Carter's, Inc.

Welcome to Carter's third quarter fiscal 2024 earnings conference call. On the call are Michael Casey, Chairman and Chief Executive Officer, Richard Westenberger, Chief Financial Officer and Chief Operating Officer, Kendra Krugman, Chief Creative and Growth Officer, and Sean McHugh, Treasurer. Please note that today's call is being recorded. I'll now turn the call over to Mr. McHugh.

Thank you and good morning everyone. We issued our third quarter 2024 earnings release earlier today. The release and presentation materials for today's call are available on our investor relations website at ir.carters.com. Note that statements on today's call about items such as the company's outlook and plans are forward-looking statements. For discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, Please see our most recent SEC filings and the earnings release and presentation materials posted on our website. In these materials, you will also find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Mike.

Good. Thanks, Sean. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. Our third quarter results were better than forecasted. Our sales and earnings exceeded the high end of the guidance we shared with you in July. We believe consumers responded favorably to the strength of our product offerings and our new pricing and marketing strategies launched in the third quarter. The better than forecasted sales were driven by our US retail segment. Our US wholesale sales in the third quarter were at the upper end of our forecast And our international sales were at the lower end of our forecast, reflecting a slow start to cooler weather apparel sales in Canada. Earnings in the third quarter were well above the high end of our guidance. Gross profit was in line with our forecast. SG&A was lower, reflecting good control over discretionary spending. Inventory levels and cash flow were better than planned. We ended the quarter with a higher cash balance, no seasonal borrowings, lower interest costs, and over $1 billion in liquidity. Our best-selling product offering continued to be in our baby age segment. Baby apparel sales grew 2% in the quarter compared to last year and contributed over 50% of our total apparel sales. We saw slightly lower sales in the toddler age segment. Collectively our baby and toddler apparel sales contributed over 80% of our total apparel sales and were comparable to last year. We had a double digit decrease in sales in our apparel for four to 10 year old children. It's largely a play where product offering and contributed less than 20% of our apparel sales. We believe we have strengthened this component of our product offering for 2025. In the context of our good, better, and best product offerings, we continue to see a barbell-shaped trend in our US retail sales in the third quarter. We saw low single-digit sales growth in our opening price point product offerings. We had over 50% growth in our best product offerings, including our Little Planet, Purely Soft, and Baby Bagash collections. Sales of our mid-tiered product offerings were down over 10%. We saw lower sales on bestsellers carried over from last year, and we saw higher sales where we offered fresh color stories, new multicolored prints, and elevated fabrics. Shopping for holiday-related apparel Trended later than last year, we believe consumers are shopping closer to need and buying what's needed and only when needed. In recent weeks, thankfully, as weather turned cooler in more parts of the country, the trend in our holiday-related apparel has improved. Relative to last year, our third quarter sales were down 4%, reflecting a 5% reduction in average prices and a 1% increase in unit volume. That's the best unit volume performance we've achieved since 2021. At the end of July, we announced a plan to invest $40 million in lower prices and $10 million in additional brand marketing to improve the trend in our U.S. retail sales. Year-to-date through July, our comparable U.S. retail sales were trending down about 10%, including a 13% decrease in July. We focused our price reductions on less than 20% of our product offerings, largely opening price point products, which are typically basket starters like our basic T-shirts, shorts, and leggings. We'll show you examples of where we lowered prices, and we'll discuss the related benefits this morning. We believe consumers responded favorably to those sharper prices. Our comparable US retail sales in August and September were down about 5%, Fourth quarter to date, our comparable retail sales are trending down about 4%. Collectively, we believe our investments in product benefits, price, marketing, and a better in-store and online shopping experience have improved the trend in our conversion rates, transactions, unit volume, and new customer acquisition. We're pleased with the near-term benefit from these investments. longer term we believe there may be a more meaningful benefit as we re-engage and attract consumers who shifted over to the mass channel and off-price retailers as inflation reached historic levels beginning in 2022 the results of recent market analysis were consistent with our experience over the past two years it indicated that millennials and gen z consumers our target demographic shifted to value apparel retailers beginning mid-year 2022. The research indicated that although apparel prices had grown only 5% since 2019, other costs of living, including grocery prices up 30%, drove them to value apparel retailers. Carter's is a value apparel retailer. Our average prices per piece are about $6 and change. In the third quarter, we believe more competitive prices enabled our US retail unit volume to be comparable to last year. By comparison, retail units sold in the first half this year were down 6%. We plan to continue to seek the sweet spot in pricing to drive growth in unit volume and plan to be less reliant on higher prices near term to drive growth. In the third quarter, we launched a new marketing campaign focused on the beauty of our product offerings and the special moments of early childhood. We'll share some of that brand marketing with you this morning. We believe our brand marketing is resonating with consumers. We saw a lift in new customers in the third quarter. We also saw an increase in reactivated customers returning to shop with us after more than a year since their last purchase. With our better than forecasted third quarter results, we are reaffirming our previous outlook for annual sales and profitability this year. If current retail trends in the United States continue, we may have upside to our guidance. That said, we believe the potential upside opportunities in the fourth quarter may be offset by market-related risks to our forecast. At the high end of our guidance, we are forecasting annual sales of $2.8 billion this year. Our US retail business is expected to contribute about 50% of our annual sales. We're assuming our retail sales this year will be down about 8%, store sales down 6%, e-commerce sales down 10%. We believe in the importance of stores as the very best expression of our brands. Nearly 70% of children's apparel is purchased in stores, and our stores are the number one source of new customer acquisition. We believe our stores drive our e-commerce sales. When we open stores, we see a lift in e-commerce sales, and when we close stores, we see e-commerce sales in the related market decrease. Increasingly, consumers enjoy the convenience of shopping online and picking up their purchase the same day in our stores We saw a 12% lift in omnichannel sales in the third quarter. Omnichannel sales include the store fulfillment of online purchases. About 38% of our digital orders were supported by our stores, up from 35% last year. These are margin accretive transactions and reduce the need for shipping online purchases to consumers. Initiatives to improve our store performance include opening 40 high margin stores this year in good shopping centers and closing about 30 low margin stores in declining traffic centers as leases expire. 98% of our stores were cash flow positive over the past 12 months. Our new stores continue to comp better than our older stores. To improve the performance of our older stores, we have increased our investments in store remodels this year. To improve our U.S. retail performance, we are responding to the barbell pattern in consumer purchases by increasing the mix of our opening price and premium priced product offerings. We have invested in technology to improve our performance, including a new inventory allocation system to better support the expectations of consumers shopping with us in our stores from Maine to Hawaii. And we have also invested in new marketing personalization technology enabled by artificial intelligence to tailor our digital marketing to consumers' product preferences based on the age and gender of their child. For the year, we are forecasting U.S. wholesale sales of over $1 billion. The strength of our wholesale business continues to be in our exclusive brands sold to mass channel retailers. Carter's has an unparalleled competitive advantage as the largest supplier of children's apparel to Target, Walmart, and Amazon. Collectively, our unit volume to these retailers in the first nine months this year was up about 15%. By comparison, the unit volume in our US retail segment was down 4%. With inflation weighing on families with young children, we believe our target consumers have sought the convenience that mass channel retailers provide with one-stop shopping for groceries, diapers, baby formula, and children's apparel. Carter's has benefited from that traffic to mass channel retailers. Our exclusive brands are forecasted to grow to 55% of our total U.S. wholesale sales this year up from 51% last year. By comparison, our sales to department stores this year are forecasted to be less than 20% of our wholesale sales, down 3 percentage points to last year. For the year, we are also forecasting lower sales to off-price retailers. With our progress managing inventories, we are forecasting a nearly 50% reduction in low-margin off-price sales this year. Excluding off-price sales, we are forecasting low single-digit growth in our U.S. wholesale sales this year. To date, we have received bookings which indicate modest growth in wholesale demand for our brands for our spring and summer 2025 product offerings. Our international sales this year are expected to contribute about 14% of Carter's annual sales, or a little over $400 million. Our operations in Canada and Mexico are expected to contribute over 80% of our international sales. We're forecasting high single-digit growth in Mexico this year. By comparison, in Canada, we're forecasting a high single-digit decrease in sales. The Bank of Canada has cut interest rates four times this year to strengthen the economy. Like the United States, families with young children have been weighed down by inflation and higher interest rates. That said, we're encouraged by recent trends in Canada. With cooler weather arriving, our retail sales in Canada are comping positive in the fourth quarter. Our supply chain continued to be a source of strength for us in the quarter. Product costs were down 5%, down 7% year to date. Shipments to our wholesale customers and our stores were largely on time despite unrest in Bangladesh, a port strike on the East Coast, and rerouting of ships to avoid the Red Sea. We're forecasting a low single-digit decrease in product costs in the fourth quarter. The early read on product costs for the first half of 2025 suggests modest inflation. Our market research suggests consumers plan to increase the mix of apparel purchases for their holiday gift giving this year. Our market research also continues to indicate that families with young children have pulled back on spending due to inflation. Children's apparel is a relatively small component of a young family's budget. but even less discretionary purchases, like children's apparel, have been scaled back because of inflation. We believe that Carter's advantages in inflationary markets include our focus on essential core products, a high mix of less discretionary baby apparel, our broad and unparalleled market distribution capabilities, including our exclusive brands sold through Target, Walmart, and Amazon, in our compelling value proposition with average retail price points of less than $11, including many high-value multipacks. Our growth strategies are focused on the fundamentals, including elevating the style and value of our product offerings, improving our marketing capabilities and effectiveness, and leveraging our unparalleled multi-channel market presence to ensure wherever children's apparel is sold in a meaningful way, consumers will have a good experience with our brands. We'll share our thoughts on each of these growth strategies with you this morning. I want to thank all of our employees, many tuning in this morning, for helping us exceed our third quarter plans and their commitment to achieve our growth objectives in the home stretch this year. At this time, Richard and Kendra will walk us through the presentation on our website.