Good day, everyone and welcome to Carter's Second 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 second 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 these 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 the website, I'd like to share some thoughts on our business with you. Over the past few months, we've made good progress improving the profitability of our business. We believe the margin pressure from the cotton crisis is now largely behind us and we're expecting more meaningful margin improvement in the balance of the year. Since our last update, we continue to see strong demand for our products in all channels of distribution. We significantly improved our inventory position and cash flow, and we acquired one of our sourcing agents in Hong Kong to help us accelerate our direct sourcing initiative. With respect to our business segments, our Carter's business in the United States continues to be the driver of our results. The strength of our Carter's business is the baby product offering, which is the core of the brand. A key component of the baby product line is called Little Layette. This is a high-margin replenishment business, which we refreshed and relaunched in May, and its performance to date has been very good in all channels of distribution. We're on track to open over 60 Carter's stores this year and our new stores have been achieving their plans. Our retail team has made good progress this year, improving the store experience. They've reduced the density of the product on the floor, made the stores easier to shop and improved the brand presentation. We recently completed our fall floor set. We've meaningfully improved the wear now component of our fall product line and third quarter sales are off to a stronger start than last year. Carter's eCommerce sales nearly doubled in the second quarter, and it's profit contribution…

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. I'll begin on Page 2 with some highlights of the second quarter. Second quarter was very solid for us with significant growth in both our top line and in earnings. We posted strong revenue growth of roughly 20%. This was on top of 21% growth in the second quarter of last year. Our Carter's domestic businesses and our international operations drove the revenue growth we experienced in the quarter. Adjusted operating income and adjusted EPS, as noted here, grew significantly over the prior year. These results were better than we had planned, principally due to strong year-over-year gross margin expansion and the contribution from our growth initiatives. On Page 3, just to orient everyone as for the composition of our business in the second quarter, the chart at the left shows the components of our roughly $470 million in second quarter revenue. As you can see, our Carter's business, domestic businesses represented about 80% of our revenue base, OshKosh approximately 15% and international is roughly 8% of the mix. In the waterfall chart at the right, you can pretty readily discern the headlines for the change in profitability for the quarter. And that is that the Carter's domestic businesses, primarily wholesale, drove the increase in year-over-year operating income. International contributed $4 million of the increase. And lower earnings from OshKosh, which were principally due to higher product costs, as well as some higher corporate expenses, reduced earnings in total by about $7 million. We're very pleased with the overall increase in adjusted operating income of over 55%. On Page 4, we provided a more detailed look at our second quarter sales performance.…

[Operator Instructions] And for our first question, we go to Robby Ohmes with Bank of America Merrill Lynch.

This is Helena Tse in for Robby. A couple of quick questions. One, can you discuss the comp trend for the Carter's retail segment through the quarter and also sort of trends in July?

Sure, sure. For each of the brands, Helena, it rolled out as follows. Again, on the quarter, we were up 1% in each of the brands. We started out in April with the expected shift due to the Easter shift this year. April came in down 3.4%. May rebounded to a positive 2.2% and June was up 3.9% for the Carter's brand. Similar results in OshKosh, April down 1.9%, May up 6.5% and June roughly flat. And again, coming in at 1%. So the way we look at the quarter, as Richard spoke about in his opening comments, we believe there's about a roughly 2% shift into Q1 that would've been realized in Q2, primarily due to the Easter shift and also the unseasonably warm temperatures that we had earlier in this year. So our current comp trends, as Mike alluded to, pretty much bared that out. And we feel as though we're very much on track with our plans.

Great. And then on the AUR trends, I know that in the past, you've sort of given out pretty detailed sort of segment AUR trends as well as UPTs. Would you be able to provide that for the Carter's retail brand and also your wholesale segment?

Yes, Helena, I'd say in general, we had good results in all of the key metrics in retail, particularly AUR. We've decided to pull back a bit on some of that disclosure. We don't think from a competitive perspective it's probably that advantageous for us to continue to report that. But we've continued to make very good progress on pricing.

Got it. And is your wholesale -- well, can you let us know if whether the wholesale and the retail segment AUR trends are relatively similar like in the past quarter?

I'd say that we've continued to make progress across all of our channels on pricing.

Got it. And then last question would be in terms of your Carter's wholesale segment. Can you mention, are there any shifts in the quarter, any pull forwards from 3Q to 2Q, and maybe elaborate also on any sort of growth initiatives you might have in that segment, whether it's rolled out of any planned distribution and the timing of any of that?

Helena, I'd say the wholesale business has had very strong performance. We have at least a couple of our customers working through some issues within their business. But to date, it has not had any meaningful impact on our business. As I shared with you in the opening remarks, 4 of our top 5 customers had growth in excess of 10% in the first half of the year. So the business is rock solid. The feedback we continue to get from our wholesale customers is that we're doing a good job for them. I don't think -- I'm not aware of any meaningful pull forward or shifts in demand. I think the performance has generally been good. We're going through a transition now. Everybody's getting rid of the spring product and summer product getting ready for back-to-school. The timing of the fall floor set varies by retailers. We're probably on the early side of it. We usually get set early on the fall because people, just based on the nature of the age segment that we're focused in on, people buy ahead of needs. So if you'd walk in our stores right now, you'd probably see a lot of good offering of Halloween product and probably within a month, you might even see Christmas, which we've moved up because people are buying beautiful things for their children way ahead of actual need. But I'd say that the wholesale business has been a very solid performance so far this year. And the outlook is good. Outlook for that business is good for us.

Just add to that, Helena, we didn't really see much of a trend towards demand pull forward. We have, as you know in previous quarters, had a bit of a phenomenon where customers have come to us and asked for product earlier than we had originally planned. That was not a significant factor in the second quarter.

And for our next question, we go to Susan Anderson with Citi.

I was wondering if you could maybe give a little bit more color on your guidance. You had a good great quarter this quarter. So just wondering why you didn't raise the year. It sounds like you're being very cautious on the back half. Is that something that you're seeing now in the results or you just wanted to kind of like take more of a cautious approach?

I don't know if it's so much a cautious approach. We've got a good plan for the year. We've got good growth plan in both sales and earnings. And when you think about what we were up against, at least in the first quarter, we had no growth in earnings. And for the year now, we're forecasting 20% to 25% growth in earnings. So I'd read less that we're more cautious than we were 3 months ago. I just don't feel any compelling desire to every 3 months be elevating the forecast. We're, as a company, we are focused on executing a very good growth plan for the year. We don't really manage this businesses from quarter-to-quarter. You've got a lot of moving pieces in our business, multiple channels, multiple brands. So I think if you look at this business from quarter-to-quarter as opposed to year-over-year on an annual basis, I would encourage you to do the latter because that's the way we manage the business. But we have a robust growth plan for this year. We think we have good growth plans for many years to come. So we have had a rock solid first half, far better than what we envisioned. We've got good growth plans for the balance of the year. It's just I wouldn't read anything into that we're not elevating the forecast. I just don't think that's a good practice after just 3 months. Second quarter is probably the least significant quarter of the year. We have 2/3 of our profitability still ahead of us. But I would encourage you to think about the kind of growth this company is positioned to deliver for its shareholders for the year. 10% growth in sales, 20% to 25% growth in earnings, that's a terrific plan. And of course, as you know, our track record has been we're focused on executing that plan and perhaps, doing a bit better than it.

Great. That sounds good. And then maybe if you could talk about maybe a little bit more color on just taking your eCommerce in-house in terms of the timing and then transitioning to the new DC and I think you kind of mentioned that there should be some margin benefits. If you can maybe -- I don't know if there's any numbers you can put around it or just maybe a little bit more color?

Sure. So the big deal is the eCommerce's business, we're well ahead of what we originally laid out a couple of years ago, it's our 5-year plan. We're probably in year -- at least 3 if not year 4 of where we -- in our second full year of doing business online. The consumers clearly love the presentation of both brands online. So we didn't envision we'd have to make this investment this year. We thought we'd have to probably make it in years 4 or 5. So we -- so anyways, we scrambled earlier this year. We looked throughout the entire country. We engaged some good outside experts to guide us on where is the best place to have an eCommerce fulfillment center. Thankfully, one of the final choices happened to be just north of Atlanta. We've got a beautiful 1 million square foot distribution center about 45 minutes north of Atlanta. We were up there earlier this week. They're making good progress. Product's flowing in, not flowing out yet. We don't think we'll be shipping out of that facility until later this year. And the margin benefit I would characterize as significant. You pay a very healthy premium to a third-party provider, and they've done a good job for us. There's no doubt the third party fulfillment providers have done a nice job for us. But it's time to bring it in-house. And for Carter's, the operating margin, I'm told, I think our forecast we'd probably be somewhere around 10% operating margin for Carter's eCommerce this year, which I think is terrific. And it's first -- pardon me, second full year of doing business. So demand has been good. The profitability's getting better. We think by making this investment it gives us an opportunity to even further improve the operating margin when that new facility gets up and running. In this new facility, we described it as a multichannel distribution center. And because Phase 1, probably the smartest thing -- things worked out well for us. Phase 1 of this new facility is to bring eCommerce in. And it's the smallest component of our business relative to retail and wholesale. But we were briefed earlier this week in terms of some of the technology that will ultimately go into this facility, beginning sometime next year, to better support our retail stores and the national retail partners. So I think our service levels in our stores and for our wholesale business I'd say is good. I think we're going to move from good to great over time. And so we're pretty excited about eCommerce, but particularly there's good initiative underway with respect to the new distribution center.

Great. That sounds exciting. And then one last question on the direct store thing. It seems like maybe you've accelerated that a bit also maybe with the acquisition. I was expecting maybe 5% next year but it sounds like you're already doing that. Maybe you could, yes, talk about the timeframe to reach the 50, I think 5 years, but is it more back-end loaded or front end? And then also with a 5% you're doing now, what have been the challenges and what have been the benefits, so far?

Well, again, the high view is substantially everything we've done over the past 10 years has been through sourcing agents. And most of that's been done through Li & Fung. The service level from Li & Fung and the others has been, I would say, excellent. They helped us achieve a 14% operating margin back in 2010. In terms of the quality of the product, the execution, rarely do we have any issues in terms of deliveries. Every once in a while, if you're sourcing 400 million units, you'll hit a bump in the road. I'd say -- I'd give Li & Fung and the other sourcing agents a solid A. But it was clear that we needed to evolve. It's unusual for the kind of volume we're doing to have substantially everything going through sourcing agents. So over the past year, we have developed plans to evolve the business away from agent-sourced to more direct sourcing. And the timeframe we've set on it is take the time you need, do it over a 5-year period, looks at a goal that at least have a 50-50 mix over the next 5 years. So just the overall objective is create a more competitive supply chain, become a lot more knowledgeable about where good factories are to do some components of our business. The thing that we're more excited about after we bought Canada, Canada was doing all their business direct sourcing. Their margins were far better than ours. And their experience in terms of some of the plants that they were doing business with we were not, so they've introduced us to some good suppliers. But you really can't appreciate, at least based on this conversation, the good work that's been put into finding 2 first-class sourcing offices in Hong Kong,…

For our next question, we go to Margaret Whitfield with Sterne Agee.

I was wondering, Mike, if you could comment on the product cost outlook for this fall and next spring and if there is a difference between the Playwear as you described, more pressure there than in Baby or Sleepwear?

Okay, okay, sure. So the outlook is good and continues -- I think at the end of fall costs for both brands, the mother brand so to speak, Carter's and OshKosh, are down about 10% for fall after going up over 20% last fall. So I think it's important -- even though this cost outlook is good, we're still not back to where we were 2 years ago on the cost scenario. We're starting to get some visibility into spring '13. We're encouraged by that directionally. We think those costs might be down some portion of 10%. But again, it's important to understand the history. In spring '11, costs went up about 12%. In spring '12, they went up about another 15% or so depending on what brand. And now they're going down 10%. So we're kind of digging out a hole. So we're thrilled with this performance that we're reporting today. Our performance relative to 2010 in first half to first half, we're kind of -- we're still a little bit below what we were earning just 2 years ago. So -- but the outlook is good. And I think it says not so much getting -- the cotton's improved but some other things that we've done over the past year I think are going to be important margin drivers. We just talked about one in terms of direct sourcing, but the progress we've made in terms of inventory management over the past year, I would say, has been significant. This initiative that we referred to on earlier calls what we call quick backup, where we ship into our stores a fraction of what we would have otherwise shipped in -- so for purposes of this conversation, just assume we'd ship in about 80% of what we'd normally ship in, see what sells, and then quickly replenish what sells. So that the stores isn't sitting on a lot of stuff they didn't need. And if they have some stuff they don't need, they have to mark it down. So our level of clearance sales in our Carter's stores is down meaningfully to last year. So markdowns or excess inventory is lower just as a company needs to get to the total consolidated view for a moment. Our off-price sales this year, we're forecasting might be half of what they were last year. In round numbers, whatever was $80 million of off-price sales last year will be about $40 million. And the profits, there are probably the losses attached to that, will probably be half of what they were last year. So we're excited about what's going on with product cost. It's important to note they're still higher than they were a couple of years ago. But we've got some other things where we've made progress on that we're seeing a meaningful benefit in margin improvement, which I think, you'll see more of in the second half of this year.

Well, offsetting the benefits of the product costs and the initiatives you mentioned, I know you're reinvesting in the business. Would you say SG&A, as a percent of sales, would grow at a similar rate in the back half to what you reported today for Q2?

I think just directionally, you will see SG&A rise as a percentage of sales. Our business is changing. So if you look at the percentage of our business that is now direct to the consumer, with the acquisition of Canada, with the success of eCommerce, with the success we're seeing in terms of site selection for the Carter's stores, directionally, I think in this -- our direct-to-consumer sales a year ago was a little over 50%. I think this year it's closer to 54%. So that -- those businesses have a different cost structure. But it also has a different gross profit structure, gross profit margin structure. So if you looked at our business relative to our defined peer group, I would say we probably rank in probably -- at least the median if not the top quartile in terms of operating margin. But we rank low in gross profit margin and rank low in SG&A. So as our businesses is evolving, as our business evolves, the gross profit margin will improve and SG&A relative to sales will increase. But it's -- when you get underneath those numbers, and Richard will be happy to provide a little bit more color if you like it, but it's largely driven by the new Canadian operations, the expansion of our retail stores, the success of eCommerce. As Richard mentioned, we're funding because we can, some good work on the marketing side of the business. We'll tell you more about that in October. But yes, directionally, you will see SG&A increase relative to sales.

Final question. I wondered what the acquisition of Channel [ph] and your efforts in Hong Kong means for exploiting the Asian market. I know that was cited earlier as a key focus point apart from Canada and perhaps Brazil down the road.

I think it's an important part of it. So we're establishing a management team in Hong Kong to source product and more importantly to support our international partners. I think we've referenced that we're opening a third-party logistics center in Hong Kong. So instead of product going from Asia to Georgia and then back to Asia, the product will go from the factories in Asia to Hong Kong, then directly to our Asian-based partners. So the offices are dual-purpose, certainly to support our direct sourcing initiatives but also to be our hub in Asia to do a much better job supporting our international partners in developing a bigger base of business in Asia.

And we go next to Howard Tubin with RBC Capital Markets.

This is Courtney in for Howard. I just had a question, this might apply more to OshKosh but where are your -- do you have any specific marketing plans for back-to-school, something new or different? And then I know you mentioned that the product had been improving. Can you talk about what's been working d what you'd highlight for back-to-school product-wise?

So what's been working is Girl's. Girl's has been -- in OshKosh. The Girl's product offering I would say, in recent years, had been the weaker component of the offering, and Girl's product by its nature, it's more a bit more fashion-forward, it's got to have a little bit more bells and whistles on it, a little bit more shine is the word that I hear in Atlanta. It's got to have a lot more beauty to it. The more beauty in it, the better it sells. The more basic it is, doesn't sell as well. So we've addressed that. We've had good feedback on the spring line. I think you'll start to see this holiday season -- yes, spring was good, back-to-school is good, even the holiday product offering I think you'll start to see the improvements we've made in the Girl's designs. We've beefed up the talent in that component of the business, and I would say what's driving the performance right now has been Girl's. Boy's has always been good. And interestingly for OshKosh B'Gosh, about 1/2 is Boy's, about 1/2 is Girl's. I think right now Girl's is a little higher percentage of the mix. But Boy's has always been good, Girl's is right now is outperforming Boy's. In terms of our overall marketing effort, and this is just for all the efforts at both Carter's and OshKosh, the focus is improve the brand presentation, acquire new customers and increase the loyalty of existing customers. And we've made good technology investments in recent years in CRM to help with that effort. But I've seen the back-to-school. It's focused on the everyday essentials. It's focused on easy dressing. I think probably the most significant change year-over-year, and this is Carter's and OshKosh, is a more wear now…

For our next question, we go to Anna Andreeva with FBR Capital Markets.

I had a couple of questions. I was hoping to follow up on the gross margin line. You guys obviously, saw a nice upside on gross margins and in the first quarter, you talked about the higher margin DTC, eCommerce and the lower off-price sales contributing the most to that upside. Can you maybe give us similar type of comments for the second quarter and again, how should we think about the gross margin line into the back half? I was hoping to follow up on Canadian comps. Did you guys say that Bonnie Togs was comping negatively in 2Q? Just a question on is it pull forward or is there something else going on there? And then Mike, you always talk about just what are you guys seeing in the pricing environment out there. I know you said department stores, your business continued to be very solid in the second quarter. Just what are you seeing from the pricing perspective into the back half?

Anna, I'll take the Canadian question first. We had a positive comp in the co-branded stores for the second quarter of about 5%. The comp in the Bonnie Togs nameplate stores was down about 12%. What we experienced in Canada was a more significant pull forward of demand into the first quarter. You had the earlier Easter holiday. I think the real factor though was just how extraordinarily warm it was for Canada at that time of year. So more pronounced shift forward of that business. On balance, if you look at the first half comps, very solid performance. The Bonnie Togs stores were only down about 1.5%, that's about $400,000 of revenue. Most of that actually was outerwear. So in our minds tracks pretty well to the performance that we saw and the climate at the time. Very solid performance in the co-branded stores of about 10%. So a bit of a shift there. The focus clearly of the business is to continue to build out the co-branded format and that's what we're going to be pursuing going forward. And your question on gross margin, the majority of the upside year-over-year was driven by the Carter's businesses, and recall that, that includes the core Carter's wholesale business, it includes the Child of Mine business, it includes Just One Year. We've had Just One Year, rather, we've have very good margin performance from a variety of different sources. We've started the shift fall product, those costs to Mike's point are down about 10%. So we get a very nice benefit from that. Our inventory position year-over-year is dramatically better than it was a year ago. So the provisions you have to make for excess inventory for troubled inventory are far lower than they were a year ago. And then rounding it out I would say would be the very strong contribution of our pricing and promotional efforts in our retail stores, where despite still facing the higher product costs in the spring assortment, we are -- we're making more on those sales each day as we've been just smarter on our promotions and yielding more. So on balance, I think the outlook for gross margin looks good. To your point, we will have a continued mix benefit, mix shift benefit as we move into the second half. The Direct-To-Consumer businesses are a bigger proportion of the total in the second half and of course we'll have the full benefit of the fall assortments being at lower product costs in the second half as well. So we're bullish on the outlook for gross margin.

In terms of what we're seeing at wholesale, generally speaking, the pricing is higher year-over-year. It has to be. Everyone's costs went up. So everybody has figured a way to elevate their pricing. It's just -- it's more than just raising the price. So the best price is going to be on the product that's selling well. So I think everybody's focused on strengthening the product offering, strengthening the brand presentation in the stores, making the stores easier to shop. Price clarity, I think, with our wholesale customers and certainly with us has been a big initiative, so consumers understand the value in the product offering. And the other thing we've talked on previous calls is just run leaner on inventory. So that you're not stuck with a lot of excess goods. And that's always been good for pricing, good for margin. And I'd see those are some good practices in place with most of our wholesale customers.

Mike, are you planning to keep pricing flattish then in the back half?

We are.

And department stores flattish as well or...

Yes. This whole strategy with the benefit of the cost reduction in the second half, our strategy was to maintain the level of pricing that we had in the second half of 2011. That's correct.

We go next to Susan Sansbury with Miller Tabak.

Everybody's asked most of the questions, but Mike, kudos for getting all of this momentum going and because the upside just seems to be enormous. In that regard, talking about this return to the 14% plus pretax margin, is it too soon to shorten the timeframe in which you might accomplish that objective?

Yes, first, thank you. And in second, yes, too soon. Again, a lot of these things are still evolving. And if you look at over, say, over the next 4 to 5 years and just knowing that we're -- everybody here -- if there's one number that most people that are in this company, particularly people who support me know, is that 14%. That's what we're working hard to get back to that. If you look at our business in 2010 versus where we are today, it's a much different business. We have Canada, we have this wonderful eCommerce business, we have a bigger presence with our stores, we're making some good investments in the supply chain, we're making good progress with inventory management disciplines. I think it's a far better company today than it was in 2010. In 2010, we achieved our record level of performance. So we're determined to get back to that. But things take time. As Richard said before, we're going to continue to invest. We're not going to wring every nickel of opportunity out of this business this year. We are performing well, we're going to use some of that upside to reinvest into some of these good growth initiatives. We're starting to focus more on 2013 and '14 now, and making sure that we position ourselves well as we roll into next year. So yes, I'd say too early to accelerate that timeframe. But even if it does take us 4 or 5 years to get there, we will deliver good performance for our shareholders.

That's exciting. Any feedback that you can provide from the gathering of all your licensee partners in Atlanta? Is there any update in terms of your franchising initiatives or bringing anybody in-house?

Yes, for me, it was something -- and this has been an area of focus over the past couple of few years. Yes, we always had an established business in our international markets. It just didn't get a whole lot of attention. And it's got a tremendous amount of attention right now. So we brought these folks in. We had a big sales meeting over the weekend here back in June. And as these folks stood up and introduced themselves, I was struck by one, the number of countries represented. We had over 40 countries represented at this meeting. And as they stood and introduced themselves, I asked them, "How long have you been doing business with us?" And a number of people said 5, 7, 10 years. Some people were 15, 20, -- one fellow, 25 years that represents our brands in the Middle East. And what a wonderful opportunity now to work with these folks to say, "What's the full potential of your business with us?" With our wonderful resources and their local market expertise, what can we do together? So our vision here for our company is to be the world's favorite brands in young children's apparel. We are the market leader in the United States. We own 17% share in a $22 billion market. Nobody is even close. We own 3x the share of the nearest competitor. If you look at the earliest ages, newborn to 24 months, we own 5x the share of the nearest competitor. If you look outside the United States, and you take the top 5 markets, it's at least equal to the size of the market in the United States, and we own probably less than 1% share of the collective market outside the United States. So our near-term focus is on China and Japan because that's where the market is. The other markets, South Korea, Mexico, Australia, those market sizes pale in comparison to China and Japan. So we're devoting some attention to that. And as those things take shape, we'll share it with you. But we're trying to replicate this wonderful model that's been built over many years in the United States, which has got a retail component, wholesale component, licensing and eCommerce. And all of those things exist today outside the United States. It's just what's the full potential of each of those business components. And we have a search underway. Probably the only gap I'd say we have of any significance in our organization is a full-time executive over international. So we've been interviewing for that position over the past few months. And we're seeing some very talented people and hope that we have more to share with you next time we have our update.

We'll go next to Scott Krasik with BB&T Capital Markets.

Question on the sales guidance. It sounds like all your direct businesses are off to a really good start in the third quarter, and you said you were going to get probably flat pricing in your wholesale business. So how are you thinking about your wholesale businesses for the back half of the year? It would imply to me that maybe you're thinking about those being flat to down in the previous...

A significant factor, Scott, it continues to be the decline in off-price activities. That will affect our reported wholesale numbers in the second half. Absent that, we're forecasting good continued growth in what we call the regular-priced portion of the business.

Okay. So you wouldn't label it conservative because the off-price is coming out, is that...

I think we can even have nice momentum in the core part of the wholesale business. The decrease in off-price inventory tracks directly to our improved inventory position. So I wouldn't look at our reported number as the exact barometer on the health of the business. I think we're in better shape today than we were a year ago because we're not liquidating inventory.

Okay. And then Jim, historically, you guys had a bit of a traffic problem. When the weather would get very hot, people would stay away from the outlets. You said that your comps quarter-to-date are positive. So are you not seeing that phenomenon at this point?

It's earlier in the year with the shift, traffic kind of came in, in the first quarter, a little bit of a decline in the second quarter as a result of that. We're very happy right now with our overall performance, especially in the brand stores. We've got 209 brand stores right now, Scott, that are close to where mom lives and are convenient. We'd like to think we've positioned these stores in their shopping destination of choice. So as a result, that is helping us to offset what in the past may have been a little bit more of a concern from a traffic perspective. And the hot weather declined, the people going out to our -- of course the people not go out to our outlets. So overall, we feel as though we're able to meet the customers' needs with the incremental locations. We also have a couple of initiatives underway that are assisting with this. We don't talk much about it but we've begun remodeling some of our stores. And interestingly enough, the remodels, which we've got about 33 done to date, are also seeing incremental upside in sales, in large part due to traffic. So we've been able to go into some of our stores, you've been in them. We've moved our cash wrap out of the center of the store to more effectively utilize the overall square footage and picked up capacity and those stores have actually seen an uptick in our traffic. So there -- it ebbs and flows a little bit with the peaks and valleys of the hot weather. But the beauty of this business is that these children basically grow out of their wardrobe every 3 months and they've got to go back out and get more. And with our brand store strategy meets mom's needs. So we're in good shape.

Okay. And then Mike, you mentioned you're holding pricing flat at wholesale right now. Does that assume pricing flat for spring of '13 in your discussions as well? [indiscernible]

That's correct, yes, it will be -- the pricing for spring '13 will be comparable to spring '12.

Okay. Great. And then if I just look at your sort of key core quarter gross margin performance, if you look at the second half of 2009 to the first half of 2010, you did about 39.5%. But to your point, you've got mix in your favor, costs are going to keep coming down even more. Is there any reason to think that you can't be above that or significantly above that?

Well, I think long term we certainly have the potential to get back to that territory, Scott. I don't see any barriers. We have a lot of wind in our sails from a gross margin perspective.

Well to get there, I think you're going to be there in the next couple of quarters. But I mean in terms of exceeding that for 2013, would that be the goal to exceed past peak margins or...

Yes, the goal is to work our way back to that 14%. I think less about gross profit margins. You've got to look at that operating margin because the business is changing. So the thing that it is important to us is how do we work our way back to that 14% operating margin. And I think that's the key metric that we will work hard to show progress with.

Okay. And then let just lastly, sorry, Richard, I know you're investing in the business but the cash flow profile still looks really strong. Any reason why you're not buying stock back here if you think the margins are going to keep going up?

Well, we've considered a range of alternatives for our cash, Scott. I'd say right now we're in a more aggressive period of evaluation of how we put that cash back to work in our business. I'd rather see if we can't accelerate our growth and use it for that purpose. But if we really find ourselves in a position of true excess cash and that's really where the debate is, how do you define excess, then that's not our intention to hold onto it forever.

Okay. So you don't view yourselves as having the excess cash to do that right now?

Well, I think we're still in a period of evaluating it, and there's a number of opportunities that could be potentially attractive for our business. I think international is a good case study where I don't think we've fully scoped how we can take these great brands and take them overseas in a more meaningful way, and we'd like to accelerate that and that likely have some cash implications.

We'll go next to Jim Chartier with Monness, Crespi, Hardt.

Two quick questions. First, what do OshKosh bookings look like for spring next year, excluding the off-price?

I'd say down slightly, Jim.

Okay. And then is there any impact on second half earnings from the acquisition of the sourcing agent?

There is not. It's actually a Q3 transaction for us, and it's very immaterial to the consolidated results of the company. So we've not disclosed terms of that transaction.

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

You mentioned you're keeping your pricing flat in the back half. Is that based on anticipation that competitors will do the same?

Well, I don't know what the competitors are going to do. I know what's right. We've studied the market, we've seen what our competitors are doing, it's based on our best judgment. We're the leader in the market, so I'd like to think what we do, others follow. But it's based on what our pricing strategy has been determined to be, based on what we think will move our brands forward. The reality of it is we don't know what our competitors are going to do in the second half but we have enough history of setting prices that we think we're going to be well-positioned in the market. Our overall focus, make sure we're providing great value to the consumer.

Okay. And given that you're not providing us with the numbers of transactions or the units per transaction at retail, can you at least tell us if the number of transactions were up or down in the quarter?

Number of transactions on the quarter, on a comparable store basis, we're down slightly. But the quality of transaction was much more significant. The stores, in large part due to the quality of product, have done a really nice job in conversion. Conversion is up and our conversion numbers, to begin with, which is obviously, transactions to traffic, our conversion rate is record high in the industry to begin with. On a quarter and year-to-date basis, we've seen nice improvement in that conversion rate overall. So that tells me that the customers are voting very positively around the assortment. We've also -- I think that Mike alluded to it earlier, but I don't think we can underestimate the importance of what improving the overall shopping environment has done. We deliberately exited from our store a number of fixtures, approximately 10 on a large percentage of our stores and created a much more, I think shop-able experience and positive response from the customers has been significant. So all of this has allowed us to focus on more profitable product, more desirable product and the overall quality the transaction has seen upside as a result of it. So while traffic or transaction's down slightly, overall quality of transaction has been meaningfully improved. So that's, I think, the best way to run one of these businesses. It's also helped us to realize a less significant clearance side of the business, which has helped overall averaging at retail. So the initiatives that we put in place have been really, in large part, about an incremental gross margin quality per unit. And they have not only begun paying us back this year, but they've got long-term, sustainable benefits to them.

Lastly, just one strategic kind of question. I know the mall-based store initiative is relatively young. But do these malls you're going into have anchors like JCPenney or Macy's, et cetera, that might already have your product or you're trying to avoid malls with those kind of anchors?

No, we're going to pursue where the best real estate is. So keep in mind, the wholesale component of OshKosh is very small. And so -- that we're not avoiding any locations. The overall objective with this component of our OshKosh initiative is simply to bring the brand closer to the consumer. We've got the brand, got very high marks last year when there was a survey done with consumers of what brands they ranked highest in the outlet centers. OshKosh and Carter's scored very high in quality, value, selection, service. What we're trying to do is just add another dimension to this convenience. And so, no. Some of these centers, some of these malls may have some of our very good wholesale customers. But it's -- I don't think it's going to be an issue whatsoever with respect to OshKosh, given it's becoming one of the smaller components. Still important, but one of the smaller components of the business. I think near term, the focus for OshKosh should still continue to be on the outlet stores. That's where the lion's share of the revenue is. And even as we look out over the next 4 or 5 years, the lion's share of the profitability is going to be coming out of the existing business we have today. The first real mall store we will have will be in the Mall of Georgia, sometime here in September. I would encourage you to come see it. We'll have another one in the Houston Galleria later this year. But it's, relative to the total OshKosh franchise, it is the smallest component of the business near term. I would view it as R&D. We're trying to create a -- make the brand more convenient, elevate the experience, have it be a more special product offering for the consumer and create another growth vehicle for the brand.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Casey, I will turn the conference back over to you for any closing remarks.

Okay. Thank you, all, for joining us this morning. Your questions are very helpful to us. We hope this briefing has been helpful to you. We look forward to updating you on our progress in October. Goodbye.

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