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OshKosh B'Gosh: Good Kid Stuff

Premium-priced kids clothier OshKosh B'Gosh (Nasdaq: GOSHA  ) ended 2003 on a discount rack. Both revenue and earnings declined for the year, but the company was looking for a fashionable 2004 with earnings of $0.75 to $0.95 a share.

Well, 2004 results are out, and, although yearly revenue fell once again, net income came in at $1.17 a share (hey, it wasn't kidding about getting things back on track). Wall Street liked the numbers, and the company's decision to focus on kids' apparel only in its lifestyle stores, so the stock soared as much as 18.5% today.

Compared with last year's fourth quarter, revenue grew 10.6%, same-store sales rose 10.5%, gross margins increased from 32.1% to 41.5% (wow!), and net income increased almost ninefold. Those are fantastic numbers, even after considering that 2003's fourth quarter was marred by inventory problems that led to markdowns.

For 2004, OshKosh B'Gosh upgraded its product offerings (making the dapper Johnnie and Suzie look that much better) and its average selling prices. That worked, and the results prove it.

What didn't work was a strategy to sell clothes to Mommy and Daddy while they shopped for their cookie snatcher. The company was smart to see that kids' items were making the big money and end that strategy early. Its 15 existing "family lifestyle" stores will convert to a kids-only format by fall.

The fourth quarter's sales momentum seems to have continued into the first quarter. OshKosh B'Gosh anticipates that first-quarter sales will be 3% to 6% higher that last year's quarter and that the year's bottom line will show a modest improvement (which means analysts will likely need to raise their $1.15 earnings estimate).

Before investors buy, they should consider all the competition. There is Toys "R" Us (NYSE: TOY  ) , which likes the business so much it is considering selling its namesake toy business to focus on its highly profitable and growing Babies "R" Us business. There are clothing retailers like Motley Fool Stock Advisor recommendation Gap (NYSE: GPS  ) that like the business enough to have babyGAP stores. Then there are the standalone retailers like Gymboree (Nasdaq: GYMB  ) and Children's Place (Nasdaq: PLCE  ) .

Add in a few assorted department stores -- and giants like Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) -- and you see that OshKosh B'Gosh has its work cut out.

Debt-free OshKosh B'Gosh is selling for 18.8 times trailing earnings, and the annual dividend yield is 2.3% -- a nice quarterly allowance for Mom and Dad. The stock is reasonably priced, but considering the company is pulling out of a yearly sales decline, all eyes are likely to be on the top-line growth going forward.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.

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