Good day, everyone. And welcome to Carter's First Quarter 2016 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President; and Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its first quarter 2016 earnings press release earlier this morning. A copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the company's website at www.carters.com. Before we begin, let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent Annual Report filed with the Securities and Exchange Commission and the presentation materials posted on the company's website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. And now, I would like to turn the call over to Mr. Casey.

Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before you walk you through the presentation on our website, I'd like to share some thoughts on our business with you. We are off to a good start this year. Earlier today we reported a record level of sales, earning and cash flow for our first quarter. We had good sales growth in all channels of distribution, wholesale, retail and international. Despite the highly promotional retail market we improved price realization and our profit margins. Our supply chain performance was exceptionally good in the first quarter in terms of on time deliveries and distribution efficiencies. And we meaningfully increased the return on capital to our shareholders. Given our first quarter performance together with our latest forecasts, we believe we are on track to have another good year of growth in sales and earnings. And we are raising our earning guidance for the year. As we shared with you on our last call, we saw a good demand for our brands through the holidays last year which continued into the first quarter in through most of March. Our year-to-date comp sales were up about 5% through the third week of March. With the Easter shift we did not see the holiday related demand we expected in the last two weeks of the quarter. Historically, an early Easter is good for our business if it is accompanied by warmer spring like weather. And as many of you know winter weather return too many parts of the country in the latter part of March and into early April. Thankfully with warmer weather arriving in more parts of the country, sales trends are improving and we are expecting positive retail comps for the second quarter. The stronger dollar continues to…

Thank you, Mike. Good morning, everyone. My comments today will refer to our performance on an adjusted basis, reconciliation to our GAAP results are provided in the appendix on today's presentation and in our earnings release. I'll begin on Page 2 with some first quarter highlights. Overall, we had a very good first quarter. We saw good demand across our business with consolidated net sales growth of 6%. Adjusted operating income grew by 8% and adjusted operating margin expanded by 30 basis points to 13% driven by strong gross margin. Adjusted earnings per share grew 8% over last year to $1.05 which was above our previous expectations. Unfortunate this performance we attribute to favorable timing, including earlier than plan demand in our US wholesale business and lower spending. We expect to get back some portion of these benefits in the second quarter. So another Q1 results and our expected Q2 performance is a first half which we believe will be largely in line with our expectations coming into the year. We believe foreign currency issue continue to work against us including negative translation effects which reduce our net sales growth by about 70 basis points in the first quarter. And the ongoing effect of lower international consumer demand in our US retail store and e-commerce businesses. Moving to Page 3, with details of sales performance in the first quarter. Our Carter's and OshKosh businesses in the US each grew 5% with good growth in OshKosh retail segment at plus 12%. Revenues from new stores have continued to contribute strongly to our overall growth. Our international business was particularly strong in the first quarter; reported growth for this segment was approximately 14% with growth of 20% on a constant currency basis. I'll cover our business segment results in more detail in…

[Operator Instructions] And for our first question we go to Taposh Bari with Goldman Sachs.

Good morning. Nice start for the year guys. Mike I got on the call few minutes late.

You miss the best part.

Did you talk about April?

Yes. April is improving. Yes, we are actually seeing good performance year-to-date. Carter's right now total retail is up about 2%, OshKosh up little bit more than 1%. We had good performance through the year-to-date, through the third week of March. I think our comps, our retail comps are up about 5%. The last two weeks of the quarter were not what we had expected, typically get a nice lift during holy week that week before Easter. And we didn't see it. And then typically business drop throughout that Easter. And based on what I've heard from people we do business with, I think that's -- in a similar experience that -- typically if you have early Easter it is good for our business if you have nice weather. If you have more spring like weather. But if as you know lot of winter weather came back tail end of March into early April there was snow starting up in the Northeast it was cold here. It is cold here in Atlanta over Easter so what we gain through most of the first quarter we gave back in the last couple weeks. But with warmer weather more spring like weather arriving in many parts of the country, the consumers back out shopping and business is picking up. So we expect positive retail comps for the second quarter.

Good to hear. I wanted to ask another one on the store comp which has been negative for a while now. And I know that they are -- it sounds like there are discrete Issues but I was hoping you can give a little bit more color. I guess this specific question I am asking is you are opening a lot of stores, a lot of these side-by-side stores in call it domestic market or domestic addressable market not tourist locations I am assuming. And not outlet centers, can you talk to what the comp growth is looks like in some of these newer stores call it the one, two, three year old vintage stores. Are they comping positive?

They are. We are seeing good performance in the new stores. The issues we are having with the stores right now is international demand. With the stronger dollar we are seeing less international tourism. A relatively small number of stores are representing a 100% of the comp store decline largely in these large very successful outlet locations, Orlando, Miami, Sawgrass Mills, this one is down out in Las Vegas, these are good and some of our largest most successful outlet stores just in less international tourism. Domestic demand, domestic the comp from domestic demand in the first quarter was up about 4%. And it largely got offset by lower international traffic. So we believe our strategy is the right one to consider open these stores, bringing the brands closer to the consumer, improve the portfolio of stores such that the outlet stores which continue to be good for us. And have them very profitable stores but make those a smaller percentage of the total portfolio. We are seeing good returns on the new stores. We are seeing a very good response to the new side-by-side stores which the lion share of the store is going forward will be side-by-side stores. And the best traffic that we saw in the first quarter was to the side-by-side store. So we feel good about the strategy. If we for whatever reasons in the next several years we start to see fewer good centers to go into if we are not seeing the returns that we are seeing on the new store investment we'll reconsider the pace of store growth. But for now we are going to continue to open up, we open up about 60 Carter's stores here in the United States and about 50 OshKosh stores and all those OshKosh stores will be in the side-by-side format.

Great. Last one I know let somebody else I hop on Richard on the capital return evaluation process. Sounds like -- obviously you picked up the pace of buyback here in the first quarter but it sounds like the review is still ongoing. Did I hear that correctly? I am just trying to understand if the increased buyback pace in 1Q kind of satisfies the review or if there is still review conclusion that's pending.

Well, the review is ongoing. As I mentioned I think on our last call this is a topic that we spend a lot of time talking about internally. We talk about with our Board every time we get with them. So capital structure is always an important subject. I think you've seen us we are committed to the return of capital up way the accelerated rate pace that we demonstrated here in the first quarter show that we are committed to being active against that new share repurchase authorization. That's the outstanding question really for us is not what to do with accumulated extra capital where we've shown a clear commitment to increasing the dividend and now doing more share repurchases. The open question is really around should there be additional leverage at work in the business. And that's the piece that we are continuing to needle around internally and with the Board. Our leverage ratio right now on an adjusted basis with the store leases we think that's the appropriate way to evaluate our commitment is just over 2x. And I think clearly the business can support more of the questions should we do that and by how much. So we are continuing to evaluate. We have a good team of folks advising us and we are going to spend some time with Board on the subject as well.

And for our next question we go to Ike Boruchow with Wells Fargo.

Hi, everyone. Good morning. Congrats on the nice quarter. Just two questions. The first -- the first part just to go through the Q2 guide. So the sales are a little slower and you talked about due to the timing of shipments at Carter's wholesale. I guess first question is, is that a shift that fell into Q1 or is that shift that will push into Q3? Is there anything going on there that differs from your plan from when you started the year?

I'd say largely we had some volume that shifted forward to the first quarter, that spread some amount that shifted later into the third quarter but it primarily ineffective, shipments moving from Q2 as originally planned into the first quarter.

Got it. Okay. And then on that sales base for Q2, the implied EBIT margin erosion I think it is around 150 basis points. Just seems a little odd given the gross margin performance in Q1 so can you talk about what exactly driving that? Whether it is elevated spending or shift in SG&A or anything on the gross margin line? Thanks a lot.

I think one thing to note it is a smallest quarter of the year. You can have the relatively small number of pennies have disproportionate effect in terms of the reported our percentage range that they were talking about. So that's one thing to consider. Certainly the revenue moving forward into the first quarter is an issue. And we are planning good gross margin performance. We are planning expansion year-over-year in our gross margin. And the other variable would be spending. We do have some things that are ongoing right now in terms of the investment agenda that will weigh a bit on the quarter. And then -- beyond that just the ongoing effects of foreign currency both translation and this dynamic having fewer international consumers in our stores and online.

We go next to Anna Andreeva with Oppenheimer.

Great. Thanks so much. Good morning, guys. And thanks for taking our question. I guess hoping to understand the expectations for our earnings growth acceleration in the back half. Just percent sake there, how do we think about gross margin for the year? I think you said up modestly in the second quarter. They were up very nicely in 1Q and inventories look very clean and finally just what's driving you guys to take the earnings guide up for the year this early on? Thanks.

Sure. Well, thanks. So Anna the second half represents the largest proportion of the earnings base as well so it's a bigger opportunity to grow earnings just in general. We are planning for some acceleration of revenue growth in the second half. I'd say a larger contribution from our retail and e-commerce businesses here in the US. We are expecting that there would be less of a drag from foreign currency both from a translation and hopefully the drag that in the liquidation activity that we had a year go related to the international consumer will be lessen in the second half. We are expecting good contributions from the other portion of our international business from Canada, as Mike mentioned we have big plans for China e-commerce so lot of that volume comes now in the second half. We are planning for margin expansion in the second half. I'd say SG&A right now that we are planning it, it has a bit lower growth rate than what we are forecasting for the first half of the year. So all that combined gives us confidence to say business will have a stronger earnings contribution profile in the second half. Is this relates to increasing the forecast? I would say our operating assumptions for the full year are largely consistent. The raise in the EPS guidance really reflects the strong year-to-date share repurchase activity that we've accomplished so far.

For our next question we go to Robert Ohmes with Bank of America Merrill Lynch.

Hey, good morning, guys. Nice quarter. Hey actually just two quick questions. Mike your further -- every quarter you get a little further along and I was -- in terms of the growth of your dotcom business versus the growth of your brick and mortar business. Is there anything you can share incrementally on sort of you have the credit card data and lot of these, is the crossover customer increasing, decreasing, are you getting new customers on dotcom versus stores or maybe just remind us and some insights what's going on there? And then the other just quick question, I apologize if you had addressed this before but the Cat and jack launch coming at Target just any color and any expectation if that could impact your business with Target at all? Thanks.

So I'll take the first one. In terms of e-commerce Brian will address the Cat and jack, so e-commerce business has been particularly strong. This even despite the weakness in terms of international demand on the US website. So I think we had shared with you in the years past. And one point in the early days we saw about 45% of the demand on our US website was coming from international guests and that has dropped to closure to 25%. And even with that drop we've seen terrific performance on our -- in terms of online demand. So I'd still say the vast majority of the customers that we have shop in the stores. They like the stores. They like to visit the store. Our stores have been described as a candy store. You go in there are all these rich colors, beautiful products and increasingly as people shop online they like the convenience of coming back in the store. So we are seeing a very good performance online that Richard has shared with Taposh in the stores is largely from international demand. And we hope that's settles down in the second half when exchange rates start to normalize year-over-year. I'd say the information we have would suggest that the lion share of the customers that we have shop only in the stores. The others -- there are some percentage that only shop online and then there is another relatively small portion that shop both online and in store. That's our most valuable customers though. Those who shop both online and in the store are by far most valuable customer. And we continue to see good cross brand shopping. So that's why we are continuing roll forward the side-by-side stores. Consumers like the physical representation of the online experience. Online you can shop Carter's and OshKosh, go back and forth between the two brands, one easy convenient checkout. And they like the fact that the stores are now modeled in a similar way. So we are expecting good growth. Online increasingly Robby we will be combing these just as other retailers have done. We are combing e-commerce and the stores as we look at the business. It's increasingly difficult to distinguish where the transaction starts. We have some good omni-channel initiative rolling out in the second half where they can --consumers can easily shop online and pickup the product in the store and so when you put the two together I would actually say we are delivering pretty good performance.

That sounds great.

Robby, regarding your Target question say we have a significant business with Target with three exclusive brands with them just when you fresh it first and genuine kids OshKosh brand. The baby category has been growth opportunity for them. But we feel our brands are well positioned there. We are the lead alternative to private label and Target understands from a cat and jack standpoint. We do speak with them often. They are launching their brand. They are very successful with launching brands. So we expect them to do be successful with that. We wish them well. That brand is basically replacing as we understand two existing private label brands on their selling floor. So I think they will do a good job with that. But we have a strong partnership with them. We'll continue to do a good job for them. We continue to invest in brand presentation with our three exclusive brands and I think we'll continue have a significant presence there. So we wish them well.

For our next question we go to Susan Anderson with FBR Capital Markets.

Good morning. Congrats on a good quarter. I was just wondering if you can talk about just investments that you are making this year. Seems like SG&A as we see little bit more than expected in first quarter and it just sounds like you are making a lot of omni-channel investment. Maybe if you could kind of give a quick run down where those investments are going this year?

Sure. So I stays across that the categories that Susan you mentioned first and foremost I'd say technology. So there is a whole range of initiatives around omni-channel that we are pursuing as the stores and e-commerce channels are converting more and more their capabilities that consumers expect and so we are bringing that spare , Mike mentioned one of them that's something that we are rolling out. We are also in the process of addressing some of our long standing enterprise systems that quite honestly are outdated and need to be replaced. We are in the process of upgrading of our core financial systems that will go live later part of this year. But there is a fair amount of spending and efforts that's going into that initiative. Marketing would be another area where we have decided just to spend more here in the US market primarily. Our study show that we are under index that some of the benchmark that are out there. We think this is important way of continuing to drive traffic particularly to the store. So I think those are primarily where the investments are coming from.

Great. That's helpful. And then I think you called out in addition to just go forward on wholesale side for Carter's demand, did you mean by that it had slowed into the second quarter whole sale ? And if so is that across all the channel?

Well, no. That the comments that we have some shipments that were originally planned to occur in the second quarter with go forward into the first quarter. Beyond that we did have somewhat of timing benefit related to SG&A. We are just some things move to the right and that spending is expected to happen in the second quarter and beyond.

Got it. Okay. That’s helpful. And then one last question on China and Brazil. And do you think it hurts at all those online sales in the US coming from those countries now that you guys have operations there? Or how should we think about that?

It is for sure it does. It is easier to -- does the brand is more accessible, to more convenient to shop in China now that we have the Tmall website. From what we understand we would have seen that drop in the United States anyways given the issues that is going on in China. We would have seen that drop on our US website. Foreign thing as always when we combined the performance we are seeing in China on Tmall together with the business that we still see on our US website. We are forecasting that the sales to China online will be over 50% this year. So that initiative is progressing very, very nicely. That should be a nice source of growth for us in the years to come.

We go next to Steve Morato with TL King and Associates.

Good morning, everybody. Mike you mentioned earlier in the call that there are additional direct sourcing initiative that might get you over the 50% barrier. Can you talk about, would that be accelerated from 2017 or is that mean beyond 2017 and also can you be a little bit more specific about those categories?

Sure. It's -- I would say it's beyond 2017. Our focus right now is to complete phase one of the initiative that we launched about four or five years ago to go from what was at the time a 100% agent based sourcing through largely through Li & Fung, they have been great partners, they continued to be great partners, they will continue to be important part of our sourcing capabilities. As we approach the goal of being 50% direct source by 2017, we've been asking ourselves where we go from here. What else is possible? We build a first class team in Hong Kong. We've got some portion of that about 150 or more people helping support the direct sourcing operations for us. We think they are capable of doing more. So we are revisiting what's possible beyond 2017. But my guess is over the next year or so we will be articulating a strategy that takes our direct sourcing capabilities beyond that 50% goal.

Great. Thank you. And Rich just to underpin your comment share count that's expected in the fiscal year 2016 EPS guidance is exactly what and does it assume further share repurchases from this point forward?

So the guidance Steve reflects the cumulative year-to-date repurchases that I mentioned and are reflected in the press release this morning. The guidance doesn't exclusively have any additional share repurchase benefit. That certainly a possibility but as you know there are a number of variables that go into forward looking share repurchases. It becomes very difficult to base your guidance on that. So it's -- if we do some additional share repurchase, you are right, there some upside that might be possible for EPS but there is a lot of variables that can go into that.

And we go next to Steph Wissink with Piper Jaffray.

Thanks. Good morning, everyone. And just a few really quick ones for us. The first, Mike, could you talk a little bit about the e-com profitability threshold? Where are you at relative to that curve? And then second just update on the loyalty program adoption. I know you rolled out new loyalty program, seems like and getting some traction at the store level. I am just curious about some of the utilization and number of members there? And then last just on increased marketing spend. If you can give us any insights into the next between traditional format, maybe some of the new digital initiative that you have.

Sure. We couldn't be more happy pleased with the profitability of e-commerce. It is I would say its comparable year-over-year but the margins, the operating margins on e-commerce are rich and so they are well into mid 20% operating margin range at least in the first quarter. In terms of loyalty, we've made good progress. We are seeing a good response to it. I think last check we have some portion about 7 million people enrolled. We are seeing good redemption, good spending upon redemption. Higher sales per customer so all the metrics would suggest that has been very effective way of driving more people to our brands both online and in the stores. Then with respect to marketing, we are stepping the marketing particularly with the launch of this new little baby basics. And probably more than half of that marketing will be in digital. We will continue to do some good things in terms of direct marketing. It has been very highly effective. The beautiful things that you get in your home, the email has been effective but increasingly we have wonderful ways to connect with the consumers through digital marketing. So keep an eye out for the new launch of little baby basics that will be making some noise with that starting middle to end of May.

Thank you guys. Imagery does look beautiful and that's a tongue twister name. Thank you.

And for our next question we go to Kate McShane with Citi Research.

Hi. Thank you for taking my question. Just in the prepared comments you had mention promotional activity a few times. I just wondered if anything is changed here, if this is a continuation of what you have been seeing last several quarters and what you anticipate for the rest of the year.

Kate, I'd say overall the Q1 retail environment. It remained really promotional. Most retailers posting different messages to drag traffic is that it has been uneven and I think there was some activity in the market too to respond to the fact that Q4 was soft for lot of national retailer so they had to promote more heavily to clear out some of the carryover goods. We saw it category based and total store and total site based. I know there at least some folks, these small customers is actually promoting more aggressively online even in store which we found interesting. So we are a bit for promotional than last year. But despite that environment we still are able to grow our AUR which we felt good about.

Okay. Great. That's helpful. And them my second question was just on the refresh. I just wondered if you were getting any incremental space in your wholesale account because of it. And where we see refresh of other categories either in the Carter's or OshKosh brand over the next year?

I would say couple. First of all, we are really excited for the customers to see this -- we call the new arrival was little baby basics where we have innovated it and we feel the continued innovation of that product as well as other is critical to remain and grow our market leadership. So I think you will continue to see us innovate and brand things where it makes sense. It's our core product, this one largest category in the company and it's really -- it's going to be beautiful launch with emotional marketing and imagery that's relevant to the new moms. To tell you just a little bit about it. There is going to be celebration of some of our old products like the original bodysuit, our sets business and then what we call little extras which have complete new look. So we are very excited about it. The national retailers have seen it. They are excited about the May launch. It should be a good opportunity for us and for them. That said, it is a replenishment business. So we have a significant launch. We go out and we set the fixtures, there are multiple fixtures in virtually every account that we are in as well as our stores and online. We set the proc and then the proc is replenished as the customers find as demand slow. So we will see with that sell through is the work, excited about the results.

And with that ladies and gentlemen, we have no further questions on our roster. Therefore Mr. Casey, I'll turn the conference back over to you for any closing remarks.

Thank you. Thanks very much. Thank you all for joining us this morning. We appreciate your interest in our business. And we look forward updating again with our progress in July. Thanks very much. Good bye.

And again ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.