Ladies and gentlemen welcome to Carter's Second Quarter 2018 Earnings Conference Call. On the call today are Mr. Michael Casey, Chairman and Chief Executive Officer; Mr. Richard Westenberger, Executive Vice President and Chief Financial Officer; Mr. Brian Lynch, President; and Mr. Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its second quarter 2018 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 we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. We achieved the second quarter sales and earnings goals that we shared with you on the last call. Our growth was driven by our Retail and International segments. As expected, our Wholesale sales were lower than last year, due to the loss of sales to Toys "R" Us and Bon-Ton, but were better than planned given earlier demand for our new product launches from some of our largest customers. We meaningfully outperformed our earnings forecast in the second quarter. You may recall our quarter got off to a slow start with unusually cold weather through the first half of April. As we've seen in years past, demand during our seasonal transition period is difficult to forecast. By late April, we clearly saw the benefit of pent-up demand for warmer weather apparel. That's the beauty of our business. Young children's apparel is a less discretionary purchase. Children outgrow their clothing rapidly in those early years of life and require more frequent refreshes of their outfits, particularly as the seasons change. As spring-like weather arrived in more parts of the country, we saw significant improvement in our sales. Not knowing exactly when our sales trends would improve, we curtailed discretionary spending where possible to mitigate the impact of unseasonably cold weather and winter storms earlier this year. You can see the benefit of that effort in our results this morning. All in all, we had a good second quarter and first half. We saw a good contribution from our new sources of growth, including Amazon, Skip Hop and Mexico, which largely offset the discontinued sales to Toys…

Thank you, Mike. Good morning everyone. I'll begin on page 2 of today's presentation materials with our GAAP-basis income statement for the second quarter. Most of my comments today will speak to our results on an adjusted basis. We had no adjustments to our second quarter GAAP-basis results this year. Last year's Q2 results included some minor charges related to our acquisitions of Skip Hop and Mexico. Our second quarter presentation and earnings release include reconciliations of our GAAP-basis results to the adjusted basis of presentation. I encourage you to review this information as you evaluate our results. Turning to page 3 with some highlights of the second quarter. As Mike noted, we exceeded the sales and earnings guidance provided on our previous call in April. A good portion of our outperformance in the quarter was timing related, including some earlier demand for new product launches in the Wholesale channel and lower spending, some of which we now expect to incur later in the year than we had originally planned. Consolidated net sales grew 1% over last year, driven by growth in our U.S. Retail and International businesses. As expected, our U.S. Wholesale business was down versus last year, although total Wholesale net sales were stronger than we had planned. It's worth pointing out that our sales to Toys "R" Us and Bon-Ton in last year's second quarter were approximately $26 million, so we have had a significant challenge this year and as Mike said, we feel good about our progress to date in sales recapture and the progress of our growth initiatives in providing new sources of revenue. Adjusted operating income declined 13%, driven by higher investment spending and lower Wholesale revenue, which were partially offset by a higher gross margin rate. Adjusted earnings per share were comparable to…

Thank you. And our first question will come from Ike Boruchow with Wells Fargo.

Hi. Good morning, everyone. Congrats on a really strong quarter. I guess, Richard for you on the wholesale and the recapture. So I think you mentioned Bon-Ton and Toys "R" Us were $26 million in Q2 last year. Can you just – is there any way to help us understand what those numbers were for Q3 and Q4 of last year?

It's in the low $30 million range for both customers combined for both Q3 and Q4.

Okay. And then you 're targeting 50% recapture on those revenues in the back half, would you say you saw any recapture of that $26 million in Q2?

I think we have to-date. It would be probably a modest kind of $8 million to $10 million would be our estimate at this point across the various channels, Wholesale and our retail stores and online. The analysis is imprecise at some level, we probably have the best visibility to the commitments that we're seeing in the Wholesale channel. We have seen a lift in the performance of the first wave of stores that had closed near our own stores. We're able to measure that. But as Mike said in his remarks, we're anticipating the majority of this recapture demand will come in the second half of the year.

Got it. And then just the last question on the spend, so your commentary around SG&A spending, sounds like it's going to be in line with – the SG&A rate in line with sales in the back half. Just can you help us understand what's going on there that deviates off of what we've seen in the first half? Is that lapping the investments that you've kind of laid out there? Last year that – some investment spend rolling off? Just how do we think about the SG&A rate dynamic in the back half? And then should that lead us on how to think about SG&A management into 2019?

So, we've had a considerable wave of investment in the business over the last couple of years; particularly within Retail. That investment is continuing this year. It will moderate a bit as we get into the second half of the year. To your point, we did start to anniversary some of the spend and investment that we made a year ago so that will benefit later in the year – Mexico in particular was acquired in the third quarter, so we'll anniversary that. That will be in the cost base. I'd anticipate that we're going to see a lower percentage growth in dollar terms. We won't necessarily see leverage in the third quarter, but we are planning for a nice reduction in the year-over-year growth rate in spending in the fourth quarter. And we are, at this point, are planning for SG&A rate leverage in the fourth quarter, I don't believe that will translate to the entire half, but we will see leverage we believe in the fourth quarter. As it relates to next year, I think the trend that we've seen over the last few years will continue in the sense that the rate will continue to march up as the mix shift of the business continues. So growth in the Wholesale business will be stronger, we believe next year than it was this year, but still modest relative to the growth we're anticipating from our direct businesses and that is driving a higher SG&A rate over time.

Got it. Thank you so much.

You're welcome.

Thank you. Our next question comes from Anna Andreeva with Oppenheimer. Anna Andreeva - Oppenheimer & Co., Inc.: Great. Thanks so much. And also let me add my congrats; just trying to understand what is driving the flat sales and earnings for 3Q, maybe what was the dollar amount of the earlier demand in Wholesale? And what was the expense shift that benefited 2Q? And what kind of trends are you guys seeing in Retail quarter to-date, I think you said to expect a comp acceleration in the back half?

Hi, Anna. I would say that the majority of the outperformance we had to our forecast we are attributing to timing. The amount of the Wholesale demand that shifted was probably between $5 million and $10 million, probably a similar amount of SG&A that's moving around. So that does not represent upside to the full year. For the third quarter, in particular, it's really the Wholesale business is expected to be under some pressure. Top-line is expected to decline. And that's a variety of different issues that is some of the volume that shifted into Q2 from Q3. We do have some volume that's shifting the other direction from Q3 into Q4. And while we are anticipating good, recapture of the Toys "R" Us volume that is still a net drag on the Wholesale business. That's good margin business a year ago that's not in the base, we are planning for good growth in Retail and International as I mentioned. Spending will continue to be up year-over-year. Those are probably the – that's a major building blocks of what's driving us to the sort of flattish top line guidance and flattish earnings outlook for the quarter. Anna Andreeva - Oppenheimer & Co., Inc.: Okay, that's helpful. Many thanks and best of luck.

Thank you.

Thank you. Our next question comes from Susan Anderson with B. Riley FBR.

Hi, good morning, nice job in the quarter. I was wondering if you could give a little bit more color on the gross margin for the back half and how we should think about it relative to the first half, particularly I guess as we go into fourth quarter and we start to see the higher product costs?

Sure, Susan. I would say, in the third quarter we're still planning for a good gross margin, some modest expansion year-over-year. That's largely an issue of the mix. That situation reverses a bit when we get to the fourth quarter, I think gross margins might be under a little bit more pressure in the fourth quarter because we are expecting a rebound in the Wholesale business. Product costs will start to affect us in the spring 2019, shipments which start in the fourth quarter for the Wholesale business. We do believe we are going to cover most of that with higher pricings, so we don't think that's particularly going to be injurious to margins. We've had a very good trend in gross margins as it relates to the sourcing efficiencies that we are driving in Hong Kong. We're looking forward to that benefit continuing. Those are probably the major building blocks.

Great, that's helpful. And then last question, a follow-up on Toys "R" Us and Bon-Ton. I was curious, are you guys seeing – do you think consumers had stocked up at these liquidation events and will that kind of curtail spending as we look into the back half? It sounds like you did see a lift once for the Toys "R" Us liquidations were complete, so it seems like there was actually a benefit afterwards, but just any thoughts on if you've been able to quantify anything in second quarter and then if you do think there is going to be some lag on spending?

Susan, it's Mike. Yes, we did. I think it's fair to assume that there was some pull forward of demand as those stores were going through their store closure sales. We have visibility into the level of sales at Toys "R" Us in the first half year-over-year, and it was probably up some portion, of 30% or 40% as they were liquidating the inventory. So I think it's fair to say there was some pull forward. And we've seen, even when the stores were closing, we didn't see an immediate benefit. There was a little bit of a time delay. And then after the stores have closed, we started to see a lift in our store sales. So we're assuming we'll start to see more of a lift in our store sales now that all the other stores have been closed later in the third quarter, I'd say, more meaningful in August and September than we're seeing in July. I was in the stores in June. I saw the people loading up baskets full of product. Most of our Carter's brand product was – had already been sold off, but the people were clearly loading up with those store sales. And so I think that probably is weighing a bit on our July performance right now.

Great, that's very helpful. Thanks so much. Good luck next quarter.

Thank you.

Thank you. Our next question comes from Heather Balsky with Bank of America.

Hi. Good morning. Thank you for taking my question. I was hoping you could, I guess, touch on the International business and provide any update on China. You had talked last quarter about revisiting the strategy, and I'm just curious to know where you are in that process?

Sure. So I'd say China is not making the progress we had planned for this year. Just to put it in context, we'll probably do some portion of about $3.5 billion in sales this year, total company, and the China initiative is probably worth some portion of about $15 million in sales. With losses some portion of $7 million, so to lose that amount of money on a $15 million business, we think, it needs to be revisited. The mix of sales we have is heavily weighted to our eCommerce business on Alibaba's Tmall website. And I'd say the store model is not performing as expected. The wholesale partner that we chose a few years ago has not been able to transfer their success in adult apparel to children's apparel. And so we're exploring an alternative model. That model would enable us to provide a better experience for the consumer and a much more profitable model for us. So our objective right now is to get the foundation for China strengthened and build a better growth plan beginning next year. Still a very attractive market. Brand name recognition – the Carter's brand name recognition is growing. It's a very fragmented market; lots of small players. We continue to believe there's an absence of a strong baby apparel brand in China and so it creates an opportunity for us. We believe the store – us having a store model and an eCommerce model are consistent with the Chinese consumer's expectation. Managing those two businesses differently, we were managing the online business. We had our partner managing the wholesale business that was probably we would say now that was a flaw in the model. Better to have one partner managing both models for us. So we'll share – have more to share with you on that progress, creating that new model later this year – or early next year.

Thank you. And just with regards to International, are you still looking for a mid-single digit growth this year? And how does FX I guess play into it?

Sure. Should be mid-single digit growth this year, if not better. And longer term we'll have more to share with you early next year. But we still envision International will be a good growth business for us.

We are watching the strengthening of the dollar. That could be a factor in the second half, so we're watching it.

Thank you.

Thank you. Our next question comes from Laurent Vasilescu with Macquarie. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Good morning, thanks for taking my question. I want to follow-up on a comment made last quarter; I think it was called out that sales transfer rates are in the 15% to 20% range for store closures, that compares to the guide of 50% sales transfer rate for Toys "R" Us. Could you provide further clarity on the variance between these two metrics?

I think you're confusing two things. We're closing old outlet stores and we have our own stores in adjacent markets. And what we're saying is 20% of those sales for the – our closed stores are transferring over to our stores. And then on Toys "R" Us, our best estimate as – Toys "R" Us has now closed all 800 of their stores, we hope to recapture some portion of $40 million of the $80 million we expected to sell to them this year. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Okay. Thank you very much for the clarification. And then on any update on Skip Hop's introduction in Canadian stores, the rollout of Skidaddle? And how should we think about Skip Hop overall and the growth rate this year. Should it be high singles, low teens, mid-teens? Any context would be great.

Yes, Skip Hop, we've got really strong sales growth we had in Q2. We're planning it up significantly this year. The team is doing a good job of – driving innovation. And we're exploiting this multi-channel, multi-brand CRI model. We continue to add resources and integrate with CRI where beneficial. I'd say just overview, retail is real strong. We have good growth on skiphop.com. We've got expanded distribution in our Carter's stores and real strong sales particularly in the major metropolitan and international tourist stores. Wholesale, we do expect largely to recapture the discontinued sales from TRU this year through expanded distribution, with several key accounts. We do have the Skidaddle business at Walmart which is small to-date, but plan to grow as we add new categories like diaper bags and bath as we go through the year. And then international is doing very well. We've got expansion of our direct business over in UK. And to your point in Canada, we are leveraging our retail distribution channels in Canada and Mexico. In Canada both in-stores, we've a good presence of the product, and on their website. We're planning strong growth this year. We bought a business. It was about $100 million last year. We continue to feel good about our strategy to at least double the next five years. This year the growth rate of Skip Hop will probably be north of 30%. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Okay, great. Thank you very much. And then my last question is on the incremental spend on marketing of, I think, $20 million for the year. I think marketing spend increased by about $3 million in the first quarter, per the 10-Q. How much did it increase in the second quarter and how do we think about it for the back half?

We have been investing in marketing and that is growing faster than sales. I would say, a portion of the $20 million that we'd earmarked on our year-end call relates to marketing, not the entire amount. In the second quarter, from memory, total marketing was up to about $3 million year-over-year. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Okay. Thank you very much and best of luck.

Thank you.

Thank you. Our next question comes from John Kernan with Cowen. Krista Zuber - Cowen & Co. LLC: Hi, this is Krista Zuber on behalf of John. Just two quick questions, just circling back a little bit on the inventory target for fiscal 2018, I'm sorry could you walk us through your expectations for inventory in the second half in order to hit that mid-single digit growth target for the full year? And kind of how would you characterize your inventory levels by segment?

I'd say inventory has been running a little higher. As I mentioned, we've been bringing inventory in from a timing point of view a bit earlier to support some of the various programs we have around the company. We also have a number of new initiatives that are in kind of rapid growth mode. So we've got Simple Joys which is our new brand with Amazon experiencing terrific growth. That's a little bit of a different model for us, so we have inventory on hand to support that demand. Skip Hop is a business that we acquired last year that's growing to Brian's comments a few minutes ago. It's growing rapidly across all of its channels so we have inventory on hand to support that. That's largely a replenishment business which is a bit different for us. And then we have inventory on hand that I would say was originally earmarked for Toys "R" Us and Bon-Ton. That's largely our best margin, highest velocity product. That's our core baby assortment. That inventory is on hand and available to be redeployed to other wholesale customers as well as demand in our own Retail channel. So inventory levels are a bit elevated. We do think they're going to moderate. It will still be elevated in the third quarter and then moderate by the time we get into the early part of the fourth quarter, more in line with our forward sales projections. We believe the quality of the inventory is very strong at the moment. Krista Zuber - Cowen & Co. LLC: Great, thanks. And then just one follow-up question just sort of any update you're seeing on the competitive environment both domestically and outside of the U.S. particularly as it relates to the promotional environment. Thank you so much.

I would just say that the promotional environment, some specialty retailers do appear to have a little more promotion of late, I think some folks got a little heavy on inventory with Q2 with the colder weather. And we've seen some elevated promotions from some of the specialty players recently. Our promotional cadence was fairly consistent with last year, I think the big changes were tied to the Easter shift in Q2. And we did introduce a new Fun Cash Promotion in late April that helped our business, we think in May as well. That was a trade for our Friends & Family promotion that we ran last year. But I think our promotions overall were comparable. We may have a different flavor, but in terms of their overall effectiveness they were more effective. But I would say not anymore promotional than last year. And to my comments, I think we've seen a little bit elevated levels with some of our competitors recently. Krista Zuber - Cowen & Co. LLC: Thank you.

And at this time I will turn it back to Mr. Casey for closing comments.

Okay. Thank you very much. Thank you all for joining us on the call this morning. We appreciate your questions and your interest in our business. We look forward to updating you again on our progress in October. Goodbye.

Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines. And thank you for joining us this morning.