Carter's, Inc.

Welcome to Carter's first quarter fiscal 2026 earnings conference call. On the call are Richard Westenberger, interim chief executive officer and president, chief financial officer and chief operating officer. Allison Peterson, chief retail and digital officer and TC Robillard, vice president investor relations. Please note that today's call is being recorded. I'll now turn the call over to TC Robillard.

Thank you. Good morning, everyone. We issued our first quarter 2026 earnings release earlier today. The release and presentation materials for today's call are available in our investor relations website at ir.cotters.com. Note that the 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 as well as 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 Richard.

Thank you, TC. Good morning, everyone. We appreciate you joining us on the call this morning for an update on our business. And I'm pleased to have my colleague, Alison Peterson, who leads our North American direct-to-consumer businesses, joining me today to provide her thoughts. As usual, we have a lot going on here at Carter's. As I'm sure many of you saw, we announced a leadership transition last week. Doug Palladini has departed as our CEO. We have continued progress to report today, and I'd like to thank Doug for his leadership and contributions over the past year. Anyone who met Doug quickly appreciated his passion for our brands and our mission of serving families with young children. And we wish Doug all the best. We're looking forward to welcoming Sharon Price-John as our new CEO next month. Sharon has a rich background in the children's industry, having held senior leadership positions at several outstanding companies in our space, and she has a demonstrated track record of driving transformation and growth. Now turning to our first quarter performance, the year's off to a good start. Our first quarter performance, both sales and earnings, exceeded the expectations we shared with you on our last call. We saw higher year-over-year demand for our brands across all of our channels in the first quarter. The Easter holiday came a bit earlier this year, which benefited demand. Our senses that consumers were out shopping broadly in the first quarter. Earnings, although above our expectations, were impacted by a number of factors, including the net negative impact of higher tariffs, spending, and interest costs. Areas of progress that we'll highlight today include continued positive comparable sales in our U.S. retail business, driven in part by the success of our investment in demand creation in driving higher traffic to our U.S. stores and websites. We're also continuing to attract new consumers to our brands, including Gen Z. Balancing out these encouraging green shoots are multiple and continued uncertainties in the marketplace, including the evolving tariff landscape and questions about the resilience of the consumer in the face of ongoing inflation and other pressures. And we remain on our journey to improve the profitability of the company. We know we have continued work to do on this objective in particular. Today we'll share our thoughts on these matters and how we're thinking about our business over the balance of the year. In reviewing our first quarter performance and our outlook, our comments this morning will track along with the presentation posted to the investor relations portion of our website. Turning to our presentation materials, beginning on page two, we have our gap basis P&L for the first quarter. Our net sales were $681 million. Our reported operating income was $28 million compared to $26 million last year. And our reported earnings per share were 39 cents compared to 43 cents in first quarter last year. On the following page, we've summarized our non-GAAP adjustments. We had no adjustments to our reported results in the first quarter of 2026. Last year, we had adjustments related to operating model improvement costs and leadership transition costs, which reduced our reported profitability. Our comments this morning will speak to our performance on an adjusted basis, which excludes these unusual items in the prior period. Our first quarter adjusted P&L is on page four. Our net sales in the first quarter, up $681 million, represented growth of 8% over the prior year. On these sales, gross margin was 43.1%, a decrease of slightly more than 300 basis points compared to prior year. As we expected, year over year, our gross margin rate was pressured by tariffs, a gross incremental impact of roughly $50 million in the quarter. This negative impact was partially offset by improved pricing, other supply chain mitigation initiatives, a higher mix of U.S. retail sales, and the benefit of our productivity initiatives. On a consolidated basis, AURs improved in the high single digits, and units were up low single digits. In U.S. retail, first quarter AURs were up low single digits, and we achieved higher pricing gains in our U.S. wholesale and international segments. First quarter adjusted SG&A increased 3% over prior year to $270 million. The increase was driven by incremental investments in demand creation and general inflationary pressures in wages and rent, which were partially offset by the benefits from our productivity initiatives. We do believe our productivity initiatives are delivering as expected, roughly $6 million in cost reduction in the first quarter between the cost of goods sold and SG&A lines of the P&L, These savings are helping to fund our investment agenda, including the incremental spend on demand creation. While spending was up in dollars, we achieved 180 basis points of leverage in the quarter. First quarter adjusted operating income was $28 million, with an adjusted operating margin of 4.2%. While ahead of our expectations, this profitability was lower than last year. Clearly, we're focused on delivering growth in both the top line and operating earnings. And to this end, we have operating income growth planned in the second half of 2026. Below the line, net interest and other expenses increased over prior year, as expected, due to higher interest costs and a higher debt balance related to the refinancing of our senior notes in fourth quarter last year. Our effective tax rate was approximately 28% in the first quarter, up 60 basis points compared to prior year, which was driven primarily by the new higher minimum tax in Hong Kong, which we highlighted last quarter. For the full year, we're forecasting an effective tax rate of approximately 22%. The net of all this on the bottom line first quarter adjusted earnings per share were $0.39 compared to $0.66 last year. The impact of our debt refinancing on first quarter 2026 EPS was approximately $0.08 per share. On page five, we have the details of first quarter performance by business segment. As mentioned, consolidated net sales grew roughly $50 million over last year's first quarter or by 8% with growth in each of our business segments. Adjusted operating income declined $7 million, resulting in the adjusted operating margin of 4.2%, which I just mentioned. We achieved meaningfully higher profitability year over year in our U.S. retail and international segments. However, these gains were more than offset by lower profitability in our wholesale business, which can be attributed to the net negative impact of tariffs. Corporate expenses for the first quarter were comparable to prior year. And Allison will now provide some additional perspective on our U.S. retail businesses, beginning on page six.