Michael Casey - Chairman and Chief Executive Officer Richard Westenberger - Executive Vice President and Chief Financial Officer Brian Lynch - President Sean McHugh - Vice President and Treasurer

Maria Vizuete - Piper Jaffray Taposh Bari - Goldman Sachs Susan Anderson - FBR Capital Markets Robert Ohmes - Bank of America Nancy Hilliker - Citi Research Rick Patel - Stephens Incorporated Steve Marotta - C L King & Associates Anna Andreeva - Oppenheimer

Ladies and gentlemen, please standby. We are about to begin. Good day everyone and welcome to Carter's Second Quarter 2015 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President; and Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its second quarter 2015 earnings press release earlier this morning. A copy of the release and presentation materials for today's call, have been posted on the Investor Relations section of the company's website at www.carters.com. Before we begin, let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent Annual Report filed with the Securities and Exchange Commission and the presentation materials posted on the company's website. Also on this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also today's call is being recorded. And now, I would like to turn the call over to Mr. Casey.

Thanks very much. Good morning, everyone. Thanks for joining us on the call. Before we walk you through the presentation on our website, I would like to share some thoughts on our business with you. We made good progress with our growth initiatives in the second quarter. We exceeded the sales in earnings goals we shared with you on our last call and achieved sales growth in all of our business segments. In the second quarter, we opened 34 beautiful new stores. We began to pilot our rewarding moments loyalty program, we saw the highest growth in online sales to U.S. consumers in nine quarters and we launched our e-commerce business in China. Despite the highly, promotional retail environment in the second quarter, we improved price realization and our gross profit margin. We leveraged SG&A, expanded our operating margin, and returned excess capital to our shareholders. Given our strong first half performance and outlook for the second half, we've raised our earnings forecast for the year. In terms of business trends we saw sales growth in April, May and June. We have a strongest sales growth in June as we began to deliver our new fall product offerings. And we are expecting very good growth in sales and earnings in the third quarter. Traffic to our stores and online has been more sluggish than expected in July. We believe we've been less promotional than our competitors given our favorable inventory position. We're expecting better performance as we move beyond this clearance sales period and then to the back-to-school shopping season. As you know traffic has been a challenge for the retail apparel industry. Increasingly, consumers preferred convenience to shopping online and we've benefited from this secular shift in shopping behavior with our successful e-commerce business. In the first half, Carter's and OshKosh outperformed the industry decline in store traffic with the best traffic to our new side-by-side stores. We believe we have good traffic driving initiatives planned for the second half starting with our back-to-school marketing. We've increased our investments in direct mail marketing, impactful emails and direct marketing, which have been highly effective tools to drive traffic to our brands. We believe our investments in marketing together with our stronger product offerings and other growth initiatives will enable us to achieve our growth objectives and continue to gain market share. With nearly seven months into the year, I believe, we're making good progress with our top priorities for 2015, which include creating a more compelling direct-to-consumer experience with our brands, providing better performance for our wholesale customers, launching e-commerce in China and improving our supply chain capabilities and performance. With respect to improving the direct-to-consumer business experience, we have begun to pilot our new customer loyalty program called rewarding moments in our stores. It's a beautifully branded cross-channel cross-branded rewards program, which we believe will increase the frequency of visits and customer retention. It's in its early phases, but today we've offered, a very high percentage of our customers are enrolling in this new program. In our e-commerce business, we believe we're creating a more engaging online experience for consumers, especially millennial moms, with the refresh of our Carter's brand marketing, easier site navigation, and expanded scope of beautiful outfits and an easier checkout process. Beginning this fall, we've expanded the size range of our Carter's product offering at all stores and online to improve size 8. We've had over seven leaves of selling of size 8 and today its sell-throughs are much higher than expected. We believe these initiatives will enable us to extend our relationship with consumers and drive higher sales. With respect to providing better performance for our wholesale customers, in the first half, we saw a good over-the-counter selling of our spring product offerings and favorable trends in our replenishment business. We believe many of our wholesale customers were lean on non-inventory levels in the first half and chasing demand. As a result we saw significant reduction in our excess inventory levels and sales to the opt [ph] price channel. In May, we launched our new Little Layette product offering. This is a high margin replenishment program for the national retailers, beautifully textured [ph] and supported at a high level by our supply chain. This fall, we have expanded and improved the presentation of our playwear product offering with Kohl beginning with the back-to-school shopping season. This initiative built on a very successful expansion of our baby product offering with Kohl's last year. And we're encouraged by the recent reports by Target and Walmart, which indicate a greater emphasis on the baby product market. We have a strong brand presence with each of these retailers and may benefit from higher traffic generated by their new initiatives. With respect to China, in June we launched our Carter's brand on Tmall, Alibaba's consumer website. Our initial focus is to offer a small subset of the total Carter's product offering and we plan to expand the product choices over time based on the consumers' response to this new business. There are over 40,000 children born every day in China. Four times the number of births in the United States. It's a rich market opportunity for us it's estimated to be about $12 billion market. Recent research indicate that Children's apparel is the fastest growing segment of the apparel market in China. The research also tells us that Chinese consumers look for brands and have a reputation for safety, quality and value. These are the brand attribute that have declined our Carter's brand for generations of consumers. We continue to see strong demand from China on our U.S. website with sales up over 20% in the second quarter. In May, Rich and I were in Shanghai, meeting with our international team and advisors, exploring the opportunity to establish a brick and mortar presence in China. As these plans firm up, we'll have more to share with you. With respect to improving our supply chain capabilities and performance, we've continued to see excellent performance from our suppliers in the second quarter. We now have better visibility to strength 2016 product costs, which we expect will begin to favorably impact our product margins beginning later this year and into the first half of next year. We've taken [indiscernible] of this favorable cost environment and negotiate product costs for about a third of our product offerings through fall of 2016. As may know, there is currently an abundance of cotton in the market, keeping prices low. Oil prices are also lower. And there appears to be adequate manufacturing capacity at our cost objectives given the weakness in global demand for apparel. These favorable inputs may help to offset the effects of rising labor costs in Asia. In the second quarter we continue to leverage our distribution expenses, the second largest component of our SG&A driven by increased efficiencies in our distribution network. That's a brief update on some of our top priorities for 2015, each of these initiatives supports our focus on providing the best value and experience in young children's apparel, extending the reach our brands and improving profitability. This focus is served us well for many years and is enabled good returns for our shareholders. In summary we've made good progress improving our business in the first half given the strength of our growth initiatives and latest forecasts. We believe we are on track to achieve our growth objectives this year. Looking beyond 2015, we are encouraged by recent reports indicating an improving trend in the U.S birth rate. And we expect to benefit from this improving trend, given our strength of our brands in the marketplace. I want to thank our employees throughout the company, who helped us achieve the strong results we're reporting this morning. I'm grateful for their passion for our brands, their high level of engagement and their commitment to help us execute our growth plans. Rich will now walk you through the presentation on our website.

Thanks, Mike, good morning everyone. I remind you that our presentation materials which are posted on our website include important reconciliations of our GAAP financial results to the as adjusted basis, which we will use in discussing our performance this morning. We encourage you to review this information as part of your analysis of the Company's results. I'll begin on Page 2 with some highlights of our performance in the second quarter. As Mike mentioned, we delivered a very successful quarter with good growth in both top line revenue and earnings. Consolidated net sales increased 7%, with each of our business segments posting growth over last year. Consolidated adjusted operating income grew 11% to $65 million and our adjusted operating margin improved by 50 basis points to 10.7%. Adjusted earnings per share grew strongly at 19% to $0.73 per share. We outperformed our previous forecast, which had called for adjusted earnings per share to be roughly comparable to a year ago. At a high level, this better performance was driven by lower than forecasted spending, higher wholesale sales in the U.S. and overseas and gains on the revaluation of foreign currency contracts, which we put in place to help manage our FX exposure in Canada. We believe a good portion of our upside in the quarter approximately $0.08 represents favorable timings, which we expect will reverse in the second half of the year. Moving to Page 3, with some details on our sales performance in the second quarter. Our consolidated sales growth was driven by higher unit sales with average pricing improving modestly. We saw good demand in the U.S. for our Carter's and OshKosh branded products. Total Carter's sales in the U.S. grew about 6% with growth in our retail stores, e-commerce and wholesale businesses. Our retail segment which includes both our retail stores and e-commerce businesses grew approximately 6%. And Carter's wholesale net sales also grew about the same level of 6% over last year. OshKosh continue to perform well in the second quarter with total OshKosh sales in the U.S. up 11% over last year. We posted good growth in international in the second quarter with net sales in this segment up over 8% versus last year. Like most companies with international operations are reported results have been negatively affected by the strong U.S. dollar. On a constant currency basis, international segment net sales increased 17%. On Page 4, we've included some additional information on comparable store sales. Our comp reporting this year is affected by a calendar shift caused by having 53 weeks in fiscal 2014, and 52 weeks this year. Information on Page 4 intended to be helpful in understanding the differences between the comparable sales and total reported sales growth metrics. In the second quarter our U.S. direct-to-consumer comparable sales were positive in the low single-digits for both Carter's and Oshkosh, this reflects down brick-and-mortar store comps, consistent with the lower consumer traffic that we've mentioned and solid e-commerce comps for both brands. Moving to Page 5, and our second quarter P&L. Consolidated gross margin improved by 10 basis points over last year to 42.9%, reflecting a modest improvement in average unit pricing and comparable product cost. Lower than expected traffic to our stores and a more promotional retail environment adversely effected pricing in our U.S. direct-to-consumer businesses in the second quarter. Adjusted SG&A improved by 30 basis points to 33.6%. I'll provide some more detail on SG&A in a moment. The combination of our sales growth, gross margin expansion and expense leverage, resulted in solid adjusted operating margin expansion over the last year. The low operating income we reported income of approximately $2 million in the quarter, related to the revaluation of foreign currency forward contracts. We've recently reinitiated some hedging activity to help manage a portion of the exposure we have in Canada related to currency exchange rates. Our weighted average share count declined approximately 1% versus a year ago, reflecting our share repurchase activity. So to recap adjusted EPS for the second quarter grew 19% to $0.73 per share. Moving to Page 6 with some additional detail on spending in the second quarter, overall spending grew 6% and we achieved leverage of 30 basis points compared to last year. SG&A was about $10 million higher than last year's second quarter, mostly driven by higher spending in our U.S. direct-to-consumer businesses. Over the last year, we've added 110 net new stores in the U.S. and Canada, and achieved over 25% growth in e-commerce. We've also been investing more in marketing, particularly in e-mail, digital and social media and we're spending more on technology across the business, which is one of the principle drivers of the higher depreciation expense called out on this chart. While distribution and freight expenses have increased due to higher sales volumes. We are achieving leverage in this area of spend through the efficiencies we are generating across our distribution network. I think we've done a good job managing spending across the company, which has been important given the unevenness of consumer demand that we've experienced this year. As I noted earlier, some of our plan spending such as for technology initiatives and hiring related costs are now expected to occur later in the year than originally planned. Accordingly, we expect second half spending will grow at a higher year-over-year rate than we experienced in the first half of the year. Pages 7 to 9 summarize our year-to-date results, we've delivered a solid first half with all key metrics showing improvement. Consolidated net sales have increased 6%. We've expanded gross margin by 90 basis points. Leveraged SG&A and expanded our consolidated operating margins. Adjusted earnings per share have increased 26% versus last year. On Page 9, we've included our business segment financial results for the first half for your reference. Now turning to Page 10 to cover a few balance sheet and cash flow highlights. Our balance sheet is in great shape. Liquidity is strong we ended the second quarter with approximately $250 million in cash and roughly $180 million of availability on our revolving credit facility. Quarter end inventories increased 1% in dollars, compared to a year ago, with unit growth of 6%. We believe inventory was very clean exiting the second quarter. We made good progress in our return of capital initiatives in the second quarter by repurchasing approximately 350,000 of our shares for a total $35 million and paying $12 million in dividend. In the first half of the year share repurchases have totaled $49 million and dividend distributions were $23 million. Our operating cash flow for the first half was $27 million, down a bit from $33 million in 2014. This decline reflects higher earnings and unfavorable movements in network and capital. First half capital expenditures were $50 million, down from $61 million in last year's first half. Our CapEx last year was higher in part because of spending on our Braselton distribution center, which did not recur this year. If we're successful with our plans for the balance of 2015, we believe we'll have another good year of operating and free cash flow generation, which will support a solid investment agenda in the business as well as enable our continued return of capital to shareholders. Page 12 summarizes our second quarter results by business segment. As previously noted, consolidated adjusted operating income grew by $7 million. Our consolidated adjusted operating margin increased 50 basis points to 10.7%. Improved profitability in our U.S. Carter's businesses, primarily wholesale, drove the overall operating margin expansion. I will cover our individual business segments in some more detail beginning with Carter's wholesale on Page 13. Net sales in the Carter's wholesale segment grew 6% in the second quarter. This growth was driven by strong demand for new fall product and the launch of the new playwear initiative. Spring 2015 season to-date over the counter selling in our top accounts increased in the low single-digits with improved AURs compared to last year. Segment operating margin improved by 360 basis points, reflecting solid demand, higher product margins, and lower off-price channel sales. Fall of 2015, seasonable things are up in the mid single-digit range with good forecasted replenishment demand. As Mike mentioned one of our key incentives in wholesale this year is the rollout of an expanded playwear assortment Kohl. Page 14 includes a photo of one of these new Carter's playwear shops, which were in place to nearly 800 call stores now, early results have been good. Turning to Page 15 and the Carter's Retail Segment, total Carter's U.S. Retail Segment sales in the second quarter increased 6% versus last year, driven by the addition of 53 net new stores and an increase in direct-to-consumer comparable sales of 1%. Retail store comparable sales declined by 4%, we believe the primary drivers of the down comp were lower consumer traffic and the shift of the Easter holiday end of the first quarter this year compared to the second quarter in 2014. Also we've seen a drop in traffic to stores in tourist destinations which drive a large portion of their sales from international customers. In part, we believe do to strength of the U.S. dollar. Monthly retail store comps improved sequentially during the quarter but remains negative. We opened 13 new stores in the second quarter and have opened 31 net new stores year-to-date. New stores continue to track in line with our expectations. Carter's e-commerce sales grew 21% over last year and represented 19% of total Carter's retail segment sales. Demand from U.S. customers was especially strong and demand from international customers on our U.S. website increased in the second quarter, which is an improvement from business in the first quarter where international demand declined year-over-year. Carter's retail segment profits were $38 million in the second quarter, compared to $40 million last year and segment operating margin decline by 170 basis points. This margin decline reflects higher levels of promotional activity given the softer than planned traffic trends, retail store expense deleverage and the 53 to 52 week calendar shift. Within the overall Carter's Retail Segment, e-commerce operating margins have increased year-over-year in part due to the efficiencies we're seeing in the distribution and fulfillment function. Pages 16 and 17 include selections from a recent Carter's direct mail piece. Page 16 highlights our new sites eight offering across our retail stores and online channel. We're encouraged by our consumers' initial responses to this expanded merchandise offering. Page 17 is also from a recent direct mail piece, this one featuring graphic bodysuits. Overall, we have been redesigning our marketing to freshen up the Carter's branding, which we believe is more contemporary and compelling, particularly to millennial moms. Moving to Page 18, in OshKosh retail, segment sales increased 9% versus last year, driven by the addition of 34 net new stores in the U.S. and strong e-commerce sales growth. Direct-to-consumer comparable store sales increased 3%. Retail store comparable sales declined 2.6%, driven by the same factors that crush with the Carter's retail store comp namely softer consumer traffic trends and the Easter shift. OshKosh side-by-side stores comped positively in the second quarter. During the second quarter, we opened 15 new OshKosh stores, all of which were in the side-by-side format and closed two. Side-by-side stores now compromised one-third of our OshKosh store portfolio as of the end of the second quarter. We're forecasting approximately 45 new OshKosh side-by store - side-by-side store openings in 2015. E-commerce was a particular source of strength for OshKosh in the second quarter with net sales growth of 31% and comparable sales growth of 36%. We believe the quality of our assortments and increased store presence in the U.S. are contributing to the strong online performance. The operating loss and margin of the OshKosh Retail Segment in the second quarter was comparable to last year as increased promotional activity, adverse impact of the Easter shift and retail store expense deleverage were offset by lower e-commerce fulfillment cost. Pages 19 and 20 are from our recent Oshkosh direct mail piece, featuring portions of our back-to-school assortments. Our back-to-school marketing focuses on communicating the value, convenience, and relevance of the Oshkosh brand. Pages 21 and 22 include photos of our stores in the Dolphin Mall in Miami. We recently relocated two separately positioned stores within this mall to a new location in the side-by-side configuration. The Dolphin Mall stores are among the highest volume stores in our portfolio. These new stores look great. We believe consumers are going to respond well for this new side-by-side location in such a productive mall. Moving to OshKosh wholesale on Page 23, second quarter net sales grew 23% compared to last year, principally driven by earlier demand for fall product versus a year ago. Spring 2015 seasonal over-the-counter selling at our top accounts increased in the high single-digits compared to last year with improved AURs. OshKosh Wholesale Segment operating income in the second quarter grew to $2 million with segment operating margin improving meaningfully to nearly 16% reflecting lower product costs, lower inventory provisions, and lower off-price channel sales. Fall 2015, seasonal bookings are expected to be down in the low single-digit range. Full year OshKosh Wholesale Segment sales are forecasted to decline approximately 12% or about $9 million. Moving on to our international segment on Page 24, second quarter international segment net sales increased 8% on a reported basis, and grew 17% on a constant currency basis. Reported net sales of our retail stores in Canada increased 3% versus last year, our growth of 16% on a constant currency basis. Same-store sales were comparable to last year, which was much better than we had planned for the second quarter in light of the Easter shift as well as having move some direct mail marketing into the first quarter. We're really pleased with the performance and the momentum of our business in Canada right now. For the first half, Canadian retail store comps have increased 3%. We opened six new stores in Canada in the second quarter, bringing our total store count to 133. New stores are performing in line with our expectations. Our international e-commerce business grew to $3 million in the second quarter, up from $1 million last year, driven by e-commerce sales in Canada. Net sales in the wholesale component of our international segment grew by $2 million to $26 million in the second quarter, driven by growth in multiple markets outside of Canada, partially offset by loss sales related to the Target Canada bankruptcy in 2015. International segment adjusted operating income was roughly comparable to the prior year at $8 million. Segment operating margin declined by 160 basis points to 11.5%, reflecting unfavorable foreign exchange costs for goods sold in Canada and China-related cost. Turning to Page 25, in our new e-commerce business in China, as Mike said, we've recently launched our China e-commerce business on Tmall. So in startup mode in this new business, our current product offering is somewhat limited and we haven't yet done a lot of marketing, but we're encouraged by the initial reaction of Chinese consumers to our products. We've hired a very good team to manage this new business. Its employees are based in Shanghai. And we'll keep you posted on our progress as we proceed in China. Pages 26 and 27 highlights some second quarter store openings from several of our international partners. Page 26 is a picture of a new Carter store in Jeddah, Saudi Arabia. Page 27 is a new co-branded Carter's and Oshkosh store in Jakarta, Indonesia. Our partners collectively expect to open approximately 130 new stores in 2015, which would increase our international partner retail presence to nearly 750 locations throughout the world through a combination of pre-standing stores and shopping shops. I mentioned the success of our partners business on our last call, this part of our business which represented over $50 million in annual net sales in 2014 is expected to cause sales growth of over 20% this year. Now, turning to Page 28 for our outlook for the fiscal year and the third quarter. Given our solid first half performance and current expectations for the balance of the year, we're raising our earnings outlook for the full year. We expect net sales to grow appropriately 5% driven by our U.S. direct-to-consumer and international businesses. This view on net sales was consistent with our previous guidance. Unfavorable exchange rate movements, the 53rd week comparison to 2014 and the impact of the West Coast port delays are collectively estimated to reduce our expected 2015 revenue growth rate by about three percentage points. We expect full year adjusted earnings per share growth will be in the range of 12% to 15% compared to 2014's adjusted $3.93 per share. This compares to our prior EPS growth expectation of 10% to 14%. 2015 is expected to be a strong year for our investment in the business. As noted here, we plan to open over 100 new retail stores in North America. And as mentioned previously, we have significant agenda of technology initiatives indented to support our growth plans. We project full year capital spending will be approximately $130 million, funded by strong operating cash flow in the range of $275 million to $300 million. For the third quarter, we expect net sales to increase approximately 7% driven by growth in our U.S. direct-to-consumer in Carter's wholesale businesses. We expect third quarter adjusted diluted earnings per share to increase approximately 10% to 15% compared to adjusted EPS of $1.27 in last year's third quarter. Meaningful risk that we continue to monitor include inconsistency in consumer demand and traffic, the overall level of promotional activity in the marketplace and possible further weakening of the Canadian dollar relative to the U.S. dollar. With these remarks, we're now ready to take your questions.

Thank you, sir. [Operator Instructions] And for our first question we go to Stephanie Wissink with Piper Jaffray.

Hi, good morning. It's actually Maria Vizuete in for Stephanie. Thanks so much for taking my questions. First off, we're just wondering if you can talk a little bit more about what you're seeing in the competitive environment. You mentioned some toughness in July and we're just wondering was that although a result of timing shift may be in the fall product sales. Thank you.

I would say just generally speaking traffic in the second quarter was inconsistent. You've read the same reports on the retail market as I have. April was tough, largely because Easter shopping moved into March. May was better. But I think what I saw is consumer spending rose some portion of about 1%, June was tougher than May and July, July you haven't seen much written about July yet. But based on our visibility, I would say July has been tougher than June. That said we had good growth. We have sales growth in April, May and June. We're expecting a good third quarter. July is largely a clearance month. It's a smallest component of our third quarter probably contributes - probably less than 25% of our total sales to less than 15% of our earnings in the third quarter. So our outlook for our business is good. We've got strong product offerings, strong marketing does looking stores and young children's apparel. So we feel good about our growth plan, this year. But I would say demand for most of this year has been inconsistent.

I appreciate that insight. And then just even the persistent negative store level comp, we're just wondering does that change your view of domestic growth over time? Thank you.

No, no, it doesn't. Again, we saw negative comps in April but expected it. And the comps for Carter's, I would say, were slightly negative in May and June. We're expecting, based on some strong initiatives in the second half, we're expecting positive short comps in the second half, driven by size 8 that expanded product offering for Carter's, which has been received extremely well. Like consumers we've got the rewarding moments, loyalty program launching in the second half. And so, I think, we've got a much stronger product offering. And we feel good about the second half of the year.

Thank you so much. Best of luck.

Thank you.

And for our next question we go to Taposh Bari with Goldman Sachs.

Hey guys, good morning.

Hi Taposh.

Mike, I wanted to follow-up on the Walmart target point. Clearly they are investing in baby in a big way and you saw a lot of baby stuff. How do you expect their strategies to affect your business? Are you expecting either shelf-space gains or even better presentation of your brand within their doors? It will be helpful if provide some more comments.

We're expecting - yes I think as you know the two of our largest customers, we have a very strong brand presence on the floor. And buyers, so I think we got the best looking stuff on the floor target Walmart. And our brands have always been known as traffic drivers. They want our brands in there, they know the mom needs to get out of the house frequently because the child is going through multiple wardrobes in those early years of life. So I'm hopeful, their focus on the baby product market drives more young families into their stores and when they go shopping and target Walmart and they will see a strong presence of our brand. So that these have been good growth accounts for us and we're expecting good growth in the second half and for the foreseeable future.

Great. And then I wanted to follow-up on the product cost commentary, it sounds like you've got Spring locked in, can you just give us sense of whether it's up or down year-over-year like you have over past few seasons and then as far as the third of the fall business you have locked in right now are those rates up or down versus fall of 2015?

Yes, generally speaking we are entering into a much favorable cost environment. We are expecting lower cost in the second half are based on what we know today, we are expecting lower cost in the first half of next year. Given the favorable cost environment we've locked into a third of our product cost through all of 2016. We don't know enough about fall 2016; we are still developing the line now. But I think there is reason to be optimistic about the cost environment for the balance of this year and certainly into the first half of next year.

Great, if I could just squeeze it one more in, on the Carter's DTC operating income performance, couple of quarters now, I guess, less than stellar performance on that particular line. And I think there are a bunch of exaggerated [ph] factors, but if you can just help us understand how you're thinking about that particular line, operating income for the Carter's DTC business going forward that would be helpful?

That's two sided. You look at the first half results, I believe our operating segment is - operating margin is down about 150 basis points. If we had maintained that 17.9% margin from last year, we would have had another $7 million or so of operating income. To your point, I think, there were a number of somewhat unusual factors in the first half you had effect of the port strikes. In fact, we have seen this drop off of international traffic too. Both our U.S. website and to more towards located retail stores really a feature of what's happened with currency rates and the non-balance traffic trends being a bit softer. Those of all had an impact on our AUR. We are also in the first half of the year, so up against modestly higher product cost year-over-year. So I think if you look at the full year outlook for the segment operating margin, that's probably a better metric, we were encouraged by what our forecast indicated, which would be expansion of the retail segment, meaning both the stores and e-commerce in the second half of the year. So I would look to the second half into the year as with the better indication.

Thanks a lot. Best of luck.

Thank you.

Thank you.

Our next question we go to Susan Anderson with FBR Capital Markets.

Good morning. Congrats on the good quarter.

Good morning Susan, thank you.

I was wondering if maybe you could touch on somewhat you got a little bit of pricing this quarter, what should we expect for the back half, I don't think you are probably raising prices, but you think you can continue to drive AUR maybe with lower promotions.

Sure, it is just based on latest forecast we are expecting modest price increases for the second half largely driven by mix. I think it’s noteworthy, the second quarter, and these were off price sales, this venue you used to sell excess inventory, I think it was down about 50% in the second quarter. That has the effect of improving price realization. So that's an indication of a higher quality business. So there is no need to raise prices in the second half or it will have lower product cost, so we've taken some of that lower product cost and invested into product benefit, so we feel very good about the strength of the product offering in fall and spring. We've sold in spring and we've gotten a very good response to the improvements made to that product offering. So - but - I would expect that price increases into the second half and probably into the first half of next year will be modest.

Great, that's helpful. And then just to dig a little bit deeper on the Carter's retail segment, and the traffic, and profit issue, how much, I guess, was the Easter shift impact in the 52, 53 week on this quarter. And I guess, it sounds like you expect it to kind of improve from here going forward?

Yes, Susan, the Easter shift cost about two points in the quarter. That was about two point impact, to our comp bases. And again, we feel good about a lot of things you can take into account, you had the Easter shift, despite that we still have positive direct-to-consumer comps in both brands. And then we had this international traffic thing did also impact us. But the Easter shift, the lowest about two points.

Got it, that's helpful. And then just one last question on the OshKosh segment, maybe if you could just update us there on your expectations for profitability as we kind of go into the back half?

Well, we've made very good progress this year, strengthening the brand, its performance, as I've shared with you in the past, very strong team, we're seeing consistency in talent, consistency in execution. We're focused on improving the product offering make sure it's relevant to the millennial mom, focusing on an explicit message around value, improving the convenience of shopping for the brand with the side-by-side stores. So last year we passed through it new milestone over $500 million in sales, we are working our way closer to $800 million. We believe by 2019 profit operating margin last year was around 6% that we earned about $30 million. It will be closer to a 7% operating margin this year. I hope by 2019 at least 8% to 10% and if it is, we will more than double the profitability that we have last year from the brand. So couldn't be happier with the performance and the progress we're making with OshKosh.

Great. Thanks. Good luck next quarter. I think the stores and the product look great so far for back-to-school.

Thanks for that feedback. Thanks very much.

Sure.

And for our next question, we go to Robby Ohmes with Bank of America.

Hey guys congrats on a great quarter.

Robby, good morning. Thanks very much.

Good morning to you. Mike I had some questions on the Carter's playwear business couple of things. Could you give us a little more detail how big it should be this year? Number one. Number two, is it exclusive to call so, could it be a wholesale business that is another wholesale customers? But third, is Carter's playwear rolled out or being rolled out to your own stores? And then finally could you walk us through sort of the how Carter's playwear affects the OshKosh Playwear business? Well hopefully doesn't impact it. Thanks.

You're welcome. Hey, Robby, just I'll take a shot at your two point question here. We're really proud of our growth in playwear. We've now got the market share leadership position in Target playwear which we worked really hard to get and we've grown significantly in that four to seven and four to eight, eight segment and even eight with the recent edition of size eight in Carter's. I think we've got well-designed product that [indiscernible] would you need design static. And we've been working on strategies on how to help our wholesale accounts for the last couple of years and growing their playwear business, because we built a beautiful playwear business in our direct channels. So we have a very robust playwear offering, it's a significant part of store in e-commerce business, we do have placed in wholesale, have had good place in the past, but we want to intensify that. So we are talking to many of our partners Kohl's being one of them, we've had success with in the baby business with establishing compelling concept shops. And we work with Kohl's after the addition of baby shops in the last 18 months about a playwear strategy and agree to work with us on floor space and putting together promotional strategy to intensify our playwear presence for back-to-school and going forward. So just comprise some of the fixtures on the floor, majority of their doors in an integrated marketing plan, it's only been out there a few weeks, but the results so far are very good and the big news of the starting for back-to-school in the next couple of weeks with the campaign called Count Me In that we're launching across not only direct channels, but also in our wholesale customers, including Kohl's. We think it's a good strategy, we would like to see it in all of our wholesale accounts, we think it’s a significant opportunity overtime. As you may know, we have significant penetration in the baby business and good penetration in playwear, but we've got a big opportunity, I think, to grow the playwear business, assuming we're successful with our effort to Kohl's.

Has been impact on OshKosh?

Impact on OshKosh, we kind of see a two different things, we've led in wholesale with the Carter's playwear business, they do have choices on that spend their dollars in terms of private label. And what have you saw, we've led with the Carter's brand in the wholesale business. In terms of our direct channel, I don't think there is any significant impact we've got. Mom shops that four to five or even six stores in brands for her playwear product and we just want to be two of the top ones in that. So we've had a good success with OshKosh and good success with Carter's. I think many times she comes into the Carter's store for her baby product and then - and then looks our playwear and it's a different aesthetic for Carter's and OshKosh. We think that that we think the one plus one is actually three when it comes to how the brands are work together. That helpful to you Robby? We'll go to the next question.

And for our next question we go to Kate McShane with Citi Research.

Hi, thanks for taking our questions. This is Nancy Hilliker on for Kate McShane.

Good morning, Nancy.

Good morning. I'm hoping, could you give us a little bit more color in terms of the China Tmall launch and - how that impact basically the segment performance here and also if you could just give us some color in terms of your longer term expectations in terms of the size. You know - about now we have that 1% market share in the e-commerce shift, which is kind of generally if you could talk about share opportunities?

Sure, the focus this year was to get - the Carter's brand launched on Tmall. I'm told that 70% to 80% of consumer e-commerce in China is done on Tmall. You can go on carters.tmall.com and you'd see a beautiful presentation of the Carter's brand. Your question how would impact segment profitability near-term not, not meaningfully. We'll probably have start-up costs, some portion of a couple of million dollars and the volume won't be significant that the objective was not to have a big splash this year on Tmall wish to get established, to learn, to see what the consumers' responding to. We currently also have our own Carter's marketing website carters.cn. And that's currently marketing only and next year it will turn into an e-commerce site. So we'll have multiple ways to reach the consumers in China over time. We hope it's a wonderful opportunity for us. And best information we have it could grow to some portion of $60 million to $80 million business over the next five years. And but it's so early. It’s - I will tell you it's a $12 billion market. Children's apparels we're told based on some research that's been done. It is the fastest growing apparel segment in China. And so we are thrilled that it's been launched, our team did an exceptional job getting it launched actually early. So we are in the early days and as that business evolves we'll have more to share with you.

Thanks so much. And then just a quick follow-up. In terms of the birth rate are you already seen the impact of the positive inflection or should we continue reflect benefit?

Sales rep 7% in the second quarter, we have 7% in the third quarter, and we have 5% on a 52-week year versus 53. So I - we never worked that into our assumptions, but it's certainly will - is a nice trend that hopefully will serve us well over time. Many place young moms are shopping for their children, they're likely to see a strong presentation of our brand. But we have done well over the years weather the birth rate was up or down. Our focus is to expand the reach of the brand and wherever consumers are shopping to have the best value, best presentation of young children's apparel.

Thank you so much.

You are welcome.

And we go to next to Rick Patel with Stephens Incorporated.

Good morning, everyone and I'll add my congrats as well.

Thank you.

You mentioned that SG&A spending in the back half will be growing at a higher rate than the first half, can you just give us a little bit more granularity on the different buckets of investments and do you see this as something more weighted towards 3Q, or 4Q, or it will be spreading evenly?

Hi Rick, I would say there's a handful of buckets where we've had some changes in the pacing of the plan spending. We are managing to full year spending plans. We have a number of technology projects which are going to fall more in the second half of the year progresses just not been as - just not as far long as we anticipated initially. There is some additional staffing that we need to add across the organization. We're hiring, as I mentioned, new folks in Shanghai and in Hong Kong. There are that additional staff positions and all-in related costs are come with hiring, in some cases relocation. Marketing is an area where we're intending to spend a bit more year-over-year. And importantly, I'd say we're going to look to continue our international business development activities in the second half of the year. At this point, I'd say that spending, our forecast assumption is that it's fairly balanced across Q3 and Q4.

And can you also talk about the competitive environment and promotions in general. I know that the channel that you're in is very competitive and always fears from a promotional perspective. But have you noticed an uptick in the level of promos as of late and as you think about the back half, are you expecting this level of promotional pressure to be the same as it was in the first half or escalate?

I think the environment continues to be really promotional. We were a bit more promotional in the quarter with things like free shipping and with some of the traffic challenges we did deal with more promotional stores for point tag, but total company, our AURs were still up in Q2. I would say, right now, what's going is our inventory is in very good shape. We've got a lot of competitors that, it's the last month of their quarter I can't speak to the inventory position, but we're seeing them getting a little bit more aggressive in July, and they clear through their product and it’s something we haven't have to do because we've launched all we feel good about that and we're not jammed up an inventory. So that said we will always be competitive, it's a competitive environment out there, we've got to make sure that mom understand. So we've got wonderful value with our great look in product. And we would expect it, when you get in the back-to-school season in the holiday and folks would continue to do with, they have to do to promote their products. And trying to drive traffic in a real competitive environment.

And a quick question on the Friday initiative if I may. Anyway to quantify, how much of the store this will represent and how are you making space for this product, are you deemphasizing any lines or sizes to execute this.

Yes, it's kind of too early to comment on exactly the impact, I would say, we're excited about it. Carter's moms have been asking this for these largest sizes for years. We like to marketing program we've got out there in the product - in our stores and online. And some of our major wholesale account it done so well, really that we've actually gone in and raised our buys for spring 2016 to chase it up in terms of the amount of demand we're having. So we feel really good about it. But it's a little early to comment that safe to say we will meet our plan to exceed in terms of size 8 and it will become a stronger component of the business. In terms of space, it hasn't really been a space issue. We have had a four to seven business. We've got fixtures set up for that. So we've been able to merchandise that in the store in the existing straight points that we've already got.

Thanks everyone, good luck this fall.

Thank you.

For next question we go to Steve Marotta with C L King & Associates.

Good morning everybody, just two quick questions. The first is regarding new store productivity, have you seen any differential in the productivity of new stores over the course of the last year?

I would say it's improved. We're very pleased with the performance of the new stores, particularly side-by-side stores. So, now we're achieving the pro forma goals that we have for the new stores we have in recent years. So that's why we're on track to open over 60 Carter's stores this year over 40 OshKosh stores. We're still rolling. There is very, very good returns on these new stores.

Great. And the second question, Richard, you mentioned marketing spend in the back half of this year is expected to tick up a bit from last year. Can you talk about aggregate marketing spend this year versus last year on dollars?

Steve, I don't think it's something that we've disclosed discretely. So, no.

Okay. Thank you very much.

You're welcome.

And we go next to Anna Andreeva with Oppenheimer.

Great. Thanks so much. Good morning guys. Thanks for taking my questions.

With pleasure.

Just a follow up I guess to Richard, some of the puts and takes on gross margin coming in a bit softer in retail. And I am not sure if you quantify this, but how much of that was driven by this higher promotional activity that you guys saw during the quarter. I guess what was AUR versus AUC relationship versus your expectations and now that you are promoting it sounds like less into the back half, and AUC becomes a bigger tailwind, what's embedded in your gross margin guidance for 3Q and 4Q?

I would say that's the majority of the degradation and the direct-to-consumer margins were lower AURs, lower than we had planned certainly and that was the future of the factors that we've mentioned. The benefit going into the second half of the year with that gap between our assumed pricing and as Mike said earlier we are assuming, a modest improvement in average pricing across the company in the second half of the year that gap between, not assumption and product cost starts to widen out, because we are planning product cost to be down in the second half of the year. So that should spending fund, consumer traffic in the second half and comps and such that should pretend well for the gross margin line in the second half of the year.

So in other words I guess, should we expect gross margin expansion to accelerate from 2Q levels?

Our forecasts indicate more meaningful year-over-year gross margin expansion in the second half of the year, so yes.

Okay. Okay, that's helpful. And I guess on the quarter-to-date, challenges in traffic, are you guys seeing that in July at both Carter's and OshKosh? And what should we expect for 3Q comp?

Yes. It's a Carter's and OshKosh will be affected by more sluggish traffic than we had expected. But for the third quarter, fourth quarter we're expecting modest comp store growth.

Okay, thanks. That's helpful guys. Good luck.

Thank you.

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

Well, thanks for joining us this morning, everybody. We appreciate your questions and your interest in our business. We will update you again on our progress in October. Good bye.

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