Carter's, Inc.

Welcome to Carter's second quarter fiscal 2025 earnings conference call. On the call are Doug Palladini, Chief Executive Officer and President, Richard Westenberger, Chief Financial Officer and Chief Operating Officer, Kendra Crewman, Chief Product 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 second quarter 2025 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 expectations and plans are forward-looking statements. For a 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 Doug.

Thank you, Sean. Good morning, and thank you for joining us today. Just over 100 days ago, I began my journey as Carter's CEO and President. It's both an honor and privilege to lead this company and its iconic brand, and I'm more energized and inspired than ever about our potential. In the short time I have been here, I've visited as many Carter stores, key accounts, distribution centers, regional offices, and factories as possible to hear directly from our teams where our greatest opportunities lie and how best to get after them. I have also listened to feedback from many new, existing, and lapsed consumers. And based on my learnings, I've been able to develop a clear picture of what success will look like as we move forward, returning all Carter's brands to growth that is long-term, sustainable, and profitable. Carter's brands are truly iconic, and our legacy is a source of trust and strength. Our teams possess talent, acumen, and drive, all necessary to unlock the company's next tranche of success. And our market leadership affords Carter's unparalleled competitive advantage. I'm going to share some details around the roadmap to future success shortly, but first, Richard is going to discuss our 2025 second quarter and first half results. which I believe offer proof that we have stabilized our business and put in a position to grow again.

Richard? Thank you, Doug. Good morning, everyone. With the first half of the year now behind us, it's clear we're navigating an unsettled world and marketplace. As the year has unfolded, tariffs have emerged to present significant uncertainty and challenges to planning our business. We're obviously not unique in this. Higher tariffs are an issue across the industry. The incremental baseline tariffs which have been implemented were not especially meaningful to our results in the second quarter, but they're expected to have a much more significant impact on our business going forward, not to mention any additional reciprocal tariffs which might be additive to what's already been imposed. I've been pleased, though, with how our team is actively responding to these new challenges. Over the years, there's been no shortage of unexpected events that we've had to respond to. whether it was the sudden emergence of record high cotton prices, record inflation, or the market exit of significant wholesale customers. Carter's has staying power, and I'm confident we'll work through whatever the current environment throws our way. My comments on our second quarter and first half performance will track to the presentation materials, which are posted to the investor relations portion of our website. So beginning on page two of our materials. On page two, we have our GAAP basis P&L. Sales in the second quarter were $585 million. Our second quarter reported profitability included $8 million in charges, which I'll comment on in a moment. Our Q2 reported operating income was $4 million. Our first half gap P&L is on page three. On first half sales of $1.2 billion, our reported operating income was $30 million. First half reported profitability included $17 million in charges. We detailed the second quarter and first half charges on page four. We've treated these items as adjustments to our reported results. In the first half, we incurred approximately $10 million in costs, largely third-party professional fees, in support of improving our product and brand development processes. We'll talk further today about the benefits these efforts are yielding. Overall, we believe this work will improve our capabilities and our ability to more effectively compete and grow in our marketplace. The first half also included $7 million related to our leadership transition earlier this year. We're expecting far less significant charges related to these matters in the second half of the year, $5 million or less, primarily as our use of third-party external support winds down and our internal teams assume our go-forward processes and work. As we disclosed on our February earnings release, we also expect a non-cash pre-tax charge in the third quarter of up to $10 million related to the termination of the legacy Oshkosh-Bagash pension plan. This morning, I'll speak to our results on an adjusted basis, which excludes these items. Some overall highlights of our adjusted second quarter performance are summarized on page five. Our second quarter sales of $585 million represented growth of 4% over last year. This growth was driven by our US retail and international segments. US wholesale sales were comparable to last year in the quarter. Our profitability, both adjusted operating income and adjusted earnings per share, We're down considerably versus a year ago. We had planned profitability to be down largely due to the year over year investment in pricing and retail and higher spending in some specific areas. Our objective though is obviously to grow profitability. We have much higher ambitions for our business than our second quarter profitability reflects. Second quarter is historically our smallest quarter of the year. In 2024, second quarter represented about 20% of our full year sales. and approximately 14% of full-year adjusted operating income. Our adjusted P&L for the second quarter is on page 6. On our sales of $585 million, gross margin in the second quarter was 48.1%, a decrease of 200 basis points from last year. The largest driver of the decline in gross margin was our investment in pricing in U.S. retail. Recall we had planned approximately $20 million in incremental pricing for the first half Given improved traffic and good sell-throughs, we ended up spending a bit less than this. Pricing in U.S. retail was down about 3% in the second quarter. As we told you previously, these pricing investments were concentrated in key value item basket starters and in our key market share promotional events to be more competitively priced in the market. At this point, we don't believe further investment in lowering AURs is needed. In the second half, we'll anniversary the significant investments we made in pricing and marketing last year. AURs are planned up in the low single digits in our retail business in the second half versus down about 4% in the first half. In recent weeks, we've also seen some indications of competitors beginning to raise prices. Gross margin in the second quarter was also pressured by a few other factors, including a higher mix of excess inventory sales to the off-price channel in the wholesale segment, higher inbound freight rates, and the net impact of foreign currency. The impact of higher baseline tariffs on gross margin in the second quarter was approximately $2 million. As I've said, we expect these incremental tariffs to be more meaningful going forward. Royalty income was about $1 million lower than last year, in part due to tariff-related order cancellations of licensed product across our channels. Adjusted SG&A in the second quarter increased $26 million to $273 million, an increase of about 10%. The largest driver here was higher storage-related expenses, These include higher volume-related costs and having nearly 40 more stores across North America than last year. Store maintenance expenses were also higher than last year as we caught up on some deferred projects across the fleet. As we told you on our last couple of calls, we expect SG&A to be higher this year as we're planning for more normalized levels of variable performance-based compensation compared to last year. This represented about $8 million of the increase in SG&A in the quarter. Our first half adjusted spending was up about 4%, For the second half, we're targeting an increase in the mid-single-digit range. Our adjusted operating income in the second quarter was $12 million, representing an adjusted operating margin of 2%. Below the line, interest and other costs were about $2 million compared to $5 million last year. The improvement here relates to higher interest income and an FX gain driven by the weakening of the U.S. dollar since the end of the first quarter. Our effective tax rate in the quarter was unusually high at approximately 74%. This high rate was due to stock option expirations in the quarter and the implementation of a global minimum tax rate in Hong Kong during the quarter. Given the noise in the quarterly rate, it's more meaningful to consider our full year forecasted effective tax rate, which we've estimated to be about 23% compared to about 19.5% in 2024. With all of that, on the bottom line, adjusted earnings per share were 17 cents in the quarter compared to 76 cents last year. At page 7, we summarized our adjusted segment performance in the second quarter. As mentioned, our U.S. retail and international businesses drove the revenue growth in the quarter. U.S. retail sales grew $9 million, and international sales grew by $11 million. Wholesale sales were comparable to a year ago. On profitability, our consolidated adjusted operating income declined $28 million with lower profitability in U.S. retail and wholesale accounting for most of that. I'll provide a little more color by business beginning with U.S. retail on page 8. Demand in U.S. retail in the second quarter was good and we achieved a plus 2% total retail comp. The quarter started out strong with the buildup to the later Easter holiday this year in April. There may have been also some measure of a stock-up phenomenon in April as consumers were reading the headlines about potential reciprocal tariffs and may have pulled forward some of their purchasing to get ahead of higher prices in the future. More of our pricing investment in the quarter was also concentrated in April. Business slowed a bit in May and around the Memorial Day holiday in particular, but we had several very good weeks of selling in June to finish the quarter. In terms of product, baby, the largest part of our apparel business, continues to perform very well with double-digit sales growth in the second quarter, which builds on growth we posted in baby over the past several quarters. Continuing to win in baby is a high priority, so we're pleased to see consumers' response to the changes and improvements we've made to our assortment here. Our latest market share information indicates we've maintained our share in baby and grown share in the toddler and younger kid segments. We've also seen an improvement in the trend of new customer acquisition and retention, building on the progress we began to see in the second half of last year. As expected, second quarter retail profitability was lower than last year. We've listed the primary drivers here, including the investment in lower pricing and expense deleverage. Our teams are focused on executing a good second half, supported by several new product and marketing strategies and an overall planned improved inventory position versus a year ago. Third quarter sales are off to a good start. July month-to-date comp sales in the US are running up about 2%, with average AURs also higher than last year. We're also encouraged by back-to-school selling, which is off to a good and earlier start than last year. We've summarized our US wholesale and international segment performance for second quarter on page nine. In-wholesale sales were comparable to last year, as I've noted. There's always a number of moving pieces in wholesale, and second quarter was no exception. Year-over-year, we had higher sales in the off-price channel as we were able to opportunistically move some excess inventory. I'd characterize this growth as more or less timing with full-year clearance of excess inventory through the off-price channel, forecasted to remain very low by historical standards, and planned down year-over-year in the second half. We had year-over-year growth with two of our three exclusive brand customers in the quarter, and we've seen some good momentum for new Skip Hop products within the wholesale channel. On profitability, wholesale had a 14% adjusted operating margin. The decline versus last year reflects lower pricing, changes in customer mix, including the higher clearance sales, and expensity leverage. International was a standout area in the business in the quarter, with all components of this segment posting sales growth over last year. The largest component of our operations outside the United States is our Canadian business, which had terrific performance with a plus 8% comp. Mexico has also continued its momentum with consumers in its market, posting at plus 19% comp. And our international wholesale business sales also grew in the quarter, driven by higher demand from our partner in Brazil. International's operating margin was approximately 4%. The stronger US dollar compared to a year ago continues to weigh on the profitability of our international businesses. On the next several pages, we've summarized our first half performance in total and by business segment, and this information is included for your reference. We've summarized our balance sheet and cash flow performance on page 13. Our balance sheet remains in very good shape. We ended the second quarter with good liquidity, substantial cash on hand, essentially also full availability under our credit facility, and our forecasts project good continued liquidity going forward. Inventory was up 3% year over year at the end of the second quarter. About $17 million of our quarter end inventory balance represented higher costs due to tariffs. Excluding the cost impact of tariffs, inventory was comparable to a year ago, and inventory units at the end of the quarter were down 1% versus last year. The quality of our inventory heading into the second half is very good. We have less excess inventory than a year ago, and we feel good about the inventory investments we've made to drive the business in the second half with more newness and ongoing improvements to our assortments across the baby, toddler, and kid categories. Also, as summarized here, we've had a net use of cash year to date, which tracks to our lower earnings and higher inventory balance, including the cost of higher tariffs. We typically generate most of our cash as a business in the second half of the year, and our forecast reflects the same expectation for this year. We're expecting positive operating and free cash flow for the full year. Turning through a couple of initiative updates on page 15, as we've mentioned, we've had a tremendous amount of work underway the past number of months across several important areas. First, we've been comprehensively assessing and redesigning our end-to-end product development process from initial design concepts all the way through delivery of the finished product. We have a complicated product assortment with multiple categories, brands, and channels to consider. Our assessment indicated we have an opportunity to shorten our product development lead times and improve this aspect of how we go to market. We've also identified an opportunity to reduce the number of changes we make to the assortment during the process and to reduce overdevelopment. This has been a comprehensive project involving a large portion of our organization with very active participation across our design, merchandising, supply chain, wholesale, and retail teams. We've already begun to see benefits from this work and have realized a meaningful reduction in our product development timeline. We've had good partnership from our vendors in Asia as part of this initiative as well. The end objective of this work is for us to become faster, nimbler, better able to react to consumer preferences, and continue to induce greater and more frequent newness in our assortments. In recent years, this has been a good spark to consumer spend, purchase frequency, and consumer retention. Additionally, we've completed a tremendous amount of work in assessing our retail store portfolio. As Doug will describe more fully, we've employed some meaningful new analytics to our store portfolio. This analysis has identified opportunities to close some stores and will also strengthen the way we evaluate future store sites going forward. On the next page, we've reprised a page from our last earnings column. Tariffs continue to obviously be a topic of discussion across the industry. The frequently changing outlook for potentially significant additional tariffs has presented a tremendous challenge in planning our business. We have a very well-diversified sourcing footprint. We've meaningfully reduced our exposure to China manufacturing over the last number of And now, as summarized here, our largest countries of origin are Vietnam, Cambodia, Bangladesh, and India. Unfortunately, these countries are in scope for additional tariffs, as the administration has announced. We've assessed the higher incremental tariffs, which have already been implemented, an additional 10 percent duty for all countries, and higher incremental duties for products from China, Vietnam, and Indonesia. Relative to a few months ago, we're preparing for a world with higher and more permanent tariffs above the over $100 million in duties which we have paid historically. Our estimate of the additional baseline tariffs is that it would represent a gross additional tariff amount between $125 and $150 million on an annualized basis. If this is our new reality, and again, this is not an issue unique to Carter's, it's our intention to be aggressive in our response as we would for any other meaningful increase to our cost structure. Our intended actions are summarized here on page 16. We're in active discussions with our vendor and wholesale partners to share in the additional cost of these tariffs, depending upon what tariff structures are eventually inactive. We'll continue to be dynamic in moving production to more advantageous geographies, and we'll continue to look at our product assortment. Given the magnitude of the challenge, we also intend to raise our prices. In the past, when we've needed to raise prices because of product cost increases, we've done so successfully. We will remain focused on the extraordinary quality and value that our brands are known for, but we are also committed to managing a higher operating margin business going forward as well. As this morning's press release indicated, we've not reinstated guidance given the overall uncertainty around tariffs and their potential impact on the business. I am encouraged by a number of things we're seeing in the business right now, particularly in U.S. retail. Consumers are responding well to our product assortments and marketing strategies, and wholesale channel demand overall has held up well. We have a number of plans and initiatives intended to drive a good second half. Our product initiatives are focused on leaning into our best category of product, including Little Planet, Purely Soft, and new higher-style collections. As mentioned, we've also invested in an overall improved inventory position relative to the first half. Average in-store inventory in U.S. retail was down low double digits in the first half and is planned to be comparable in the second half, with increases planned during the critical holiday selling season in the fourth quarter. Additionally, we have increased the depth and breadth of our top performing categories and our assortments will reflect more frequent injection of newness. Our marketing plans also reflect increased investment over last year's second half. We've been seeing very good returns on our marketing spend thus far this year. We're expecting some near-term pressure on gross margin from higher tariffs, but in 2026 and beyond, our planning assumption is that we'll be able to offset these costs. Our estimate of the net earnings impact in the second half of 2025 of the incremental baseline tariffs, which have been implemented, is approximately $35 million. Key risks that we're monitoring include the prospect of additional tariffs, consumer response to higher prices, and the overall level and trend in consumer sentiment. With these remarks, I'll turn it back to Doug to share some of his observations and thoughts on our path forward.

Thank you, Richard. Our Q2 and H1 results. show me that Carter's business is stabilizing as we control what we can. I also believe that we now have the necessary foundation in place to return Carter's to long-term, sustainable, and profitable growth. As mentioned at the beginning of today's call, I'd like to spend some time talking about what I've learned during my first 100 days plus in this role and where I intend to take Carter's moving forward. Also, in today's presentation materials, We've provided links to a brand video and illustrative PowerPoint deck to bring this narrative to life. Everyone I've met since my April 3rd start date has a story to share about Carter's or Oshkosh, something they wore as a baby that their mom stored away as a keepsake, a dress or pair of overalls passed down through generations, or a favorite outfit they have their kids wearing right now. Phones come out, photos and memories are shared, the fondness and warmth are palpable. It's exactly the powerful emotional response to our brands that any company leader would covet, and it reinforces the tremendous privilege Carter's has as a part of people's lives during such a meaningful time when families are having babies and raising young children. Our return to growth will be predicated upon this place of honor. Backed by 160 years of cumulative trust and fueled by a commitment to serve a new generation of young families, with brands and products that emphasize high quality, modern design, and exceptional value. I think our newly crafted company purpose, to embrace the wonder of childhood and uplift those shaping the future, captures this position perfectly. I'm also inspired by the talent and potential of many leaders and teams across the Carter's organization, and we will certainly continue to attract and retain the absolute best talent possible as we optimize our organizational model. To that end, several changes and additions to the Carter's leadership team have added substantial experience and acumen where we require it most. Our retail leader, Allison Peterson, joined Carter's with tremendous experience from Best Buy. Our new head of strategy, Emily Evert, joins us officially in August, moving over from Boston Consulting Group after leading our transformation roadmap. And Sarah Crockett recently joined Carter's from Designer Shoe Warehouse as our chief marketing officer, to drive demand creation and consumer connectivity. In my nearly 40 years of building and nurturing brands, I've consistently seen that thoughtful, measured investment drives profitable growth, and that's exactly the path we're back on at Carter's. I've also learned that the strongest brands are those with a clear sense of identity and purpose, knowing exactly what they stand for and what they don't, and most importantly, I know that lasting consumer loyalty comes from balancing the transactional with the emotional, combining value with meaning. At Carter's, we are returning to all these fundamentals. To better know, appreciate, and thank our fans, Carter's is taking several meaningful actions to more impactfully connect with our consumers. We've just completed the most significant consumer research study in Carter's history, which now forms the basis for an always-on flow of direct insights and data informing every decision we make. We've successfully removed a full three months from our product development calendar, dramatically increasing our ability to read and react to consumer signals and upscaling agility. Each year, our newest fans represent 90% of all US births, building on Carter's loyalty member base of more than 9 million known consumers. Through this dynamic platform, we are elevating personalization of product, content, and offers for each shopper and presenting a seamless digital experience across apps, stores, and websites. The name atop our Atlanta headquarters is Carter's. The name above almost every retail door we operate and on website homepages is Carter's. Carter's is our flagship brand, full stop. As such, our future success is inextricably tied to the Carter's brand. and we're treating it with a commensurate level of care. To regain lost market share and reinforce Carter's position as the number one baby apparel brand in all points of distribution and across all vital product categories, we have focused and redoubled our efforts to deliver relevant and resonant apparel to today's new parents. This prioritization is already showing signs of success. Across U.S. stores and e-commerce, Carter's baby category sales continue to accelerate for the fourth straight quarter, with plus 5% total growth in Q1 and plus 10% in Q2 versus last year. An emphasis on product newness is yielding more consumer acquisition, up 8% versus last year, and these new consumers deliver higher lifetime value. Carter's Purely Soft assortment has simply exploded in popularity and is a solid source of growth each season in our must-win baby category. This product is truly the softest I have ever felt. In addition to selling at higher non-promotional prices, Purely Soft consumers visit us more often and spend more per visit than average. There's something very special about Oshkosh Bagash that goes well beyond its 130 years of denim heritage. For many of us shopping regularly for new baby gifts, a pair of Oshkosh overalls and a denim jacket are the perfect set and always adored by recipients. Due to its tremendous brand equity, we now have a clear line of sight to Oshkosh becoming Carter's most global and differentiated brand. We're updating the Oshkosh business model to really get after this opportunity and look forward to sharing details in the coming months. We are also incubating three emerging brands that show tremendous promise. Skip Hop, Little Planet, and Otter Avenue. Skip Hop, our hard line brand, Focus by parents for parents continues to resonate with its powerful blend of thoughtful design and functional innovation. Q2 sales for Skip Hop were up 7% and H1 was up 4.5 to last year. Since its 2021 relaunch, Little Planet has become a baby, toddler, and young children's leader in sustainable apparel made with eco-friendly materials. Little Planet's high quality make and more sophisticated aesthetic command higher prices, and give the brand much greater upmarket potential that we believe will generate solid growth and brand halo. And just this week, Carter's launched its next emerging brand, Otter Avenue, named for the Wisconsin street on which Oshkosh B'gosh was founded. This is our first ever brand specifically for toddlers, crafted through insights around how kids begin to dress themselves. And we believe it will keep our infant and baby consumers engaged as their kids grow. As with Little Planet, Otter Avenue commands higher prices through premium design and make, and we believe it will experience solid growth from its test phase this year into 2026 and beyond. Very early results are highly encouraging. These new brands are resonating. Little Planet, for example, has grown its consumer base by 50% this year, all new fans to Carter's, with a lifetime value 1.5 times higher than our average consumer. In Q2, our best products with higher AURs outperformed our good and better buckets with sales up and outpacing inventory investment. The best product category often features our most style-forward assortments and carries an exceptional value overall. I've come to understand and appreciate that Carter's products are not discretionary, but instead vital, necessary, and cherished from birth through all the fast-growing and rapidly evolving early stages of life. Infants become babies, babies become toddlers, and toddlers become young kids with strikingly predictable regularity. Our business model and strategic framework reflect this inherent strength. When your name is above the door, consumers come in with higher expectations and rightfully so. As both a fan and student of retail, I know I do. Shoppers expect curated assortments led by newness. knowledgeable and engaged associates, a clear brand point of view, and total value that's easy to understand. And that is exactly what we're striving to deliver across our more than 1,000 Carter stores in North America and beyond. At the same time, it's important to remember that Carter's reaches consumers with unmatched scale. Last year, we earned more than 250 million visits to our own stores and digital platforms, not to mention Carter's presence as a leading brand in nearly 20,000 points of wholesale distribution across North America's most prominent retailers. Few brands have the opportunity or the responsibility to show up this consistently and meaningfully for families raising young children. And to that end, each point of interaction must serve our consumer in a much more resonant way to drive brand loyalty and unlock lifetime value. One step we are taking is implementing a new fleet segmentation strategy providing the right consumer experience at each point of own distribution from more market-style stores to value-driven outlets. Beginning to roll out in 2026, I expect these segmented Carter stores to be key growth drivers. We are already iterating on new stores as we open them, and their sales comps are outperforming the balance of the fleet by 350 basis points. In addition, we are seeing strong proof points in key retail metrics such as conversion, units per transaction, and unit volume, each showing meaningful gains for five quarters running. In fact, year over year, active consumers and owned stores have delivered growth for the first time since 2022, and our unit velocity has greatly increased, comping 6.3% versus last year. We have also launched a new proprietary algorithm to help us understand where stores should be open, moved, or closed. The first outcome of this analysis is that we have identified approximately 100 Carter's doors which we will close as leases expire. While we employ the same multifaceted set of inputs to relocate or open new doors in high traffic impactful locations, our clear focus will continue to be increasing productivity where we have already invested capital in existing doors. As we test and learn, we are iterating on Carter's business model in real time. again to drive sustainable and profitable growth. Our key wholesale accounts remain a vital and substantial part of the CRI business model. Carter's global multi-channel approach will continue to afford us distinct competitive advantage across all points of distribution and among our competitive set. We have remapped our North America wholesale model, anchored by our big three, Walmart, Target, and Amazon. to strategically include more of our brands in more doors with more accounts, while continuing to emphasize our exclusive brands. Retaining and growing our number one baby and toddler brand status among all key accounts is expected to continue to drive sales growth through outsized reach and impact. Carter's aggressive promotional cadence must be rebalanced to support more sustainable, profitable growth. We're already making progress. investing approximately 15% less in promotions than planned, particularly in must-win categories such as baby. Given early success of new investments thus far, we intend to elevate demand creation resources and position much of it to generate revenue growth against two primary areas, store traffic and consumer loyalty. Every point of additional traffic across our current store fleet is worth approximately $10 million in revenue and $5 million in operating income, a good example of the return on investment I'm looking for. We are also building on our base of more than 9 million active loyalty members. For each additional 500,000 members Carter's adds, we would expect an incremental $70 million or so in sales. We are also learning how best to generate global scale in international markets, where birth rates outpace that of the US, such as Brazil, where we've built a high performing partnership operating 81 Carter stores and more than 200 shop and shops. The outcomes of what we experience here inform how we think about geographic expansion in the future. As we focus on what really matters to drive sustainable long-term growth, we expect to become much more efficient and effective in every choice we make, which we believe can yield substantial SG&A savings, some of which we expect to reinvest into our brands and capital expenditures that service our brands where thoughtful investment will provide the greatest return on capital. Early indicators show that our foundational work is translating into real business momentum, but we're just getting started. Our plans will evolve as we read signals in the business, and we will remain agile no matter the level of uncertainty. We will continue to be transparent, pointing to proof in our progress, as well as what we learn from what isn't working. My confidence in our future prospects emanates from the trust placed in Carter's by generations of families. We are the largest and most significant company focused exclusively on young children's apparel, and we must continue to honor that very special relationship at a very special time in people's lives. I look forward to sharing much more with you as we move forward. Thank you. And with these remarks, we're ready to take your questions.

Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, please press star one, one again. Our first question comes from Jay soul with UBS. Your line is open.

Great. Thank you so much, Doug. Thank you for all the comments today. I'd love to ask you, you know, given everything that you talked about and everything you've learned and you know, your first hundred plus days, what kind of sales growth opportunity, you know, do you see going forward for the company? What kind of annual sales growth rate do you think you can deliver? What kind of, EBIT margin you think you can get the company to over, say, a three- or five-year period? And generally speaking, if you had an earnings goal, what kind of earnings do you think the company should be able to deliver? Thank you.

Hey, Jay. Thank you for your questions. Yeah, I have a lot of earnings goals and sales goals, but we're not going to share specific numbers today. I can tell you, I can just reinforce what I said. We have substantial and meaningful reasons to believe that we can return to growth that that growth can be profitable and sustained over time, and that it's accretive. It's accretive for our brands. It benefits our consumers. That's what we're really focused on, and, yeah, and that's what we're driving toward right now.

Got it. Understood. And maybe if I can ask one for Richard. Just talking about tariffs, you gave the number. I think it was 125 to 150 million gross tariffs. Can you just talk about how – and you gave some ideas about how you're going to offset the impact, whether it's change the product assortment cost share with vendors, et cetera. Can you dive in a little bit and maybe give us an idea of, like, what the biggest potential offset would be? Is it price increases? Is it, you know, something else? And how much over time of that 125? It sounds like you can offset a lot of it, but, like, over what time frame and sort of what might be the impact to next year?

Right. And this is, Jay, our best – kind of analysis to date on this. Obviously the landscape is anything but certain on this. It seems like every day there's a new announcement or different interpretations, even among the countries who are negotiating this. So it's been tough even to try and run the scenarios that we've shared this morning. I do think probably the most meaningful opportunity is price, just in terms of the magnitude of the dollars, just given the size of our business. That's not the only tool that we intend to employ here. The other ones that were listed in the presentation are very important to us as well. We've had good partnership with our vendors. We are sharing some of the tariff costs with our wholesale partners. We have raised our prices. It's tougher to do near-term, obviously, because we have goods that have been ticketed. We have goods that have been sold in, and that's the reference to the expected impact for the second half of 2025. It's just tougher for us to cover near-term. As I said, we're committed to growing the profitability of the company. We have a long heritage of being a high operating margin business. We have no interest in running a lower margin business, particularly due to tariffs. If this is something that's going to be a permanent increase to our cost structure, we have to find a way to cover it. That's why our ambition is for 26 and beyond that we would find a way to completely mitigate what we're estimating. The analysis gets a little circular because there's a lot of data that suggests that you lose some unit intensity when you raise prices. therefore that affects the number of units that you're importing into the country that are subject to tariffs. So we'll see where it all lands. As I said, I'm pleased with how aggressive our teams have been in responding to this challenge, and it's the challenge of the moment, and I think it's one for the industry as well. As the leader in young kids apparel, we expect to lead in this regard as well, and we'll be as aggressive as we can with it over time.

If I could just add one note. I really want to applaud the agility of our supply chain team. They've done incredible work diversifying our existing sourcing base, and we will continue to be agile. So as we get clarity on what's happening with the terror situation, we can move among the countries of sourcing that we have. And I think we have tremendous agility, and it is a competitive advantage for us. So I would just add that as a an important factor that's working in our favor, irrespective of the uncertainty.

Got it. Thank you so much.

Thank you. Our next question comes from Paul LaJuice with Citi. Your line is open.

Hi, this is Kelly on for Paul. Thanks for taking your question. Doug, thanks for all the color. I was wondering if you could just double-click on your plans on the U.S. retail business I think you talked about closing some stores as leases come up. I guess when we think about sort of the net stores, you know, 800 and change in the U.S., would you expect those stores, the store caps to move lower? And just any color on, you know, where you're seeing opportunity to close stores versus opening stores and just, you know, just more detail around your USDTC strategy. Thanks.

Yeah, thank you, Kelly, for the question. The first thing I would tell you is that I really believe in this new multifaceted algorithm that we have that is proprietary to our company. It's a more analytical look at our fleet than we've ever had before. So we have more inputs, and I think we're making much more intelligent choices. That said, all options are on the table. Closing more stores, moving stores, opening new stores, relocating. remodeling, we're going to look at every possible option available to us and we're going to use all this insight to decide what's best moving forward. The other thing that we're really leaning into as I discussed is this fleet segmentation strategy. It's going to be very important for us as we want to deepen consumer connectivity and be more resonant with the product assortments in each point of distribution to ensure that our outlet stores, our inline stores, our more upmarket stores reflect the consumer who's shopping in those spaces. We believe there's a tremendous opportunity there. And you're already seeing us distort assortments in different stores to try new things to appeal to consumers with good results, by the way, as we've detailed today. So we'll continue to test and learn, and we'll continue to employ all the information available to us to make the most informed choices possible. And, yeah, that's probably the most detail I can give right now.

Kelly, just to add briefly onto that, we are continuing to see good real estate opportunities. I think to Doug's point, we're increasing the analytical rigor around those new site selections, but our last two classes of new stores are the best performing in the fleet at the moment. So we're encouraged by that. Of the 100 stores that Doug mentioned around closing, they represent probably around $75, $80 million of revenue. We actually think there's an OI gain that we get when you factor in the fact that we're going to transfer some of those sales from closed stores to the existing store base. It's really about improving the productivity of the existing store fleet. That's our focus, but that doesn't mean we don't have opportunities to continue to expand over time and open new stores.

Any timeline for when you expect to close the 100 stores?

Over the next several years as the leases expire, we've gone through the analysis that there's really not a strong NPV case to be made for closing the stores before lease expiration. We have some situations where we have lease kickouts. That would be kind of a handful of locations is our expectation. We're continuing to read it, but we think the best decision is to have these stores close at their lease expiration. So it's over the next several years that we'll hit the 100 stores.

Got it. And just last question on pricing. So you've made these pricing investments in USDTC. They seem to help the comp. You also made some investments in pricing in the U.S. wholesale channel. I think you ended up throwing up six sales or flat. I guess, how do we square that when your planned price increases in the back half of the year? Like, have you started to raise price and you're seeing a good consumer response? Like how flexible are you on pricing here? And what feedback are you getting from your wholesale partners?

Right. So we have begun to raise prices including in the wholesale channel. That was something that started late last month as we started to ship fall product. I'd say the dialogue with our wholesale customers has been very constructive. This is an issue, as I said, that's not unique to Carter's. They're seeing it in their own private label sourcing. They're seeing it from their other vendors. I think it's just understood that there has to be some measure of sharing. They've responded really well. So that's how we're handling it in the wholesale channel. We have probably more flexibility in our own retail channel, obviously, to change prices dynamically based on what we're seeing. And as I mentioned, in recent weeks, we're actually seeing competitors raise their prices. So It's our intention to probe up where we can. We'll obviously read the situation with how the consumers respond. Interestingly, the best performing part of the assortment is our best set of products, the products that have the most added benefits and features and carry the highest price points. So clearly our consumers recognize when we've added to our assortments, we've added features and benefits, they're willing to pay for that, and that's why we're leaning into that part of the assortment in particular. That helps on the pricing front as well.

And just to add to that, we are seeing reasons to believe that our consumers are appreciating those opportunities. Again, I reference specifically Little Planet and Purely Soft, which is a Carter's assortment, as examples of where we're seeing real achievement there. It's helping bring new consumers in more often as well. So it's not just what we have to raise prices on, it's what we want to raise prices on so that we are being more proactive and directive ourselves already.

Great. Thank you so much. Best of luck.

Thank you.

Thank you. Our next question comes from Jim Cartier with Moness Crespi and Hart. Your line is open.

Hi. Good morning. Doug, you've talked about the need to invest to drive sustainable, profitable growth. Can you quantify or give a sense of how meaningful those investments would be? And are those investments near term dilutive to margins?

So I'm not going to quantify the investments. I will tell you that historically, I do not believe we have invested sufficiently in demand creation and reaching our consumers with the best possible story. That's a real opportunity for us going forward. Where we are already investing more, the MROI and the return on the investment is outstanding. I will just reiterate the two places where I believe demand creation investment is going to yield the greatest upside for us. One is store traffic and website traffic, and the other is consumer loyalty. Again, that return on invested capital, as we model it, is very high, both in terms of revenue and operating income. So we think we can continue to justify these increased investments, and we believe that they will drive growth that is profitable for us.

Great. And then in terms of investing behind the best product and the best performing parts of the assortment, where does kind of second half stand in terms of the changes that were made year over year relative to the first half?

Yeah, I will tell you that the assortments are continuing to expand in the best bucket. Again, our reasons to believe are showing us that there's real resonance with our consumer with these products, and so there's no reason to slow down. So you will see more inventory, and you will see higher AURs. You will see more of this product in a more expansive way. To reiterate something that Richard said, I think you will see more newness more frequently from us throughout our platforms as well in the second half.

Yeah, breadth and depth of investment.

Great. Thank you.

Thank you. Our next question comes from Chris Nardone with Bank of America. Your line is open.

Thanks, guys. Good morning. So Doug, just with your first view on the business, I'm curious to hear why you think the category has been relatively weak over the last several years and just how the competitive landscape in the category has changed. Maybe you can put into context how much the category has grown and your confidence in really getting this business back to growth.

Yeah. We know the market is down approximately 2% overall, but But what we've seen is the primary change in the landscape is around private label. When you go into a lot of our key account partners, you will see much greater investment for them in our category. I think that's primarily what we're seeing is growth from them. But I would also tell you that as I have met with a lot of these key accounts directly, what they have told us is they they expect us to grow our business as their primary baby and toddler national brand. So yes, more competition from private label in these key accounts, but also more of an opportunity for us as the leader. And we definitely are leaning into that and plan to continue to build on that as well. Yeah, the other note I would have for you just is to keep an eye on international because there's a lot of bright signs there for us as well. And we are, again, are leaning on our awareness. You know, 160 years of trust means something in a lot of places around the world. And we benefit from tremendous awareness, especially around quality. We find that that's something where we outpace all the other brands. And that's true outside of the United States as well. Richard spoke to our results in Canada and Mexico. And I talked about Brazil, all those good examples there.

Got it. Very helpful. Then just a quick follow-up on the wholesale business. I noticed the exclusive business, two of the three are growing. Has there been any material change in sell-through or just the health of inventory in the channel? And then also you're pushing more of your best product into the market. Is there opportunity to expand shelf space with Little Planet, Purely Soft, and your newly launched brands? Like, how big of an opportunity is that over the next couple years?

So, Chris, I'd say that there is an opportunity for us to broaden the availability of our brand portfolio in the wholesale channel, and that's something that Doug has been helping us prioritize. I think there is an opportunity to see greater penetration of Little Planet. The new brand that we've launched this week, Otter Avenue, we're only days into it, but we think that's a great opportunity where it's a differentiated product. It's a white space in the market. And so we think that's an opportunity with a number of our wholesale customers over time as well. I would say on balance, sell-throughs have been good. We're kind of early into kind of fall-winter selling. That will start to ramp up here in coming weeks. We'll get a better read on back-to-school here with our key customers in the next number of weeks. But on balance, as I said in my remarks, the outlook for demand in the wholesale channel has held up. very well for fall-winter product, and so I'm encouraged about what the next few months could mean in that segment of the business.

Yeah, and I would just also refer back to my comments about redrawing our wholesale landscape, because I think you will see, as I said, more of our brands in more accounts and more doors as we move forward. And traveling the country, visiting these accounts directly with our wholesale leader, we clearly have that opportunity. and that invitation from our key accounts.

All right, thanks, guys. Good luck.

Thank you. Our next question comes from Ike Borochow with Wells Fargo. Your line is open.

Hey, good morning, everyone. A couple questions from me. I guess I know there's no guidance on revenue, but I guess just when we think big picture revenue, In the back half of the year, which channel, whether it's direct-to-consumer or wholesale, would you expect to outperform in the back half? And then I guess to both channels, would you expect the rate of change on revenue from where we are today to worsen or stay the same as you push price? Now you're talking about pushing price a little bit more aggressively than you were in the first half.

I'd say on balance, we have higher revenue growth planned in the second half relative to the first half, and that would be led by the largest business for us, which is our direct-to-consumer business. So we have, I'd say, probably more direct control over what gets executed in our own retail business than we do in the wholesale channel. We've sold in, obviously, fall, winter. Those bookings were planned kind of comparable year over year. We have replenishment demand planned up slightly in the second half. So I think the outlook across our channels, and, of course, continued momentum to Doug's point in international we've been on, Just a great streak there, and so I would expect that demand profile to continue in our international segment. So on balance, forecasting, some acceleration of revenue growth in the second half. We do have an extra week in the second half, just to be transparent on that. We're in a 53rd-week year, so that contributes to the second half as well.

Got it. Thanks, Richard. And then I guess just to move to margin. So on the $35 million that you guys talked about, it's roughly, I think, 200 basis points. in the back half. I guess just, Richard, you're talking about AURs that we're down for, now you're planning up low singles. Can you just do the math for me? If AURs are up low singles, how much of that roughly 200 basis points 2H headwind gets offset?

Well, I'd say it's a portion. I don't know if I'll be as discreet as all the basis points, but... As I said, it's just tougher to cover the impact from the tariffs near term with pricing. There's some measure of an offset, but it won't completely offset the impact. The $35 million is the net effect after taking some benefit from pricing, other offsets in terms of vendor sharing and such. That's the net amount. To your point, though, we are planning AURs up in the second half, and so that's less of a drag. There's also, if you recall from just our guidance earlier in the year, the dynamics was expected to shift a bit independent of tariffs between first half and second half. First half was a bit more of that drag from lower AURs in the retail business, far less so, and actually prices planned up in the second half. What becomes a bit more of a swing factor is product costs themselves are higher in the second half independent of tariffs, and that's conscious on our part. That's where we've made investments in the product. That's what's driving it. momentum with the consumer, and so that comes through a bit as well, discreetly looking at product costs.

Okay, so the $35 million is after they assume price increases go in.

That's correct.

Okay, great. That's helpful. And then my last one for Doug, bigger picture. I think just to go back to the first question, Jay's question, I think obviously we're all interested in long-term earnings power and growth and all that, but I'd like to ask more questions. For the short term, honestly, I mean, it seems like you guys are in reset mode in 25, and that likely goes deeper into 26. You're dealing with tariffs. You have to accelerate investment. Is there any way to frame where you see the bottom of margin or profit dollars as you look to hit stabilization, I assume, in the next 12-plus months? Any other help you can kind of give us would be great.

Yeah, absolutely. I really don't think that there's much more detail we can provide beyond what we've already said. I would just reinforce a couple things to you. My primary long-term objective is long-term, sustainable, profitable growth. All three of those things must be true for Carter's to win. We've given back some market share in the past few years. We have a very clear plan to win that back, and we're going to win that back with product that is profitable. And again, we're already seeing reasons to believe that we can do that. And that's resonating with our consumers. The newness that we're putting in the marketplace is yielding the best results that we have. Our wholesale partners are encouraging us to grow with them as they grow this part of their business. Their dedication to what we do is a big part of their future success as well. So, long-term, sustainable, profitable growth. I know it sounds like a broken record, but that's short-term, mid-term, and long-term, what we're focused on here.

Thank you. And our last question comes from Paul Kearney with Barclays. Your line is open.

Good morning. Thanks for taking my question. I guess with the outlook for EORs to increase one single digit in the back half, what is your expectation for promotions in the market? And relative to competition, are the planned price increases in line with what you are already starting to see competitively in the market?

I think it continues to be a very promotional marketplace. I don't know if it's more so than it has been. As I said, we are starting to see some indication of response across the industry, across the competitive set to presumably tariffs. And so we will read that. I think our retail team in particular does a great job in kind of scraping the competitive price information out there and making sure that we are competitively priced. That's our mission is to not be an outlier. We want to be competitive. But our brands are worth more and we think that we'll have the ability to successfully price up to cover. So that's kind of how we're thinking about it.

My second is When you think about improving the store productivity in the DPC business, I know you can't quantify it, but can you help maybe rank some of the shifts in SG&A spend between maybe taking out some costs and what are the bigger buckets of reallocating and reinvesting between marketing or product or anything else? Just ranking some of the puts and takes on SG&A to improve the productivity long term. Thanks.

Sure. Well, I would say in general, stores are expensive to operate. They have a high fixed cost structure. They're SG&A intensive. And so as we look to close 100 stores, that SG&A comes out of the base. And these are stores that are kind of marginally productive. They're making a few million. They're losing a few million. They're at the margins by definition. So that SG&A comes out of the base. We have a good ongoing productivity program. I think we've done in general a good job managing SG&A over the last number of years. We're trying to keep a lid on hiring where we can organizational costs we have a great indirect procurement program where we become much more disciplined and how we go to market and procure the things that we need to run the enterprise we would like to find more savings there and I think a destination would be in some of this marketing investments that we've talked about we want to drive more demand in the business so that would be an area that a possible reinvestment over time yeah I would just add and reinforce a couple things that I said our in-store metrics are

are performing much better, quarter over quarter, too, for multiple quarters now. Our opportunity is driving greater traffic. There's a lot of ways to do that, better real estate decisions, all the way through demand creation. But that's the unlock for us, right? So that is one of the two key investment buckets I talked about. We need to bring more people into the stores, onto our websites. And then once there, I think we're doing a much better job of converting them and keeping their loyalty.

Okay. Last one, if I can just squeeze one more in. I think just on tariffs, you mentioned you expect to mitigate them in 2026 and beyond. Does that mean you expect to fully offset them in 2026, or should we be looking to 2027 for additional offsets? Thank you.

Our intention, Paul, would be to offset them fully in 2026. So we'll have more to say over time, but that's the direction we've given to the organization, and the teams are moving out against that priority.

Thank you. Best of luck. Thank you, Paul.

Thank you. That's all the time we have for questions. I'd like to turn the call back over to Doug Palladini for closing remarks.

Yeah, we're at time, so I'll be very brief here. Thank you all for your time and interest in Carter's. Hopefully you've seen, as I do, that our business is stabilizing and that we are in a position to grow again. I see myriad reasons to believe that we're moving into a phase of long-term sustainable and profitable growth. But please remember, we're just getting started. I look forward to sharing much more with you as we move forward. Thank you.

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.