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 JUNE 28, 2008 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 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 August 6, 2008
Common stock, par value $0.01 per share		56,153,663

CARTER’S, INC.

INDEX

			Page
Part I. Financial Information

	Item 1.	Financial Statements
		Unaudited Condensed Consolidated Balance Sheets as of June 28, 2008 and December 29, 2007	3
		Unaudited Condensed Consolidated Statements of Operations for the three and six-month periods ended June 28, 2008 and June 30, 2007	4
		Unaudited Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 28, 2008 and June 30, 2007	5
		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six-month period ended June 28, 2008	6
		Notes to the Unaudited Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
	Item 4.	Controls and Procedures	33

Part II. Other Information

	Item 1.	Legal Proceedings	34
	Item 1A.	Risk Factors	34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 3.	Defaults upon Senior Securities	39
	Item 4.	Submission of Matters to a Vote of Security Holders	40
	Item 5.	Other Information	40
	Item 6.	Exhibits	40
Signatures			41
Certifications			42

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except for share data)

(unaudited)

	June 28, 2008		December 29, 2007

ASSETS
Current assets:
Cash and cash equivalents	$	45,223	$	49,012
Accounts receivable, net		102,593		119,707
Finished goods inventories, net		250,817		225,494
Prepaid expenses and other current assets		15,464		9,093
Assets held for sale		6,109		6,109
Deferred income taxes		23,727		24,234

Total current assets		443,933		433,649
Property, plant, and equipment, net		70,014		75,053
Tradenames		306,733		308,233
Cost in excess of fair value of net assets acquired		136,570		136,570
Deferred debt issuance costs, net		4,176		4,743
Licensing agreements, net		7,087		8,915
Other assets		8,021		7,505

Total assets	$	976,534	$	974,668

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	4,379	$	3,503
Accounts payable		73,822		56,589
Other current liabilities		36,803		46,666

Total current liabilities		115,004		106,758
Long-term debt		336,275		338,026
Deferred income taxes		113,316		113,706
Other long-term liabilities		30,979		34,049

Total liabilities		595,574		592,539

Commitments and contingencies
Stockholders’ equity:
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at June 28, 2008 and December 29, 2007		--		--
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 56,422,592 and 57,663,315 shares issued and outstanding at June 28, 2008 and December 29, 2007, respectively		564		576
Additional paid-in capital		217,741		232,356
Accumulated other comprehensive income		1,791		2,671
Retained earnings		160,864		146,526

Total stockholders’ equity		380,960		382,129

Total liabilities and stockholders’ equity	$	976,534	$	974,668

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
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007

Net sales	$	301,675		$	287,775		$	631,647		$	607,903
Cost of goods sold		202,094			192,357			427,151			406,105

Gross profit		99,581			95,418			204,496			201,798
Selling, general, and administrative expenses		92,207			84,635			184,483			172,881
Intangible asset impairment (Note 3)		--			154,886			--			154,886
Executive retirement charges (Note 13)		5,325			--			5,325			--
Closure costs (Note 10)		--			470			--			4,977
Royalty income		(7,203	)		(6,700	)		(15,117	)		(14,245	)

Operating income (loss)		9,252			(137,873	)		29,805			(116,701	)
Interest expense, net		4,789			5,704			9,309			11,432

Income (loss) before income taxes		4,463			(143,577	)		20,496			(128,133	)
Provision for (benefit from) income taxes		1,684			(128	)		6,158			5,705

Net income (loss)	$	2,779		$	(143,449	)	$	14,338		$	(133,838	)

Basic net income (loss) per common share	$	0.05		$	(2.48	)	$	0.25		$	(2.30	)
Diluted net income (loss) per common share	$	0.05		$	(2.48	)	$	0.24		$	(2.30	)
Basic weighted-average number of shares outstanding		56,156,795			57,838,075			56,685,914			58,142,782
Diluted weighted-average number of shares outstanding		58,163,705			57,838,075			58,741,653			58,142,782

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
	June 28, 2008			June 30, 2007
Cash flows from operating activities:
Net income (loss)	$	14,338		$	(133,838	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		14,150			16,282
Amortization of debt issuance costs		567			583
Non-cash intangible asset impairment charges		--			154,886
Non-cash stock-based compensation expense		5,055			3,057
Income tax benefit from exercised stock options		(60	)		(7,038	)
Loss on sale of property, plant, and equipment		5			386
Deferred income taxes		552			(7,280	)
Non-cash closure costs		--			2,450
Effect of changes in operating assets and liabilities:
Accounts receivable		17,114			6,081
Inventories		(25,323	)		(38,000	)
Prepaid expenses and other assets		(7,120	)		(6,565	)
Accounts payable and other liabilities		4,781			686

Net cash provided by (used in) operating activities		24,059			(8,310	)

Cash flows from investing activities:
Capital expenditures		(7,055	)		(7,667	)
Proceeds from sale of property, plant, and equipment		--			53

Net cash used in investing activities		(7,055	)		(7,614	)

Cash flows from financing activities:
Payments on term loan		(875	)		(1,752	)
Share repurchase (Note 7)		(20,059	)		(40,012	)
Income tax benefit from exercised stock options		60			7,038
Proceeds from exercise of stock options		81			1,953

Net cash used in financing activities		(20,793	)		(32,773	)

Net decrease in cash and cash equivalents		(3,789	)		(48,697	)
Cash and cash equivalents, beginning of period		49,012			68,545

Cash and cash equivalents, end of period	$	45,223		$	19,848

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 income (loss)			Retained earnings		Total stockholders’ equity

Balance at December 29, 2007	$	576		$	232,356		$	2,671		$	146,526	$	382,129
Income tax benefit from exercised stock options		--			60			--			--		60
Exercise of stock options (16,070 shares)		--			81			--			--		81
Stock-based compensation expense		--			4,661			--			--		4,661
Issuance of common stock (43,386 shares)		1			629			--			--		630
Share repurchase (1,320,085 shares) (Note 7)		(13	)		(20,046	)		--			--		(20,059	)
Comprehensive income (loss):
Net income		--			--			--			14,338		14,338
Unrealized loss on interest rate swap, net of tax benefit of $310		--			--			(563	)		--		(563	)
Unrealized loss on interest rate collar, net of tax benefit of $175		--			--			(317	)		--		(317	)
Total comprehensive income (loss)		--			--			(880	)		14,338		13,458
Balance at June 28, 2008	$	564		$	217,741		$	1,791		$	160,864	$	380,960

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, 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 to our Carter’s and OshKosh retail stores that market our brand name 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 statement of our financial position as of June 28, 2008, the results of our operations for the three and six-month periods ended June 28, 2008 and June 30, 2007, cash flows for the six-month periods ended June 28, 2008 and June 30, 2007, and changes in stockholders’ equity for the six-month period ended June 28, 2008. Operating results for the three and six-month periods ended June 28, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2009. Our accompanying condensed consolidated balance sheet as of December 29, 2007 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 December 29, 2007.

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 2008 reflect our financial position as of June 28, 2008. The second quarter and first half of fiscal 2007 ended on June 30, 2007.

Certain prior year amounts have been reclassified for comparative purposes.

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:

Cost in excess of fair value of net assets acquired represents the excess of the cost of the acquisition of Carter’s, Inc. by Berkshire Partners LLC which was consummated on August 15, 2001 (the “2001 acquisition”) over the fair value of the net assets acquired. Our cost in excess of fair value of net assets acquired is not deductible for tax purposes.

In connection with the 2001 acquisition, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), and applied the required provisions of SFAS No. 142, “Goodwill and other Intangible Assets” (“SFAS 142”). Accordingly, our Carter’s tradename and cost in excess of fair value of net assets acquired have been concluded to have indefinite lives and are not being amortized.

In connection with the acquisition of OshKosh B’Gosh, Inc. on July 14, 2005, (the “Acquisition”) the Company recorded cost in excess of fair value of net assets acquired, tradename, licensing, and leasehold interest assets in accordance with SFAS 141. During the second quarter of fiscal 2007, as a result of negative trends in sales and profitability of the Company’s OshKosh B’Gosh wholesale and retail segments and re-forecasted projections for such segments for the balance of fiscal 2007, the Company conducted an interim impairment assessment on the value of the intangible assets that the Company recorded in connection with the Acquisition. This assessment was performed in accordance with SFAS 142. Based on this assessment, impairment charges of approximately $36.0 million and $106.9 million were recorded to reflect the impairment of the cost in excess of fair value of net assets acquired for the OshKosh wholesale and retail segments, respectively. In addition, an impairment charge of $12.0 million was recorded to reflect the impairment of the value ascribed to the OshKosh tradename asset. For cost in excess of fair value of net assets acquired, the fair value was determined using the expected present value of future cash flows. For the OshKosh tradename, the fair value was determined using a discounted cash flow analysis which examined the hypothetical cost savings that accrue as a result of our ownership of the tradename.

During the first half of fiscal 2008, approximately $0.9 million of contingencies recorded in connection with the Acquisition were reversed due to settlement with taxing authorities. This reversal resulted in a corresponding reduction to the OshKosh tradename asset of $1.5 million and a reduction in the related deferred tax liability of $0.6 million in accordance with Emerging Issues Task Force (“EITF”) No. 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination” (“EITF 93-7”).

The Company’s intangible assets were as follows:

		June 28, 2008						December 29, 2007
(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	$	86,500	$	--	$	86,500	$	88,000	$	--	$	88,000
OshKosh licensing agreements	4.7 years	$	19,100	$	12,013	$	7,087	$	19,100	$	10,185	$	8,915
Leasehold interests	4.1 years	$	1,833	$	1,382	$	451	$	1,833	$	1,149	$	684

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)

Amortization expense for intangible assets was approximately $1.0 million and $2.1 million for the three and six-month periods ended June 28, 2008 and $1.2 million and $2.4 million for the three and six-month periods ended June 30, 2007. Annual amortization expense for the OshKosh licensing agreements and leasehold interests is expected to be as follows:

(dollars in thousands)
Fiscal Year	Estimated amortization expense

2008 (period from June 29 through January 3, 2009)	$	2,044
2009		3,717
2010		1,777

Total	$	7,538

NOTE 4 – INCOME TAXES:

The Company and its subsidiaries file income tax returns in the United States and in various states and local jurisdictions. The Internal Revenue Service has recently completed an income tax examination for fiscal 2004 and 2005, and has recently begun its audit of fiscal 2006. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2004.

During the first half of fiscal 2008, we recognized approximately $1.6 million in tax benefits due to the completion of the Internal Revenue Service audit for fiscal 2004 and 2005. In addition, we recognized approximately $0.9 million of pre-Acquisition uncertainties previously reserved for upon completion of these audits. These pre-Acquisition uncertainties have been reflected as a reduction in the OshKosh tradename asset in accordance with EITF 93-7.

As of June 28, 2008, the Company had gross unrecognized tax benefits of approximately $6.7 million. The Company’s reserve for unrecognized tax benefits as of June 28, 2008 includes approximately $4.6 million of reserves which, if ultimately recognized, will impact the Company’s effective tax rate in the period settled. The reserve for unrecognized tax benefits also includes $1.9 million of reserves which, if ultimately recognized, would be reflected as an adjustment to the Carter’s cost in excess of fair value of net assets acquired or the OshKosh tradename asset, and $0.2 million for 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.

Included in the reserves for unrecognized tax benefits are approximately $0.3 million of reserves for which the statute of limitations is expected to expire in the third quarter of fiscal 2008. Such exposures relate primarily to state and local income tax matters. If these tax benefits are ultimately recognized, such recognition may impact our annual effective tax rate for fiscal 2008 and the tax rate in the quarter in which the benefits are recognized. In addition, the reserves for unrecognized tax benefits include approximately $0.6 million of pre-Acquisition reserves for which the statute of limitations is expected to expire in the third quarter of fiscal 2008. Recognition of these uncertainties would be reflected as an additional adjustment to the OshKosh tradename asset in accordance with EITF 93-7.

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 $1.0 million of interest accrued as of June 28, 2008.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 5 – FAIR VALUE MEASUREMENTS:

Effective December 30, 2007 (the first day of our 2008 fiscal year), the Company adopted 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 June 28, 2008, as required by SFAS 157:

(dollars in millions)	Level 1		Level 2		Level 3

Assets
Investments	$	--	$	--	$	--

Liabilities
Interest rate swap	$	--	$	1.2	$	--
Interest rate collar	$	--	$	1.0	$	--

Our senior credit facility requires us to hedge at least 25% of our variable rate debt under the term loan. 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 variable rate term loan debt. The interest rate swap agreement matures on July 30, 2010. As of June 28, 2008, approximately $139.7 million of our outstanding term loan debt was hedged under this agreement.

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

Both our interest rate swap and collar 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.

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 other liabilities are net of these expected employee contributions. Additionally, we have an obligation under a defined benefit plan covering certain former officers and their spouses. 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)	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007

Service cost – benefits attributed to service during the period	$	26	$	26	$	53	$	52
Interest cost on accumulated post-retirement benefit obligation		132		130		263		260
Total net periodic post-retirement benefit cost	$	158	$	156	$	316	$	312

The components of pension expense charged to operations are as follows:

	For the three-month periods ended				For the six-month periods ended
(dollars in thousands)	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007

Interest cost on accumulated pension benefit obligation	$	13	$	15	$	26	$	30

The Company acquired two defined benefit pension plans in connection with the Acquisition. The benefits for certain current and former employees of OshKosh under these pension plans were frozen as of December 31, 2005.

During the second quarter of fiscal 2007, the Company liquidated the OshKosh B’Gosh Collective Bargaining Pension Plan (the “Plan”), distributed each participant’s balance, and the remaining net assets of $2.2 million were contributed to the Company’s defined contribution plan to offset future employer contributions. In connection with the liquidation of the Plan, the Company recorded a pre-tax gain of approximately $0.3 million related to the Plan settlement during the second quarter of fiscal 2007.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 6 – EMPLOYEE BENEFIT PLANS: (Continued)

The Company’s net periodic pension benefit included in the statements of operations is comprised of:

	For the three-month periods ended						For the six-month periods ended
(dollars in thousands)	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007

Interest cost on accumulated pension benefit obligation	$	562		$	552		$	1,124		$	1,103
Expected return on assets		(944	)		(1,404	)		(1,887	)		(2,316	)
Amortization of actuarial gain		(19	)		(35	)		(38	)		(70	)
Gain on settlement		--			(276	)		--			(276	)
Total net periodic pension benefit	$	(401	)	$	(1,163	)	$	(801	)	$	(1,559	)

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 second quarter and first half of fiscal 2008, the Company repurchased and retired approximately $10 million and $20 million, or 645,727 and 1,320,085 shares, of its common stock at an average price of $15.55 and $15.20 per share, respectively. Accordingly, we have reduced common stock by the par value of such shares and have deducted the remaining excess repurchase price over par value from additional paid-in capital.

Since inception of the program and through the first half of fiscal 2008, the Company repurchased and retired approximately $78 million, or 3,793,304 shares, of its common stock at an average price of $20.44 per share. Accordingly, we have reduced common stock by the par value of such shares 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 2007, the Company repurchased and retired approximately $10 million and $40 million, or 394,587 and 1,647,419 shares, of its common stock at an average price of $25.37 and $24.29 per share, respectively. Accordingly, we have reduced common stock by the par value of such shares 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 2008, the Company issued 43,386 shares of common stock at a fair market value of $14.48 to its non-management board members. Accordingly, we recognized $630,000 in stock-based compensation expense. We received no proceeds from the issuance of these shares.

During the second quarter and first half of fiscal 2007, the Company issued 21,420 shares of common stock at a fair market value of $25.21 to its non-management board members. Accordingly, we recognized $540,000 in stock-based compensation expense. We received no proceeds from the issuance of these shares.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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 June 28, 2008.

	For the six-month period ended June 28, 2008

Volatility		35.95	%
Risk-free interest rate		3.30	%
Expected term (years)		6.0
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.

The following table summarizes our stock option and restricted stock activity during the six-month period ended June 28, 2008:

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

Outstanding, December 29, 2007		4,315,689			620,000		661,870		372,283

Granted		37,250			--		--		25,106
Exercised		(16,070	)		--		--		--
Vested restricted stock		--			--		--		(38,850	)
Forfeited		(12,900	)		--		--		(5,200	)
Expired		(8,100	)		--		--		--

Outstanding, June 28, 2008		4,315,869			620,000		661,870		353,339

Exercisable, June 28, 2008		3,571,163			400,000		661,870		--

As a result of the retirement of Frederick J. Rowan, II, Chief Executive Officer and Chairman of the Board of Directors, 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”).

During the three-month period ended June 28, 2008, we granted 22,000 time-based stock options with a weighted-average Black-Scholes fair value of $5.93 and a weighted-average exercise price of $14.48. In connection with these grants, we recognized approximately $4,100 in stock-based compensation expense.

During the six-month period ended June 28, 2008, we granted 37,250 time-based stock options with a weighted-average Black-Scholes fair value of $6.88 and a weighted-average exercise price of $16.99. In connection with these grants, we recognized approximately $14,000 in stock-based compensation expense.

During the three-month period ended June 28, 2008, we granted 11,000 shares of restricted stock to employees with a weighted-average fair value on the date of grant of $14.48. In connection with these grants, we recognized approximately $5,000 in stock-based compensation expense.

During the six-month period ended June 28, 2008, we granted 25,106 shares of restricted stock to employees and a director with a weighted-average fair value on the date of grant of $16.58. In connection with these grants, we recognized approximately $28,000 in stock-based compensation expense.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 8 – STOCK-BASED COMPENSATION: (Continued)

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

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

2008 (period from June 29 through January 3, 2009)	$	1,735	$	1,267	$	3,002
2009		2,495		2,114		4,609
2010		1,257		1,473		2,730
2011		1,065		939		2,004
2012		122		93		215
Total	$	6,674	$	5,886	$	12,560

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.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 9 – SEGMENT INFORMATION: (Continued)

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)	June 28, 2008			% of Total			June 30, 2007				% of Total			June 28, 2008			% of Total			June 30, 2007			% of Total

Net sales:
Wholesale-Carter’s	$	94,322			31.3	%	$	93,294				32.4	%	$	212,154			33.6	%	$	205,947			33.9	%
Wholesale-OshKosh		13,760			4.6	%		10,227				3.6	%		32,209			5.1	%		35,220			5.8	%
Retail-Carter’s		92,656			30.7	%		76,275				26.5	%		179,058			28.4	%		151,101			24.8	%
Retail-OshKosh		49,883			16.5	%		48,885				17.0	%		94,248			14.9	%		94,733			15.6	%
Mass Channel-Carter’s		51,054			16.9	%		59,094				20.5	%		113,978			18.0	%		120,902			19.9	%
Total net sales	$	301,675			100.0	%	$	287,775				100.0	%	$	631,647			100.0	%	$	607,903			100.0	%

Operating income (loss):				% of segment net sales							% of segment net sales						% of segment net sales						% of segment net sales
Wholesale-Carter’s	$	12,007			12.7	%	$	16,102				17.3	%	$	33,566			15.8	%	$	37,488			18.2	%

Wholesale-OshKosh		(4,312	)		(31.3	)%		(2,947	)			(28.8	)%		(6,836	)		(21.2	)%		(3,634	)		(10.3	)%

OshKosh cost in excess of fair value of net assets acquired-impairment		--			--			(35,995	)			(352.0	)%		--			--			(35,995	)		(102.2	)%

Net Wholesale-OshKosh		(4,312	)		(31.3	)%		(38,942	)			(380.8	)%		(6,836	)		(21.2	)%		(39,629	)		(112.5	)%

Retail-Carter’s		10,358			11.2	%		5,727				7.5	%		21,800			12.2	%		13,636			9.0	%

Retail-OshKosh		(2,646	)		(5.3	)%		(1,726	)			(3.5	)%		(9,379	)		(10.0	)%		(3,019	)		(3.2	)%

OshKosh cost in excess of fair value of net assets acquired-impairment		--			--			(106,891	)			(218.7	)%		--			--			(106,891	)		(112.8	)%

Net Retail-OshKosh		(2,646	)		(5.3	)%		(108,617	)			(222.2	)%		(9,379	)		(10.0	)%		(109,910	)		(116.0	)%

Mass Channel-Carter’s		7,779			15.2	%		8,794				14.9	%		14,521			12.7	%		17,145			14.2	%

Mass Channel-OshKosh (a)		628			--			361				--			1,159			--			888			--

Segment operating income (loss)		23,814			7.9	%		(116,575	)			(40.5	)%		54,831			8.7	%		(80,382	)		(13.2	)%

Other reconciling items		(14,562	) (b)		(4.8	)%		(9,298	)	(c)		(3.2	)%		(25,026	) (b)		(4.0	)%		(24,319	) (d)		(4.0	)%

OshKosh tradename impairment		--			--			(12,000	)			(4.2	)%		--			--			(12,000	)		(2.0	)%

Net other reconciling items		(14,562	)		(4.8	)%		(21,298	)			(7.4	)%		(25,026	)		(4.0	)%		(36,319	)		(6.0	)%

Total operating income (loss)	$	9,252			3.1	%	$	(137,873	)			(47.9	)%	$	29,805			4.7	%	$	(116,701	)		(19.2	)%

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

(b)	Includes $5.3 million in executive retirement charges in connection with Mr. Rowan’s retirement (see Note 13).

(c)	Includes $1.1 million in closure costs related to the closure of our OshKosh distribution center, including $0.6 million in accelerated depreciation.

(d)	Includes $7.1 million in closure costs related to the closure of our OshKosh distribution center, including $2.1 million in accelerated depreciation.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 10 – FACILITY CLOSURE AND RESTRUCTURING COSTS:

OshKosh Distribution Facility

The Company continually evaluates opportunities to reduce its supply chain complexity and lower costs. In the first quarter of fiscal 2007, the Company determined that OshKosh brand products could be effectively distributed through its other distribution facilities and third-party logistics providers. On February 15, 2007, the Company’s Board of Directors approved management’s plan to close the Company’s White House, Tennessee distribution facility, which was utilized to distribute the Company’s OshKosh brand products.

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 were impaired as of the end of January 2007, as it became “more likely than not” that the expected life of the OshKosh distribution facility would be significantly shortened. Accordingly, we wrote down the assets to their estimated recoverable fair value as of the end of January 2007. The adjusted asset values were subject to accelerated depreciation over their remaining estimated useful life. Distribution operations at the OshKosh facility ceased as of April 5, 2007, at which point the land, building, and equipment assets of $6.1 million were reclassified as held for sale. The Company continues to offer this vacant facility for sale and believes that the fair market value of this facility is equal to its carrying value.

During the first half of fiscal 2007, we recorded closure costs of $7.1 million, consisting of asset impairment charges of $2.4 million related to a write-down of the related land, building, and equipment, $2.0 million of severance charges, $2.1 million of accelerated depreciation (included in selling, general, and administrative expenses), and $0.6 million of other closure costs.

Acquisition Restructuring

In connection with the Acquisition, management developed a plan to restructure and integrate the operations of OshKosh. In accordance with EITF No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” liabilities were established for OshKosh severance, lease termination costs associated with the closure of 30 OshKosh retail stores, contract termination costs, and other exit and facility closure costs.

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

(dollars in thousands)	Severance and other exit costs			Lease termination costs			Total

Balance at December 29, 2007	$	489		$	674		$	1,163
Payments		(458	)		--			(458	)
Balance at March 29, 2008		31			674			705
Payments		(53	)		--			(53	)
Adjustments		42			(42	)		--
Balance at June 28, 2008	$	20		$	632		$	652

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 11 – EARNINGS PER SHARE:

Basic net income (loss) per share is calculated by dividing net income (loss) for the period by the weighted-average common shares outstanding for the period. Diluted net income (loss) 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 following table summarizes the shares from these potentially dilutive securities, calculated using the treasury stock method:

	For the three-month periods ended					For the six-month periods ended
(dollars in thousands, except per share data)	June 28, 2008		June 30, 2007			June 28, 2008		June 30, 2007

Net income (loss)	$	2,779	$	(143,449	)	$	14,338	$	(133,838	)

Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		56,156,795		57,838,075			56,685,914		58,142,782
Dilutive effect of unvested restricted stock		67,533		--			72,352		--
Dilutive effect of stock options		1,939,377		--			1,983,387		--

Diluted number of common and common equivalent shares outstanding		58,163,705		57,838,075			58,741,653		58,142,782

Basic net income (loss) per common share	$	0.05	$	(2.48	)	$	0.25	$	(2.30	)
Diluted net income (loss) per common share	$	0.05	$	(2.48	)	$	0.24	$	(2.30	)

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. For the three and six-month periods ended June 30, 2007, diluted net loss per common share is the same as basic net loss per common share, as the Company had a net loss.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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 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. We have evaluated the impact that FSP 157-2 will have on our consolidated financial statements and have determined that it will not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS 141, “Business Combinations.” SFAS 141(R) retains the underlying concepts of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008. SFAS 141(R) amends SFAS No. 109, “Accounting for Income Taxes,” such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R). Early adoption is not permitted. We are currently evaluating the effects, if any, that SFAS 141(R) may have on our consolidated financial statements.

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 will be required for the Company beginning with the first quarter fiscal 2009 consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). The FSP amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS 142. The FSP must be applied prospectively to intangible assets acquired after January 1, 2009. We are currently evaluating the impact that FSP 142-3 will have on its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” This statement will not have an impact on the Company’s consolidated financial statements.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 13 – EXECUTIVE RETIREMENT CHARGES:

On June 11, 2008, the Company announced the retirement of Frederick J. Rowan, II, Chairman of the Board of Directors and Chief Executive Officer, effective August 1, 2008. In connection with his retirement, the Company recorded charges during the second quarter of fiscal 2008 of $5.3 million, $3.1 million of which relates to the present value of severance and benefit obligations, and $2.2 million relates to the accelerated vesting of Mr. Rowan’s performance-based 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. You should read this discussion in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this quarterly report.

RESULTS OF OPERATIONS

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

	Three-month periods ended						Six-month periods ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007

Wholesale sales:
Carter’s		31.3	%		32.4	%		33.6	%		33.9	%
OshKosh		4.6			3.6			5.1			5.8
Total wholesale sales		35.9			36.0			38.7			39.7

Retail store sales:
Carter’s		30.7			26.5			28.4			24.8
OshKosh		16.5			17.0			14.9			15.6
Total retail store sales		47.2			43.5			43.3			40.4

Mass channel sales		16.9			20.5			18.0			19.9

Consolidated net sales		100.0			100.0			100.0			100.0
Cost of goods sold		67.0			66.8			67.6			66.8

Gross profit		33.0			33.2			32.4			33.2
Selling, general, and administrative expenses		30.6			29.4			29.2			28.4
Intangible asset impairment		--			53.8			--			25.5
Executive retirement charges		1.7			--			0.9			--
Closure costs		--			0.2			--			0.8
Royalty income		(2.4	)		(2.3	)		(2.4	)		(2.3	)

Operating income (loss)		3.1			(47.9	)		4.7			(19.2	)
Interest expense, net		1.6			2.0			1.5			1.9

Income (loss) before income taxes		1.5			(49.9	)		3.2			(21.1	)
Provision for (benefit from) income taxes		0.6			( 0.1	)		0.9			0.9

Net income (loss)		0.9	%		(49.8	)%		2.3	%		(22.0	)%

Number of retail stores at end of period:
Carter’s		231			221			231			221
OshKosh		163			159			163			159
Total		394			380			394			380

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

Three and six-month periods ended June 28, 2008 compared to the three and six-month periods ended June 30, 2007

CONSOLIDATED NET SALES

In the second quarter of fiscal 2008, consolidated net sales increased $13.9 million, or 4.8%, to $301.7 million and reflects sales growth in our Carter’s brand retail and wholesale segments and our OshKosh brand segments, partially offset by a decline in net sales in our mass channel segment. In the first half of fiscal 2008, consolidated net sales increased $23.7 million, or 3.9%, to $631.6 million and reflects growth in our Carter’s brand retail and wholesale segments, partially offset by a decline in our mass channel segment and our OshKosh brand segments.

	For the three-month periods ended										For the six-month periods ended
(dollars in thousands)	June 28, 2008		% of Total			June 30, 2007		% of Total			June 28, 2008		% of Total			June 30, 2007		% of Total

Net sales:
Wholesale-Carter’s	$	94,322		31.3	%	$	93,294		32.4	%	$	212,154		33.6	%	$	205,947		33.9	%
Wholesale-OshKosh		13,760		4.6	%		10,227		3.6	%		32,209		5.1	%		35,220		5.8	%
Retail-Carter’s		92,656		30.7	%		76,275		26.5	%		179,058		28.4	%		151,101		24.8	%
Retail-OshKosh		49,883		16.5	%		48,885		17.0	%		94,248		14.9	%		94,733		15.6	%
Mass Channel-Carter’s		51,054		16.9	%		59,094		20.5	%		113,978		18.0	%		120,902		19.9	%
Total net sales	$	301,675		100.0	%	$	287,775		100.0	%	$	631,647		100.0	%	$	607,903		100.0	%

CARTER’S WHOLESALE SALES

Carter’s brand wholesale sales increased $1.0 million, or 1.1%, in the second quarter of fiscal 2008 to $94.3 million and was driven by an 11% increase in units shipped, partially offset by a 9% decline in average price per unit as compared to the second quarter of fiscal 2007.

Carter’s brand wholesale sales increased $6.2 million, or 3.0%, in the first half of fiscal 2008 to $212.2 million and was driven by an 11% increase in units shipped, partially offset by a 7% decline in average price per unit as compared to the first half of fiscal 2007.

The increase in units shipped during the second quarter and first half of fiscal 2008 was driven by increased shipments of our baby and playwear products, due primarily to the timing of demand and higher levels of off-price sales, partially offset by a decrease in sleepwear units shipped. The decrease in average price per unit during the second quarter and first half of fiscal 2008 was due to more competitive pricing in our baby, playwear, and sleepwear product categories.

OSHKOSH WHOLESALE SALES

OshKosh brand wholesale sales increased $3.5 million, or 34.5%, in the second quarter of fiscal 2008 to $13.8 million, primarily due to a substantial increase in the amount of off-price shipments. In addition, the increase in OshKosh brand wholesale sales reflects a 79% increase in units shipped, partially offset by a 25% decrease in average price per unit as compared to the second quarter of fiscal 2007. The decrease in average price per unit reflects lower average selling prices on off-price units, in addition to the change in strategy to reposition the OshKosh brand to appeal to a broader audience of mainstream consumers.

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

OshKosh brand wholesale sales decreased $3.0 million, or 8.5%, in the first half of fiscal 2008 to $32.2 million. The decrease in OshKosh brand wholesale sales reflects a 26% decrease in average price per unit due to the change in strategy to reposition the brand, as well as lower average selling prices on off-price units. This decrease was partially offset by a 23% increase in units shipped as compared to the first half of fiscal 2007, including increases in both seasonal shipments and off-price units.

The lower average price per unit reflects a change in strategy to reposition the OshKosh brand. We believe we have strengthened the OshKosh brand to be more competitive in the marketplace and enhance the profitability of our customers. The benefits from this change in strategy are not expected to meaningfully improve our OshKosh brand sales and related profitability until the cumulative effect of changes in talent, product benefits, pricing, branding, and sourcing strategies are reflected in our Spring 2009 product line. Our Spring 2009 product line begins shipping in the latter part of the fourth quarter of fiscal 2008.

MASS CHANNEL SALES

Mass channel sales decreased $8.0 million, or 13.6%, in the second quarter of fiscal 2008 to $51.1 million. The decrease was due to an $8.5 million, or 22.2%, decrease in sales of our Child of Mine brand to Wal-Mart, partially offset by a $0.5 million, or 2.3%, increase in sales of our Just One Year brand to Target. The decrease in Child of Mine sales was due to the performance of certain Spring 2008 products. We believe we have strengthened the underperforming Child of Mine product categories for Fall 2008 which is planned up 4% as compared to Fall 2007. Fall 2008 began shipping in June 2008. The increase in Just One Year sales was driven primarily from new door growth, partially offset by product performance.