Welcome to Carter's First Quarter 2020 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 2020 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 ir.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'd like to turn the call over to Mr. Casey. Please go ahead.

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. For several weeks now, thousands of our employees around the world have responded in a truly extraordinary way to challenges related to the global pandemic. Our investments over the years in talent and technology have enabled our employees to stay connected, productive and able to support the continued operation of our business. We have dedicated employees working every day in our distribution centers around the world supporting our vibrant e-commerce operations. They are also supporting demand from some of our largest wholesale customers whose e-commerce operations and stores have remained open. We also have many store employees who have been furloughed since mid-March, and we look forward to having them rejoin us when some of our stores begin to reopen in the weeks ahead. And regrettably, in recent weeks, there were employees affected by our efforts to reduce labor costs and improved liquidity. These decisions were the toughest to make. Each of these employees contributed to the success of our company over the years, and we will now help them as they transition to new opportunities. In times like this, we're fortunate to have so many employees throughout our company with decades of experience working for Carter's. Over the past dozen years, they have helped us recover from the financial crisis, The Great Recession and the cotton crisis. Each of those challenging periods in our recent history set us back temporarily. But in every case, we came back stronger. In the five-year period following The Great Recession, our company grew sales by over $1 billion. During The Great recession, some of our competitors and wholesale…

Thank you, Mike. I'll pause for a moment on the cover page of our presentation this morning. These beautiful little girls are actually wearing some of our current best sellers. Based on the great business that we're doing online right now, consumers are stocking up on swimwear and rash guards like these, looking forward to the arrival of warm weather and buying in advance of a busy and active summer. There are two broad topics that I'd like to cover this morning. First, I'll provide some further information on our first quarter performance; and second, and perhaps most importantly, our plans to manage through this current crisis, strengthen our business and emerge on the other side as what we believe will be a stronger and more successful company for many years to come. To begin then on Page 2, we've summarized details of our first quarter net sales here, which were $654 million in total. This represented a decline of 12% over last year. As Mike said, our business was reasonably on track with our plans through about the middle of March. That's when disruption from COVID became more pronounced, most noticeably with a drop in consumer traffic to our stores. March is historically one of our larger months of the year. So that even after losing half of a significant month like this, net sales only declined 12% year-over-year. For reference, we had planned sales to be comparable to perhaps up a bit in the first quarter. In terms of our balance of sales, about half of our sales in the quarter were from our U.S. retail segment, almost 40% or over $250 million were from our U.S. wholesale segment, with the balance of our sales from international. While net sales declined in all of our segments in the…

Thank you. [Operator Instructions] And we’ll take our first question today from David Buckley with Bank of America.

Good morning, guys. Thanks for taking my question. Can you spend a few minutes just discussing your plans for store reopenings again? Do you plan to open all stores in states who are allowed or test a few and then react based on 25% of the stores being opened in those spaces?

So we have about 270 stores that can now reopen in states where the restrictions have been lifted. So we have about 90 stores in Texas, some portion of it, another 60 in Florida. And so our plan is beginning this week, we’ll probably open up 10. Our plan is to go slowly. We’ll have what we call soft reopenings. We’ll make sure that we’re in there, and the stores are squared away, and we have all the safety precautions taken. But the ramp-up by the end of May, we could have as many as 60% of our stores opened by the end of May, and then it will rollout from there. So we’ll take it a week at a time, but we are – we have been preparing during this whole period of closure to reopen. So we’ve been staying in touch with our store associates. They’re eager to get back to work. A lot of the work has been done. So the stores will begin to reopen this week. And by the time we update everyone again in July, our guess is we’ll probably have more than 80% of our stores open at the end of July.

Okay. That’s great. And what percentage of your wholesale partners currently have stores open?

The volume from the way I look at it with these exclusive brands with Amazon, Target and Walmart, they’re probably representing over 50% of our wholesale business right now.

Okay. Great. Thank you, Mike.

You’re welcome.

And next, we’ll move to Paul Lejuez with Citi.

Hey, guys. Paul Lejuez, Citi. Just – you mentioned, I think, 4% of your sales were from the department stores. I just wanted to know who you’re including in that group? And maybe if you could give any additional color on percentages within that wholesale channel? In 2019, maybe using a more normal year, what percent certain retail partners – wholesale partners of yours represented? So that’s more kind of near term. And longer term, just curious, understanding your growth plans might be altered temporarily, I’m also curious as to how you’re thinking about your longer-term plans to open mall stores? And if that’s changed, just given what we’ve been experiencing? Thanks.

Brian, you want to take department stores? I’ll take the growth.

Yes. As far as department stores, I think we hesitate to call out specific accounts. I think we’ve said before that the mall-based department stores continue to represent a smaller portion of our wholesale sales and our overall company sales. So the folks at the department stores that are based in malls are representing this year less than 4% of overall sales. And for those folks that have financial – we have financial concerns about, we feel we’re appropriately reserved. We’ve managed the inventory, and we’ve got good relationships with those folks. We talk to them every day. We’re certainly cheering for them. But I think it’s important to also highlight, what Mike said, that this year, we believe about 50% of our wholesale sales are going to be with the accounts that we ship exclusive branded product to. So that’s the Amazons, Targets and Walmarts of the world. So we continue to grow rapidly with the folks that have the strongest financial positions. And as far as the other ones, they continue to be a smaller portion of our business.

Yes. In terms of the growth plan, suffice it to say, this year, the sales and earnings will be lower. What we’ll learn in the balance of the year is how quickly the stores ramp back up. Your question with respect to the malls, the mall stores have been extremely good for us. Keep in mind, our history has been in largely outdoor shopping centers. Our – years ago, we – and today, we still have the best outlet stores in the business, number one and number two market share, Carter’s and OshKosh and outlets. We evolved from the outlets into open-air strip centers because they felt a lot like outlet centers to us. And that has been a beautiful source of growth for us. We stayed away from malls for all the obvious reasons. But in recent years, new opportunities have become available to us. So we proceeded with Crusher. Probably today, out of 860 stores, we probably have about 70 malls. Our game plan was to open maybe another 30 over the next five years. And that was the game plan until Gymboree closed all their stores. So gradually, we started to just test a new store format to smaller store format in some of those former Gymboree mall locations, and the performance was terrific. Whether it’s going to continue to be terrific near term, time will tell. But our plan is, over the next five years, our current thinking is we will close more stores than we will open. We’ll open where the best real estate is available. Again, one of the silver linings, and I think there will be many based on what we’ve experienced in over the past couple of months is that the real estate market is going to be much more favorable. Kids apparel is a traffic driver for these centers. People seek out Carter’s to bring them into centers because it brings families with young kids into those centers. So I think the real estate market is going to be much more favorable. So we’ll – it’ll be a buyer’s market, and we’ll be thoughtful in terms of what locations we go into. We always have them. Our batting average has been pretty good, not perfect, but pretty good over the years.

Thanks, Mike. And Richard, just to follow-up, that 50% of sales, Amazon, Target, Walmart, what was that number last year from those three?

Closer to 40%.

Thank you, good luck guys.

And next, I’ll move to Ike Boruchow with Wells Fargo.

Good morning, everyone. I hope you all and your families are doing well. I guess, two questions. So the first part is on the inventory, maybe for Richard or Mike, can you comment a little bit more on the carryover spring/summer product? What exactly you guys are trying to do there? And also, what are you doing with the written-down inventory? And what channel or geography is that merchandise? And do you plan to have further write-downs potentially in the second quarter?

Sure. Sure. On the first part, Ike, so there’s around $110 million of spring and largely summer product that just because of how the spring has unfolded here, we have not shipped to our wholesale customers. We’ve not shipped to our own retail stores, and it’s not online. So these are largely programs that, in their entirety, have not made it to market yet. It’s otherwise beautiful product. We think it’s a product that’s going to be extremely well received. And in fact, we’ve shown some of it to our wholesale customers. Had circumstances been different, they were excited about taking it this year. But given what we think is going to be an enormous quantity of spring product in the marketplace, and the clock is ticking, we don’t think it’s appropriate to have this product enter into the sales channel at this point. We think the best strategy for us is to pack and hold it, and we’re going to do that in a couple of different locations, some in Asia, some here in the United States. We’ll bring that product back a year from now and introduce it to the marketplace. As it relates to the excess inventory and the written-down inventory, to use your phrase, we have multiple plans for that. I’d say, first and foremost, we are historically and appropriately conservative in how we establish these reserves. I can tell you, this management team is incredibly focused and motivated to do better than those charges that we’ve set aside – the balances that we’ve set aside for this inventory. So our ambition and our mission and our operational planning is oriented around maximizing the recovery on this inventory and not taking a loss on it. We will do that through, I think, a couple of different channels. Certainly, we’ve made use of the off-price channel. In past years where we’ve had excess inventory, that will be a component. We will also look to use our extensive direct-to-consumer capabilities here in the U.S. to clear some of that inventory. So we’ll use some of our retail stores. We’ve kept some stores, which were slated to close, open for a longer period of time. So we’ll have those doors available to help move some of that product. We will look at the online channel as well. So it will be a combination of strategies, all oriented around the objective of maximizing the recovery on that investment and inventory.

Yes. You referenced wholesale. So two ways to think about wholesale. One, the exclusive brands. And I would say, with respect to exclusive brands, we’re chasing demand right now. So we wish we had more to support our exclusive brands based on the performance we’re having them – with them currently. And then there are our other wholesale customers, where when their doors reopen, they’re going to need to move through the product that they would have otherwise moved through over the past seven weeks. And their first orders will likely be on the fall product categories. The good thing to know is that every day, our sales team is engaging with our wholesale customers. Understanding what they need, what they need when they reopen, how we can support them in the balance of the year. So even though their doors have closed, there’s a very high level of engagement. Supporting their e-Commerce business, for those who have closed the stores, e-Commerce business, even including the department stores, the e-Commerce demand has been robust for our brands. And our wholesale customers are highly engaged with our sales team, thinking through the balance of the year and what needs they have from us.

Got it. And then just one follow-up. You guys have been really helpful with the quarter-to-date on e-Com and the pace of reopenings, and that helps us kind of work with our models a little bit. I guess, on the wholesale side, it’s a little bit more of a black box for us. Is there anything else you guys could provide in terms of maybe bookings or quarter-to-date in U.S. wholesale or any kind of visibility? I assume the growth rate is going to be lower than the negative 8%, you just put up in Q1, of course. But is there any other color you can kind of give us to help us think about expectations on U.S. wholesale?

I cannot give specific numbers. I think just to reiterate some of the things, we talk to these guys every day. We talked about the exclusive brands selling well. Anybody on groceries and essential items are winning. People that are shipping e-Commerce orders out of their stores are faring better than other accounts, and we’re replenishing those that are performing real well. So as far as the majors that we talked about, we are chasing demand with those folks. As far as some of the mall-based department stores are primarily the people that closed their doors, they have canceled their orders for Q2. We’re going to pack and hold those for next year. A good amount of the Q2, the back half of the Q2, we would hope to be shipping fall and winter products. So by and large, they’re not asking for spring and summer product. They’re asking us to hold those for next year. And our plan is to start shipping – the fall product will be the first fresh product that they have. So it’s a wait and see in some of this stuff. I think where we hesitate is we have door opening plans. The major retailers have door opening plans. But as Mike said, this is a health crisis, not a financial crisis. So we’ll have to wait and see as the doors reopen, what the consumer demand is, what the pull is. I will say that from a product standpoint, what we’re excited about is a lot of the basic products are selling well. So the things that we have in stock, our baby and sleepwear product are selling well, anything that’s playful and optimistic with summer characters, Americana is doing well. Our Little Baby Basics product has accelerated. I think we had record sales a couple of weeks ago in online. And those are the products that we’re chasing, those and some playwear basic products for summer. So the things that we have in stock from a replenishment standpoint, which tend to be the most profitable products for us as well as the wholesale accounts are the things that are selling best and the things that by and large, consumers are looking for today.

Thanks, Brian. Thanks, everyone.

And we’ll move on to Susan Anderson with B. Riley FBR.

Good morning, thanks for taking my question. I hope everyone is doing well. Just a follow-up on the inventory in the stores. I’m curious, have you been able to get into all the stores to utilize that for online purchases? And then also as you fulfill your own online purchases, have you seen any delays in shipping? Or is there anything you’re doing different to fulfill the increase in online demand?

Sure. So we’ve got 200 stores open right now. They were reopened for the sole purpose of supplementing our e-Commerce fulfillment capabilities. That initiative is going well. We repurposed our Stockbridge distribution center here also to support the accelerated demand. I would say if you were to check out online with us today, we will tell you that it will take us some portion of 10 to 18 business days to deliver your product. And typically, we like to deliver it within a week. Depending on where you live in the country, you should see the product within a week. 10 to 18 days is long. It’s not outside the scope of the experience that some of our competitors are also providing to their customers. It’s longer than we like, but we’re going to continue to prioritize safety over speed. So we’ve probably got some portion of about 400 people working up in the Braselton distribution center. That’s the primary e-Commerce fulfillment center. And that will ramp up. So my guess is it will probably take us until some portion of early to mid-June for us to get back to a level of speed of delivery consistent with our historical standards. So it will be slower, but we’re going to focus on safety of those workers over the speed of delivery for the time being.

Great. That’s helpful. And then just one follow-up. Maybe if you could give some color just on the margins around the exclusive product within mass and, say, Amazon versus the department store product or the product in your own stores. How should we think about that margin difference there is? Obviously, the demand through the mass channel where the stores are open and then Amazon is higher currently.

Yes. Here’s – I won’t give you by a different customer. But I think the important thing for you to know, our exclusive brands are dilutive on the gross margin line item. They are accretive to operating margin. Those are highly profitable brands for us. Given the nature of who we’re selling them to, lower initial margin, but accretive to our operating margin.

Great. That’s helpful. Thanks so much. Good luck in second quarter.

And we’ll move on to John Morris with D.A Davidson.

Thanks. Good morning, everybody. I hope everybody is well. I wanted to ask, I guess, a question for Richard, first. Unless I missed it or if you can – you guys are doing a great job with respect to cost savings, contingency planning. I think you were on this pretty early on when we saw the crisis coming. Can you map out for us what kind of cost savings in total? And again, unless I missed it, cost savings in total, you might be shooting for between now and the end of the year into the beginning of next year? And how that might play out by play out by quarter? Thanks.

John, I would say it’s been a comprehensive agenda of things that we looked at both on liquidity and just absolute expense reduction. As I think is summarized in the materials this morning, all of those actions cumulatively have improved our liquidity outlook by over $1 billion for the balance of the year. So it’s been meaningful. On the liquidity front, it’s been a combination of extending our payment terms. It’s been drawing on the revolver. It’s been suspending our return of capital programs. On the expense management front, I’d say, one of the more significant actions we took was on compensation, as I mentioned, directionally. We’ve reduced our compensation expenses by 20% or so, which is $100-ish million of a number across its various components. We are looking to augment that cost reduction agenda further as we move forward through the year. I won’t put a number on that, but it is a focus of the team, obviously, to look at all of our discretionary spending. We’ve already pulled back on spending in numerous categories even beyond compensation, marketing, travel, of course, all the things that we’re able to get our hands around. And we will be very thoughtful as we turn the business back on, the costs we bleed back into the business as we rebuild the cost structure because what we can control is what we’re spending on, we have less control over how the demand profile recovers in the balance of the year. So we’ll be very, very thoughtful. We’ll be as aggressive as we can in controlling the costs.

So I – make sure I understand that a little bit better just in terms of the expense management side and the kind of help I can give you on the SG&A line, even though you may be hiring more people back, understanding a big piece of that might be more in some of the labor savings, but hiring some of them back. So far, it’s about $100 million. But with puts and takes, obviously, the labor portion may go back up now, but you’re going to augment that further. So the $100 million on a net basis may continue to increase over the next multiple quarters. Is that fair to say? So I’m understanding correctly, just thinking about the model?

Yes. I think, in general, we are going to seek to find additional sources of cost productivity over the balance of the year just to shore up the P&L and give us our – the best chance we can as the demand recovers.

Got it. Thanks, and yes, good luck is we look ahead towards fall. Thank you.

And that will conclude today’s question-and-answer session. At this time, I would like to turn the call back over to Mr. Michael Casey for any additional or closing remarks.

Okay. Thanks very much. Well, we appreciate you joining us on the call this morning. We’ll update you again on our progress in July. Until then, wish you and all your families the best in the months ahead. Good bye everybody.

And that will conclude today’s call. We thank you for your participation.