Good day, everyone, and welcome to Carter's First Quarter 2012 Earnings Conference Call. On the call today are Michael Casey, Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Jim Petty, President of Retail Stores; and Sean McHugh, Vice President of Investor Relations and Treasury. [Operator Instructions] Carter's issued its first quarter 2012 earnings press release today before the market opened. A copy of the release as well as additional presentation materials for today's earnings conference call have been posted on the company's website at www.carters.com. Click on the Investor Relations section, then News & 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, I would like to turn the call over to Mr. Casey.

Thank you 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 on our business with you. Suffice it to say, we're off to a very good start this year. We meaningfully outperformed the projections we shared with you on our previous call. Total sales in the first quarter grew 18%. We believe consumers are responding to the compelling value of our product offerings across all channels of distribution. In the first quarter, we had sales growth in every segment of our business. We achieved positive comps in each of our retail store channels in the United States and Canada, and we continued to see strong growth with our new eCommerce and international initiatives. Given the positive trends in our business, our outlook for the year has improved. We've made good progress since our last update, increasing average prices by improving the flow of product to our stores, reducing off-price sales, which dropped nearly 70% in the quarter, and by increasing the effectiveness of our promotions. Average prices were higher across all business segments, though the vast majority of our products still sell for less than $10 each, it's a great value. The strength of our business continues to be driven by our Carter's brands, with sales up 12%. We had very good growth in our Carter's retail stores, with sales up 20%. Collectively, our new stores are achieving their plans, and we are on track to open about 60 Carter's stores this year. Carter's eCommerce sales more than doubled in the first quarter, and all key eCommerce metrics are better than last year. We're seeing very good over-the-counter performance with our top wholesale customers. The growth is being led by our…

Thank you, Mike. Good morning, everyone. My comments this morning will follow along with the presentation materials, which are available on the Investor Relations portion of our website. Beginning on Page 2, where we summarize some high-level financial metrics. As Mike said, we delivered a very solid first quarter. We posted strong revenue growth of 18%. This was on top of 15% growth in the first quarter of last year. This revenue strength was very broad-based, with significant growth in both our U.S. and international operations. Domestically, both the Carter's and the OshKosh brands contributed solidly to revenue growth in the quarter. Our adjusted operating income and adjusted EPS summarized here were comparable to a year ago. As we had planned the business down for the quarter, these results are clearly better than we had expected, driven by our strong revenue performance and better gross margins. Moving to the detail of our first quarter sales performance on Page 3. Every segment delivered growth in the quarter. In the U.S., the Carter's brand grew over 12%, driven by growth in our retail store and eCommerce businesses. In retail, comparable store sales increased nearly 7%. Carter's wholesale segment sales grew 3%, driven by strong demand for all of the brands which are reported in this segment: Carter's, Child of Mine and Just One You. Our reported revenue in wholesale will be affected this year by a meaningful reduction in off-price channel sales. Recall that a year ago, we had entered the year with a lot of inventory to work through, and our inventory position this year has significantly improved. U.S. OshKosh brand sales in total grew by over $4 million, driven primarily by continued growth in the eCommerce channel. Retail stores comps were up 4.7% in the first quarter. And as Mike…

[Operator Instructions] And for our first question we go to Margaret Whitfield with Sterne Agee.

I know Easter was earlier this year. I wondered if you could comment on how your April comps have trended to start off Q2. That's the first question.

Margaret, it's Jim. April has -- is pretty much on plan. It is a little bit slower, as you would expect, due to the shift in Easter. But on a March, April combined basis, we're looking at both brands being between 1.5% to 2% comp but very much in line with plan on both top line sales and operating income perspective. So overall, we're pleased with things.

And Jim, I wonder if you could provide more color on what you're seeing at the mall-based OshKosh stores in terms of performance.

Yes, I'd be happy to. We're pleased. They are actually performing at the top of the comp range. They -- collectively, the mall stores comp in the first quarter at about 12%. So overall, we're very excited. And that's capped off by a $1 more average unit retail in our mall stores over the balance of the company. So the customer is excited about the fact that the brand's in closer to where they live. And as you know, that's our growth strategy and vehicle on a go-forward basis. So overall, we're very happy with the performance.

And Mike, those comps up north looked very strong. What can you tell me about why Canada is performing so well, much better than U.S. comp?

I don't know if you've had a chance to go see the stores, but the Canadian team is doing a beautiful job executing, beautiful presentation of the brands in these co-branded stores, the very best of the Carter's and OshKosh brand, and in one convenient location. And it's really the only place you can buy it up there. So there's not a whole lot of other competition. We don't have any big wholesale presence in Canada. We'll be going up first quarter next year with Target, but they're the only place to buy the brands. And I just say if you haven't made a trip up there, it's worth going to see how beautifully executed the co-branded strategy is.

Margaret, this is Jim again. Just back to the mall stores for a second. I just think it's important to note that we've really given a strong attention to this category of stores. We've now dedicated some manpower from a visual perspective, from a field perspective, and we've got a great team focusing intensely on the overall store improvements. So I think we'll continue to see growth in that arena.

And Carter's wholesale was up only 3%. Are you expecting growth to pick up from here? Or is it more retail caution on taking in inventory?

I'd say that the growth is in line with what we're expecting. You've got to keep in mind that the folks that were doing business with. I think that growth is fully in line with the growth that they're planning for the year. Keep in mind that, that -- the 3% is weighed down by a significant decrease in off-price sales this year, and that was part of our strategy. We had worked through a good portion of that excess inventory last year. And I think I shared on previous updates, you will see low to mid-single-digit growth in both Carter's and OshKosh wholesale businesses this year because of the significant decrease we are forecasting in off-price sales, which is good for average price realization. It's good for margin that the quality of the business will be conservatively better this year relative.

And finally, could you just give us an update on what's going on with the Wal-Mart and Target businesses?

Relationships with both those retailers, I would say, are excellent, and we were out to see Wal-Mart just last week. The business has the potential to reach its peak level of performance this year. I think you followed all the changes going on at Wal-Mart over the past couple of years in terms of shifting their merchandising strategy, focusing on the brands, particularly our brand in the kids space. And so we're very excited about the potential growth with our Child of Mine brand and all the brands that are selling well at Target. So the business there is very healthy.

So you're saying you'll reach peak revenues this year at Wal-Mart?

That's the plan.

And what would that be, again?

Well, directionally, from memory, I think in 2008, we were -- we did some portion of about $146 million in sales. And with some shifts in their merchandising strategy, we lost ground from that level of performance. It was trending closer to $100 million, and our forecasting vision that will probably exceed that 2008 level of performance this year. We'll probably be closer to $150 million in...

And for our next question we go to Robbie Ohmes with Bank of America Merrill Lynch.

I had a question on your pricing trends across all your businesses. So AURs sound very strong for retail OshKosh and in Carter's in wholesale sort of across the businesses for spring. I was hoping if you could walk us through the expected dynamic or plan for the back half. So you're sourcing costs are coming down a lot. You took AURs up, I think, for fall 2011. How should we think about -- do you expect unit velocity to increase? Or could AURs actually comp again on tougher comparisons in the back half and so that spread really widens and we get this really fantastic gross margin rebound in the back half that we're all hoping for? So Mike, if you could just sort of walk us through on the dynamics on that, that would be great.

Sure, I'd be happy to. So just as a refresher, we had the biggest challenge in terms of product cost increase in the second half of last year starting with fall '11. So we did our best to raise prices about 10%. We didn't get all of that. This is based on the coupon dilution and some of the other things that weighed down the average prices. But that was the objective: to raise prices about 10%. That cost pressure continued the first half of this year, spring '12, so average prices. And again, the objective was to raise prices, some portion of about 10%. Keep in mind, based on our average unit prices, that's less than $1. But the objective was to try to get some portion of $1, both for fall '11 and spring '12. The objective for the second half of this year is to maintain the level of pricing we had in the second half of 2011. So fall '12, fall '11 pricing should be comparable. We do expect to see a meaningful benefit in the second half of this year from product cost improving. We've taken some portion of that cost reduction and reinvested it into product benefits, in some cases, have gotten sharper on price points. So our overall pricing strategy is to make sure we're offering great value to the consumer, making sure that we stay very, very competitive. I've referenced on previous calls probably the toughest category for us over the past 9 months or so has been Sleepwear. It was probably the most price-sensitive category. So we plan to make some adjustments on the Sleepwear offering to address that. So we don't plan on taking every bit of the cost reductions in the second half of this year and flowing it through to earnings. Some portion of it will go back into -- be back into product benefits, in some cases, price adjustments. That said, we are expecting margin expansion this year. What was about a 9% operating margin last year for the company should be in excess of 10%. Our overall objective is walk this operating margin back up to its peak level of performance that we realized just a couple of years ago in 2010 of 14%. But we feel good about our pricing strategies. We're monitoring what the competitors are doing, and our overall objective is, again, offer great value to the consumer and stay very competitive.

And could you also remind us, Mike, the mix shift away from the off-price channel is? I forgot the comparisons you're against. We're you shipping a lot to off-price in the back half of 2011, and so you could see continued mix shift benefit to margin? And did that also keep your AUR going up in the back half even as you...

That's right. That's correct. Just, again, to give you a bit of a historical perspective, off-price, this is shipments to folks like T.J. Maxx, Ross Stores, Marshall's, and that has never been a significant portion of our business. I'd say if you go back over a 10-year period, it probably ranges some portion of roughly 2% of sales, maybe a bit higher than that. But never been a -- I'll give you a range, 2% to 3%. I think in 2010, we had our best performance ever. Probably it was closer to 1%. By comparison, in 2011, it wasn't our best performance. It was probably closer to 4%, right? So but still that had some pressure on margin and price realization. By comparison, this year, 2012, we're forecasting a significant reduction in off-price sales. We've done a lot of good things, with the supply chain team's help, to reduce our exposure to excess -- shortening the product development process, buying more to order, reducing what we referred to in the past as these contingency buys, basically hold inventory in anticipation of some demand. What we're sharing with our customers, even with our retail team, order what you need, because that's all we're going to buy. And if, for whatever reason, business is better for you, we'll have limited ability to change that demand. So we encourage folks to buy what they need, and we'll do our best to support their forecasted demand. So all of those initiatives, I believe, will help us improve average unit prices and improve our margins.

And we go next to Susan Anderson with Citi.

Maybe if you can talk about the new -- I think, you mentioned there's new merchandising marketing team for OshKosh and that's weighing on margins. So it sounds like expenses for that brand are maybe higher versus they were historically. So maybe if you can -- like how should we think about the margin recovery over the next year? And then, over the long term, should we expect to be able to get back to the mid-single-digit EBIT with just the product cost recovery?

Just for clarification, we did invest in a new merchandising design team, visual merchandising team. We've made good investments in the OshKosh team over the past couple of years. We felt as though the brand needed full-time attention, and that's what we have given it. I would not say that that's what you're seeing weighing on the margins. What you're seeing weighing on the margins was a significant increase in product costs beginning in the second half of last year continuing into the first quarter of this year. First quarter product costs for OshKosh were up over 28%, and that was just a function of, I'd say, our supply chain strategy. We did not have much flexibility to shift gears when we saw the spike in cotton prices. What's interesting to us is that we have insight into what Canada's -- our Canadian operations experience was. With product cost over the past year, I'd say, they fared much better than we did here in the United States for a lot of reasons. Canada has more favorable trade arrangements than the United States has with respect to our product categories. But we are working our way out of that now. So I think that the worst is largely behind us in terms of these significant increases in product costs. As I shared with you, I think we shall start to see more meaningful margin recovery for OshKosh in the second half of this year. And so what was, all-in, perhaps a low-single-digit operating margin for OshKosh last year, the previous year, this operating margin was close to 9%. It earned some portion of about $30 million in operating income. Most of that got wiped out in 2011 with the increase in product costs. Our vision for the brand this year is that it'll show meaningful recovery in operating income. More importantly, over time, what today is a little over $400 million business with a very low operating margin, our vision is within the next 4 or 5 years, it's at least a $500 million business, earning about a 10% to 12% operating margin, which would be its earning $50 million to $60 million for the company relative to, call it at best of breakeven operation in 2011. So we're very excited about the initiatives under way with OshKosh. I think we've got a terrific team, we're making progress with the product performance. Seventh consecutive month of comp store growth, that's a direct reflection of the success this new team is achieving. So we're pretty bullish on OshKosh.

Okay, good. That sounds great. And then maybe if you can give some more color on the improved inventory management in the quarter. I assume it has to do with the restructuring, but maybe just a little bit color on what you're doing better now versus historically.

Sure, Susan. I think there's a number of things that we're doing differently there. Being more plan-ful in the business, making our commitments closer to when we have better visibility to the wholesale side of the orders so we're not buying contingency inventories. I think some of the things that we're doing with this new distribution center, what we're doing currently with replenishing retail, holding a bit more inventory at -- centrally and then getting it to the stores when they need it, so we've sharpened our systems on that front as well. We're also making more use of just a planning and allocation technology that we've invested in retail over the last couple of years. That's starting to bear some fruit as well. But on balance, we are taking some lead time out of our ordering cycles such that we're able to get more precision with the demand we're forecasting and able to hold a little bit less inventory as a result.

And for our next question we go to Susan Sansbury with Miller Tabak.

Mike, looking forward into fall. With respect to your wholesale customers. Any comment or any insights that you can share in terms of their inventory positions? Is that the reason they're ordering conservatively? Or is it more a reflection of what happened to them last year? What's your inventory position on the floor? And if you can make any comment about where you are -- or make any comment about JCPenney relative to Carter's specifically and/or generally, that would be -- I think everybody would like to hear what you have to say.

Okay. So I would say generally speaking, our wholesale customers are being conservative on their inventory commitments. I view that positively. That's good for their business. It's good for our business. Maybe near term, it puts a little pressure on our top line growth, but it's far more profitable for them. And if they're more profitable with our brands, that's good for their business and for ours. I think back to -- I believe, it was 2010, again, dealing with the effects of the recession, everybody tried to get sharper on their inventory commitments. And that's when I would say everybody's business was better. The margins were good. People were leaner on inventory. It was more of a pull model in terms of demand where they were running too lean on inventory, they'd call us, they'd ask us to accelerate some of the orders. And when you run cleaner on inventory, it's good for everybody. So actually, I'm encouraged by where we're -- how we're running the business right now. In terms of JCPenney, we're doing our best to support their new initiative, and we're looking at the prototype designs for the new stores that they're attempting to develop to improve presentation of all the things that are represented in their stores. So we're staying very close to them. Their relationship with -- is excellent, and we're hoping they're successful with their new strategy.

Great, that's really helpful. A trivia question for Richard. This $100 million CapEx program. Can you parse it between store investment, this distribution center and/or any IT or POS -- internet-related -- eCommerce-related technology investments for me?

Sure. At a high level, CapEx is up about $50 million relative to what we spent last year. I'd say our initial thoughts on the DC spending that this will be a project that will extend into next year, so probably about $25 million of that increase relates to the new DC. Collectively on new stores, we're probably spending another $4 million or $5 million over what we spent a year ago. It's a similar number of new stores for Carter's, about 7 stores for OshKosh. We have stepped up the remodel program in retail as well. There's probably $10 million or so that we're spending more in remodels to go into the older locations and spruce them up a bit. And then, the balance is growing out additional stores in Canada and then IT systems, as you suggest, so in retail and throughout the rest of the business, upgrading our systems capabilities.

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

You guys are opening up a new direct sourcing office in Hong Kong later this year. Can you do a little bit about what you believe the penetration of direct sourcing as a percent of total fiscal '13 sales might be and then, as a follow-up, ultimately may be?

I would say it's too early to give you a specific percentage. What I've asked Chris Rork, who heads up the supply chain, to do is pursue this new initiative thoughtfully, carefully. The agents have served us well, the sourcing agents. They've done a nice job for us. And we'll walk this up over time. What our vision is, is over the next 5 years, what today is about 95% agent-sourced over the next 5 years becomes more 50% agent-sourced, 50% direct-sourced. How it ramps up, we haven't even opened the office yet. So maybe later this year, I'll have a better view on what is possible as we firm up our 2013 plans. But just assume we will walk it up. We'll walk it up over time. Were not in a hurry to get to a direct sourcing formula. Our outlook for the second half of this year, we're expecting meaningful margin recovery. It will be more significant, obviously, in 2013 based on the world as we see it today. We're expecting more meaningful margin recovery. And our objective over the next 4 to 5 years is work our way back to that 14% operating margin. That's probably the best way. It's the way I think about -- what the opportunity is here is to get back to a level of performance we enjoyed just a couple of years ago in terms of operating margin. And I think that's entirely possible, because when you think of where our business was in 2010 when we had about a 14% operating margin, we didn't have this wonderful Canadian business that we have now, which has a very rich margin. I would say we did not have the clarity on what's possible on international markets, and we're making some good investments to resource that initiative appropriately. We didn't have the visibility in 2010 of how wonderful the eCommerce business would be, how it would ramp up as quickly as it has. And that, we expect, will be a high-margin business. So all those things and others things considered, we have a high confidence level that we can work our way back to that operating margin over the next 4 to 5 years.

And your eCommerce commentary is a great segue way for my last question, which is the margin improvement that's expected due to the in-sourcing of eCommerce later this year. Can you talk a little bit about what you feel that delta may be?

It's a nice a step function improvement. Certainly, the business has scaled to a size where it's appropriate for us to bring those fulfillment activities in-house. We'll have to look at the other elements of the outsourced model over time. But it's a nice meaningful step-up in the operating margin of the business. We haven't been specific beyond that, Steve.

And you don't want to take the opportunity to be now, Richard?

I do not, Steve.

And for our next question, we go to Scott Krasik with BB&T Capital Markets.

A couple of questions. So just going back to the first quarter, Richard, the swing in gross margin was so meaningful in Q1. Some of those pieces you called out, can you just sort of quantify what the contribution of each of those were to the change, whether it was the DTC [ph] mix or Canada or the less off-price and then offset by higher product cost? Maybe tell us in basis points generally what the changes were.

I don't know if I'll be as discrete on that, Scott. I think a big component, certainly, was the mix shift. The fact that our direct-to-consumer businesses grew so significantly with the addition of Canada, in particular. Canada is a very high-gross-margin business, and that was a big contributor. I'd say in basis-point terms, the biggest contributor was the mix shift and then followed by some of the very successful things that we've done on the pricing front. But that's really still just offsetting the dilution that we're seeing from product costs, which are higher in the first quarter. That should start to moderate that effect going forward. But it's really -- it's a number of things that have been contributing to it. The off-price activity being lower. As Mike said, it was down about 70% in the Carter's business. It was down significantly in OshKosh as well, although on a lower base. So really, a lot of win in our sales from a margin perspective. We're encouraged by it.

Just to add to that, Scott. I don't know if you've been in the stores recently. I think, what's driving -- first and foremost, I think what's driving the performance of the business is the strength of the product offering. I mean, it's just -- I was in the stores last week for all our brands, and I think the brands stand out relative to the competition. I think that's why we're doing so well. We have got a lot of other good initiatives going on. But I think the thing that's overall driving the strength of our business is the strength of the product offerings.

Okay. And then sort of help me with the Q2 guidance. I mean, the revenue guidance assumes acceleration and with the April comps, while on plan but not running as high as they were in the first quarter, is that going to come into a wholesale accelerate for some reason? Or will the international business -- where do you see the acceleration in Q2 versus what we're seeing right now?

Yes, I'd expect that the growth rate in wholesale does tick up a bit in the second quarter. Recall that we still have non-comparability with Canada. We'll have another quarter of their contribution, which was not in the prior year base as well. But good growth in wholesale, good growth from Canada, good growth from eCommerce expected as well.

Has there been anything you guys have had to [indiscernible] see pull forward? Or has there been any of that action in the last couple of quarters?

Yes, there was certainly some of that demand that we think pulled forward a bit earlier into the first quarter due to the earlier Easter, the favorable shopping weather out there, probably pulled a little bit of volume forward. We're also anticipating that some of the volume that we had planned for Q3 that may actually roll into the second quarter as well. So just good, to Mike's point, consistent demand for our products, and we think that will be reflected in the net sales line.

Okay, great. Just last, Jim, the numbers or the breakdown of the comps for the stores were -- was awesome. I mean, is that the model going forward? Do you hold price and you can still get the number of transactions higher? And then, also, what is the sales particularly [ph] in your Carter's stores right now? And where do think that can go to?

Just a couple of answers for you there, Scott. First, and I've got to echo what Mike said and I think what you agree with. Product has performed incredibly well in both brands, and product is everything, as you know. So we are continuing to be very optimistic about our ability to drive incremental AUR. One of the, I think, upsides that we have for us that Richard alluded to is our ability to now feed our stores more effectively based on customer demand from a distribution perspective. The fact that we can now hold more of our inventory back. And then, once we have some sales trends, feed the inventory to the stores is going to help us on bolt on AUR, which is obviously, a direct positive impact on the gross margin. Additionally, we've been able to reduce our flowback of product -- the time necessary to flow back product based on sales to stores by close to 10 days. So that's been very, very significant in order to better service the customer. As it relates to our revenue per square foot in Carter's, on an average store basis for the chain, we're at about $408 a square foot. We believe that there is upside to that. If you -- and I know you've -- due to the fact that you've got a young child, you're in our stores as well as I know you're a student of the business. We've increased the shopping experience or the overall effectiveness of the shopping experience because we've reduced the density on our selling floor. Beginning at first quarter of this year, we were able to strategically remove some fixtures off of our floor, which, quite honestly, had a density issue. And especially if you're a mom with a stroller. And we've been able to impact the vast majority of our Carter's stores by doing that. And the overall experience, we believe, been based on consumer feedback, has been increased significantly based on that. We also have, and Richard alluded to, an initiative under remodels. And one of the things that we realized was the general placement of our cash wrap in the center of our stores was probably not the best use of square footage. And in our remodel process, we're moving that off to the side, and that frees up roughly 400 square feet of selling space in the center of the floor to reallocate to the assortment. We're also adding some cabinets in the windows, and we've moved our standards inward or tighter, to a certain extent, which allows for better usage of the overall walls. So combining all of those things, we've really -- we think we do have continued upside to grow comp store basis. We've got certain stores that are operating at extreme volume levels in some of our tourist markets, and we execute them quite effectively. So yes, there's continued upside.

We'll go next to Courtney Willson with RBC Capital Markets.

This is Courtney in for Howard Tubin. Could you give us a few more details on some of your marketing plans for the year? You mentioned the movie tie-in, which sounds new. Do you have any other plans?

The big focus is to continue on and build on what's worked for us, which are these direct-mail, what we call cat-azines for each of the Carter's and OshKosh brands. Direct mail has been very effective for us. We're doing some good things around this movie. But it's building on some of the good work that we've done with social media, specifically Facebook. But the plan is just to continue to build on this wonderful database which has been built. We've invested in some good tools, some systems around customer relationship management software, so we can become more effective on the promotions. I think an important point that we haven't mentioned, a good portion of what's driving a better price realization is just becoming smarter in terms of the way we do promotions. In March, we decided we did not need to repeat a very strong promotion that we had in March. It just didn't feel as though we needed it. It was a conscious decision to roll it back and reinvest those dollars into the balance of the year. But I think we've gotten much more sophisticated with some good tools that we've invested in and with some good people who are focused on at improving the effectiveness of our marketing initiatives.

All right. So would you say that your ad spend is consistent with last year? Or...

No, I'd say it's going to be more, but I think we're going to get a higher return on those investments.

Okay. Is there anything specific for back-to-school? Or...

Always. Always. You'll see some rich marketing. I don't know if there's anything more I would specific -- I'd have on this call for you, but it will be beautifully done for both brands.

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

Okay. Well, thank you all for joining us on the call. We appreciate your questions, your interest in our business. We look forward updating you again on our progress in July. Goodbye.

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