Edgar Filing: CARTERS INC

form10_q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 4, 2009 OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____TO ______

Commission file number:

001-31829

CARTER’S, INC.

(Exact name of Registrant as specified in its charter)

Delaware	13-3912933
(state or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

The Proscenium

1170 Peachtree Street NE, Suite 900

Atlanta, Georgia 30309

(Address of principal executive offices, including zip code)

(404) 745-2700

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [ ] No [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer (X) Accelerated Filer ( ) Non-Accelerated Filer ( ) Smaller Reporting Company ( )

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock		Outstanding Shares at July 30, 2009
Common stock, par value $0.01 per share		56,784,758

CARTER’S, INC.

INDEX

			Page
Part I. Financial Information

	Item 1.	Financial Statements
		Unaudited Condensed Consolidated Balance Sheets as of July 4, 2009 and January 3, 2009	1

		Unaudited Condensed Consolidated Statements of Operations for the three and six-month periods ended July 4, 2009 and June 28, 2008	2

		Unaudited Condensed Consolidated Statements of Cash Flows for the six-month periods ended July 4, 2009 and June 28, 2008	3

		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six-month period ended July 4, 2009	4

		Notes to the Unaudited Condensed Consolidated Financial Statements	5
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
	Item 4.	Controls and Procedures	29

Part II. Other Information

	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
	Item 3.	Defaults upon Senior Securities	35
	Item 4.	Submission of Matters to a Vote of Security Holders	35
	Item 5.	Other Information	35
	Item 6.	Exhibits	35
Signatures			36
Certifications			37

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except for share data)

(unaudited)

	July 4, 2009			January 3, 2009

ASSETS
Current assets:
Cash and cash equivalents	$	173,812		$	162,349
Accounts receivable, net		96,864			106,060
Finished goods inventories, net		256,151			203,486
Prepaid expenses and other current assets		13,538			13,214
Deferred income taxes		25,712			27,982

Total current assets		566,077			513,091
Property, plant, and equipment, net		83,677			86,229
Tradenames		305,733			305,733
Cost in excess of fair value of net assets acquired		136,570			136,570
Deferred debt issuance costs, net		3,031			3,598
Licensing agreements, net		3,432			5,260
Other assets		293			576

Total assets	$	1,098,813		$	1,051,057

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,503		$	3,503
Accounts payable		109,944			79,011
Other current liabilities		42,509			57,613

Total current liabilities		155,956			140,127
Long-term debt		332,772			334,523
Deferred income taxes		106,361			108,989
Other long-term liabilities		43,082			40,822

Total liabilities		638,171			624,461

Commitments and contingencies
Stockholders’ equity:
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at July 4, 2009 and January 3, 2009		--			--
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 56,784,758 and 56,352,111 shares issued and outstanding at July 4, 2009 and January 3, 2009, respectively		568			563
Additional paid-in capital		217,707			211,767
Accumulated other comprehensive loss		(6,914	)		(7,318	)
Retained earnings		249,281			221,584

Total stockholders’ equity		460,642			426,596

Total liabilities and stockholders’ equity	$	1,098,813		$	1,051,057

See accompanying notes to the unaudited condensed consolidated financial statements

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

	For the three-month periods ended						For the six-month periods ended
	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008

Net sales	$	317,909		$	301,675		$	674,696		$	631,647
Cost of goods sold		201,619			202,094			431,059			427,151

Gross profit		116,290			99,581			243,637			204,496
Selling, general, and administrative expenses		99,843			92,207			198,973			184,483
Workforce reduction and facility write-down and closure costs (Note 10)		2,980			--			11,400			--
Executive retirement charges (Note 13)		--			5,325			--			5,325
Royalty income		(7,472	)		(7,203	)		(16,234	)		(15,117	)

Operating income		20,939			9,252			49,498			29,805
Interest expense, net		2,708			4,789			5,883			9,309

Income before income taxes		18,231			4,463			43,615			20,496
Provision for income taxes		6,902			1,684			15,918			6,158

Net income	$	11,329		$	2,779		$	27,697		$	14,338

Basic net income per common share (Note 11)	$	0.20		$	0.05		$	0.49		$	0.25
Diluted net income per common share (Note 11)	$	0.19		$	0.05		$	0.47		$	0.24

See accompanying notes to the unaudited condensed consolidated financial statements

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	For the six-month periods ended
	July 4, 2009			June 28, 2008
Cash flows from operating activities:
Net income	$	27,697		$	14,338
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,990			14,150
Amortization of debt issuance costs		567			567
Non-cash stock-based compensation expense		3,543			5,055
Income tax benefit from exercised stock options		(1,313	)		(60	)
Non-cash asset impairment and facility write-down charges		3,662			--
Deferred income taxes		(401	)		552
Effect of changes in operating assets and liabilities:
Accounts receivable		9,196			17,114
Inventories		(52,665	)		(25,323	)
Prepaid expenses and other assets		(767	)		(7,120	)
Accounts payable and other liabilities		20,492			4,786

Net cash provided by operating activities		27,001			24,059

Cash flows from investing activities:
Capital expenditures		(15,835	)		(7,055	)

Net cash used in investing activities		(15,835	)		(7,055	)

Cash flows from financing activities:
Payments on term loan		(1,751	)		(875	)
Share repurchase		--			(20,059	)
Income tax benefit from exercised stock options		1,313			60
Proceeds from exercise of stock options		735			81

Net cash provided by (used in) financing activities		297			(20,793	)

Net increase (decrease) in cash and cash equivalents		11,463			(3,789	)
Cash and cash equivalents, beginning of period		162,349			49,012

Cash and cash equivalents, end of period	$	173,812		$	45,223

See accompanying notes to the unaudited condensed consolidated financial statements

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except for share data)

(unaudited)

	Common stock		Additional paid-in capital			Accumulated other comprehensive (loss) income			Retained earnings		Total stockholders’ equity

Balance at January 3, 2009	$	563	$	211,767		$	(7,318	)	$	221,584	$	426,596
Exercise of stock options (243,016 shares)		2		733			--			--		735
Income tax benefit from exercised stock options		--		1,313			--			--		1,313
Restricted stock activity		3		(3	)		--			--		--
Stock-based compensation expense		--		3,197			--			--		3,197
Issuance of common stock (33,656 shares)		--		700			--			--		700
Comprehensive income (loss):
Net income		--		--			--			27,697		27,697
Derivative hedging adjustment, net of tax of $214		--		--			404			--		404
Total comprehensive income		--		--			404			27,697		28,101
Balance at July 4, 2009	$	568	$	217,707		$	(6,914	)	$	249,281	$	460,642

See accompanying notes to the unaudited condensed consolidated financial statements

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY:

Carter’s, Inc., and its wholly owned subsidiaries (collectively, the “Company,” “we,” “us,” “its,” and “our”) design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One Year, OshKosh, OshKosh B’Gosh, and related brands. Our products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic retailers, including the mass channel, and for our 271 Carter’s and 168 OshKosh retail stores that market our branded merchandise and other licensed products manufactured by other companies.

NOTE 2 – BASIS OF PREPARATION:

The accompanying unaudited condensed consolidated financial statements comprise the consolidated financial statements of Carter’s, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

In our opinion, the Company’s accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair presentation of our financial position as of July 4, 2009, the results of our operations for the three and six-month periods ended July 4, 2009 and June 28, 2008, cash flows for the six-month periods ended July 4, 2009 and June 28, 2008 and changes in stockholders’ equity for the six-month period ended July 4, 2009. Operating results for the three and six-month periods ended July 4, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2010. Our accompanying condensed consolidated balance sheet as of January 3, 2009 is from our audited consolidated financial statements included in our most recently filed Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q. The accounting policies we follow are set forth in our most recently filed Annual Report on Form 10-K in the notes to our audited consolidated financial statements for the fiscal year ended January 3, 2009.

Our fiscal year ends on the Saturday, in December or January, nearest the last day of December. The accompanying unaudited condensed consolidated financial statements for the second quarter and first half of fiscal 2009 are as of July 4, 2009. The second quarter and first half of fiscal 2008 ended on June 28, 2008.

Certain prior year amounts have been reclassified to facilitate comparability with current year presentation.

Subsequent events were evaluated through July 30, 2009, the date these financials were available to be issued.

NOTE 3 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS:

Cost in excess of fair value of net assets acquired as of July 4, 2009, represents the excess of the cost of the acquisition of Carter’s, Inc. by Berkshire Partners LLC which was consummated on August 15, 2001 over the fair value of the net assets acquired. The Carter’s cost in excess of fair value of net assets acquired is not deductible for tax purposes.

The Carter’s cost in excess of fair value of net assets acquired and Carter’s and OshKosh tradenames are deemed to have indefinite lives and are not being amortized.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 3 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS: (Continued)

The Company’s intangible assets were as follows:

		July 4, 2009						January 3, 2009
(dollars in thousands)	Weighted-average useful life	Gross amount		Accumulated amortization		Net amount		Gross amount		Accumulated amortization		Net amount

Carter’s cost in excess of fair value of net assets acquired	Indefinite	$	136,570	$	--	$	136,570	$	136,570	$	--	$	136,570
Carter’s tradename	Indefinite	$	220,233	$	--	$	220,233	$	220,233	$	--	$	220,233
OshKosh tradename	Indefinite	$	85,500	$	--	$	85,500	$	85,500	$	--	$	85,500
OshKosh licensing agreements	4.7 years	$	19,100	$	15,668	$	3,432	$	19,100	$	13,840	$	5,260
Leasehold interests	4.1 years	$	1,833	$	1,815	$	18	$	1,833	$	1,599	$	234

Amortization expense for intangible assets was approximately $1.0 million for the three-month periods ended July 4, 2009 and June 28, 2008. Amortization expense for intangible assets was approximately $2.0 million and $2.1 million for the six-month periods ended July 4, 2009 and June 28, 2008. Amortization expense for the remainder of fiscal 2009 and fiscal 2010 for the OshKosh licensing agreements and leasehold interests is expected to be as follows:

(dollars in thousands)
Fiscal Year	Estimated amortization Expense

2009 (period from July 5 through January 2, 2010)	$	1,673
2010		1,777

Total	$	3,450

NOTE 4 – INCOME TAXES:

The Company and its subsidiaries file income tax returns in the United States and in various states and local jurisdictions. During the first quarter of fiscal 2009, the Internal Revenue Service completed an income tax audit for fiscal 2006, and began an audit of fiscal 2007. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2005.

During the first half of fiscal 2009, we recognized approximately $1.0 million in tax benefits due to the completion of the Internal Revenue Service audit for fiscal 2006. During the first half of fiscal 2008, we recognized approximately $1.6 million in tax benefits due to the completion of an Internal Revenue Service audit for fiscal 2004 and 2005.

As of July 4, 2009, the Company had gross unrecognized tax benefits of approximately $7.1 million. Substantially all of the Company’s reserve for unrecognized tax benefits as of July 4, 2009, if ultimately recognized, will impact the Company’s effective tax rate in the period settled. The Company has recorded tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductions. Because of deferred tax accounting, changes in the timing of these deductions would not impact the annual effective tax rate, but would accelerate the payment of cash to the taxing authorities.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 4 – INCOME TAXES: (Continued)

Included in the reserves for unrecognized tax benefits are approximately $0.5 million of reserves for which the statute of limitations is expected to expire in the third quarter of fiscal 2009. If these tax benefits are ultimately recognized, such recognition may impact our annual effective tax rate for fiscal 2009 and the effective tax rate in the quarter in which the benefits are recognized. While the Internal Revenue Service has begun its audit of the Company’s income tax return for fiscal 2007, the audit has not proceeded to a point where the Company can reasonably determine the outcome or completion date.

We recognize interest related to unrecognized tax benefits as a component of interest expense and penalties related to unrecognized tax benefits as a component of income tax expense. The Company had approximately $0.6 million of interest accrued as of July 4, 2009.

NOTE 5 – FINANCIAL INSTRUMENTS:

Effective December 30, 2007 (the first day of our 2008 fiscal year), the Company adopted Statement of Financial Accounting Standards (“SFAS”) SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements under SFAS 157 is as follows:

Level 1	- Quoted prices in active markets for identical assets or liabilities

Level 2	- Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3	- Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

The following table summarizes assets and liabilities measured at fair value on a recurring basis at July 4, 2009, as required by SFAS 157:

(dollars in millions)	Level 1		Level 2		Level 3

Assets
Investments	$	--	$	130.0	$	--
Assets held for sale	$	--	$	2.8	$	--

Liabilities
Interest rate hedge agreements	$	--	$	2.0	$	--

At July 4, 2009, we had approximately $130.0 million invested in two Dreyfus Cash Management Funds, which are included in cash and cash equivalents on the accompanying unaudited condensed consolidated balance sheet. These funds consisted of the Dreyfus Treasury Prime Cash Management fund ($87.9 million), which invests only in U.S. Treasury Bills or U.S. Treasury Notes, and the Dreyfus Tax Exempt Cash Management fund ($42.1 million), which invests in short-term, high quality municipal obligations that provide income exempt from federal taxes.

At July 4, 2009, the carrying value of the Company’s White House, Tennessee distribution facility held for sale was estimated to be $2.8 million. As discussed in more detail in Note 10, during the second quarter of fiscal 2009, the Company wrote down the carrying value of this property by approximately $0.7 million to reflect the decrease in the fair market value as evidenced by recent negotiations to sell the property.

Our senior credit facility requires us to hedge at least 25% of our variable rate debt under this facility. As of July 4, 2009, approximately $147.1 million of our $336.3 million of outstanding debt was hedged under interest rate swap agreements.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 5 – FINANCIAL INSTRUMENTS: (Continued)

On September 22, 2005, we entered into an interest rate swap agreement to receive floating interest and pay fixed interest. This interest rate swap agreement is designated as a cash flow hedge of the variable interest payments on a portion of our term loan debt. The interest rate swap agreement matures on July 30, 2010. As of July 4, 2009, approximately $47.1 million of our outstanding term loan debt was hedged under this interest rate swap agreement.

On May 25, 2006, we entered into an interest rate collar agreement (the “collar”) with a floor of 4.3% and a ceiling of 5.5%. The collar covered $100 million of our variable rate term loan debt and was designated as a cash flow hedge of the variable interest payments on such debt. The collar matured on January 31, 2009.

On January 30, 2009, we entered into two interest rate swap agreements in order to limit our exposure to higher interest rates. Each interest rate swap agreement covers $50.0 million of our variable rate term loan debt, to receive floating interest and pay fixed interest. We continue to be in compliance with the 25% hedging requirement under our senior credit facility. These interest rate swap agreements are designated as cash flow hedges of the variable interest payments on a portion of our variable rate term loan debt and each mature in January 2010.

Our interest rate swap agreements are traded in the over-the-counter market. Fair values are based on quoted market prices for similar assets or liabilities or determined using inputs that use as their basis readily observable market data that are actively quoted and can be validated through external sources, including third-party pricing services, brokers, and market transactions.

The fair value of our derivative instruments in our accompanying unaudited condensed consolidated balance sheet as of July 4, 2009 was as follows:

	Asset Derivatives			Liability Derivatives

(dollars in millions)	Balance sheet location	Fair value		Balance sheet location	Fair value

Interest rate hedge agreements	Prepaid expenses and other current assets		--	Other current liabilities	$	2.0

The effect of derivative instruments designated as cash flow hedges on our accompanying unaudited condensed consolidated financial statements were as follows:

		For the three-month period ended July 4, 2009		For the six-month period ended July 4, 2009
	(dollars in thousands)	Amount of gain (loss) recognized in accumulated other comprehensive income (loss) on effective hedges (1)	Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense	Amount of gain (loss) recognized in accumulated other comprehensive income (loss) on effective hedges (1)	Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense (2)

	Interest rate hedge agreements	$ 144	$ --	$ (3)	$ (407)

(1) Amount recognized in accumulated other comprehensive (loss) income, net of tax of $85,000 and net of tax benefit of $2,000 for the three and six-month periods ended July 4, 2009, respectively.
(2) Settlement of interest rate collar agreement, net of tax of $216,000.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 6 – EMPLOYEE BENEFIT PLANS:

Under a defined benefit plan frozen in 1991, we offer a comprehensive post-retirement medical plan to current and certain future retirees and their spouses until they become eligible for Medicare or a Medicare Supplement Plan. We also offer life insurance to current and certain future retirees. Employee contributions are required as a condition of participation for both medical benefits and life insurance and our liabilities are net of these expected employee contributions. See Note 7 “Employee Benefit Plans” to our audited consolidated financial statements in our most recently filed Annual Report on Form 10-K for further information.

The components of post-retirement benefit expense charged to operations are as follows:

	For the three-month periods ended					For the six-month periods ended
(dollars in thousands)	July 4, 2009			June 28, 2008		July 4, 2009			June 28, 2008

Service cost – benefits attributed to service during the period	$	23		$	26	$	46		$	53
Interest cost on accumulated post-retirement benefit obligation		113			132		226			263
Amortization net actuarial gain		(7	)		--		(14	)		--
Total net periodic post-retirement benefit cost	$	129		$	158	$	258		$	316

The component of pension expense charged to operations is as follows:

	For the three-month periods ended				For the six-month periods ended
(dollars in thousands)	July 4, 2009		June 28, 2008		July 4, 2009		June 28, 2008

Interest cost on accumulated pension benefit obligation	$	13	$	13	$	26	$	26

Under a defined benefit pension plan frozen as of December 31, 2005, certain current and former employees of OshKosh are eligible to receive benefits. The net periodic pension benefit associated with this pension plan and included in the statement of operations was comprised of:

	For the three-month periods ended						For the six-month periods ended
(dollars in thousands)	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008

Interest cost on accumulated pension benefit obligation	$	568		$	562		$	1,135		$	1,124
Expected return on assets		(650	)		(944	)		(1,300	)		(1,887	)
Amortization of actuarial loss (gain)		102			(19	)		205			(38	)
Total net periodic pension expense (benefit)	$	20		$	(401	)	$	40		$	(801	)

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 7 – COMMON STOCK:

On February 16, 2007, the Company’s Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to purchase up to $100 million of its outstanding common shares. Such repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise. This program has no time limit. The timing and amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions, share price, and other factors.

During the first half of fiscal 2009, the Company did not repurchase any shares of its common stock. During the second quarter and first half of fiscal 2008, the Company repurchased and retired approximately 645,727 and 1,320,085 shares of its common stock at an average price of $15.55 and $15.20 per share, respectively. Since inception of the program and through July 4, 2009, the Company repurchased and retired approximately 4,599,580 shares, or approximately $91.1 million, of its common stock at an average price of $19.81 per share, leaving approximately $8.9 million available for repurchase under the plan. We have reduced common stock by the par value of such shares repurchased and have deducted the remaining excess repurchase price over par value from additional paid-in capital.

During the second quarter and first half of fiscal 2009, the Company issued 33,656 shares of common stock at a fair market value of $20.80 to its non-management board members. In connection with this issuance, we recognized approximately $700,000 in stock-based compensation expense. During the second quarter and first half of fiscal 2008, the Company issued 43,386 shares of common stock at a fair market value of $14.48 to its non-management board members. In connection with this issuance, we recognized approximately $630,000 in stock-based compensation expense. We received no proceeds from the issuance of these shares.

NOTE 8 – STOCK-BASED COMPENSATION:

We account for stock-based compensation expense in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment.” The fair value of time-based or performance-based stock option grants are estimated on the date of grant using the Black-Scholes option pricing method with the following weighted-average assumptions used for grants issued during the six-month period ended July 4, 2009.

	Assumptions

Volatility		35.83	%
Risk-free interest rate		2.50	%
Expected term (years)		7
Dividend yield		--

The fair value of restricted stock is determined based on the quoted closing price of our common stock on the date of grant.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 8 – STOCK-BASED COMPENSATION: (Continued)

The following table summarizes our stock option and restricted stock activity during the six-month period ended July 4, 2009:

	Time-based stock options			Performance-based stock options			Retained stock options			Restricted stock

Outstanding, January 3, 2009		4,733,080			220,000			113,514			444,589

Granted		448,000			--			--			208,500
Exercised		(129,502	)		--			(113,514	)		--
Vested restricted stock		--			--			--			(132,256	)
Forfeited		(85,600	)		(20,000	)		--			(52,525	)
Expired		(36,000	)		--			--			--

Outstanding, July 4, 2009		4,929,978			200,000			--			468,308

Exercisable, July 4, 2009		3,796,558			--			--			--

During the six-month period ended July 4, 2009, we granted 448,000 time-based stock options with a weighted-average Black-Scholes fair value of $7.61 and a weighted-average exercise price of $18.08. In connection with these grants, we recognized approximately $250,000 in stock-based compensation expense.

During the six-month period ended July 4, 2009, we granted 208,500 shares of restricted stock to employees with a weighted-average fair value on the date of grant of $18.08. In connection with these grants, we recognized approximately $275,000 in stock-based compensation expense.

As a result of the retirement of an executive officer during the second quarter of fiscal 2008, the Company recognized approximately $2.2 million of stock-based compensation expense as a result of the accelerated vesting of 400,000 performance-based stock options (see Note 13, “Executive Retirement Charges”).

Unrecognized stock-based compensation expense related to outstanding unvested stock options and unvested restricted stock awards is expected to be recorded as follows:

(dollars in thousands)	Time-based stock options		Restricted stock		Total

2009 (period from July 5 through January 2, 2010)	$	1,438	$	1,407	$	2,845
2010		2,502		2,466		4,968
2011		1,938		2,002		3,940
2012		1,059		1,180		2,239
Total	$	6,937	$	7,055	$	13,992

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 9 – SEGMENT INFORMATION:

We report segment information in accordance with the provisions of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which requires segment information to be disclosed based upon a “management approach.” The management approach refers to the internal reporting that is used by management for making operating decisions and assessing the performance of our reportable segments. We report our corporate expenses, workforce reduction, and facility write-down and closure costs separately as they are not included in the internal measures of segment operating performance used by the Company in order to measure the underlying performance of our reportable segments.

The table below presents certain segment information for the periods indicated:

	For the three-month periods ended												For the six-month periods ended
(dollars in thousands)	July 4, 2009			% of Total			June 28, 2008			% of Total			July 4, 2009			% of Total			June 28, 2008			% of Total
Net sales:

Carter’s:
Wholesale	$	100,088			31.5	%	$	94,322			31.3	%	$	222,985			33.0	%	$	212,154			33.6	%
Retail		110,127			34.6	%		92,656			30.7	%		212,057			31.4	%		179,058			28.4	%
Mass Channel		44,216			13.9	%		51,054			16.9	%		102,961			15.3	%		113,978			18.0	%
Carter’s net sales		254,431			80.0	%		238,032			78.9	%		538,003			79.7	%		505,190			80.0	%

OshKosh:
Retail		52,160			16.4	%		49,883			16.5	%		103,988			15.4	%		94,248			14.9	%
Wholesale		11,318			3.6	%		13,760			4.6	%		32,705			4.9	%		32,209			5.1	%
OshKosh net sales		63,478			20.0	%		63,643			21.1	%		136,693			20.3	%		126,457			20.0	%

Total net sales	$	317,909			100.0	%	$	301,675			100.0	%	$	674,696			100.0	%	$	631,647			100.0	%

Operating income (loss):				% of segment net sales						% of segment net sales						% of segment net sales						% of segment net sales

Carter’s:
Wholesale	$	12,352			12.3	%	$	12,663			13.4	%	$	36,531			16.4	%	$	34,222			16.1	%
Retail		16,575			15.1	%		10,358			11.2	%		33,163			15.6	%		21,800			12.2	%
Mass Channel		8,639			19.5	%		7,123			14.0	%		16,674			16.2	%		13,865			12.2	%

Carter’s operating income		37,566			14.8	%		30,144			12.7	%		86,368			16.1	%		69,887			13.8	%

OshKosh:
Retail		786			1.5	%		(2,646	)		(5.3	%)		455			0.4	%		(9,379	)		(10.0	%)
Wholesale		(2,318	)		(20.5	%)		(4,312	)		(31.3	%)		(2,274	)		(7.0	%)		(6,836	)		(21.2	%)
Mass Channel (a)		438			--			628			--			1,144			--			1,159			--

OshKosh operating loss		(1,094	)		(1.7	%)		(6,330	)		(9.9	%)		(675	)		(0.5	%)		(15,056	)		(11.9	%)

Segment operating income		36,472			11.5	%		23,814			7.9	%		85,693			12.7	%		54,831			8.7	%

Corporate expenses (b)		(11,910	)		(3.7	%)		(9,237	)		(3.1	%)		(23,830	)		(3.5	%)		(19,701	)		(3.1	%)
Workforce reduction and facility write-down and closure costs (c)		(3,623	)		(1.0	%)		--			--			(12,365	)		(1.7	%)		--			--
Executive retirement charges (d)		--			--			(5,325	)		(1.7	%)		--			--			(5,325	)		(0.9	%)

Net corporate expenses		(15,533	)		(4.9	%)		(14,562	)		(4.8	%)		(36,195	)		(5.4	%)		(25,026	)		(4.0	%)

Total operating income	$	20,939			6.6	%	$	9,252			3.1	%	$	49,498			7.3	%	$	29,805			4.7	%

(a)	OshKosh mass channel consists of a licensing agreement with Target Stores. Operating income consists of royalty income, net of related expenses.

(b)	Corporate expenses generally include expenses related to executive management, finance, stock-based compensation, building occupancy, information technology, certain legal fees, severance and relocation, incentive compensation, consulting, and audit fees.

(c)

Includes closure costs associated with our Barnesville, Georgia distribution facility including severance, asset impairment charges, other closure costs, and accelerated depreciation, asset impairment charges related to our Oshkosh, Wisconsin facility, write-down of our White House, Tennessee facility held for sale, and severance and other benefits related to the corporate workforce reduction (see Note 10).

(d)	Charges associated with an executive officer’s retirement (see Note 13).

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 10 – WORKFORCE REDUCTION AND FACILITY WRITE-DOWN AND CLOSURE COSTS:

Corporate Workforce Reduction

On April 21, 2009, the Company announced to affected employees a plan to reduce its corporate workforce (defined as excluding retail district managers, hourly retail store employees, and distribution center employees). Approximately 150 employees were affected under the plan. The plan includes consolidating the majority of our operations performed in our Oshkosh, Wisconsin office into other Company locations. This consolidation will likely result in the addition of resources in our other locations.

As a result of this corporate workforce reduction, we recorded severance charges and other one-time benefits to eligible employees of $2.2 million in the second quarter of fiscal 2009. During the first half of fiscal 2009, we recorded charges of $7.3 million consisting of $5.5 million in severance charges and other benefits, and approximately $1.8 million in asset impairment charges related to the closure of our Oshkosh, Wisconsin office. The majority of the severance payments will be paid through the end of the year.

The following table summarizes restructuring reserves related to the corporate workforce reduction which are included in other current liabilities on the accompanying unaudited condensed consolidated balance sheet:

(dollars in thousands)	Severance and other one-time benefits

Balance at April 4, 2009	$	3,300
Provision		2,200
Payments		(900	)
Balance at July 4, 2009	$	4,600

Barnesville Distribution Facility Closure

On April 2, 2009, the Company announced to affected employees a plan to close its Barnesville, Georgia distribution center. Approximately 210 employees were affected by this closure. Operations at the Barnesville facility ceased on June 1, 2009.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” under a held and used model, it was determined that the distribution facility assets became impaired during March 2009, when it became “more likely than not” that the expected life of the Barnesville, Georgia distribution facility would be significantly shortened. Accordingly, we wrote down the assets to their estimated recoverable fair value in March 2009. The adjusted asset values will be subject to accelerated depreciation over their remaining estimated useful life.

In conjunction with the plan to close the Barnesville, Georgia distribution center, the Company recorded accelerated depreciation charges (included in selling, general, and administrative expenses) of approximately $0.7 million in the second quarter of fiscal 2009 and charges of $4.3 million during the first half of fiscal 2009, consisting of severance of $1.7 million, asset impairment charges of $1.1 million related to the write-down of the related land, building, and equipment, $1.0 million of accelerated depreciation (included in selling, general, and administrative expenses), and $0.5 million of other closure costs.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 10 – WORKFORCE REDUCTION AND FACILITY WRITE-DOWN AND CLOSURE COSTS: (Continued)

The following table summarizes restructuring reserves related to the closure of the Barnesville, Georgia distribution center which are included in other current liabilities on the accompanying unaudited condensed consolidated balance sheet:

(dollars in thousands)	Severance			Other closure costs		Total

Balance at April 4, 2009	$	1,700		$	500	$	2,200
Provision		--			--		--
Payments		(700	)		--		(700	)
Balance at July 4, 2009	$	1,000		$	500	$	1,500

White House Distribution Facility

During the second quarter of fiscal 2009, the Company wrote down the carrying value of its White House, Tennessee distribution facility held for sale by approximately $0.7 million to reflect the decrease in the fair market value as evidenced by recent negotiations to sell the facility. The carrying value of the facility as of July 4, 2009 is $2.8 million (classified as an asset held for sale within prepaid expenses and other current assets on the accompanying unaudited condensed consolidated balance sheet) to reflect the new anticipated selling price less costs to sell.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 11 – EARNINGS PER SHARE:

Basic net income per share is calculated by dividing net income for the period by the weighted-average common shares outstanding for the period. Diluted net income per share includes the effect of dilutive instruments, such as stock options and restricted stock, and uses the average share price for the period in determining the number of shares that are to be added to the weighted-average number of shares outstanding. The table below summarizes the shares from these potentially dilutive securities, calculated using the treasury stock method.

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:

	For the three-month periods ended						For the six-month periods ended
	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008

Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		56,220,522			56,156,795			56,089,674			56,685,914
Dilutive effect of unvested restricted stock		122,781			67,533			116,583			72,352
Dilutive effect of stock options		1,787,646			1,939,377			1,727,956			1,983,387
Diluted number of common and common equivalent shares outstanding		58,130,949			58,163,705			57,934,213			58,741,653

Basic net income per common share:
Net income	$	11,329,000		$	2,779,000		$	27,697,000		$	14,338,000
Income allocated to participating securities		(93,589	)		(17,376	)		(229,335	)		(88,819	)
Net income available to common shareholders	$	11,235,411		$	2,761,624		$	27,467,665		$	14,249,181

Basic net income per common share	$	0.20		$	0.05		$	0.49		$	0.25

Diluted net income per common share:
Net income	$	11,329,000		$	2,779,000		$	27,697,000		$	14,338,000
Income allocated to participating securities		(90,728	)		(16,800	)		(222,536	)		(85,834	)
Net income available to common shareholders	$	11,238,272		$	2,762,200		$	27,474,464		$	14,252,166

Diluted net income per common share	$	0.19		$	0.05		$	0.47		$	0.24

For the three and six-month periods ended July 4, 2009, anti-dilutive shares of 1,166,050 and 1,290,050, respectively, and performance-based stock options of 200,000, were excluded from the computations of diluted earnings per share. For the three and six-month periods ended June 28, 2008, anti-dilutive shares of 1,052,135 and 991,385, respectively, and performance-based stock options of 620,000 were excluded from the computations of diluted earnings per share.

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS:

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-2 (“FSP 157-2”), which delays the effective date of SFAS No. 157, "Fair Value Measurements," for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Nonfinancial assets and nonfinancial liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This FSP defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of FSP 157-2. The Company has adopted FSP 157-2 effective January 4, 2009 and has included the required disclosures in Note 5.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS: (Continued)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133,” which requires enhanced disclosures on the effect of derivatives on a Company’s financial statements. These disclosures were required for the Company beginning with the first quarter of fiscal 2009 consolidated financial statements. The Company has adopted the provisions of this statement effective April 4, 2009 and has included the required disclosures within Note 5.

In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior period earnings per share data presented shall be adjusted retrospectively. The Company has adopted the provisions of this standard effective January 4, 2009 and has included the required disclosures in Note 11.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”), to provide guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP is effective for fiscal years ending after December 15, 2009. We are currently evaluating the impact that FSP FAS 132(R)-1 will have on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The Company has adopted the provisions of this FSP effective July 4, 2009 and has included the required disclosures in Note 5.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 applies prospectively to both interim and annual financial periods ending after June 15, 2009. The Company has adopted the provisions of this statement effective July 4, 2009 and has included the required disclosures in Note 2.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162” (“SFAS 168”). The FASB Accounting Standards CodificationTM (“Codification”) will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative under GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will amend our disclosures accordingly beginning with our Quarterly Report on Form 10-Q for the three and nine-month periods ending October 3, 2009.

NOTE 13 – EXECUTIVE RETIREMENT CHARGES:

On June 11, 2008, the Company announced the retirement of an executive officer. In connection with this retirement, the Company recorded charges during the second quarter and first half of fiscal 2008 of $5.3 million, $3.1 million of which related to the present value of severance and benefit obligations, and $2.2 million of which related to the accelerated vesting of stock options.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our results of operations and current financial position. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this quarterly report.

Our fiscal year ends on the Saturday, in December or January, nearest the last day of December. The accompanying unaudited condensed consolidated financial statements for the second quarter and first half of fiscal 2009 reflect our financial position as of July 4, 2009. The second quarter and first half of fiscal 2008 ended on June 28, 2008.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated (i) selected statement of operations data expressed as a percentage of consolidated net sales and (ii) the number of retail stores open at the end of each period:

	Three-month periods ended						Six-month periods ended
	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008

Wholesale sales:
Carter’s		31.5	%		31.3	%		33.0	%		33.6	%
OshKosh		3.6			4.6			4.9			5.1
Total wholesale sales		35.1			35.9			37.9			38.7

Retail store sales:
Carter’s		34.6			30.7			31.4			28.4
OshKosh		16.4			16.5			15.4			14.9
Total retail store sales		51.0			47.2			46.8			43.3

Mass channel sales		13.9			16.9			15.3			18.0

Consolidated net sales		100.0			100.0			100.0			100.0
Cost of goods sold		63.4			67.0			63.9			67.6

Gross profit		36.6			33.0			36.1			32.4
Selling, general, and administrative expenses		31.4			30.6			29.5			29.2
Workforce reduction and facility write-down and closure costs		1.0			--			1.7			--
Executive retirement charges		--			1.7			--			0.9
Royalty income		(2.4	)		(2.4	)		(2.4	)		(2.4	)

Operating income		6.6			3.1			7.3			4.7
Interest expense, net		0.9			1.6			0.8			1.5

Income before income taxes		5.7			1.5			6.5			3.2
Provision for income taxes		2.1			0.6			2.4			0.9

Net income		3.6	%		0.9	%		4.1	%		2.3	%

Number of retail stores at end of period:
Carter’s		271			231			271			231
OshKosh		168			163			168			163
Total		439			394			439			394

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Three and six-month periods ended July 4, 2009 compared to the three and six-month periods ended June 28, 2008

CONSOLIDATED NET SALES

In the second quarter of fiscal 2009, consolidated net sales increased $16.2 million, or 5.4%, to $317.9 million and reflect growth in our Carter’s brand wholesale and retail store segments and our OshKosh brand retail store segment. In the first half of fiscal 2009, consolidated net sales increased $43.0 million, or 6.8%, to $674.7 million and reflect growth in our Carter’s and OshKosh brand wholesale and retail store segments.

	For the three-month periods ended										For the six-month periods ended
(dollars in thousands)	July 4, 2009		% of Total			June 28, 2008		% of Total			July 4, 2009		% of Total			June 28, 2008		% of Total

Net sales:
Wholesale-Carter’s	$	100,088		31.5	%	$	94,322		31.3	%	$	222,985		33.0	%	$	212,154		33.6	%
Wholesale-OshKosh		11,318		3.6	%		13,760		4.6	%		32,705		4.9	%		32,209		5.1	%
Retail-Carter’s		110,127		34.6	%		92,656		30.7	%		212,057		31.4	%		179,058		28.4	%
Retail-OshKosh		52,160		16.4	%		49,883		16.5	%		103,988		15.4	%		94,248		14.9	%
Mass Channel-Carter’s		44,216		13.9	%		51,054		16.9	%		102,961		15.3	%		113,978		18.0	%
Total net sales	$	317,909		100.0	%	$	301,675		100.0	%	$	674,696		100.0	%	$	631,647		100.0	%

CARTER’S WHOLESALE SALES

Carter’s brand wholesale sales increased $5.8 million, or 6.1%, in the second quarter of fiscal 2009 to $100.1 million. The increase in Carter’s brand wholesale sales was driven by an 11% increase in units shipped, partially offset by a 4% decrease in average price per unit, as compared to the second quarter of fiscal 2008.

Carter’s brand wholesale sales increased $10.8 million, or 5.1%, in the first half of fiscal 2009 to $223.0 million. The increase in Carter’s brand wholesale sales was driven by a 4% increase in units shipped and a 1% increase in average price per unit, as compared to the first half of fiscal 2008.

The increase in units shipped during the second quarter and first half of fiscal 2009 was primarily driven by increased off-price sales and strong over-the-counter performance at our wholesale customers. The decrease in average price per unit during the second quarter of fiscal 2009 reflects a higher mix of off-price sales which generally carry lower selling prices and higher provisions for markdown support.

OSHKOSH WHOLESALE SALES

OshKosh brand wholesale sales decreased $2.4 million, or 17.7%, in the second quarter of fiscal 2009 to $11.3 million and reflects a 30% decrease in units shipped partially offset by an 18% increase in average price per unit as compared to the second quarter of fiscal 2008.

OshKosh brand wholesale sales increased $0.5 million, or 1.5%, in the first half of fiscal 2009 to $32.7 million and reflects a 12% increase in average price per unit partially offset by a 9% decrease in units shipped as compared to the first half of fiscal 2008.

The decrease in units shipped during the second quarter and first half of fiscal 2009 relate primarily to a reduction in off-price shipments. The increase in average price per unit during the second quarter and first half of fiscal 2009 reflect reduced levels of off-price shipments and lower levels of customer support.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

MASS CHANNEL SALES

Mass channel sales decreased $6.8 million, or 13.4%, in the second quarter of fiscal 2009 to $44.2 million. The decrease was due to an $8.6 million, or 28.9%, decrease in sales of our Child of Mine brand to Walmart, partially offset by a $1.8 million, or 8.5%, increase in sales of our Just One Year brand to Target. The decrease in Child of Mine brand sales resulted from a reduction in floor space. The increase in Just One Year brand sales was driven largely by improved product performance and timing of product launches as compared to similar launches last year.

Mass channel sales decreased $11.0 million, or 9.7%, in the first half of fiscal 2009 to $103.0 million. The decrease was due to an $11.7 million, or 17.9%, decrease in sales of our Child of Mine brand to Walmart, partially offset by a $0.6 million, or 1.3%, increase in sales of our Just One Year brand to Target. The decrease in Child of Mine brand sales resulted primarily from a reduction in floor space. The increase in sales of our Just One Year brand was due to improved product performance and new door growth. We anticipate our mass channel sales could decline approximately 10% in fiscal 2009 as compared to fiscal 2008, primarily due to lower sales of our Child of Mine brand due to strategic assortment changes made be Walmart.

CARTER’S RETAIL STORES

Carter’s retail store sales increased $17.5 million, or 18.9%, in the second quarter of fiscal 2009 to $110.1 million. The increase was driven by incremental sales of $10.9 million generated by new store openings and a comparable store sales increase of 8.1%, or $6.3 million. On a comparable store basis, transactions increased 8.0%, units per transaction increased 3.3%, and average prices decreased 3.1% as compared to the second quarter of fiscal 2008.

Carter’s retail store sales increased $33.0 million, or 18.4%, in the first half of fiscal 2009 to $212.1 million. The increase was driven by incremental sales of $19.2 million generated by new store openings and a comparable store sales increase of 6.7%, or $13.7 million. On a comparable store basis, transactions increased 5.3%, units per transaction increased 1.6%, and average prices decreased 0.3% as compared to the first half of fiscal 2008.

We attribute the increases in transactions during the second quarter and first half of fiscal 2009 to strong product performance in all product categories, changes in our merchandising strategies including a higher mix of opening price point items (high-volume, entry level basic products), a better assortment of in-season merchandise on the floor, in-store product presentation, and merchandising and marketing efforts. The decrease in average prices during the second quarter and first half of fiscal 2009 were due to our new opening price point strategy.

The Company’s comparable store sales calculations include sales for all stores that were open during the comparable fiscal period, including remodeled stores and certain relocated stores. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store calculation. If a store relocates to another center, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the period are included in the comparable store sales calculation up to the date of closing.

There were a total of 271 Carter’s retail stores as of July 4, 2009. During the second quarter of fiscal 2009, we opened 11 Carter’s retail stores. During the first half of fiscal 2009, we opened 18 Carter’s retail stores. In total, we plan to open 25 Carter's retail stores and close one Carter’s retail store during fiscal 2009.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

OSHKOSH RETAIL STORES

OshKosh retail store sales increased $2.3 million, or 4.6%, in the second quarter of fiscal 2009 to $52.2 million. The increase reflects a comparable store sales increase of 2.6%, or $1.1 million, and incremental sales of $1.1 million generated by new store openings, partially offset by the impact of store closings of $0.2 million. On a comparable store basis, transactions increased 7.2% and average prices decreased 2.5%. We attribute the increase in transactions to strong product performance, our new opening price point strategy, and a better assortment of in-season merchandise on the floor. The decrease in average prices is attributable to our new opening price point strategy.

OshKosh retail store sales increased $9.7 million, or 10.3%, in the first half of fiscal 2009 to $104.0 million. The increase reflects a comparable store sales increase of 6.7%, or $7.9 million, and incremental sales of $2.0 million generated by new store openings, partially offset by the impact of store closings of $0.3 million. On a comparable store basis, transactions increased 6.2% and average prices increased 3.2%. We attribute the increase in transactions to strong product performance, our new opening price point strategy, and improved in-store product presentation. The increase in average prices was driven by more significant prior year markdowns to clear excess goods in the first quarter of fiscal 2008.

There were a total of 168 OshKosh retail stores as of July 4, 2009. During the second quarter and first half of fiscal 2009, we opened three OshKosh retail stores. We plan to open six OshKosh retail stores and close one OshKosh retail store during fiscal 2009.

GROSS PROFIT

Gross profit increased $16.7 million, or 16.8%, to $116.3 million in the second quarter of fiscal 2009. Gross profit as a percentage of net sales was 36.6% in the second quarter of fiscal 2009 as compared to 33.0% in the second quarter of fiscal 2008. Our gross profit increased $39.1 million, or 19.1%, to $243.6 million in the first half of fiscal 2009. Gross profit as a percentage of net sales was 36.1% in the first half of fiscal 2009 as compared to 32.4% in the first half of fiscal 2008.

These increases in gross profit as a percentage of net sales reflect:

(i)	a greater mix of consolidated retail sales which, on average, have a higher gross margin than sales in our wholesale and mass channel segments;

(ii)	lower levels of excess inventory charges related to strong demand from off-price accounts, more favorable loss rates, and improved inventory management; and

(iii)

growth in OshKosh wholesale gross margin due to lower levels of customer support.

The Company includes distribution costs in its selling, general, and administrative expenses. Accordingly, the Company’s gross profit may not be comparable to other companies that include such distribution costs in their cost of goods sold.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES