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 OCTOBER 1, 2011 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 (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 “large accelerated filer, 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 November 3, 2011
Common stock, par value $0.01 per share		58,594,661

CARTER’S, INC.

INDEX

		Page
Part I. Financial Information

Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of October 1, 2011, January 1, 2011, and October 2, 2010		1

	Unaudited Condensed Consolidated Statements of Operations for the three and nine-month periods ended October 1, 2011 and October 2, 2010		2

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended October 1, 2011 and October 2, 2010		3

	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine-month period ended October 1, 2011		4

	Notes to the Unaudited Condensed Consolidated Financial Statements		5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		32
Item 4.	Controls and Procedures		32

Part II. Other Information

Item 1.	Legal Proceedings		33
Item 1A.	Risk Factors		33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3.	Defaults upon Senior Securities		39
Item 4.	Removed and Reserved		39
Item 5.	Other Information		39
Item 6.	Exhibits		39
Signatures			40
Certifications			41

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except for share data)

(unaudited)

	October 1, 2011			January 1, 2011			October 2, 2010

ASSETS
Current assets:
Cash and cash equivalents	$	81,634		$	247,382		$	182,329
Accounts receivable, net		214,558			121,453			171,501
Finished goods inventories, net		385,960			298,509			263,782
Prepaid expenses and other current assets		16,412			17,372			12,369
Deferred income taxes		24,384			31,547			25,701

Total current assets		722,948			716,263			655,682

Property, plant, and equipment, net		111,830			94,968			92,558
Tradenames		306,234			305,733			305,733
Goodwill		186,536			136,570			136,570
Deferred debt issuance costs, net		2,801			3,332			1,237
Other intangible assets, net		268			--			--
Other assets		499			316			305

Total assets	$	1,331,116		$	1,257,182		$	1,192,085

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	--		$	--		$	2,450
Accounts payable		83,491			116,481			94,440
Other current liabilities		42,426			66,891			62,502

Total current liabilities		125,917			183,372			159,392

Long-term debt		236,000			236,000			229,709
Deferred income taxes		115,982			113,817			109,855
Other long-term liabilities		81,600			44,057			45,626

Total liabilities		559,499			577,246			544,582

Commitments and contingencies
Stockholders’ equity:
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at October 1, 2011, January 1, 2011, and October 2, 2010		--			--			--
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 58,529,586, 57,493,567, and 57,696,317 shares issued and outstanding at October 1, 2011, January 1, 2011, and October 2, 2010, respectively		585			575			577
Additional paid-in capital		228,061			210,600			214,547
Accumulated other comprehensive loss		(6,911	)		(1,890	)		(3,378	)
Retained earnings		549,882			470,651			435,757

Total stockholders’ equity		771,617			679,936			647,503

Total liabilities and stockholders’ equity	$	1,331,116		$	1,257,182		$	1,192,085

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 nine-month periods ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010

Net sales	$	639,617		$	517,928		$	1,503,105		$	1,253,986
Cost of goods sold		447,744			325,125			1,018,688			764,122

Gross profit		191,873			192,803			484,417			489,864
Selling, general, and administrative expenses		145,602			123,321			380,088			333,084
Royalty income		(10,494	)		(10,396	)		(28,092	)		(27,690	)

Operating income		56,765			79,878			132,421			184,470
Interest expense, net		1,699			1,568			5,305			6,674
Foreign currency gain		(88	)		--			(319	)		--

Income before income taxes		55,154			78,310			127,435			177,796
Provision for income taxes		20,705			28,653			48,204			66,218

Net income	$	34,449		$	49,657		$	79,231		$	111,578

Basic net income per common share (Note 13)	$	0.59		$	0.84		$	1.37		$	1.89
Diluted net income per common share (Note 13)	$	0.58		$	0.83		$	1.35		$	1.86

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 nine-month periods ended
	October 1, 2011			October 2, 2010
Cash flows from operating activities:
Net income	$	79,231		$	111,578
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		23,522			22,730
Amortization of Bonnie Togs inventory step-up		5,944			--
Non-cash revaluation of contingent consideration		1,020			--
Amortization of Bonnie Togs tradename and non-compete agreements		96			--
Amortization of debt issuance costs		531			1,232
Non-cash stock-based compensation expense		7,161			5,397
Income tax benefit from stock-based compensation		(6,292	)		(8,973	)
Loss (gain) on disposal/sale of property, plant, and equipment		149			(3	)
Deferred income taxes		8,021			6,974
Effect of changes in operating assets and liabilities:
Accounts receivable		(90,263	)		(89,407	)
Inventories		(59,355	)		(49,782	)
Prepaid expenses and other assets		1,019			(1,255	)
Accounts payable and other liabilities		(56,572	)		6,710

Net cash (used in) provided by operating activities		(85,788	)		5,201

Cash flows from investing activities:
Capital expenditures		(29,157	)		(29,483	)
Acquisition of Bonnie Togs		(61,199	)		--
Proceeds from sale of property, plant, and equipment		10			286

Net cash used in investing activities		(90,346	)		(29,197	)

Cash flows from financing activities:
Payments on term loan		--			(102,364	)
Repurchases of common stock		--			(44,090	)
Income tax benefit from stock-based compensation		6,292			8,973
Withholdings from vesting of restricted stock		(1,635	)		(715	)
Proceeds from exercise of stock options		5,428			9,480

Net cash provided by (used in) financing activities		10,085			(128,716	)

Effect of exchange rate changes on cash		301			--
Net decrease in cash and cash equivalents		(165,748	)		(152,712	)
Cash and cash equivalents, beginning of period		247,382			335,041

Cash and cash equivalents, end of period	$	81,634		$	182,329

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 1, 2011	$	575		$	210,600		$	(1,890	)	$	470,651	$	679,936
Exercise of stock options (744,511 shares)		7			5,421			--			--		5,428
Issuance of common stock (38,520 shares)		--			1,170			--			--		1,170
Withholdings from vesting of restricted stock (57,062 shares)		(1	)		(1,634	)		--			--		(1,635	)
Income tax benefit from stock-based compensation		--			6,292			--			--		6,292
Restricted stock activity		4			(4	)		--			--		--
Stock-based compensation expense		--			6,216			--			--		6,216
Comprehensive income (loss):
Net income		--			--			--			79,231		79,231
Cumulative foreign currency translation adjustments		--			--			(5,021	)		--		(5,021	)
Total comprehensive income (loss)		--			--			(5,021	)		79,231		74,210
Balance at October 1, 2011	$	585		$	228,061		$	(6,911	)	$	549,882	$	771,617

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 You, Precious Firsts, OshKosh, and other brands. Our products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic and international retailers and for our 351 Carter’s, 176 OshKosh, 37 Bonnie Togs, and 27 Carter’s/OshKosh retail stores that market our brand name merchandise and other licensed products manufactured by other companies.

On June 30, 2011, Northstar Canadian Operations Corp. (“Northstar”), a newly formed Canadian corporation and a wholly owned subsidiary of The William Carter Company (a wholly owned subsidiary of Carter’s, Inc.), purchased all of the outstanding shares of capital stock of the entities comprising Bonnie Togs (“Bonnie Togs”), a Canadian specialty retailer focused exclusively on the children’s apparel and accessories marketplace. At the time of the acquisition, Bonnie Togs operated 59 retail stores in Canada and sells products under the Carter’s and OshKosh B’gosh brands, as well as other private label and national brands. Bonnie Togs was Carter’s principal licensee in Canada since 2007 and was a significant international licensee of the Company.

As a result of the acquisition of Bonnie Togs, the Company reevaluated and realigned certain of its reportable segments, please see Note 12, “Segment Information.”

Our unaudited condensed consolidated balance sheet as of October 1, 2011 includes Bonnie Togs. The unaudited condensed consolidated statements of operations for the three and nine-month periods ended October 1, 2011 include Bonnie Togs effective July 3, 2011.

NOTE 2 – BASIS OF PREPARATION:

The accompanying unaudited condensed consolidated financial statements include the accounts of Carter’s, Inc. and its wholly owned 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 October 1, 2011, the results of our operations for the three and nine-month periods ended October 1, 2011 and October 2, 2010, cash flows for the nine-month periods ended October 1, 2011 and October 2, 2010 and changes in stockholders’ equity for the nine-month period ended October 1, 2011. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the three and nine-month periods ended October 1, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. Our accompanying condensed consolidated balance sheet as of January 1, 2011 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 (“SEC”) 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 1, 2011.

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 third quarter and first nine months of fiscal 2011 reflect our financial position as of October 1, 2011. The third quarter and first nine months of fiscal 2010 ended on October 2, 2010.

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

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 3 – ACQUISITION OF BONNIE TOGS:

As noted above, on June 30, 2011, Northstar purchased all of the outstanding shares of capital stock of Bonnie Togs (the “Acquisition”) for total consideration of up to CAD $95 million. CAD $60 million was paid in cash at closing. Such payment is subject to post-closing adjustments. The sellers may also be paid contingent consideration ranging from zero to CAD $35 million if the Canadian business meets certain earnings targets for the period beginning July 1, 2011 and ending on June 27, 2015. Sellers may receive a portion of the contingent consideration of up to CAD $25 million if interim earnings targets are met through June 2013 and June 2014, respectively. Any such payments are not recoverable by the Company in the event of any failure to meet overall targets. As of July 2, 2011, the Company had included a discounted contingent consideration liability of approximately $24 million in its unaudited condensed consolidated balance sheet based upon the high probability that Bonnie Togs will attain its earnings targets.

The fair value of the discounted contingent consideration liability as of October 1, 2011 was approximately $23 million and is included in other long-term liabilities on the accompanying unaudited condensed consolidated balance sheet. The $1.0 million change in the fair value of the liability is reflected as $1.0 million in accretion expense and $2.0 million in other comprehensive income resulting from a favorable foreign currency translation adjustment. The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis. The Company will continue to revalue the contingent consideration at each reporting date.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at June 30, 2011, the date of the Acquisition:

(U.S. dollars in thousands)

Current assets	$	40,999
Property, plant, and equipment, net		13,165
Goodwill		54,340
Bonnie Togs tradename		623
Non-compete agreements		311
Total asset acquired		109,438
Current liabilities		17,437
Non-current liabilities		6,725
Total liabilities assumed		24,162
Net assets acquired	$	85,276

In connection with the Acquisition, the Company recorded total acquired intangible assets of approximately $55.3 million, including $54.3 million of goodwill, $0.6 million related to the Bonnie Togs tradename (estimated life of two years), and $0.3 million related to non-compete agreements for certain executives (estimated life of four years). The fair value of these intangible assets are subject to change until finalization of purchase accounting.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 4 – COMPREHENSIVE INCOME:

Comprehensive income, which includes net income, cumulative foreign currency translation adjustments, and unrealized gain on interest rate swap agreements, is as follows:

	For the three-month periods ended					For the nine-month periods ended
(dollars in thousands)	October 1, 2011			October 2, 2010		October 1, 2011			October 2, 2010

Net income	$	34,449		$	49,657	$	79,231		$	111,578
Cumulative foreign currency translation adjustments		(4,922	)		--		(5,021	)		--
Unrealized gain on interest rate swap agreements, net of tax of $107 and $379, respectively		--			225		--			688
Total comprehensive income	$	29,527		$	49,882	$	74,210		$	112,266

The components of accumulated other comprehensive income (loss) consisted of the following:


(dollars in thousands)	October 1, 2011			January 1, 2011			October 2, 2010

Cumulative foreign currency translation adjustments	$	(5,021	)	$	--		$	--
OshKosh defined benefit plan, net of tax		(2,894	)		(2,894	)		(4,031	)
Carter’s post-retirement benefit obligation, net of tax		1,004			1,004			819
Interest rate swap agreements, net of tax		--			--			(166	)
Total accumulated other comprehensive loss	$	(6,911	)	$	(1,890	)	$	(3,378	)

NOTE 5 – LONG-TERM DEBT:

Long-term debt consisted of the following:

(dollars in thousands)	October 1, 2011		January 1, 2011		October 2, 2010

Revolving credit facility	$	236,000	$	236,000	$	--
Former term loan		--		--		232,159
Current maturities		--		--		(2,450	)
Total long-term debt	$	236,000	$	236,000	$	229,709

On October 15, 2010, the Company entered into a $375 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) revolving credit facility with Bank of America as sole lead arranger and administrative agent, JP Morgan Chase Bank as syndication agent, and other financial institutions. The revolving credit facility was immediately drawn upon to pay off the Company’s former term loan of $232.2 million and pay transaction fees and expenses of $3.8 million, leaving approximately $130 million available under the revolver for future borrowings (net of letters of credit of approximately $8.6 million). At January 1, 2011, we had approximately $236.0 million in revolver borrowings, exclusive of $8.6 million of outstanding letters of credit, at an effective interest rate of 2.51%. At October 1, 2011, we had approximately $236.0 million in revolver borrowings, exclusive of $13.8 million of outstanding letters of credit, at an effective interest rate of 2.48%.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 5 – LONG-TERM DEBT: (Continued)

The term of the revolving credit facility expires October 15, 2015. This revolving credit facility provides for two pricing options for revolving loans: (i) revolving loans on which interest is payable quarterly at a base rate equal to the highest of (x) the Federal Funds Rate plus ½ of 1%, (y) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its prime rate, or (z) the Eurodollar Rate plus 1%, plus, in each case, an applicable margin initially equal to 1.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 1.00% to 1.50% and (ii) revolving loans on which interest accrues for one, two, three, six or if, generally available, nine or twelve month interest periods (but is payable not less frequently than every three months) at a rate of interest per annum equal to an adjusted British Bankers Association LIBOR rate, plus an applicable margin initially equal to 2.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 2.00% to 2.50%. Amounts currently outstanding under the revolving credit facility initially accrue interest at a LIBOR rate plus 2.25%.

The revolving credit facility contains and defines financial covenants, including a lease adjusted leverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated indebtedness plus six times rent expense to consolidated net income before interest, taxes, depreciation, amortization, and rent expense (“EBITDAR”)) to exceed (x) if such period ends on or before December 31, 2014, 3.75:1.00 and (y) if such period ends after December 31, 2014, 3.50:1.00; and consolidated fixed charge coverage ratio (defined as, with certain adjustments, the ratio of consolidated EBITDAR to consolidated fixed charges (defined as interest plus rent expense)), for any such period to be less than 2.75:1.00. As of October 1, 2011, the Company believes it was in compliance with its financial debt covenants.

The Company’s former senior credit facility was comprised of a $232.2 million term loan (the “former term loan”) and a $125 million revolving credit facility (the “former revolver”) (including a sub-limit for letters of credit of $80 million). There were no borrowings outstanding under the former revolver, exclusive of approximately $8.6 million of outstanding letters of credit at October 2, 2010. Amounts borrowed under the former term loan had an applicable rate of LIBOR + 1.50%, regardless of the Company’s overall leverage level. Interest was payable at the end of interest rate reset periods, which vary in length but in no case exceeded 12 months for LIBOR rate loans and quarterly for prime rate loans. The effective interest rate on former term loan borrowings as of October 2, 2010 was 1.8%.

NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS:

In connection with the Acquisition, the Company recorded preliminary estimates of goodwill and other intangible assets including a Bonnie Togs tradename and non-compete agreements for certain executives of Bonnie Togs, in accordance with accounting guidance on business combinations.

Goodwill as of October 1, 2011, represents the excess of the cost of the acquisitions of Carter’s, Inc., which was consummated on August 15, 2001, and of Bonnie Togs, which was consummated on June 30, 2011, over the fair value of the net assets acquired. Our goodwill is not deductible for tax purposes. The OshKosh tradename was recorded in connection with the acquisition of OshKosh on July 14, 2005. Our Carter’s and Bonnie Togs goodwill and Carter’s and OshKosh tradenames are deemed to have indefinite lives and are not being amortized. The Bonnie Togs tradename and non-compete agreements for certain executives are expected to have definite lives and are being amortized over two and four years, respectively.

The Company’s intangible assets were as follows:

		October 1, 2011						January 1, 2011
(dollars in thousands)	Weighted-average useful life	Gross amount		Accumulated amortization		Net amount		Gross amount		Accumulated amortization		Net amount

Carter’s goodwill (1)	Indefinite	$	136,570	$	--	$	136,570	$	136,570	$	--	$	136,570
Bonnie Togs goodwill (2)	Indefinite	$	49,966	$	--	$	49,966	$	--	$	--	$	--
Carter’s tradename	Indefinite	$	220,233	$	--	$	220,233	$	220,233	$	--	$	220,233
OshKosh tradename	Indefinite	$	85,500	$	--	$	85,500	$	85,500	$	--	$	85,500
Bonnie Togs tradename	2 years	$	576	$	75	$	501	$	--	$	--	$	--
Non-compete agreements	4 years	$	287	$	19	$	268	$	--	$	--	$	--
OshKosh licensing agreements	4.7 years	$	19,100	$	19,100	$	--	$	19,100	$	19,100	$	--

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS: (Continued)

		October 2, 2010
(dollars in thousands)	Weighted-average useful life	Gross amount		Accumulated amortization		Net amount

Carter’s goodwill (1)	Indefinite	$	136,570	$	--	$	136,570
Carter’s tradename	Indefinite	$	220,233	$	--	$	220,233
OshKosh tradename	Indefinite	$	85,500	$	--	$	85,500
OshKosh licensing agreements	4.7 years	$	19,100	$	19,100	$	--

(1)	$54.5 million of which relates to Carter’s wholesale segment and $82.0 million of which relates to Carter’s retail segment.

(2)	Relates to International segment.

The following is a reconciliation of Bonnie Togs intangible assets:

	Bonnie Togs Goodwill			Bonnie Togs Tradename			Non-compete agreements

Gross Balance at June 30, 2011	$	54,480		$	623		$	311
Purchase accounting adjustments		(140	)		--			--
Foreign currency exchange adjustments		(4,374	)		(47	)		(24	)
Gross Balance at October 1, 2011	$	49,966		$	576		$	287

Amortization expense for intangible assets was approximately $0.1 million and $0.2 million for the three-month periods ended October 1, 2011 and October 2, 2010, respectively. Amortization expense for intangible assets was approximately $0.1 million and $1.8 million for the nine-month periods ended October 1, 2011 and October 2, 2010, respectively.

NOTE 7 – INCOME TAXES:

The Company and its subsidiaries file income tax returns in the United States and in various states and local jurisdictions. Bonnie Togs, the Company’s Canadian subsidiary will file income tax returns in Canada and various Canadian provinces. The Internal Revenue Service initiated an income tax audit for fiscal 2009 during the second quarter of fiscal 2011. The Company is not anticipating a material payment or material impact on its effective tax rate as a result of this ongoing audit. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2007.

During the third quarter of fiscal 2011, we reversed approximately $0.3 million of reserves for which the statute of limitations expired during the quarter. During the third quarter of fiscal 2010, we reversed approximately $0.5 million of reserves for which the statute of limitations expired during the quarter.

As of October 1, 2011, the Company had gross unrecognized tax benefits of approximately $9.6 million, $6.7 million of which, 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.

Included in the reserves for unrecognized tax benefits as of October 1, 2011, are approximately $2.2 million of reserves for which the statute of limitations is expected to expire within the next year. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may impact our annual effective tax rate and the effective tax rate in the quarter in which the benefits are recognized.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 7 – INCOME TAXES: (Continued)

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. During the third quarter of fiscal 2011 and 2010, the Company recognized a reduction of interest expense on uncertain tax positions of approximately $0.1 million due to the settlement of prior year uncertain tax positions. The Company had approximately $0.7 million, $0.6 million, and $0.6 million of interest accrued as of October 1, 2011, January 1, 2011, and October 2, 2010, respectively.

NOTE 8 – FAIR VALUE MEASUREMENTS:

The Company accounts for its fair value measurements in accordance with accounting guidance 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 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:

	October 1, 2011						January 1, 2011						October 2, 2010
(dollars in millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

Assets
Investments	$	25.2	$	--	$	--	$	226.5	$	--	$	--	$	150.4	$	13.0	$	--
Foreign exchange forward contracts	$	1.1	$	--	$	--	$	--	$	--	$	--	$	--	$	--	$	--

Liabilities
Interest rate swap agreements	$	--	$	--	$	--	$	--	$	--	$	--	$	--	$	0.3	$	--
Contingent consideration	$	--	$	--	$	23.4	$	--	$	--	$	--	$	--	$	--	$	--

At October 1, 2011, we had approximately $25.2 million of cash invested in money market deposit accounts ($25.0 million in JP Morgan and $0.2 million in Bank of America).

At January 1, 2011, we had approximately $151.5 million of cash invested in money market deposit accounts ($73.3 million in Bank of America and $78.2 million in JP Morgan) and $75.0 million in U.S. Treasury bills.

At October 2, 2010, we had approximately $110.4 million invested in money market deposit accounts, $40.0 million in U.S. Treasury Bills, and $13.0 million invested in a Black Rock Treasury fund, which invests only in U.S. Treasury Bills and U.S. Government securities.

On June 22, 2011, as part of the Acquisition, the Company entered into a forward foreign currency exchange contract to reduce its risk from exchange rate fluctuations on the purchase price of Bonnie Togs. The contract was settled on June 30, 2011 and a gain of $0.2 million was recognized in earnings.

During the third quarter of fiscal 2011, the Company recorded a $0.1 million gain related to the mark-to-market of open foreign currency exchange contracts and Bonnie Togs’ foreign denominated payables.

In connection with the Acquisition, the Company acquired open forward foreign exchange contracts which were undesignated hedges used to reduce its risk from cash flows associated with U.S. dollar denominated inventory purchases. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily exposure to changes in the value of the U.S. dollar in relation to the Canadian dollar, the Company hedges a portion of its foreign currency exposures anticipated over the ensuing twelve-month period. The Company uses foreign exchange contracts that generally have maturities of up 12 months to provide continuing coverage throughout the hedging period.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 8 – FAIR VALUE MEASUREMENTS: (Continued)

As of October 1, 2011, the Company had contracts for sales of $23.4 million of Canadian dollars and for the purchase of $23.5 million of U.S. dollars at fixed rates. The fair value of these forward contracts was an asset of $1.1 million. The Company accounts for these foreign exchange contracts as undesignated positions in accordance with accounting standards on derivatives and hedging. As such, these positions are marked to fair value through earnings at each reporting date.

Our former senior credit facility required us to hedge at least 25% of our variable rate debt under this facility. The Company historically entered into interest rate swap agreements in order to hedge the risk of interest rate fluctuations. These interest rate swap agreements were designated as cash flow hedges of the variable interest payments on a portion of our variable rate former term loan debt. Our interest rate swap agreements were traded in the over-the-counter market. Fair values were 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. Our interest rate swap agreements were classified as current as their terms spanned less than one year.

As of October 2, 2010, approximately $100.0 million of our $232.2 million of outstanding debt was hedged under interest rate swap agreements. In connection with the repayment of the Company’s former term loan, the Company terminated these effective interest rate swap agreements originally scheduled to mature in January 2011.

The fair value of the discounted contingent consideration liability was approximately $24 million as of July 2, 2011 and approximately $23 million as of October 1, 2011. The $1.0 million change in the fair value of the liability is reflected as $1.0 million in accretion expense and $2.0 million in accumulated other comprehensive income reflecting a favorable foreign currency translation adjustment. The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis.

The fair value of our derivative instruments in our accompanying unaudited condensed consolidated balance sheets were as follows:

	Asset Derivatives			Liability Derivatives

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

October 1, 2011	Prepaid expenses and other current assets	$	1.1	Other current liabilities	$	--
January 1, 2011	Prepaid expenses and other current assets	$	--	Other current liabilities	$	--
October 2, 2010	Prepaid expenses and other current assets	$	--	Other current liabilities	$	0.3

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 8 – FAIR VALUE MEASUREMENTS: (Continued)

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

For the three-month period ended

October 1, 2011

For the nine-month period ended

October 1, 2011

(dollars in thousands)

Amount of gain

recognized in accumulated

other comprehensive

income (loss) on effective hedges

Amount of loss

reclassified

from accumulated

other comprehensive

income (loss)

into interest expense

Amount of gain

recognized in accumulated

other comprehensive

income (loss) on

effective hedges

Amount of loss

reclassified

from accumulated

other comprehensive

income (loss)

into interest expense

Interest rate hedge agreements

	For the three-month period ended October 2, 2010					For the nine-month period ended October 2, 2010
(dollars in thousands)	Amount of gain recognized in accumulated other comprehensive income (loss) on effective hedges (1)		Amount of loss reclassified from accumulated other comprehensive income (loss) into interest expense			Amount of loss recognized in accumulated other comprehensive income (loss) on effective hedges (1)		Amount of loss reclassified from accumulated other comprehensive income (loss) into interest expense

Interest rate hedge agreements	$	225	$	(291	)	$	688	$	(1,440	)

(1) Amount recognized in accumulated other comprehensive income (loss), net of tax of $107,000 and $379,000 for the three and nine-month periods ended October 2, 2010, respectively.

The effect of undesignated derivative instruments on our accompanying unaudited condensed consolidated financial statements was as follows:

	Gains recognized in earnings

	For the three-month periods ended		For the nine-month periods ended
(dollars in thousands)	October 1, 2011	October 2, 2010	October 1, 2011	October 2, 2010

Foreign exchange forward contract	$1,549	$ --	$1,780	$ --

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 9 – 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 nine-month periods ended
(dollars in thousands)	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010

Service cost – benefits attributed to service during the period	$	18		$	23		$	54		$	69
Interest cost on accumulated post-retirement benefit obligation		106			133			318			399
Amortization net actuarial gain		(5	)		(7	)		(15	)		(21	)
Total net periodic post-retirement benefit cost	$	119		$	149		$	357		$	447

We have an obligation under a defined benefit plan covering certain former officers and their spouses. The component of pension expense charged to operations is as follows:

	For the three-month periods ended				For the nine-month periods ended
(dollars in thousands)	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010

Interest cost on accumulated pension benefit obligation	$	7	$	12	$	23	$	36

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) expense associated with this pension plan and included in the statement of operations was comprised of:

	For the three-month periods ended						For the nine-month periods ended
(dollars in thousands)	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010

Interest cost on accumulated pension benefit obligation	$	614		$	598		$	1,841		$	1,794
Expected return on assets		(779	)		(718	)		(2,335	)		(2,156	)
Amortization of actuarial loss		1			34			1			101
Total net periodic pension (benefit) expense	$	(164	)	$	(86	)	$	(493	)	$	(261	)

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 10 – COMMON STOCK:

During the first nine months of fiscal 2011, the Company issued 38,520 shares of common stock at a fair market value of $30.38 per share to its non-management board members. In connection with this issuance, we recognized approximately $1.2 million in stock-based compensation expense. During the first nine months of fiscal 2010, the Company issued 24,032 and 2,115 shares of common stock at a fair market value of $33.29 and $23.65 per share, respectively, to its non-management board members. In connection with these issuances, we recognized approximately $850,000 in stock-based compensation expense. We received no proceeds from the issuance of these shares.

On February 16, 2007, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company was authorized to purchase up to $100 million of its outstanding common shares (the “2007 Authorization”). On June 15, 2010, the Company’s Board of Directors approved a new share repurchase authorization, pursuant to which the Company is authorized to purchase up to an additional $100 million of its outstanding common shares (the “2010 Authorization”). The Company has completed repurchase of outstanding shares in the amount totaling the entire $100 million approved under the 2007 Authorization. Under the 2010 Authorization, the Company has repurchased and retired 1,686,830 shares, or approximately $41.1 million, of its common stock at an average price of $24.37 per share. The total remaining capacity under this authorization was approximately $58.9 million as of October 1, 2011. This authorization has no expiration date.

The Company did not repurchase any shares of its common stock during the three and nine-month periods ended October 1, 2011. During the first nine months of fiscal 2010, beginning in the third quarter, the Company repurchased and retired 1,837,450 shares of its common stock at an average price of $24.00 per share. 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. Future repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise. The timing and amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions, share price, other investment priorities, and other factors.

NOTE 11 – STOCK-BASED COMPENSATION:

Under our Amended and Restated Equity Incentive Plan, the compensation committee of our Board of Directors may award incentive stock options (ISOs and non-ISOs), stock appreciation rights (SARs), restricted stock, unrestricted stock, stock deliverable on a deferred basis (including restricted stock units), and performance-based stock awards, intended to help defray the cost of awards. 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 nine-month period ended October 1, 2011.

	Assumptions

Volatility		34.97	%
Risk-free interest rate		2.67	%
Expected term (years)		6.8
Dividend yield		--

The fair value of restricted stock and restricted stock units (collectively, “restricted stock awards”) 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 11 – STOCK-BASED COMPENSATION: (Continued)

The following table summarizes our stock option and restricted stock awards activity during the nine-month period ended October 1, 2011:

	Time-based stock options			Restricted stock awards

Outstanding, January 1, 2011		2,471,486			481,413

Granted		450,600			384,300
Exercised		(744,511	)		--
Vested restricted stock		--			(163,137	)
Forfeited		(100,600	)		(50,550	)
Expired		(16,200	)		--

Outstanding, October 1, 2011		2,060,775			652,026

Exercisable, October 1, 2011		1,085,163			--

During the three-month period ended October 1, 2011, we granted 46,500 time-based stock options with a weighted-average Black-Scholes fair value of $9.54 per share and a weighted-average exercise price of $30.17 per share. In connection with this grant, we recognized approximately $18,000 in stock-based compensation expense during the three-month period ended October 1, 2011.

During the nine-month period ended October 1, 2011, we granted 450,600 time-based stock options with a weighted-average Black-Scholes fair value of $11.79 per share and a weighted-average exercise price of $28.76 per share. In connection with these grants, we recognized approximately $651,000 in stock-based compensation expense during the nine-month period ended October 1, 2011.

During the three-month period ended October 1, 2011, we granted 40,000 shares of restricted stock awards to employees with a weighted-average fair value on the date of grant of $30.17 per share. In connection with these grants, we recognized approximately $48,000 in stock-based compensation expense during the three-month period ended October 1, 2011.

During the nine-month period ended October 1, 2011, we granted 384,300 shares of restricted stock awards to employees with a weighted-average fair value on the date of grant of $28.85 per share. In connection with these grants, we recognized approximately $1,332,000 in stock-based compensation expense during the nine-month period ended October 1, 2011.

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 awards		Total

2011 (period from October 2 through December 31, 2011)	$	863	$	1,290	$	2,153
2012		3,074		4,843		7,917
2013		2,355		3,823		6,178
2014		1,347		2,680		4,027
Total	$	7,639	$	12,636	$	20,275

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 12 – SEGMENT INFORMATION:

We report segment information in accordance with accounting guidance on segment reporting, 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 and acquisition-related expenses 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.

In light of the Acquisition, the Company reevaluated and realigned certain of its reportable segments. As a result, the Company’s reportable segments include a new international segment reflecting our new Canadian operations, our existing international wholesale business, and royalty income from our international licensees. In addition, the Company combined its historical mass channel segments with its wholesale segments. The Company believes these changes in segment reporting better reflect how its five business segments, Carter’s wholesale, Carter’s retail, OshKosh retail, OshKosh wholesale, and international, are managed and how each segment’s performance is evaluated. Effective October 1, 2011, the Company changed its segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation.

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

	For the three-month periods ended																For the nine-month periods ended
(dollars in thousands)	October 1, 2011				% of Total			October 2, 2010			% of Total			October 1, 2011				% of Total			October 2, 2010			% of Total
Net sales:

Carter’s Wholesale	$	288,775				45.1	%	$	251,943			48.7	%	$	703,028				46.7	%	$	603,599			48.1	%
Carter’s Retail (a)		184,498				28.9	%		150,838			29.1	%		465,281				31.0	%		382,570			30.5	%
Total Carter’s		473,273				74.0	%		402,781			77.8	%		1,168,309				77.7	%		986,169			78.6	%

OshKosh Retail (a)		80,472				12.6	%		77,946			15.0	%		191,578				12.7	%		185,050			14.8	%
OshKosh Wholesale		26,472				4.1	%		25,810			5.0	%		61,248				4.1	%		55,935			4.5	%
Total OshKosh		106,944				16.7	%		103,756			20.0	%		252,826				16.8	%		240,985			19.3	%

International (b)		59,400				9.3	%		11,391			2.2	%		81,970				5.5	%		26,832			2.1	%

Total net sales	$	639,617				100.0	%	$	517,928			100.0	%	$	1,503,105				100.0	%	$	1,253,986			100.0	%

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

Carter’s Wholesale	$	33,023				11.4	%	$	44,496			17.7	%	$	90,603				12.9	%	$	122,407			20.3	%
Carter’s Retail (a)		25,698				13.9	%		31,579			20.9	%		72,897				15.7	%		76,405			20.0	%

Total Carter’s		58,721				12.4	%		76,075			18.9	%		163,500				14.0	%		198,812			20.2	%

OshKosh Retail (a)		2,154				2.7	%		9,420			12.1	%		(10,079	)			(5.3	%)		10,474			5.7	%
OshKosh Wholesale		362				1.4	%		3,855			14.9	%		(260	)			(0.4	%)		4,476			8.0	%

Total OshKosh		2,516				2.4	%		13,275			12.8	%		(10,339	)			(4.1	%)		14,950			6.2	%

International (b)		7,919		(c)		13.3	%		5,567			48.9	%		16,500		(c)		20.1	%		12,794			47.7	%

Segment operating income		69,156				10.8	%		94,917			18.3	%		169,661				11.3	%		226,556			18.1	%

Corporate expenses (d)		(12,391	)	(e)		(1.9	%)		(15,039	)		(2.9	%)		(37,240	)	(e)		(2.5	%)		(42,086	)		(3.4	%)

Total operating income	$	56,765				8.9	%	$	79,878			15.4	%	$	132,421				8.8	%	$	184,470			14.7	%

(a)	Includes eCommerce results.

(b)	Includes international retail and wholesale sales, and international licensing income.

(c)	Includes $5.9 million related to the amortization of the fair value step-up for Bonnie Togs inventory acquired and a $1.0 million charge associated with the revaluation of the Company’s contingent consideration.

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

(e)	Includes $0.1 million and $2.3 million of professional service fees associated with the Acquisition for the three and nine-month periods ended October 1, 2011, respectively.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 13 – EARNINGS PER SHARE:

The Company calculates basic and diluted net income per common share in accordance with accounting guidance which requires earnings per share to be calculated pursuant to the two-class method for unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).

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 awards, 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 is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:

	For the three-month periods ended						For the nine-month periods ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010

Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		57,729,572			58,325,162			57,366,529			58,513,228
Dilutive effect of unvested restricted stock awards		121,633			89,931			108,577			111,110
Dilutive effect of stock options		464,846			599,598			599,805			781,849
Diluted number of common and common equivalent shares outstanding		58,316,051			59,014,691			58,074,911			59,406,187

Basic net income per common share:
Net income	$	34,449,000		$	49,657,000		$	79,231,000		$	111,578,000
Income allocated to participating securities		(384,738	)		(427,084	)		(890,416	)		(956,589	)
Net income available to common shareholders	$	34,064,262		$	49,229,916		$	78,340,584		$	110,621,411

Basic net income per common share	$	0.59		$	0.84		$	1.37		$	1.89

Diluted net income per common share:
Net income	$	34,449,000		$	49,657,000		$	79,231,000		$	111,578,000
Income allocated to participating securities		(381,699	)		(422,775	)		(881,305	)		(944,082	)
Net income available to common shareholders	$	34,067,301		$	49,234,225		$	78,349,695		$	110,633,918

Diluted net income per common share	$	0.58		$	0.83		$	1.35		$	1.86

For the three and nine-month periods ended October 1, 2011, anti-dilutive shares of 963,925 were excluded from the computations of diluted earnings per share. For the three and nine-month periods ended October 2, 2010, anti-dilutive shares of 673,804 and 601,404, respectively, were excluded from the computations of diluted earnings per share.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS:

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, while other amendments change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

In June 2011, the FASB issued guidance to amend the presentation of comprehensive income to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied retrospectively. The Company will include such disclosures in our first quarter of fiscal 2012 quarterly report.

In September 2011, the FASB issued new guidance on testing goodwill for impairment. This guidance gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This guidance is effective for fiscal years beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

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.

On June 30, 2011, Northstar Canadian Operations Corp. (“Northstar”), a newly formed Canadian corporation and a wholly owned subsidiary of The William Carter Company (a wholly owned subsidiary of Carter’s, Inc.), purchased all of the outstanding shares of capital stock of Bonnie Togs (the “Acquisition”) for total consideration of up to CAD $95 million. CAD $60 million was paid in cash at closing. Such payment is subject to post-closing adjustments. The sellers may also be paid contingent consideration ranging from zero to CAD $35 million if the Canadian business meets certain earnings targets for the period beginning July 1, 2011 and ending on June 27, 2015. Sellers may receive a portion of the contingent consideration of up to CAD $25 million if interim earnings targets are met through June 2013 and June 2014, respectively. Any such payments are not recoverable by the Company in the event of any failure to meet overall targets.

As of July 2, 2011, the Company had included a discounted contingent consideration liability of approximately $24 million in its unaudited condensed consolidated balance sheet based upon the high probability that Bonnie Togs will attain its earnings targets. The fair value of the discounted contingent consideration liability as of October 1, 2011 was approximately $23 million and is included in other long-term liabilities on the accompanying unaudited condensed consolidated balance sheet. The $1.0 million change in the fair value of the liability is reflected as $1.0 million in accretion expense and $2.0 million in other comprehensive income resulting from a favorable foreign currency translation adjustment. The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis. The Company will continue to revalue the contingent consideration at each reporting date.

Our unaudited condensed consolidated statements of operations for the three and nine-month periods ended October 1, 2011 include the results of Bonnie Togs effective July 3, 2011.

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

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						Nine-month periods ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010

Net sales

Carter’s Wholesale		45.1	%		48.7	%		46.7	%		48.1	%
Carter’s Retail		28.9