sholk molecular diagnostics presentation final.ppt idea...

sholker [printed: August 29, 2007 8:03 AM] [saved: August 29, 2007 8:19 AM] C:\Documents and Settings\sholker\Desktop\Sholk\Presentation\Sholk Molecular Diagnostics Presentation Final.ppt

Idea performance

Positive asymmetric risk-reward under $30 Long Carter’s Inc. (CRI)

Doug Bennett

September 4, 2011


2

Long CRI under $30: thesis summary

•Potential opportunity afforded by overall consumer spending uncertainty and a gross margin squeeze of

uncertain magnitude / duration

•Cotton spike (30% COGS) is transitory and already fading, company has hired Levi’s executive to head up

China sourcing diversification effort (experience with retail and wholesale, denim experience useful given

OshKosh’s return to denim roots). More importantly, the company is putting through mid-single digit price

increases without significant effect on demand

•Company exhibits little fashion risk as it sells baby apparel essentials. Value-priced, branded baby apparel

sales are relatively inelastic to economic cycles as evidenced by growth throughout last recession

•Taken private 3 times since 1993 -> implies stable growth and sustainable competitive advantage. Berkshire

Partners, the private equity firm that took them private in 2001, has increased stake to 13.6% (in the $27-$33

range) and filed a 13D

•If the shares dropped to the $25-$27 range, LBO analysis indicates a private equity firm could bid for the

company at a 30% premium and still earn 15-20%+ IRR’s. Given history with private equity and large Berkshire

stake, $25-$27 is likely downside risk

•Private market value of the firm today at roughly $40/share, based on 8x normalized EBITDA of $300m (2010

EBITDA - $275m). FCFF valuation also suggests value around $40/share (10% discount rate, 2% terminal

growth rate)

•At $30, stock offers asymmetric risk-reward (Bear case -15%, Bull case +35%+)


3

Temporary gross margin squeeze •CRI gross margins will contract in Fall 2011 (and potentially Spring 2012) due to future cotton supplies

contracted for Fall 2011 near record high prices and rising apparel production costs in low-wage countries

(CRI currently sources 55% from China, 45% rest of Asia). Continued pressure would invalidate

management’s expectations for a 14%+ normalized operating margin

• However, cotton prices have fallen sharply since March and are expected to positively affect COGS

beginning in 2012

•Apparel sourcing price pressures are being addressed - company recently hired a supply chain executive

from Levi’s with extensive wholesale & retail sourcing experience in order to spearhead the company’s

sourcing diversification efforts

CRI's battered gross margin

expected to contract further near-term...

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

30.0%

32.5%

35.0%

37.5%

40.0%

42.5%

45.0%

Percent

Cotton (LHS) Gross Margin (Q) (RHS)Source: Bloomberg, FactSet

Indexed

Jan '06

Cotton for Fall 2011

contracted near

highs

Gross margin

squeeze

…which has created uncertainty regarding mgmt's expected

14%+ operating margin

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

Percent

EV/EBITDA (LHS) Operating Margin (LTM) (RHS)Source: FactSet

EV /

EBITDA

Expect continued margin

compression in near-term

EV/EBITDA: 6.7x


4

Better chance to pass through inflation •We estimate the company can raise overall prices by 3-5% and still maintain historical $1-$2 price premium

to private label; expected private label price increases and relatively inelastic demand for value-branded

baby apparel likely to mitigate trade down/demand destruction and associated gross margin pressure

•That said, the company will be attempt to pass 10% price increase in Fall 2011, which poses some risk

Carter’s Spring 2010 sale Carter’s Spring 2011 sale

“Last year, we had a $5, $7, $9 sale. This year, we have a $6, $8, $10 sale in the Carter’s brand and results have

been actually very positive. So that’s a bit more meaningful of a price increase than we’ve moved towards earlier in

the year, but initial results are indicating that there is some price tolerance.” – James Petty, President – Retail

Stores, 4/28/11

+20%

+11%

+14%


5

Little fashion risk •More importantly, an investment in CRI dramatically reduces potential “fashion risk” relative to an investment

in its cheaper peers owing to its position as a value-branded baby apparel retailer/wholesaler with a growing

#1 market position

•While OshKosh outlet store sales are choppy, comparable store sales growth in Carter’s core retail stores

accelerated during the recession and has continued its upward trajectory on difficult comparisons,

suggesting the company’s name-brand, value-priced baby apparel sales are relatively insensitive to declines

in real disposable income

CRI U.S. market share

(Apparel: sizes newborn - seven)

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

Carter's OshKosh

Source: Company reports

Percent Percent

Data not

comparable prior to

2008 due to NPD

restatement

CRI share of U.S. baby & young children's apparel market

Private label

43.0%

OshKosh

3.1%

Carter's

10.9%Others

18.0%

Specialty Retail

25.0%

Source: Company Presentation

Comparable Store Sales 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1'11 Q2'11

Carter's retail (31% of CRI sales) 14.3% 6.5% 4.4% -1.8% 6.2% 4.8% -0.1% 4.1% 9.0% 6.4% 2.5% 1.2% 8.1%

OshKosh (15% of CRI sales) 1.7% 2.4% -5.0% -6.3% 2.7% -4.3% 3.2% 1.9% -1.9% -9.8% 2.2%

Ann Inc. -0.5% -6.1% -3.9% 5.3% 3.6% 0.1% 2.8% -3.3% -14.8% -17.8% 10.7% 15.3% NA

American Eagle Outfitters 5.8% 2.3% -4.3% -6.6% 21.4% 15.5% 12.0% 1.0% -10.0% -4.0% -1.0% -8.0% NA

Gap Inc. -5.0% -13.0% -3.0% 7.0% 0.0% -5.0% -7.0% -4.0% -12.0% -3.0% 1.0% -3.0% NA

Aeropostale Inc. 8.7% 15.5% 6.6% 6.6% 8.7% 3.5% 2.0% 3.3% 8.0% 10.0% 1.0% -7.0% NASource: Company reports, FactSet


6

Stable growth •Carter’s is positioned to capture baby & young children’s demand in multiple channels (branded retail,

outlets, department stores, off-price, mass channel “premium”, e-commerce), which allows nimbleness with

regard to customer channel preference

•If company gains wholesale traction in Canada (likely given retail presence), Brazil (likely given e-commerce

demand) and China (uncertain), our forecasts will prove conservative

•Carter’s owns “brands”, as opposed to “places” sustainable competitive advantage

Sales Channels 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016ERetail StoresCarter's (U.S.)

183 103 126 178 233 288 300 300 300

Carter's Outlet (U.S.) 170 173 180 180 180 180 180 180 180OshKosh (U.S.)

29 12 19 24 29 34 39 44 49

OshKosh Outlet (U.S.) 156 158 161 161 161 161 161 161 161Bonnie Togs (Canada)* 0 0 0 65 83 103 123 123 123Total 418 446 486 608 686 766 803 808 813

Total retail sales $672 $747 $811 $973 $1,217 $1,405 $1,547 $1,614 $1,651growth 11% 9% 20% 25% 15% 10% 4% 2%

Wholesale sales 3

$569 $602 $683 $764 $786 $808 $825 $841 $858growth 6% 14% 12% 3% 3% 2% 2% 2%

Mass channel sales $254 $241 $255 $306 $312 $318 $324 $331 $338growth -5% 6% 20% 2% 2% 2% 2% 2%

Total sales $1,495 $1,590 $1,749 $2,043 $2,315 $2,532 $2,696 $2,786 $2,847Add: licensing $34 $36 $38 $38 $39 $40 $42 $43 $44Adjusted total sales $1,528 $1,626 $1,787 $2,081 $2,354 $2,572 $2,737 $2,829 $2,891

6% 10% 16% 13% 9% 6% 3% 2%1 Mgmt cites potential for 300-400 stores with no major effect on wholesale volumes; we model max at 300

2 Mgmt cites potential for 300+ stores; we model slower growth (50 by 2016) for relative risk

3 Conservative estimate of wholesale growth in US, Excluded: Canada (likely given retail presence), Brazil (likely given ecommerce demand) and China (uncertain)

*A licensee of Carter's/OshKosh before recent acquisition


7

Potential catalyst •Temporary, near-term sales and profitability issues masked the growing, long-term cash-generating power of

J. Crew and Gymboree, leading to depressed market valuations and bids from private equity participants

with longer-term investment horizons (for transaction history, see Appendix I)

•While CRI is not as cheap as JCG and GYMB were pre-offer, its earnings growth prospects are more

attractive and lower risk given proven, #1 market position, negligible fashion risk & diversified sales channels

2008 2009 2010E 2011E 2008 2009 2010E 2011E 2009 2010 2011E 2012ESales $1,428.0 $1,578.0 $1,725.0 $1,840.0 $1,000.7 $1,014.9 $1,080.0 $1,160.0 $1,589.7 $1,749.2 $2,042.5 $2,315.0

growth 7.0% 10.5% 9.3% 6.7% 8.7% 1.4% 6.4% 7.4% 6.4% 10.0% 16.8% 13.3%

EBITDA $142.9 $265.3 $291.2 $321.2 $183.2 $200.9 $220.0 $230.0 $245.0 $275.0 $201.5 $253.7

growth -30.8% 85.6% 9.7% 10.3% 13.5% 9.7% 9.5% 4.5% 37.6% 12.2% -26.7% 25.9%

MarginsGross 38.9% 44.1% 43.5% 43.1% 47.6% 47.3% 47.7% 47.4% 38.0% 38.5% 32.1% 33.4%

Operating 6.9% 13.5% 13.7% 13.8% 14.8% 16.1% 16.5% 16.2% 13.3% 13.9% 8.1% 9.1%Profit 3.8% 7.9% 8.1% 8.3% 9.3% 10.0% 10.1% 10.0% 7.9% 8.4% 5.0% 5.7%

EBITDA 10.0% 16.8% 16.9% 17.5% 18.3% 19.8% 20.3% 20.0% 15.4% 15.7% 9.9% 11.0%

Debt $99.2 $49.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $331.0 $236.0 $293.7 $236.0Cash $146.4 $298.1 $311.0 NA $140.5 $257.7 $228.7 NA $335.0 $247.4 $287.3 $250.9

Offer premium 36% 58% LTMEV/EBITDA (pre-offer) 5.8x 4.8x 6.7xEV/EBITDA (offer) 8.1x 7.9x NA

Source: Company reports, Susquehanna Financial Group, Robert W. Baird, Needham

J. Crew Group (JCG) The Gymboree Corp. (GYMB) Carter's Inc. (CRI)

Specialty retailer of apparel targeting affluent, college-

educated professional and fashion-consious men &

women (& their children) through the retail store and

direct channels

Specialty retailer of high-quality apparel and accessories

for children under the Gymboree, Gymboree Outlet, Janie

& Jack and Crazy 8 brands. Operator and franchisor of

Gymboree Play & Musinc parent-child play centers

Largest branded marketer of apparel exclusively for babies

& young children in the U.S. Sells Carter's, OshKosh, Child

of Mine, Just One You and Precious Firsts branded apparel

through department stores, company-owned retail & outlet

stores, the mass channel, licensed partners & its website

Company Description

170-270 Carter's, 280+ OshKosh, 81 Canadian stores via

acquisition + 100 more over 4-5 years, potential

Canada/Brazil/China wholesale & mass distribution

Growth Opportunities

Planned 75-100 Crazy 8 stores in 2010, 50-60 total

planned openings in all formats in Canada over 4-5 years,

50 franchised international locations

~90-105 total J. Crew in U.S. & Canada, ~15 J. Crew

Factory, ~25 crewcuts, 10-15 Madewll in 2011 (unproven)

& international direct/potential flagship stores

Store base219 J. Crew, 20 Madewell, 9 crewcuts, 83 J. Crew

Factory, 2 crewcuts factory and 3 J. Crew clearance

629 Gymboree, 140 Gymboree Outlet, 119 Janie & Jack

and 72 Crazy 8 stores in the U.S., Canada & Puerto Rico.

3 Gymboree Play & Music play centers and franchised

another 650 in the U.S. and 30 other countries

126 Carter's, 180 Carter's Outlet, 19 OshKosh, 161

OshKosh Outlet

Reason for depressed

valuation (pre-offer)

Management lowered EPS estimates for 2nd half of 2010

which led market participants to overlook long term

growth opportunity

Reduced near-term sales growth outlook (-3% SSS

decline in QE July 2010) and temporary margin pressure

led market participants to overlook strong cash flows,

long-term growth

Near-term gross margin squeeze of unknown duration

distracting market from large, relatively low-risk growth

opportunity


8

Private equity involvement reduces downside •Berkshire Partners, the PE firm that took CRI private in Aug. ‘01 (exit Oct. ’03), has accumulated a 13.6%

stake over the last 8 months in the $27-$33 price range (90k shares @ $32.95 on 8/1/11)

•Though the stake appears to be passive, we estimate a bid in the $32-$36 range could meet a 15-20% IRR

threshold, which assuming a necessary 30% premium for a successful offer, puts a “floor” on the stock price

in the $25-$27 range

•Berkshire’s involvement also reduces the risk of management engaging in value-destroying cash flow

reinvestment, further reducing the investment’s overall risk

$25 - $27 “Floor”

Purchase PriceBasic Shares Outst. 58.13587Current Share Price $25.00Offer Premium 30.0%Offer Price $32.50FD Shares Outst. 60.5FD Equity Offer Price $1,966.5

Return AnalysisTerminal EBITDA $371.3 $371.3 $371.3 $371.3Exit Multiple 7.5x 8.0x 8.5x 9.0xTEV $2,784.8 $2,970.5 $3,156.1 $3,341.8Less: Net Debt 537.4 537.4 537.4 537.4Equity Value $2,247.4 $2,433.0 $2,618.7 $2,804.3Sponsor Ownership at Exit 95.0% 95.0% 95.0% 95.0%Sponsor Equity at Exit $2,135.0 $2,311.4 $2,487.7 $2,664.1Sponsor Equity at Closing $994.7 $994.7 $994.7 $994.7IRR % 16.5% 18.4% 20.1% 21.8%

Purchase PriceBasic Shares Outst. 58.13587Current Share Price $27.00Offer Premium 30.0%Offer Price $35.10FD Shares Outst. 60.6FD Equity Offer Price $2,127.3

Return AnalysisTerminal EBITDA $371.3 $371.3 $371.3 $371.3Exit Multiple 7.5x 8.0x 8.5x 9.0xTEV $2,784.8 $2,970.5 $3,156.1 $3,341.8Less: Net Debt 537.4 537.4 537.4 537.4Equity Value $2,247.4 $2,433.0 $2,618.7 $2,804.3Sponsor Ownership at Exit 95.0% 95.0% 95.0% 95.0%Sponsor Equity at Exit $2,135.0 $2,311.4 $2,487.7 $2,664.1Sponsor Equity at Closing $1,152.2 $1,152.2 $1,152.2 $1,152.2IRR % 13.1% 14.9% 16.6% 18.3%


9

Upside to current valuation

•Private market valuation implied by J Crew / Gymboree LBO precedent multiple of 8.0x normalized 2011

EBITDA around $300m implies stock upside today of 35%

•DCF model (10% discount rate & 2% terminal growth) with low end of management store growth

assumptions, below management-expected margins and potential Canada/Brazil/China wholesale growth

excluded implies stock upside today of ~35% (See Appendix II for DCF and LBO models)

Risk-Reward Recap

Perceived Downside = 8-15% Perceived Upside = 35%+

2010 2011E 2012E 2013E 2014E 2015ESales $1,749 $2,043 $2,315 $2,532 $2,696 $2,786

growth 10.0% 16.8% 13.3% 9.4% 6.5% 3.4%

EBITDA $275 $201 10% $231 $253 $270 $279margin 15.7% 9.9% 11% $255 $278 $297 $306

12% $278 $304 $323 $33413% $301 $329 $350 $362

CRI management goal of 16%+ 14% $324 $354 $377 $39015% $347 $380 $404 $418

J Crew 8.1x 6.5x $1,655 $1,975 $2,278 $2,354Gymboree 7.9x 7.0x $1,783 $2,127 $2,453 $2,535

7.5x $1,910 $2,278 $2,628 $2,7168.0x $2,037 $2,430 $2,804 $2,8988.5x $2,165 $2,582 $2,979 $3,079

Current $29.34 6.5x -4% 13% 29% 34%8.0x normalized EBITDA $41.23 7.0x 3% 21% 40% 45%of ~$300m +41% 7.5x 11% 30% 50% 55%UBS DCF valuation $39.86 8.0x 18% 39% 60% 66%@10% dr & 2% tgr (2016) +36% 8.5x 25% 48% 70% 76%

EBITDA scenarios

Stock return

Enterprise Value

CRI Valuation

Precedent LBO multiples

Implied stock price


10

Long Carter’s (CRI): risks

•Gross margins fail to bounce back in the near-term due to continued commodity inflation and inability to find

cheaper sourcing

•Consumer demand destruction in response to price increases

•Difficult market conditions lowering probability of an LBO and thus, perceived stock price floor

•Successful new OshKosh retail test stores fade, company overinvests in losing concept

•Overall market multiple contraction

Appendix I Historical P.E. involvement – apparel retail


12

Appendix I: Prior private equity transactions •Capital misallocation and other near-term temporary hiccups often distract public investors from the long-

term cash flow generating potential of a firm’s core concepts, affording “control” investors the opportunity to

purchase assets below fair value and manufacture returns

•Private equity firms have been prolific investors in the industry over the past 6 years; U.S. firms capable of a

buyout in our investment universe currently hold an estimated $100+ billion in “dry powder”

Private Equity - Uncommitted Capital ($ bil)

TPG $18.2

Carlyle Group $16.6

Blackstone Group $15.2

Goldman Sach Merchant Banking $13.4

Bain Capital $10.4

Advent International $9.6

Kohlberg Kravis Roberts $9.3

Apollo Global Management $8.9

TA Associates $4.7

Thomas H Lee Partners $4.0

Golden Gate Capital $4.0Source: Preqin Global Private Equity Report - 2011

Retail Apparel Private Equity Transactions (2004-2011)Announcement

Date Revenue EBITDA

11/23/2010 J. Crew Group TPG, Leonard Green & Partners $2,860 1.5x 8.1x

10/11/2010 Gymboree Corp Bain Capital $1,831 1.6x 7.9x

8/24/2009 Charlotte Russe Holding Inc Advent International Corp $380 0.5x 8.0x

7/20/2009 Eddie Bauer Holdings Inc Golden Gate Capital $286 0.3x 5.9x

6/8/2009 J. Jill Division of Talbots Golden Gate Capital $75 0.2x NA

5/23/2008 Angelica Corp Lehman Brothers $297 0.7x 9.2x

10/24/2007 Deb Shops Inc Lee Equity Partners $395 1.2x 11.1x

6/22/2007 Barneys New York Inc Istithmar World (UAE firm) $942 1.6x 18.0x

5/15/2007 Limited Brands Inc - Express Golden Gate Capital $548 NA NA

5/15/2007 American Apparel Inc Endeavor Acquisition Corp $133 NA NA

3/20/2007 Claire's Stores Inc Apollo Management $3,100 2.7x 9.0x

1/18/2006 Burlington Coat Factory Wrhs Bain Capital $1,875 0.6x 6.9x

10/12/2005 Goody's LLC Prentice Capital Management $239 0.2x 10.3x

4/23/2004 Loehmanns Holdings Inc Crescent Capital $167 0.5x 7.4x

Median $388 0.6x 8.6x

Mean $938 0.9x 9.4x

Source: Bloomberg, Citigroup, Susquehanna

Financial Group, Needham

AcquirerDeal

ValueEnterprise Value /

Target


13

Appendix I: Private equity framework •Private equity firms have traditionally focused on stable cash flow streams generated by retailers with

unlevered balance sheets, likely potential growth opportunities and, ideally, iconic brands with high customer

mindshare/dominant market positions

•The historical evidence suggests retailers exhibiting such characteristics are targeted when transitory

problems create uncertainty and investors temporarily discount the stock; the recent J. Crew and Gymboree

buyouts are prime examples

J. Crew shares leading to private equity offer

$25

$30

$35

$40

$45

$50

$55

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Source: FactSet

$/share

2H '10 EPS estimates

low ered - obscures value of

consistent, modestly grow ing

cash f low s and pristine

balance sheet

A 13% offer discount

from previous $50 high

becomes a more

palatable 38% premium

Gymboree shares leading to private equity offer

$35

$40

$45

$50

$55

$60

$65

$70

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Source: Bloomberg, FactSet

$/share

Near-term sales

grow th and margin

uncertainty

depresses shares

An 18% offer premium

from previous $55 high

becomes a more

palatable 57% premium

Appendix II Carter’s Inc. model and assumptions


15

Appendix II: Forecasts vs. consensus / Sales growth

Forecast Consensus Forecast ConsensusSales $2,042.5 $2,043.1 $2,315.0 $2,281.6growth 16.8% 16.8% 13.3% 11.7%

Gross profit $656.1 $672.2 $773.4 $771.2Gross margin 32.1% 32.9% 33.4% 33.8%

EBIT $165.7 $178.3 $209.7 $228.7EBIT Margin 8.1% 8.7% 9.1% 10.0%

EPS $1.75 $1.81 $2.23 $2.24

Source: Analyst estimates, FactSet

2011 2012

Sales growth FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E

Retail 6.7% 11.9% 11.2% 8.6% 19.9% 25.1% 15.4% 10.1% 4.4% 2.3%

Wholesale 1.7% 1.4% 5.8% 13.5% 11.8% 2.9% 2.9% 2.0% 2.0% 2.0%

Mass 10.4% 4.5% -5.3% 5.8% 20.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Net sales 5.3% 6.4% 6.4% 10.0% 16.8% 13.3% 9.4% 6.5% 3.4% 2.2%

Wholesale sales - Carter's 3.0% 3.7% 6.7% 15.4% 10.0% 3.0% 3.0% 2.0% 2.0% 2.0%

Wholesale sales - OshKosh -4.9% -10.3% 0.6% 1.5% 25.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Retail sales - Carter's 10.0% 15.3% 15.9% 11.5% 20.9% 20.8% 17.7% 9.8% 3.3% 2.0%

Retail sales - OshKosh 2.0% 6.6% 3.3% 3.0% 6.4% 3.8% 3.7% 3.6% 3.6% 3.5%

Retail sales - Bonnie Togs (Canada) 28.2% 23.9% 11.0% 2.0%

Mass channel sales - Carter's 10.4% 4.5% -5.3% 5.8% 20.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Net sales 5.3% 6.4% 6.4% 10.0% 16.8% 13.3% 9.4% 6.5% 3.4% 2.2%


16

Appendix II: LBO model •Note: We assume higher than average sponsor equity (total debt at 4.5x EBITDA vs. 2010-2011 typical 5.5x

– 6.0x)

Assumptions Purchase Price Options TableSponsor Target IRR 20.0% Revolver 1.0x 4.5% Basic Shares Outst. 58.135868 Options Strike ITM ProceedsTax Rate 34.0% Senior Debt 3.0x 7.0% Share Price $25.00 0.6 $3.08 0.6 $1.72010 "Normal" EBITDA $275.0 Subordinated Debt 0.5x 10.0% Offer Premium 30.0% 0.1 $6.98 0.1 $0.6

Mezzanine 0.0x 13.0% Offer Price $32.50 0.9 $16.44 0.9 $15.3FD Shares Outst. 60.5 0.8 $25.51 0.8 $20.5FD Equity Offer Price $1,966.5 0.1 $33.35 0 $0.0

2.5 2.4 $38.1

Sources % Total Uses Free Cash FlowRevolver $275.0 12.1% Purchase of Equity $1,966.5 2012E 2013E 2014E 2015E 2016E

Senior Debt $824.9 36.3% Refinance Net Debt 293.7 EBITDA 253.7 312.9 355.1 365.6 371.3Subordinated Debt $137.5 6.1% Transaction Fees 10.0 Less: Investment in Working Capital 50.5 17.2 8.3 (8.3) (3.1)Mezzanine $0.0 0.0% Less: Capital Expenditures (56.9) (58.8) (42.4) (29.9) (30.5)Option proceeds $38.1 1.7% Total $2,270.2 Less: Cash Interest (80.0) (72.0) (62.5) (52.0) (38.3)Sponsor Equity $994.7 43.8% Less: Cash Taxes (44.1) (65.1) (81.3) (88.0) (94.5)Total $2,270.2 100.0% FCF available for debt paydown 123.2 134.2 177.2 187.5 205.0

Debt Schedule Credit AnalysisRate 2011E 2012E 2013E 2014E 2015E 2016E 2011E 2012E 2013E 2014E 2015E 2016E

Revolver 4.5% Cumulative Pay-down $0 $110 $230 $380 $530 $700Beg. Balance $275 $275 $275 $275 $275 % of Initial Debt Raised 0.0% 8.9% 18.6% 30.7% 42.8% 56.6%Paydown 0 0 0 0 0 Leverage Ratios:Ending Balance 275 275 275 275 275 275 Total Debt / EBITDA 6.1x 4.4x 3.2x 2.4x 1.9x 1.4xInterest Expense 12 12 12 12 12 Total Debt / (EBITDA - Capex) 23.1x 5.7x 4.0x 2.7x 2.1x 1.6xSenior Debt 7.0% Coverage Ratios:Beg. Balance $825 $715 $595 $445 $295 EBITDA / Interest Exp. NM 3.2x 4.3x 5.7x 7.0x 9.7xPaydown (110) (120) (150) (150) 0 (EBITDA - Capex) / Interest Exp. NM 2.5x 3.5x 5.0x 6.5x 8.9xEnding Balance 825 715 595 445 295 295Interest Expense 54 46 36 26 21 Return AnalysisSub. Debt 10.0% Terminal EBITDA $371.3 $371.3 $371.3 $371.3Beg. Balance $137 $137 $137 $137 $137 Exit Multiple 7.5x 8.0x 8.5x 9.0xPaydown 0 0 0 0 (170) TEV $2,784.8 $2,970.5 $3,156.1 $3,341.8Ending Balance 137 137 137 137 137 (33) Less: Net Debt 537.4 537.4 537.4 537.4Interest Expense 14 14 14 14 5 Equity Value $2,247.4 $2,433.0 $2,618.7 $2,804.3Mezzanine Debt 13.0% Sponsor Ownership at Exit 95.0% 95.0% 95.0% 95.0%Beg. Balance $0 $0 $0 $0 $0 Sponsor Equity at Exit $2,135.0 $2,311.4 $2,487.7 $2,664.1Paydown 0 0 0 0 0 Sponsor Equity at Closing $994.7 $994.7 $994.7 $994.7Ending Balance 0 0 0 0 0 0 IRR % 16.5% 18.4% 20.1% 21.8%Interest Expense 0 0 0 0 0

Total Debt (net) $1,237 $1,127 $1,007 $857 $707 $537Net Interest Expense 80 72 63 52 38


17

Appendix II: FCFF model FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E

31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec

2010 2011 2012 2013 2014 2015 2016

Earnings (Loss) before income taxes - adjusted 233.4 160.4 206.3 259.7 297.9 307.1 312.5

Add: Interest Expense 10.4 5.9 5.9 5.9 5.9 5.9 5.9

Deduct:Interest Income on ST investments (0.6) (0.6) (2.5) (2.2) (2.1) (2.2) (2.3)

Adjusted operating income 243.3 165.7 209.7 263.4 301.7 310.8 316.1

Taxes on adjusted operating income 88.7 69.0 80.9 99.2 111.9 113.7 115.0

NOPLAT 154.5 96.8 128.7 164.3 189.8 197.1 201.1

Add: Depreciation expense 31.7 35.7 44.1 49.4 53.4 54.8 55.2

Gross cash flow 186.3 132.5 172.8 213.7 243.2 251.9 256.3

Change in WC accounts:

Accounts receivable, net (39.4) (1.1) (16.3) (13.0) (9.8) (5.4) (3.6)

Inventories (84.5) (81.3) (0.3) (24.7) (18.3) (13.2) (9.4)

Prepaid expenses and other current assets (6.3) (3.1) (2.7) (2.2) (1.6) (0.9) (0.6)

Accounts payable 18.9 27.7 28.5 26.3 23.7 18.6 16.6

Other current liabilities (2.7) 11.2 10.4 8.3 6.3 3.5 2.3

Decrease (Increase) in WC Accounts (113.9) (46.6) 19.6 (5.3) 0.1 2.5 5.3

Unlevered operating cash flow 72.4 85.9 192.4 208.4 243.4 254.5 261.6

Capex (39.8) (125.4) (56.9) (58.8) (42.4) (29.9) (30.5)

Goodwill, net 0.0 (22.6) 0.0 0.0 0.0 0.0 0.0

Licensing agreements, net 1.8 0.0 0.0 0.0 0.0 0.0 0.0

Deferred debt issuance costs, net (0.9) 0.7 0.7 0.7 0.7 0.7 (3.3)

Leasehold interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other assets (0.0) 0.0 0.0 0.0 0.0 0.0 0.0

Other liabilities 3.8 3.0 6.3 5.0 3.8 2.1 1.4

Cash from (used for) Gross Investment (35.1) (144.4) (50.0) (53.2) (38.0) (27.1) (32.4)

Value of Firm $2,369.8

Free cash flow 37.3 (58.4) 142.4 155.2 205.4 227.3 229.2 Mid-year adjustment factor 1.05

Value of the firm after adjust $2,488.2

Discount rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Plus: Excess Cash 100

Value of Firm $2,588.2

Terminal growth rate 2.0% Less: Value of debt $236.0

Continuing value 2,922.4 Value of Equity $2,352.2

Number of periods discounted 0.4 1.4 2.4 3.4 4.4 5.4 5.4 Number of Shares O/S 59.0

Discounted cash flows (56.2) 124.4 123.3 148.3 149.2 136.8 1,743.9 Value per share $39.86


18

Appendix II: Income statement FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E

31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Wholesale sales - Carter's 471.4 488.6 521.3 601.6 661.7 681.6 702.0 716.1 730.4 745.0

Wholesale sales - OshKosh 89.3 80.1 80.5 81.7 102.2 104.2 106.3 108.4 110.6 112.8

Retail sales - Carter's 366.3 422.4 489.7 546.2 660.6 797.7 938.9 1,030.5 1,064.4 1,085.7

Retail sales - OshKosh 233.8 249.1 257.3 264.9 281.8 292.4 303.2 314.2 325.3 336.7

Retail sales - Bonnie Togs (Canada) 30.5 127.2 163.1 202.1 224.4 228.8

Mass channel sales - Carter's 243.3 254.3 240.8 254.8 305.8 311.9 318.1 324.5 331.0 337.6

Net sales 1,404.0 1,494.5 1,589.7 1,749.3 2,042.5 2,315.0 2,531.6 2,695.7 2,786.1 2,846.7

COGS 929.0 976.0 985.3 1,075.4 1,386.4 1,541.6 1,641.6 1,716.0 1,769.6 1,807.6

Gross profit 475.0 518.5 604.4 673.9 656.1 773.4 889.9 979.7 1,016.5 1,039.1

SG&A 359.8 404.3 428.7 468.2 528.3 602.9 666.8 719.7 748.5 766.9

Investigation expenses 0.0 0.0 5.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Intangible asset impairment 154.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Executive retirement charges 0.0 5.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Acquisition-related charges 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Write-down of long-lived assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Workforce reduction/closure costs 5.3 2.6 10.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Deferred charge write-off 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Management fee termination 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Royalty income (30.7) (33.7) (36.4) (37.6) (38.0) (39.1) (40.3) (41.6) (42.8) (43.9)

Total operating expenses 489.3 378.5 408.7 430.6 490.3 563.7 626.5 678.0 705.7 722.9

Operating income (14.2) 140.0 195.6 243.3 165.7 209.7 263.4 301.7 310.8 316.1

Interest income (1.4) (1.5) (0.2) (0.6) (0.6) (2.5) (2.2) (2.1) (2.2) (2.3)

Loss on extinguishment of debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Interest expense 24.5 19.6 12.0 10.4 5.9 5.9 5.9 5.9 5.9 5.9

Income before income taxes (37.3) 121.9 183.8 233.4 160.4 206.3 259.7 297.9 307.1 312.5

Provision for income taxes 38.5 44.0 68.2 86.9 57.7 74.3 93.5 107.2 110.6 112.5

Net income (75.8) 77.9 115.6 146.5 102.7 132.0 166.2 190.7 196.5 200.0

Basic EPS -$1.31 $1.38 $2.04 $2.52 $1.75 $2.23 $2.78 $3.15 $3.22 $3.24

Diluted EPS -$1.31 $1.34 $1.98 $2.48 $1.72 $2.19 $2.73 $3.10 $3.17 $3.19

Basic wtd avg shares 57.9 56.3 56.7 58.1 58.7 59.3 59.9 60.5 61.1 61.7

Diluted wtd avg shares 57.9 58.3 58.3 59.0 59.6 60.2 60.8 61.4 62.0 62.6

D&A 29.9 30.2 32.3 31.7 35.7 44.1 49.4 53.4 54.8 55.2

EBITDA 15.7 170.2 227.9 275.0 201.5 253.7 312.9 355.1 365.6 371.3

Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash interest 24.9 19.1 10.5 7.8 5.9 5.9 5.9 5.9 5.9 5.9

Cash taxes 32.4 44.2 54.6 71.7 51.3 66.0 83.1 95.3 98.3 100.0


19

Appendix II: Common-size income statement FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E


2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Wholesale sales - Carter's 33.6% 32.7% 32.8% 34.4% 32.4% 29.4% 27.7% 26.6% 26.2% 26.2%

Wholesale sales - OshKosh 6.4% 5.4% 5.1% 4.7% 5.0% 4.5% 4.2% 4.0% 4.0% 4.0%

Retail sales - Carter's 26.1% 28.3% 30.8% 31.2% 32.3% 34.5% 37.1% 38.2% 38.2% 38.1%

Retail sales - OshKosh 16.7% 16.7% 16.2% 15.1% 13.8% 12.6% 12.0% 11.7% 11.7% 11.8%

Retail sales - Bonnie Togs (Canada) 1.5% 5.5% 6.4% 7.5% 8.1% 8.0%

Mass channel sales - Carter's 17.3% 17.0% 15.1% 14.6% 15.0% 13.5% 12.6% 12.0% 11.9% 11.9%

Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

COGS 66.2% 65.3% 62.0% 61.5% 67.9% 66.6% 64.8% 63.7% 63.5% 63.5%

Gross profit 33.8% 34.7% 38.0% 38.5% 32.1% 33.4% 35.2% 36.3% 36.5% 36.5%

SG&A 25.6% 27.1% 27.0% 26.8% 25.9% 26.0% 26.3% 26.7% 26.9% 26.9%

Investigation expenses 0.0% 0.0% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Intangible asset impairment 11.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Executive retirement charges 0.0% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Acquisition-related charges 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Write-down of long-lived assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Workforce reduction/closure costs 0.4% 0.2% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Deferred charge write-off 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Management fee termination 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Royalty income -2.2% -2.3% -2.3% -2.1% -1.9% -1.7% -1.6% -1.5% -1.5% -1.5%

Total operating expenses 34.8% 25.3% 25.7% 24.6% 24.0% 24.4% 24.7% 25.2% 25.3% 25.4%

Operating income -1.0% 9.4% 12.3% 13.9% 8.1% 9.1% 10.4% 11.2% 11.2% 11.1%

Interest income -0.1% -0.1% 0.0% 0.0% 0.0% -0.1% -0.1% -0.1% -0.1% -0.1%

Loss on extinguishment of debt 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Interest expense 1.7% 1.3% 0.8% 0.6% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2%

Income before income taxes -2.7% 8.2% 11.6% 13.3% 7.9% 8.9% 10.3% 11.1% 11.0% 11.0%

Provision for income taxes 2.7% 2.9% 4.3% 5.0% 2.8% 3.2% 3.7% 4.0% 4.0% 4.0%

Net income -5.4% 5.2% 7.3% 8.4% 5.0% 5.7% 6.6% 7.1% 7.1% 7.0%

EBITDA 1.1% 11.4% 14.3% 15.7% 9.9% 11.0% 12.4% 13.2% 13.1% 13.0%


20

Appendix II: Balance sheet FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E


2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Assets

Current assets:

Cash & cash equivalents 49.0 162.3 335.0 247.4 287.3 250.9 224.1 212.6 221.6 228.8

Accounts receivable, net 94.6 85.5 82.1 121.5 122.6 138.9 151.9 161.7 167.2 170.8

Inventories 225.5 203.5 214.0 298.5 379.8 380.1 404.8 423.1 436.3 445.7

Prepaid expenses and other current assets 15.2 13.2 11.1 17.4 20.4 23.1 25.3 27.0 27.9 28.5

Assets held for sale 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Deferred income taxes 33.5 35.5 33.4 31.5 40.9 46.3 50.6 53.9 55.7 56.9

Total current assets 417.8 500.0 675.7 716.3 850.9 839.3 856.7 878.4 908.7 930.7

Gross PP&E 161.5 190.8 207.5 237.1 362.4 419.3 478.2 520.6 550.5 581.0

Accumulated depreciation (86.5) (104.5) (121.4) (142.1) (177.8) (221.9) (271.3) (324.7) (379.6) (434.7)

PP&E, net 75.1 86.2 86.1 95.0 184.6 197.5 206.9 195.9 170.9 146.2

Tradename, net 308.2 305.7 305.7 305.7 305.7 305.7 305.7 305.7 305.7 305.7

Goodwill, net 136.6 136.6 136.6 136.6 159.2 159.2 159.2 159.2 159.2 159.2

Licensing agreements, net 8.9 5.3 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Deferred debt issuance costs, net 4.7 3.6 2.5 3.3 2.7 2.0 1.3 0.7 0.0 3.3

Leasehold interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other assets 7.5 0.6 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Total assets 958.8 1,038.0 1,208.6 1,257.2 1,503.5 1,504.0 1,530.1 1,540.1 1,544.9 1,545.5

Liabilties & stockholder's equity

Current liabilties:

Current maturies of long-term debt 3.5 3.5 3.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Accounts payable 56.6 79.0 97.5 116.5 144.2 172.7 199.0 222.6 241.2 257.9

Other current liabilities 46.7 57.6 69.6 66.9 78.1 88.5 96.8 103.1 106.5 108.9

Total current liabilities 106.8 140.1 170.6 183.4 222.3 261.2 295.8 325.7 347.8 366.7

Long-term debt 338.0 334.5 331.0 236.0 236.0 236.0 236.0 236.0 236.0 236.0

Excess debt (plug) 57.7 0.0 0.0 0.0 0.0 0.0


Other long-term liabilities 34.0 40.8 40.3 44.1 47.0 53.3 58.3 62.0 64.1 65.5

Total liabilities 592.5 624.5 652.6 577.2 676.8 664.3 703.8 737.6 761.7 782.1

Stockholders equity:

Common stock 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

Additional paid-in capital 232.4 211.8 235.3 210.6 252.8 272.1 293.7 317.6 344.2 373.7

Deferred compensation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

AOCI 2.7 (7.3) (4.1) (1.9) 0.0 0.0 0.0 0.0 0.0 0.0

Retained earnings 130.6 208.5 324.2 470.7 573.3 567.0 532.0 484.4 438.4 389.1

Total stockholders' equity 366.2 413.6 556.0 679.9 826.7 839.8 826.3 802.6 783.1 763.4

Total liabilities & stockholders' equity 958.8 1,038.0 1,208.6 1,257.2 1,503.5 1,504.0 1,530.1 1,540.1 1,544.9 1,545.5


21

Appendix II: Retail sales FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E


2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Retail sales:

Carter's $366.3 $422.4 $489.7 $546.2 $660.6 $797.7 $938.9 $1,030.5 $1,064.4 $1,085.7

OshKosh $233.8 $249.1 $257.3 $264.9 $281.8 $292.4 $303.2 $314.2 $325.3 $336.7

Bonnie Togs (Canada) $30.5 $127.2 $163.1 $202.1 $224.4 $228.8

Sales per sq. ft.

Carter's $348.7 $373.7 $402.5 $408.1 $432.5 $449.8 $463.3 $472.6 $482.1 $491.7

growth 3.5% 7.2% 7.7% 1.4% 6.0% 4.0% 3.0% 2.0% 2.0% 2.0%

OshKosh $304.4 $316.5 $326.8 $322.1 $328.5 $331.8 $335.1 $338.4 $341.8 $345.2

growth -4.7% 4.0% 3.3% -1.5% 2.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Bonnie Togs (Canada) $337.0 $343.8 $350.6 $357.7 $364.8 $372.1

growth 2.0% 2.0% 2.0% 2.0% 2.0%

Total - Carter's

Beginning stores 219 228 253 276 306 358 413 468 480 480

Opened 10 25 24 30 52 55 55 12 0 0

Closed -1 0 -1 0 0 0 0 0 0 0

Ending Stores 228 253 276 306 358 413 468 480 480 480

Carter's

Avg. sq. feet per store 4,700 4,700 4,600 4,600 4,600 4,600 4,600 4,600 4,600 4,600

Avg. total sq. ft. 1,050,450 1,130,350 1,216,700 1,338,600 1,527,200 1,773,300 2,026,300 2,180,400 2,208,000 2,208,000

Total - OshKosh


Opened 9 3 6 12 5 5 5 5 5 5

Closed -3 -1 -1 -2 0 0 0 0 0 0

Ending Stores 163 165 170 180 185 190 195 200 205 210

OshKosh

Avg. sq. feet per store 4,800 4,800 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700

Avg. total sq. ft. 768,000 787,200 787,250 822,500 857,750 881,250 904,750 928,250 951,750 975,250

Bonnie Togs (Canada)

Beginning stores 0 65 83 103 123 123

Acquired 59 0 0 0 0 0

Opened 6 18 20 20 0 0

Closed 0 0 0 0 0 0

Ending Stores 65 83 103 123 123 123

Bonnie Togs (Canada)

Avg. sq. feet per store 5,000 5,000 5,000 5,000 5,000 5,000

Avg. total sq. ft. 310,000 370,000 465,000 565,000 615,000 615,000

Total Stores


Acquired 0 0 0 0 59 0 0 0 0 0

Opened 19 28 30 42 63 78 80 37 5 5

Closed -4 -1 -2 -2 0 0 0 0 0 0

Ending Stores 391 418 446 486 608 686 766 803 808 813

Company sq. feet 1,818,450 1,917,550 2,003,950 2,161,100 2,694,950 3,024,550 3,396,050 3,673,650 3,774,750 3,798,250


22

Appendix II: Wholesale/mass sales FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E


2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Wholesale sales - Carter's $471.4 $488.6 $521.3 $601.6 $661.7 $681.6 $702.0 $716.1 $730.4 $745.0

growth 3.0% 3.7% 6.7% 15.4% 10.0% 3.0% 3.0% 2.0% 2.0% 2.0%

Wholesale sales - OshKosh $89.3 $80.1 $80.5 $81.7 $102.2 $104.2 $106.3 $108.4 $110.6 $112.8

growth -4.9% -10.3% 0.6% 1.5% 25.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Mass channel sales - Carter's $243.3 $254.3 $240.8 $254.8 $305.8 $311.9 $318.1 $324.5 $331.0 $337.6

10.4% 4.5% -5.3% 5.8% 20.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Royalty Income $30.7 $33.7 $36.4 $37.6 $38.0 $39.1 $40.3 $41.6 $42.8 $43.9

growth 5.1% 9.8% 8.0% 3.3% 1.1% 3.0% 3.1% 3.3% 2.9% 2.6%

Mass:

Child of Mine (Walmart)

Number of stores 3500 3500 3600 3600 3600 3600 3600 3600 3600 3600

Just One You/Precious Firsts (Target)

Number of stores 1600 1600 1700 1800 1800 1800 1800 1800 1800 1800

Sales per mass channel store $47,707 $49,861 $45,438 $47,187 $56,624 $57,757 $58,912 $60,090 $61,292 $62,518

growth -14.2% 4.5% -8.9% 3.8% 20.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Total mass channel stores 5100 5100 5300 5400 5400 5400 5400 5400 5400 5400

Carter's royalties:

Wholesale & mass:

Net sales $174.4 $188.4 $211.3 $203.4 $203.4 $205.4 $209.5 $213.7 $218.0 $222.4

growth 4.6% 8.0% 12.2% -3.7% 0.0% 1.0% 2.0% 2.0% 2.0% 2.0%

Royalties $15.3 $16.8 $18.5 $18.4 $17.9 $18.1 $18.4 $18.8 $19.2 $19.6

% of licensed sales 8.8% 8.9% 8.8% 9.0% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8%

International:

Net sales $3.2 $17.7 $32.0 $44.8 $58.2 $69.9 $80.4 $88.4 $92.8

growth 453.1% 80.8% 40.0% 30.0% 20.0% 15.0% 10.0% 5.0%

Royalties $0.3 $0.7 $1.9 $2.6 $3.4 $4.0 $4.5 $4.9 $5.1

% of licensed sales 9.4% 4.0% 5.9% 5.9% 5.8% 5.7% 5.6% 5.5% 5.5%

Total Carter's lic. net sales $174.4 $191.6 $229.0 $235.4 $248.2 $263.7 $279.4 $294.1 $306.4 $315.2

growth 4.6% 9.9% 19.5% 2.8% 5.4% 6.2% 6.0% 5.3% 4.2% 2.9%

Total Carter's royalties $15.3 $17.1 $19.2 $20.3 $20.5 $21.5 $22.4 $23.3 $24.0 $24.7


OshKosh royalties:

Domestic:

Net sales $187.7 $184.0 $184.5 $184.5 $184.5 $184.5 $184.5 $184.5 $184.5

growth -2.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Royalties $9.5 $9.3 $9.8 $9.6 $9.4 $9.2 $9.2 $9.2 $9.2


International:

Net sales $112.3 $114.8 $124.8 131.04 137.592 144.4716 151.69518 159.27994 167.24394

growth 2.2% 8.7% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Royalties $7.1 $7.9 $7.5 $7.9 $8.3 $8.7 $9.1 $9.6 $10.0


Total OshKosh lic. net sales $288.5 $300.0 $298.8 $309.3 $315.5 $322.1 $329.0 $336.2 $343.8 $351.7

growth -5.7% 4.0% -0.4% 3.5% 2.0% 2.1% 2.1% 2.2% 2.3% 2.3%

Total OshKosh royalties $15.4 $16.6 $17.2 $17.3 $17.5 $17.7 $17.9 $18.3 $18.8 $19.3



23

Appendix II: COGS/SG&A assumptions FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E


2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

COGS

Gross margin

Retail & e-commerce 47.8% 49.6% 51.0% 52.0% 46.0% 45.5% 46.5% 47.0% 47.0% 47.0%

Wholesale & mass channel 23.4% 22.5% 26.5% 26.8% 19.5% 20.0% 21.0% 22.0% 22.0% 22.0%

Consolidated gross margin 33.8% 34.7% 38.0% 38.5% 32.1% 33.4% 35.2% 36.3% 36.5% 36.5%

Adjusted gross margin 33.8% 34.7% 38.0% 38.5% 32.1% 33.4% 35.2% 36.3% 36.5% 36.5%

Consolidated

Retail sales (as a % of total) 42.7% 44.9% 47.0% 46.4% 47.6% 52.6% 55.5% 57.4% 57.9% 58.0%

Wholesale sales (as % of total) 39.9% 38.0% 37.9% 39.1% 37.4% 33.9% 31.9% 30.6% 30.2% 30.1%

Mass channel sales (as % of total) 17.3% 17.0% 15.1% 14.6% 15.0% 13.5% 12.6% 12.0% 11.9% 11.9%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

COGS as % total sales 66.2% 65.3% 62.0% 61.5% 67.9% 66.6% 64.8% 63.7% 63.5% 63.5%

38.00% 38.50% 32.12% 33.41% 35.15% 36.34% 36.48% 36.50%

SG&A

Total SG&A 359.826 404.3 428.7 468.2 528.3 602.9 666.8 719.7 748.5 766.9

% sales 25.6% 27.1% 27.0% 26.8% 25.9% 26.0% 26.3% 26.7% 26.9% 26.9%

Corporate expenses (ex- extraordinary) 41.138 46.8 59.6 62.4 63.1 63.7 64.3 65.0 65.6 66.3

% sales 2.9% 3.1% 3.7% 3.6% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Total SG&A -ex corporate expenses 318.688 357.5 369.1 405.7 465.3 539.2 602.5 654.7 682.9 700.6

% sales 22.7% 23.9% 23.2% 23.2% 22.8% 23.3% 23.8% 24.3% 24.5% 24.6%

Wholesale & mass channel:

Net sales 803.954 823.0 842.6 938.1 1,069.7 1,097.7 1,126.5 1,149.0 1,172.0 1,195.4

% of total sales 57.3% 55.1% 53.0% 53.6% 52.4% 47.4% 44.5% 42.6% 42.1% 42.0%

Adjusted gross profit 187.726 185.5 223.1 251.7 208.6 219.5 236.6 252.8 257.8 263.0


Operating income 92.874 84.9 117.4 135.5 91.2 102.2 119.2 135.4 140.5 145.6

Operating margin 11.6% 10.3% 13.9% 14.4% 8.5% 9.3% 10.6% 11.8% 12.0% 12.2%

Implied SG&A 94.852 100.6 105.7 116.2 117.4 117.4 117.4 117.4 117.4 117.4

SG&A growth -1.1% 6.0% 5.1% 9.9% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Retail & e-commerce:

Net sales 600.072 671.6 747.0 811.1 972.8 1,217.3 1,405.1 1,546.7 1,614.1 1,651.2

% of total sales 42.7% 44.9% 47.0% 46.4% 47.6% 52.6% 55.5% 57.4% 57.9% 58.0%

Adjusted gross profit 286.834 333.1 381.0 421.8 447.5 553.9 653.4 727.0 758.6 776.1


Operating income 63.506 76.1 118.9 132.6 99.6 132.1 168.3 189.6 193.1 192.9

Operating margin 10.6% 11.3% 15.9% 16.4% 10.2% 10.9% 12.0% 12.3% 12.0% 11.7%

Implied SG&A 223.328 257.0 262.1 289.1 347.9 421.8 485.1 537.3 565.5 583.2

Implied SG&A (% of retail sales) 37.2% 38.3% 35.1% 35.6% 35.8% 34.6% 34.5% 34.7% 35.0% 35.3%

SG&A cost per avg store 0.582 0.6 0.6 0.6 0.6 0.7 0.7 0.7 0.7 0.7

-2.4% 9.1% -4.5% 2.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Gross profit

Implied SG&A

Wholesale & mass 94.852 100.6 105.7 116.2 117.4 117.4 117.4 117.4 117.4 117.4

Retail & e-commerce 223.328 257.0 262.1 289.1 347.9 421.8 485.1 537.3 565.5 583.2

Corporate expenses 41.138 46.8 59.6 62.4 63.1 63.7 64.3 65.0 65.6 66.3

Total Implied SG&A 359.319 404.4 427.4 467.8 528.3 602.9 666.8 719.7 748.5 766.9

% of total sales 25.59% 27.06% 26.89% 26.74% 25.87% 26.04% 26.34% 26.70% 26.87% 26.94%


24

Appendix II: Interest/taxes assumptions FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E


2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Interest, net

Interest rate on cash 2.36% 1.41% 0.09% 0.20% 0.2% 1.0% 1.0% 1.0% 1.0% 1.0%

Debt

Former term loan 341.529 338.0 334.5

New revolving credit facility

Rate 2.51% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Beginning balance 236.0 236.0 236.0 236.0 236.0 236.0 236.0

Draw / (Paydown) 0.0 0.0 0.0 0.0 0.0 0.0

Ending balance 236.0 236.0 236.0 236.0 236.0 236.0

Interest expense 5.9 5.9 5.9 5.9 5.9 5.9

Taxes

Income before income taxes -37.308 121.9 183.8 233.4

Provision for income taxes 38.488 44.0 68.2 86.9

Tax rate -103.2% 36.1% 37.1% 37.2% 36.0% 36.0% 36.0% 36.0% 36.0% 36.0%

Cash taxes 32.393 44.2 54.6 71.7

Cash tax rate -86.8% 36.2% 29.7% 30.7% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%


25

Appendix II: Balance sheet assumptions FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E


2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Current assets:

Current assets:

Cash & cash equivalents % revenue 3.49% 10.86% 21.08% 14.14% 12.00% 10.00% 8.00% 7.00% 7.00% 7.00%

% total debt 14.35% 48.03% 100.15% 104.82%

Accounts receivable, net % revenue 6.74% 5.72% 5.16% 6.94% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

Inventories Days in inventory 88.60 76.10 79.27 101.32 100.00 90.00 90.00 90.00 90.00 90.00

Prepaid expenses and other current assets % revenue 1.08% 0.88% 0.70% 0.99% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%

Assets held for sale 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Deferred income taxes % revenue 2.38% 2.38% 2.10% 1.80% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Non-current assets:

Property and equipment, gross

Retail capex:

Cash investment per new store 0.362 0.367 0.373 0.378 0.386 0.394 0.402 0.410 0.418 0.426

Number of new stores 19 28 30 42 63 78 80 37 5 5

Cash investment per remodel 0.188 0.192 0.196 0.200 0.204 0.208 0.212 0.216 0.221 0.225

Number of remodels 0 0 15 20 20 20 20 20 20 20

Number of acquired stores 0 59 0 0 0 0 0

Cost per acquired store 0 1.661 1.661 1.661 1.661 1.661 1.661

Growth capex 6.870 10.279 14.120 19.891 126.393 34.866 36.366 19.483 6.505 6.635

Wholesale capex:

Wholesale total (maintenance) 15.0 24.7 19.5 19.9 21.6 22.0 22.5 22.9 23.4 23.9

Total capex 21.9 34.9 33.6 39.8 148.0 56.9 58.8 42.4 29.9 30.5

Depreciation and amortization Cost per avg store 0.078 0.075 0.075 0.068 0.068 0.068 0.068 0.068 0.068 0.068

% revenue 2.13% 2.02% 2.03% 1.81% 1.83% 1.86% 1.89% 1.92% 1.95% 1.98%

Tradename, net 308.2 305.7 305.7 305.7 305.7 305.7 305.7 305.7 305.7 305.7

Goodwill, net 136.6 136.6 136.6 136.6 159.2 159.2 159.2 159.2 159.2 159.2

Estimated premium paid for Bonnie Togs 30.00%

Licensing agreements, net 8.9 5.3 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Deferred debt issuance costs, net 4.7 3.6 2.5 3.3 2.7 2.0 1.3 0.7 0.0 3.3

Leasehold interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other assets 7.5 0.6 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Current liabilities:

Current maturies of long-term debt 3.5 3.5 3.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Accounts payable % revenue 4.0% 5.3% 6.1% 6.7% 7.06% 7.46% 7.86% 8.26% 8.66% 9.06%

Other current liabilities % revenue 3.32% 3.85% 4.38% 3.82% 3.82% 3.82% 3.82% 3.82% 3.82% 3.82%

Non-current liabilities:

Long-term debt 338.0 334.5 331.0 236.0 236.0 236.0 236.0 236.0 236.0 236.0

Excess debt plug


Other long-term liabilities % revenue 1.64% 2.28% 2.57% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30%

Stockholders' equity:

Common stock 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

Additional paid-in capital 275.0 232.4 211.8 235.3 252.8 272.1 293.7 317.6 344.2 373.7

Deferred compensation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

AOCI 5.3 2.7 -7.3 -4.1 0.0 0.0 0.0 0.0 0.0 0.0

Basic wtd avg shares 57.9 56.3 56.7 58.1 58.7 59.3 59.9 60.5 61.1 61.7

Share growth % -0.22% -2.70% 0.61% 2.62% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Diluted wtd avg shares 57.9 58.3 58.3 59.0 59.6 60.2 60.8 61.4 62.0 62.6

Share growth % -5.51% 0.70% 0.12% 1.15% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Number of shares repurchased (millions) 0 0 0 0 0 0

Assumed share buyback/option exercise price $30.00 $33.00 $36.30 $39.93 $43.92 $48.32


26

Appendix II: Segment operating margins FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Carters operating income:

Wholesale 43.6 51.4 59.6 80.6 80.3 82.0 80.8 103.7 130.4

Retail & e-commerce 53.8 49.9 58.1 63.2 56.4 57.0 67.0 97.3 115.1

Mass channel (3.4) 4.8 15.3 21.6 33.5 37.4 33.3 40.2 33.6

Carter's operating income 94.0 106.2 132.9 165.3 170.2 176.4 181.1 241.3 279.1

Carters operating margins:

Wholesale 14.4% 14.4% 15.4% 18.9% 17.6% 17.4% 16.5% 19.9% 21.7%

Retail & e-commerce 21.2% 19.0% 19.9% 20.0% 16.9% 15.6% 15.9% 19.9% 21.1%

Mass channel -14.4% 5.8% 10.5% 12.1% 15.2% 15.4% 13.1% 16.7% 13.2%

Carter's operating margin 16.2% 15.1% 16.2% 17.9% 16.8% 16.3% 15.5% 19.3% 19.9%

OshKosh operating income:

Wholesale 0.7 8.7 1.5 1.4 7.0 6.0

Retail & e-commerce 8.7 18.8 6.5 9.1 21.5 17.5

Mass channel 0.8 2.4 2.7 3.2 2.8 3.1

OshKosh operating income 10.2 30.0 10.6 13.7 31.4 26.6

OshKosh operating margins:

Wholesale/mass 2.5% 11.9% 4.7% 5.7% 12.3% 11.1%

Retail & e-commerce 6.2% 8.2% 2.8% 3.7% 8.4% 6.6%

OshKosh operating margin 5.1% 9.3% 3.3% 4.2% 9.3% 7.7%