Berkshire Nets 7x On Carter’s

Firm: Berkshire Partners

Company: Carter’s Inc.

Return: 7x original $125 million, 2001 investment

Fund: Berkshire Fund V

Berkshire Partners netted roughly 7x the firm’s 2001 investment in baby and toddler clothing maker Carter’s Inc., capitalizing on the company’s marketing agreements with Target and Wal-Mart, as well as its acquisition of competitor OshKosh B’Gosh last year.

Boston-based Berkshire bought the company from Investcorp in August 2001, and a little over two years later staged an IPO for Carter’s. Prior to the IPO, it owned 85% of the company, then after a secondary offering in September 2004, it owned 36 percent. Berkshire distributed its shares again in December 2004 and November 2005. This most recent sale unloaded the firm’s remaining 12.5% stake, representing a final exit for the firm, which originally invested $125 million in the $450 million Carter’s buyout.

“This investment would certainly rank among our better investments,” said Berkshire Principal Michael Ascione.

Providing mid- to low-priced clothing for the “birth to bus” age range, Carter’s initially focused on mostly zero- to two-year olds at the time of Berkshire’s original purchase. Seizing on an opportunity, the company now makes clothes for kids up to six years of age. Prior to Carter’s entry, no brand had more than 3% of the market share for kids up to six years old.

A major driver of growth on Berkshire’s watch included agreements with mass merchants Target and Wal-Mart. At the time of the purchase, Carter’s had just launched its Tykes brand at Target, which is now called Just One Year. In 2003, Berkshire oversaw the launch of its Wal-Mart brand, Child of Mine. A crowning moment of Berkshire’s ownership was the Wal-Mart launch, said Ascione.

Another initiative that Berkshire completed was moving 100% of manufacturing out of the U.S., a project that was about 50% complete at the time of the purchase.

One avenue Berkshire considered early on but did not pursue was the expansion of Carter’s products to include higher end customers as opposed to its outlet store model. About two months after the purchase, management and Berkshire sat down to a two day meeting to talk strategy, Ascione recalled. After that meeting, Berkshire decided the opportunity to grow within its current customer set was ample and there was no need to target a new customer. Berkshire also decided that Carter’s shouldn’t market to kids over seven years old. That’s the age that kids start deciding what to wear for themselves.

The final major move for Berkshire was the OshKosh acquisition, which more than doubled Carter’s sales. OshKosh had been stagnating through the 90s. With the purchase, Berkshire thought it could revitalize what remained of the famed, toddler-focused brand. Since the purchase, OshKosh has been performing “well if not better,” said Ascione. The combined company now posts sales of over $1 billion.

The Carter’s IPO in October 2003 locked in a return for Berkshire, but the firm has continued to reap upside. Debuting at $19 per share, at press time shares were trading at $65. Carter’s value at the time of the IPO was $675 million, and its market value is now $1.9 billion.

Other stats reflect similar growth. When Berkshire took over, annual sales at Carter’s were $518 million and operating profit was $43 million. For 2005, sales had improved to $1.1 billion, while operating profit registered at $121 million. In the first quarter Carter’s opened seven new Carter’s stores and one new OshKosh store. In total it now has 199 Carter’s stores and 142 OshKosh stores.

Berkshire purchased Carter’s through its $880 million fifth fund. It currently is investing out of its sixth fund, a $1.7 billion vehicle that was raised in 2002. (Fund VI is roughly 70% invested.)

Berkshire is applying a similar blueprint used in building Carter’s to other brands in its portfolio. The firm currently owns cosmetics and skin care products maker Bare Escentuals and blue jeans maker Citizens of Humanity. — M.C.