Carter's, Inc. (CRI)

CRI 
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Carter’s, Inc. (CRI)

Q3 2008 Earnings Call

October 22, 2008 8:30 am ET

Executives

Michael D. Casey - Chief Executive Officer, Executive Vice President, Director

Joseph Pacifico - President

James Petty - President of Retail Stores

Analysts

Omar Saad - Credit Suisse First Boston

Margaret Whitfield - Sterne Agee & Leach

Benjamin Rowbotham - Goldman Sachs

Presentation

Operator

Welcome to Carter’s third quarter earnings conference call. Today’s call is being recorded. On the call today are Mike Casey, Chief Executive Officer, Joe Pacifico, President, and Jim Petty, President of Retail Stores. After today’s prepared remarks we will take questions as time allows. If you have any follow up questions after today’s call, please direct them to Eric Martin, Vice President of Investor Relations. Mr. Martin’s direct telephone number is 404-745-2889.

Carter’s issued its third quarter earnings press release yesterday after the market closed. The text of the release appears on Carter’s website at www.carters.com under the Press Releases section. Additionally, presentation materials for today’s earnings conference can be accessed on the company’s website by clicking on the Investor Relations tab and choosing Conference Calls and Webcasts 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 differ 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.

Now I’d like to turn the call over to Mr. Casey.

Michael D. Casey

Thanks for joining us for an update on our business. We’ve prepared a brief presentation on our third quarter results, which is available on our website. Before going through the presentation, I’d like to frame up what I believe is important for you to understand bout our business.

In a tough retail environment we exceeded our goals for the third quarter, which is our largest quarter of our year. The trends in our business are good heading into the final weeks of the year. Our performance reflects the benefit of significant investments made over the past year to strengthen our organization and our product offerings.

We’re very fortunate to be competing in the young children’s apparel space. It’s a less discretionary purchase. It’s also a very affordable purchase. The birth rate continues to be strong, and parents and grandparents continue to spend money on their young children.

For years Carter’s has led the young children’s apparel market because we’re providing consumers with significant product value. Our average unit price is less than $8. By comparison the value equation in recent years at OshKosh has been out of balance and we’ve been working hard to correct it. Over the past two years we’ve refined our product and pricing strategies to strengthen the OshKosh product offering.

In the second quarter we started to see meaningfully better performance in our OshKosh retail segment. That positive trend continued through the third quarter and into the fourth quarter. On our last call we outlined a handful of milestones in each of the retail and wholesale segments to correct OshKosh’s performance. We believe we are on track to achieve those milestones.

Ideally all components of our business would be performing at an optimal level. Of course that’s rarely the case but the beauty of our business is we now have multiple levels to enable growth.

Starting with the highlights of our third quarter results on page 2 of the presentation, our sales for the quarter were up 6% driven primarily by the strength of our retail store segments and earlier demand in our wholesale and mass channel segments. On a GAAP basis our earnings were $0.58 a share including charges related to the write-down of an OshKosh distribution facility. On an adjusted basis excluding that charge, earnings were $0.60 a share 3% better than last year. We’d say at least $0.10 of the $0.60 we’re reporting is attributed to earlier than expected spend and the timing of spending.

We continue to make excellent progress controlling the growth in inventories. Inventories were down 13% at the end of September due primarily to the higher sales in the quarter. We’re expecting inventories to be up 5% at the end of the year. Cash flow continues to be good. Through the first nine months we generated $57 million of cash flow. The improvement in cash flow was driven by better inventory management and we’re expecting operating cash flow of at least $80 million this year.

In terms of our outlook based on the strength of our retail segments, the strength of our product offerings and the current trends in our business, our outlook for the year has improved since our last call. On page 3 you have a snapshot of the growth in sales for each component of our business. Here you can see the terrific performance in both retail segments. We had growth in all but one segment, OshKosh wholesale, which Joe will review with you this morning.

On page 4 you have our third quarter P&L. Historically our third quarter has been the largest quarter in terms of sales and earnings contribution. It typically contributes about 30% of our annual sales and over 40% of our operating income. Our gross profit margin in the quarter was comparable to last year. We’re pleased with that performance given the very promotional environment.

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