slow start, although recent trends, as Mike said, have been much more favorable. With that in mind we currently project first-quarter net sales growth in the range of 8% to 10% driven by the Carter segments wholesale retail stores and e-commerce. Our International and OshKosh retail businesses are also expected to contribute to revenue growth.

We expect first-quarter adjusted earnings per share to decline 10% to 15% versus last year's adjusted $0.79 per share. Our first-quarter outlook reflects some expected pressure in gross margin due to higher product costs which are not expected to be fully offset by higher pricing, as well as higher planned SG&A principally in the distribution, IT and professional fee categories. With those remarks we are ready to take your questions.

(Operator Instructions). Taposh Bari, Goldman Sachs.

Good morning, nice job on the fourth quarter there.

Good morning, thank you.

A question, I guess Richard to start off, on the full-year gross margin guidance. Can you elaborate on whether you expect gross margins to be up for the year?

And I also wanted to follow up on where you stand in terms of inflation. Last we heard it was going to be up 4%-ish for the spring season. How is the fall season looking like? And just give us some more insight into where you stand in your ability to offset that inflation through price increases, migration towards lower cost geographies, etc.?

Sure. For the full year we are planning gross margin rates to be down a bit, more so in the first half of the year versus the second. We didn't take action in the first half to completely offset the impact of higher product costs in the first half. We took much more complete action, much more significant pricing action in the second half to narrow that gap.

So for the full year we are expecting gross margin rates to be down a bit. There are a few other headwinds that are in that as well, what we have a tremendous benefit of shifting to the higher gross margin direct-to-consumer businesses we are expecting that the deterioration of the Canadian dollar in Canada, which is a very high gross margin business, that will depress things a bit.

Japan, while it was a very small business, was an extremely high gross margin business. We are planning for some additional freight expenses as well in anticipation of this port strike on the West Coast. Those are costs that we expect will be incurred regardless of whether the strike happens or not because we have already begun to reroute products to other ports.

So on balance I think the long-term outlook for gross margin looks good. We were not anticipating product cost increases of this magnitude for the entire year. To your question on the first-half/Second-half, average costs are up about 7% in the first half and up about 6% in the second half of the year.

Second-half, for fall 2014, those cost increases are being matched with pricing increases and we're planning the operating margin to improve the year some portion of 25 basis points or more.

And how are your retailers responding to those price increases that you are taking?

I would say good. Fall has been sold in, we had good bookings for Carter's, we are showing growth in bookings for Carter's. So it wasn't taking the same product and raising the price on it, some of that cost increase reflects upgrades to product improvement and benefits and we picked our spots.

It wasn't an across-the-board price increase, we picked our spots on pricing where we thought there was a compelling value in the product offering and we are -- what we were offering was less easily compared to what the competitor was offering.

Okay, and then the other question that we had was just on this idea of channel shift. So clearly your e-commerce business is on fire. The new stores -- obviously traffic has been an issue across the entire industry.

But talk to us about as you continue to expand stores and accelerate the pace of OshKosh stores in particular. Walk us through how you evaluate the direct-to-consumer channel, whether it be -- I'm assuming stores in e-commerce are not independently evaluated. But help us understand what the payback is on stores, what the ROIs are and how you kind of evaluate the two channels in light of this channel shift continuing to evolve.

We are fortunate that we have fewer than any other competitor, a fewer number of brand stores. So our strategy is to bring our brands closer to the consumer with the Carter and OshKosh stores. The returns on those stores are good. Returns on the OshKosh stores are about 17% return on the investment, the returns on Carter's are better than that.

We plan on opening up some portion of about 60 Carter's stores a year over the next five years. And then with OshKosh the plan is to open up 24 side-by-side stores this year. We're seeing good progress with that, the consumer is responding very favorably to that convenient way of shopping for both brands and we plan to open up 24 this year, that is on top of the 24 last year.

And if we continue to see the returns that we are currently seeing on the side-by-side stores we will consider increasing the pace of store openings for OshKosh. But we are saying that we are seeing good growth, good traffic to the brands both online and in the stores in total.

As Richard mentioned, what we're seeing is we're seeing some decline in traffic to what we call our drive to outlet stores. These are where you've got to drive some portion of 30 or 40 minutes out to get to those stores.

We are monitoring that. I wouldn't say it is overly significant. Year to date our comps for Carter's are I'd call it flattish, the comps for the OshKosh stores are positive. So we are pretty excited about what is possible with the growth in our retail stores.

Great. Just actually I have one more, if I may, on the International business. Obviously a big opportunity for you longer-term. But walk us through the Japanese business as it stands now. So it used to be a licensed business, you took it in, it sounds like that entire business is basically being written off, if I am not mistaken. So does the business go back to a distributor at some point or --?

Right. Well, we had a licensee; we also have a good wholesale business in Japan. The licensee was winding down. The licensee did not have the ability to source the product at the same cost we were able to source the product. So they were winding the business down.

Our decision point a year ago was to let them wind it down or take it over, assume control of it and grow it, source it better, present it better, support it better, which I think we did. I think we did a good job over the past year.

We thought in the first year we would do $20 million. With the devaluation of the yen, it quickly became a $16 million business. What we thought would be some nominal operating losses start up costs in the first year wound up being closer to $7 million.

And then based on the experience we revisited the forecasts and it was potentially a good growth business, it potentially is a good market. It was going to require significantly more investment than what we originally envisioned.

The revised forecast we are showing several years of continued losses and if that was the only thing we had to do we might have stuck with it. But we have considerably more profitable opportunities to pursue.

The thing I would say we learned with Japan we do have acquisition criteria. We like to stick with companies that are doing what we do for a living, selling young children's apparel since this was our brands that was -- in Japan that was a connection with the opportunity.

But we also look for businesses that have management teams that help us grow the business, Japan did not have that, the licensee was winding down and out. We look for businesses that have a history of growth, this did not. And we look for businesses that are accretive to earnings.

So it met one of the four criteria, so as we evaluated the business we said, you know, it was an opportunity, we didn't make a huge investment in it, but the decision point was to either let it fail or take it over and see if we could do a better job with it.

I think the reality of it, the business was in a greater state of decline then we realized. And so we tried something, it didn't work and we will move on to other opportunities.

Well, I commend you for taking swift action. I guess the question I had was does this experience change your appetite for similar or further International opportunities down the road?

No. No, we see wonderful opportunities outside the United States. I think near term we have wonderful opportunities to grow what I would describe as the core business, which is Canada and distributors and licensees we have throughout the world.

There are other markets that we're starting to get some visibility on. As you know, we were pursuing an opportunity in China, we actually had a -- we were far down a path with a good retailer in China. And that is our plan, to connect with someone who has great market expertise and then combine their market expertise, retail expertise in different parts of the world with our wonderful brands and then grow a wonderful business together.

We were far down that path and then we decided to consolidate our operations in Georgia including bringing the International team from New York to Atlanta and we decided we wanted to wait on the opportunity in China until we developed the internal resources. So we wanted to make sure we did it right and that opportunity still exists.

As we look at the demand we are seeing online on our US website, the three top markets are in this order -- Brazil, Russia and China. Collectively the demand online from those three countries is around $26 million and that is profitable for us.

And that's people from outside the United States shopping our US website and having that product either shipped to a family member in the United States or to a hotel. And China had the largest growth online last year relative to those other two countries.

So we are intrigued by that, there is clearly a demonstrated level of demand for our brands in other parts of the world. So we learned something from Japan and we will take what we have learned and apply it to other market opportunities.

Okay, thanks for the time and good luck.

Robby Ohmes, Bank of America-Merrill Lynch.

Two questions, the first is the -- I just wanted to clarify. So the 2014 Carter's wholesale business, the bookings are planned on mid-single-digits, is that correct?

For the fall season Robby, we are planning revenue growth for the full year in the segment of low-single-digits.

And can you just walk us through why the bookings would be down in the fall?

Robby, it is Brian. It is due primarily to one customer. We had positive response to the product, but the majority of the customers are booked up. We had one customer that made some different decisions and pared back. But when you look at the whole year we feel good about our business, we feel good about the relationships.

Again spring was up mid-singles, fall we certainly we would have been up with the exception of this one customer. And then keep in mind we have got a great replenishment business, which is about 25% of our sales and we plan that replenishment business with the new launches of our brand walls and Little Layette products to be up low- to mid-single-digits for the year. So all in it gets you to that low-single-digit number.

Which is consistent with our growth objectives.

Yes, we planned low-single-digits last year we are performed at a 5.5 so we felt good about that. But we feel based on the market and all the initiatives that we have planning at low-single-digits is appropriate.

Is the one customer issue expected to carry through into spring 2015?

I would say don't know, too early to know at this point.

Thanks. And then the other question was just could you remind us on the e-commerce transition where you are at in terms of bringing it fully in house and where the operating margin stands now, where you think it will be in 2014 and where you think e-commerce operating margin can get to?

Sure, a good portion of it is in house. So the biggest component was fulfillment and that has gone extremely well, bringing the fulfillment in. As I shared with you, we had nearly a 50% increase in e-commerce sales last year and fulfillment costs were only up 2% and that is largely on a manual basis in this new distribution center.

So as the automation becomes fully completed in the first half of this year we are expecting distribution costs to be lower in the second half than they were in the second half of last year. Other things we are looking at are bringing the customer service, the call center in house; we are exploring that opportunity this year. But you should view that most of what used to be outsourced with e-commerce is now being done internally.

Any operating margin commentary for us, Mike?

It continues to be very rich, over 20%. So it is our fastest growing and highest margin business, it has been a wonderful business for us.

Fantastic. Thanks a lot.

Susan Anderson, FBR.

Congrats on a good quarter in a tough environment.

Good morning, thank you.

So not to still nail down on the EBIT margin, but I guess just kind of curious what your thoughts are now I think it was back in 2011 you guys said you would get back to the peak like in five years, which now we are starting to get close to that. And so is the thought that you can still get back there or better?

And then also, how do we get back there over time if we continue to see this higher labor environment? And with that maybe you could talk about or quantify a little bit the benefit you think you are getting from the e-commerce and the new DC and supply-chain, etc.?

Sure, good question. So we are still committed to improve our operating margin, we still believe a 14% operating margin, which was our peak operating margin back in 2010, is still possible. Some of the facts have changed; we were not anticipating a $100 million product cost increase this year. We have raised our prices by some portion of $80 million to help offset that.

So we -- it will probably continue -- our long-term plan to continues to show us making progress toward that 14% operating margin. And if it does we will have good growth. Inherent in that assumption is that sales will grow some portion of about 8$ to 10% a year on average over the next five years and earnings will grow some portion of about 15%.

And if we are able to do that in this industry we will continue to take share. We are assuming our share of the market will grow from some portion of 16% to closer to 20% by 2018.

The things that continue to help us drive that operating margin is a higher mix of retail, e-commerce, International sales, more efficient distribution capabilities -- you will start to see the benefit of -- the significant benefit from higher distribution center we expect in the second half of this year.

We are increasing the mix of direct sourcing. What was 25% of our total sourcing last year was done directly, this year it will be closer to 25%, we expect by 2017 it will be at least 50% or more.

We are shifting out of some of the higher cost countries. For years we had well over 50% of our products coming from China and this year only about 35% of our product will be coming from China. More is being done in Vietnam and Cambodia and that is enabling us to mitigate what would otherwise be higher product cost increases.

Labor rates, as you know, are up. And so to Brian's point, a little too early to comment on spring 2015, but some of the pre-work being done on spring 2015 we hope our experience on costs are better as we roll into next year.

And the retail team and the distribution teams are working on some good initiatives on inventory allocation, making sure that we get the right product to the right stores at the right time, change in the allocation based on climate differences, based on the volume of the stores. High-volume stores move through inventory quickly, some lower-volume stores need a different assortment so they don't get stuck with too much inventory and wind up marking it down.

And then the other component is OshKosh profitability. I think we made good progress last year improving the performance of OshKosh. All in from all sources OshKosh earned about $11 million in 2012, last year it more than doubled its profit contribution to our Company. We are expecting good growth.

OshKosh is off to a stronger start this year than any of us can recall. The product looks beautiful. I'd encourage you to go in the store and see it. We've got a terrific team. The product is better, the marketing is better, the presentation is better.

So a lot of levers to pull. So we are still bullish on the opportunity to improve the operating margin, it is very much a part of our plan and very much a part of our incentives.

Great, thanks. And then I noticed that you guys rolled out to ages seven to 12 on the Carter's business, I think it is a test right now in some stores and online. Any early reads on that? What do you think the opportunity is? And then also how does this play into the OshKosh brand which I have kind of always viewed as an older brand?

A couple things, Susan. We did roll that out, we have got it in I think it is 50 doors and online. We are excited about that. We have had feedback from moms for years as to the fact that she wishes that she could stay with the brand longer, particularly when she gets kids in multiple size segments and has to shop at different stores.

We had tremendous feedback on Facebook, on social media when we launched it. She told us that she really wanted to keep her kids in our products with our aesthetic as long as possible given the alternative choices that she had out there.

So I would say we are off to a good start, it's a test; we will see where it goes. The average mom shops in our segment between four and six stores, we don't see any reason why two of those can't be Carter's and OshKosh. So we think it is a good strategy particularly as we line up these side-by-side stores.

She has got a young child, she can shop for both, if she has got a child that is starting to move out of our sweet spot in infant and toddler and goes into four to seven and then even seven to 12 that we can service her needs. So we are excited about it. We think it can be incremental growth, but it is very early to call it. But the early reads are positive.

Okay. Then one last question, back on the cost. Are by any chance the $100 million in raised costs directly related to the large customer lowering orders at all or it is not really related?

Not at all. I would say the way we are looking at it probably a third of the cost increase is due to product benefit improvements, probably some portion of a third of the cost increases due to higher labor and we are assuming some portion of a third of the increase is due to some of the packaging complexity in our product and those are some opportunities that we are working on.

Great. That is really helpful. Thank you.

Kate McShane, Citi Research.

Hi, good morning, this is Corinna Van der Ghinst on behalf of Kate. Could you provide a little bit more clarity behind your channel expectations going into 2014? Do you expect the drive to outlet declines, traffic declines to continue and how long would you expect that to happen?

I think it is important to keep in mind the drive to outlets are only about 20% of the total portfolio for Carter's, closer to 40% for OshKosh, that mix will change as we continue to open doors. And so, there is still clear demand for the outlets, it is a great place to shop, it is critical mass, she can hit a number of the top brands in one location.

What Richard's commenting on, relatively speaking, we are pleased with performance of the portfolio. Something we are keeping an eye on is traffic to the drive to stores is lower and that is logical to us because we are opening stores -- more stores closer to the consumer and you have the convenience of shopping online.

So these are good stores for us, they are extremely profitable stores. It is just what we are trying to do is make sure that we have got good marketing to draw traffic to those stores. And over time if the stores aren't meeting our investment criteria those stores would be closed. So I think we have a handle on it; it is just something we are briefing and keeping an eye on.

And does your guidance for the year assume kind of a continuation of the recent trends that you have been seeing?

Say that again, please?

Just wondering if your guidance assumes a continuation of the traffic trends that you guys have been experiencing?

Yes, yes, it sure does.

Okay, great, thank you.

Scott Krasik, BB&T Capital Markets.

So I think way back on Taposh's question, I think you made some comment, Mike, that backlog or bookings for the Carter's brand were actually up. So is this shortfall is this in a sub brand?

Well, we included -- we had some new information in terms of one customer taking a different point of view. I would say that we so good growth with all but one of our customers.

But for the Carter's brand?

Correct, Carter's. Correct.

Okay. Okay. And then can you just update us -- I think you were going to begin shipping Walmart in Canada, maybe explore Walmart in Mexico. Has any of that started?

Walmart Canada -- Walmart Canada is off to a good start, we are actually doing well at Target Canada. Nothing developed yet with Walmart Mexico.

Okay. And then in terms of you made some comment the replenishment was soft in Q4. Was that actually negative, Richard?

Yes, I think it was a more isolated comment on the month of December. I think it reflected the weaker lower traffic that we were seeing in our stores. I think our wholesale customer saw a bit of the same. But we had very good demand for the seasonal product that ships that time of the year.

And we are optimistic on replenishment going forward, those trends have picked up in the wholesale channel. And again, we launch new brand walls at Target just a belt a month ago is doing well and we are launching Little Layette across the Company in May and we have some advanced bookings on that and feel good about that program.

Okay, great. And then when are you ready or can you give us any type of metrics around the side-by-side stores? I mean they have been open for a couple quarters now.

Well, Scott, it is early. I think we feel good about it. We have about 24 of those open and you recall the goal is to open next to a Carter's store and go in with those. We've got a couple of models both stores at 4,000 square feet and then we are testing a best of OshKosh model, it is about 2,850 square feet up against Carter's. That is the best model we have got at this point. We feel good about those returns.

The customers love it. We've got about 25% of the customers that are buying both brands now when they are next to each other versus about 8% we are transacting with both stores when they are in the same centers but not on a side-by-side. So it's a separate entrance, a separate branding, but a shared cash wrap and interior pass through.

Our model is to do in that model about $1.2 million in Carter's, about $700 million in OshKosh. The returns as I think Mike mentioned are very good, low 20%s for Carter's and high teens for OshKosh.

So I would say that although it is early we opened a bunch of them in December and of course there was whether issues in January but overall I would say that we are optimistic we are going to open another 20 to 24 this year. And I think we will have a better read as we move through the year midyear and late in the year of how specifically we feel about it and what the plans would be to roll it forward.

Have you seen one, Scott?

Just pictures.

Okay, all right, happy to take you there.

But still, of the 20 odd that you were going to open, those are in the best of OshKosh format, the 2,800?

It is a combination. We have got some that are 4,000 OshKosh and some that are 2850. And the best model is the 2850 model. We have got lower CapEx costs, candidly for the entire box which has a positive impact on Carter's return, and got lower labor costs and so that appears to be, early read, the most favorable model.

And then am I -- Richard am I doing the math right? If it is going to be some parts of half of the free cash flow return to shareholders, there was about $40 million for dividends, so you are only earmarking $20 million or so this year for share buybacks?

Yes, I think directionally, Scott, we do have some accumulated cash and it is possible we would use a portion of that. But per the framework that math is directionally correct.

Okay, thanks. Good luck.

Steph Wissink, Piper Jaffray.

The first question just related to the store growth target. I think you mentioned 60 stores per year for the next five years or roughly 300 stores. Can you talk about the balance between malls, strip and outlets?

And then give us some sense of how the pro forma's work around those stores that you kind of [densify] markets. Is there any displacement of revenue from other stores, or do you see e-commerce taking on some of that store growth? And then could you just give us a sense of how those stores mature and layer into the operating margin targets, that would be helpful.

I would say that our most typical profile new store is in a strip center location. We love the outlets; we would love to open outlet stores all day long given the pro forma characteristics. An average Carter's outlet for us does over $2 million a year as a four wall of north of 30% but the challenges there is just not a lot of new outlets opportunities out there.

To the extent there are good developments that come along we would participate in those. And generally have very good returns. The more typical new store openings as I said are in the strip centers, those tend to be a little less productive on the top-line, more like $1.2 million is what we pro forma first year.

They have a four wall of around 23% -- low 20% range. And the capital that goes in is around $360,000 with $130,000 or so of inventory. Those stores tend to be very high return format boxes for us. They tend to pay back I would say between a year and 18 months. And we found good real estate opportunities over the years to continue to roll out that pace.

We think 60 is a good comfortable pace, it keeps our folks busy identifying good locations and to open good quality stores. We probably could open more but we think this is a good pace for us to be on.

I think the question around channel shift and e-commerce is one that we have still to learn about and to solve completely. We think there is a great virtuous cycle though between customers who shop with us in store and also online and that is still developing. But all of that store growth is baked into our long-range models and the expansion of operating margin that Mike mentioned, this is certainly an element of it.

You actually led into my second question which is just around that loyal customer. Can you talk a little bit about some of your consumer insights in the cross channel shopping and maybe basket size as you look at that core customer relative to maybe the new customer?

Sure, the cross channel shoppers obviously are the most valuable and we would like to certainly increase that. It is noteworthy when you talk about store growth and e-commerce growth. We have got less than 10% of the folks are actually transacting online and in-store. So we see that as an opportunity.

That said, you have got a very high percentage of shoppers that are actually going on the website and pre-shopping. So one of our goals is to look at this as a way of making sure that the total experience is something she feels great about.

And we pull together a store and online experience for her, and we're looking at things like mobile and the checkout process and are re-looking at our loyalty programs and inventory availability, look up those sorts of things as we go forward.

But we think there is good growth in both channels. Again, we plan on e-commerce growing 20% a year, we think we can grow stores 10% a year. There is some cannibalization of course from building stores to the drive to outlets, but that is more of an industry trend as well.

When you have got mall stores promoting heavily and developers opening outlets closer in towns you are going to have some decline in traffic to those drive to outlets. But it is the traffic to the brands are both up the traffic is up high single digits to our brand but it is up in all the brand stores and the challenge is the drive to outlets as we look at that going forward.

Yes, one of the key strategic priorities for our Company is to extend the reach of our brands. As good as our growth has been over the years we still only have 16% share of the market, 84% of the market isn't shopping with us. So we are planning to grow our share from about 16% to closer to 20% over the next five years and one of the ways we plan to do that is to open up more stores.

Thank you, guys. Best of luck.

And, ladies and gentlemen, this will conclude our allotted time for the question-and-answer session. And, Mr. Casey, I will turn the conference back over to you for any closing remarks.

Okay. Thank you all very much for joining us on the call this morning. We appreciate your thoughtful questions, your interest in our business and we will update you again on our progress in April. Thanks very much, goodbye.

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