Morningstar Stock Report. Carter's CRI. 2 Quote/Snapshot 3 Analyst Report 5 Financials 6 Valuation 7 Ownership

Transcription

1 Morningstar Stock Report 2 Quote/Snapshot 3 Analyst Report 5 Financials 6 Valuation 7 Ownership

2 Release date 21 Mar 2007 NASD Members: For internal use or client reporting purposes only Page 2 of 7 Quote/Snapshot Morningstar Investment Style Style Breakdown Value Core Growth Small Mid Large Valuation Stock Industry S&P 500 Price/Earnings Forward P/E Price/Book Price/Cash Flow Price/Sales Dividend Yld % Quick Stats Morningstar Style Industry Sector Stock Type Small Growth Apparel Makers Consumer Goods Speculative Growth Price/Cash Flow Price/Earnings Price/Sales Sales ($Mil) , Wk Range Avg. Volume Yield Market Cap ($Mil) ,192,900 ( ) 0.0 1,527 Profitability Stock Industry S&P 500 ROA % ROE % Net Margin % Asset Turnover Fin Leverage Sales/Employee $Thousands Industry Peers Growth % 1 Yr % 3 Yr S&P 500 Sales Net Income EPS Equity/Share Dividends NMF 14.3 Morningstar Stock Grades Growth A+ Profitability C+ Financial Health B- Market Cap $Mil TTM Sales $Mil VF 9,170 6,912 Polo Ralph Lauren 9,022 4,236 Liz Claiborne 4,431 4,865 Guess? 3,771 1,115 Jones Apparel Group 3,647 4,751 Fund Ownership Morningstar Rating TM % Share Held % Fund Assets Baron Growth QQQQQ RS Partners A QQQQ Columbia Acorn Z QQQQQ AIM Constellation A QQ Baron Small Cap QQQQQ Performance 25 Growth of $10, K YTD History Stock S&P 500 Industry Total Return % /- S&P /- Industry Year Price Graph 30.8 Daily ($) CRI YTD History TTM Year Volume 2.0 (Mil) Earning Trends 0.96 Historical years use 0.78 fiscal year-end % Operations What Does This Company Do? Carter's is a specialty retailer of children's apparel through its own stores as well as the department-store and mass channels. Brands include Carter's, OshKosh, Child of Mine, and Just One Year. The firm operates approximately 200 Carter's locations, and 140 OshKosh retail stores. Contact Information Address The Proscenium 1170 Peachtree Street NE Suite Atlanta, GA Phone Website Direct Investment No Dividend Reinvestment No

3 Release date 21 Mar 2007 NASD Members: For internal use or client reporting purposes only Page 3 of 7 Analysis Trailing One-Year Price Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Analysis by Michelle Chang Price $ 36.0 Rivalry is intense in children's wear, but Carter's distribution strategy gives it an advantage in this space. It has diversified distribution into three channels: retail, wholesale, and mass, which helps to reduce dependence on any one segment. Carter's faces risks in all three channels. Children's Place PLCE has had success as a value-priced retailer and goes head-to-head with Carter's shops. Additionally, pricing pressure from Carter's mass customers, Wal-Mart WMT and Target TGT, could hurt margins. Also, department stores are pushing private-label brands to improve their own margins, potentially reducing floor space for Carter's clothing. Yet, by offering apparel through multiple channels, Carter's reduces the risk from any one of these segments. For instance, in 2002, sales from department stores amounted to over half of total revenue. In 2005, revenue from this segment totaled $487 million, or 43% of total sales. If department stores were to place fewer orders, it would have less of an impact today compared with three years ago. Less dependence on the department-store channel can be partly attributed to Carter's growing mass-merchant business. Mass merchants now account for about 25% of total sales in children's apparel. Carter's has capitalized on this trend by supplying clothing and accessories to Wal-Mart and Target. Revenue from this channel has grown from $24 million to $178 million, or 4% to 16% of total sales, over the past three years. With better efficiency and economies of scale, Carter's has been able to improve the operating margin from this segment, though it still trails the company's overall margin. We think it can continue to leverage growth as mass merchandisers continue to grow in popularity. In addition to gaining ground in the mass market, Carter's grew the size of its footprint when it acquired OshKosh B'Gosh in July OshKosh added to Carter's existing retail and wholesale base, contributing $200 million, or 18% of total sales in Carter's has closed unprofitable OshKosh stores, shut down plants, and relocated manufacturing to lowercost sources. Carter's also has the opportunity to grow OshKosh's presence in the wholesale channel due to existing relationships with suppliers. While the acquisition dragged down margins in 2005, we believe Carter's can continue to improve profitability through lower product costs coupled with higher sales volume In our opinion, the strength of its brand and availability through many channels reduce the impact of a slip in one segment, whereas its competitors have all of their eggs in one basket. Analyst Note by Michelle Chang full-year 2006 results were in line with our expectations, but details on the fourth quarter give us an indication of the softness that is to continue into 2007, which the company warned us about last week. For the year, sales grew by 20% to $1.3 billion, boosted by the OshKosh acquisition made in July 2005 and growth in Carter's wholesale and mass channel sales. The gross margin improved from 35.3% to 36.4%, offset slightly by higher operating expenses, which crept up 50 basis points to total 26.2% of sales. Nonrecurring plant closure costs, as well as higher royalty income helped to improve the operating margin from 10.8% in 2005 to 12.3% in As announced last week, the company expects softness this year for OshKosh wholesale and retail operations in both brands, which is continuing from the fourth quarter of In its conference call, management outlined some key issues and steps that it plans on taking to fix these segments. The company went too far in cutting inventory levels at Carter's retail, leading to declines in store productivity, and plans on replenishing inventory at stores. At OshKosh, the company continues to discontinue unprofitable accounts and improve the product offering, and it also plans to lower merchandise price points. The company also continues to improve OshKosh operations and is closing a distribution center this year. These initiatives should weigh down margins in 2007 while we wait for them to bear fruit; however, we believe that the long-term prospects for Carter's remains bright. We like that Carter's reduced its debt load, paying down $84 million in long-term debt last year. We were also pleased to hear the company return wealth to shareholders by announcing a $100 million stock buyback program. Our fair value estimate is unchanged. Valuation Fair Value Estimate $30.00 Stock Price $26.25 Consider Buying $23.10 Consider Selling $37.60 Business Risk Economic Moat Stewardship Grade Avg None C Based on a discounted cash-flow analysis, our fair value estimate remains $30 per share. OshKosh contributes its first full year in 2006, which should boost top-line growth initially. From 2007 to 2010, we anticipate sales growth to average 10% per year, fueled primarily by growth in the wholesale and mass market channels. We expect the gross margin to improve as the company continues to integrate OshKosh, partly offset by the increased presence of the lower-margin mass channel. With leverage

4 Release date 21 Mar 2007 NASD Members: For internal use or client reporting purposes only Page 4 of 7 Analysis continued in fixed costs, we anticipate the operating margin to grow to 14% by K Other Opinions Bulls Say The average age of women giving birth for the first time has risen nearly four years since 1970, according to the U.S. Census Bureau. As couples are having children later in life, households could have more income for children's clothing. In the national chain, outlet, and specialty store sales channels, Carter's 30% share in both sleepwear and newborn clothing represents 2 and 4 times, respectively, the market share of the next-largest brand. Many items sold are everyday products such as pajamas, blankets, and bodysuits, which protects the firm from fashion risk. The Carter's brand is targeted more toward newborn apparel and accessories, while OshKosh is positioned for an older age range. There is minimal overlap between the two brands. By selling through department stores, mass merchants, and its own retail locations, Carter's reduces its dependency on one channel. Its two largest customers each account for 10% of revenue. Strategy By selling through multiple channels, the company hopes to reach a broader group of consumers. It has improved retail locations and added to its presence in all segments with the OshKosh B'Gosh acquisition. To reduce expenses, the firm has sourced product manufacturing to lower-cost plants. Management Frederick Rowan II has been CEO since 1992 and chairman since We would like to see the two roles split, and we find overall corporate governance to be average at the firm. Directors serve on a three-year staggered board, isolating the company from takeovers. We'd prefer that they come up for election on an annual basis. In 2005, Rowan received $812,000 in salary, a $2.9 million bonus, and 200,000 stock options. He owns 4% of outstanding common stock, which we see as ample incentive to behave in the interest of shareholders. In May 2006, private equity firm Berkshire Partners sold off its remaining 12% interest in the company. Risk The growing influence of the mass channel could pressure margins. The OshKosh acquisition could prove to be hard to digest and could take management's eyes off of the remaining business. Bears Say Many retailers are pushing more private-label brands in an effort to improve their own margins. This could put some pressure on Carter's sales and margins in the wholesale channel. Carter's retail stores experienced 5% same-store sales growth in 2005, compared with 9% for both Gymboree GYMB and Children's Place. The company has no long-term contracts with its customers. If one reduced or dropped its order, Carter's sales and profitability could be negatively affected. Carter's debt interest and principal payments restrict the cash available for reinvesting into the business. Additional Commentary Growth The OshKosh acquisition added $200 million to Carter's top line in Excluding OshKosh revenue, top-line growth averaged 17% per year since the firm's initial public offering in 2003, driven by positive growth in all distribution channels. Profitability From 2003 to 2004, Carter's operating margin averaged 11% per year, compared with its closest rivals' 6% margin. Carter's advantage is partly due to the greater amount of operating leverage it achieves through its wholesale and mass businesses. Financial Health Carter's took on additional debt to finance the OshKosh purchase, yet ended fiscal 2005 with a manageable debt balance of $427 million. With strong cash flows, it should have no trouble reducing its debt load. Profile Carter's is a specialty retailer of children's apparel through its own stores as well as the department-store and mass channels. Brands include Carter's, OshKosh, Child of Mine, and Just One Year. The firm operates approximately 200 Carter's locations, and 140 OshKosh retail stores.

5 Release date 21 Mar 2007 NASD Members: For internal use or client reporting purposes only Page 5 of 7 Financials Revenue $Mil Fiscal year-end: December 1, Income Statement Financials Revenue $Mil , , Gross Margin % Oper Income $Mil Operating Margin % Net Income $Mil Earnings Per Share Dividends $ Shares Mil Book Value Per Share $ Oper Cash Flow $Mil Cap Spending $Mil Free Cash Flow $Mil Profitability Return on Assets % Return on Equity % Net Margin % Asset Turnover Assets/Equity Financial Health Working Capital $Mil Long Term Debt $Mil Total Equty $Mil Debt/Equity Cash Flow Cash From Operations Cap Ex Free Cash Flow Cash Flows Ratios Operating Cash Flow Growth-YOY Free Cash Flow Growth- YOY Cap Ex as a % of Sales Free Cash Flow/Sales Free Cash Flow/NetIncome Balance Sheet Assets $Mil Current Cash and Equiv Short Term Investments Accts Rec Inventory Other Current Assets Total Current Assets Net PP&E Intangibles Other Long-Term Assets Total Assets 1, , , Liabilities and Stockholder's Equity $Mil Accts Payable Short Term Debt Income Tax Payable Accrued Liabilities Other Short Term Liabilities Total Current Liabilities Long Term Debt $Mil Other Long Term Liabilities Total Liabilities Total Stockholder's Equity Total Liabilities & Equity 1, , , Quarterly Results Sales Current % Change From Year Earlier Net Income Current % Change From Year Earlier Earnings/Share Current % Change From Year Earlier

6 Release date 21 Mar 2007 NASD Members: For internal use or client reporting purposes only Page 6 of 7 Valuation/Estimates Valuation Ratios Stock Industry S&P 500 *Stock's 5 Yr Average Price/Earnings Price/Book Price/Sales Price/Cash Flow Dividend Yld % * Price/Cash Flow uses 3-year average. Forward Valuation Ratios Stock Industry S&P 500 Forward Price/Earnings PEG Ratio PEG Payback (Yrs) Quarterly Earnings Prior Yr Qtrly EPS Current Yr Qtrly EPS Estimated Qtrly EPS Sep 04/05 Dec 04/05 Mar 05/06 Jun 05/06 Mar 06/07* Jun 06/07* Fiscal Quarters Prior Year EPS Current Year EPS Earnings Growth% Earnings Surprises % By what percentage did the company beat concensus analyst earnings estimates? Annual Earnings Estimates Earnings Type $ Growth % $ Growth % High Low Mean Days Ago Days Ago Days Ago Number of Estimates 8 8 Five Year Growth Forecast: 16.90% Industry Average: 11.90% Range of Analyst Opinions Analyst Opinion Trends Total number of Analysts: Buy Outperform 3 Hold 0 Underperform 0 Sell =Buy 5=Sell 1.9 Average Rating 2.0 Last Month 2.3 Industry Average 2.4 S&P 500 Average Current Rates of Return % Erngs Yld 0.00 Div Yld Cash Ret S&P 500 Erngs S&P 500 Div 30-Yr T-Bond

7 Release date 21 Mar 2007 NASD Members: For internal use or client reporting purposes only Page 7 of 7 Ownership Fund Ownership Summary Shares Outstanding Fund Ownership Total of Funds Average Star Rating 58,163,110 29,081, Insider Activity Date Name/Position Shares Transaction Casey Michael Dennis/Executive V.P. and CFO 12,000 Acquisition (including grants/awards) 12,000 Shares Casey Michael Dennis/Executive V.P. and CFO 12,000 Acquisition (including grants/awards) 12,000 Shares Pacifico Joseph/President Pacifico Joseph/President Pacifico Joseph/President Pacifico Joseph/President Pacifico Joseph/President Pacifico Joseph/President Pacifico Joseph/President Whetzel Charles E Jr/Executive VP - Global Sourcing 300 Sold at $29.08/Share Pacifico Joseph/President 90,834 Sold at $27.00/Share Pacifico Joseph/President 700 Sold at $27.12/Share. Top Funds Largest Stake Fund Name Morningstar % Shares % Fund Chng in Date of Rating TM Held Assets Ownrshp Portfolio Baron Growth QQQQQ , RS Partners A QQQQ , Columbia Acorn Z QQQQQ AIM Constellation A QQ Baron Small Cap QQQQQ Meridian Growth QQQQ Fidelity New Millennium QQQ Rainier Small/Mid Cap Equity QQQQQ AIM Dynamics Inv QQQ Artisan Small Cap QQQ Columbia Acorn USA Z QQQQQ AIM Capital Development A QQQ Vanguard Explorer QQQQ Morgan Stanley Inst Small Co Gr A QQQQ Delaware Trend A QQ Olstein All Cap Value C QQQ Evergreen Growth C QQQ AIM Leisure Inv QQQQQ Vanguard Small Cap Index QQQ Baron Capital Asset Ins QQQQ Top Funds Owners Largest Concentration Fund Name Morningstar % Shares % Fund Chng in Date of Rating TM Held Assets Ownrshp Portfolio RS Investors A Chinook Emerging Growth Phoenix Dynamic Growth A Baron Capital Asset Ins QQQQ RS Partners A QQQQ , Members Mid Cap Growth A QQQ Meridian Growth QQQQ Heritage Diversified Growth A QQQ ING Partners Baron Small Cap Gr Svc QQQQQ Artisan Small Cap QQQ AXA Enterprise Small Company Growth Y QQQ FMA Small Company Portfolio QQQ Baron Growth QQQQQ , Baron Small Cap QQQQQ Delaware Pooled Smid-Cap Growth Eq RS Smaller Company Growth A QQQ Delaware Trend A QQ Delaware American Services A QQQQ Delaware Pooled Small Cap Growth EqQQQ RS Small Cap Core Equity A QQQ