Ladies and gentlemen welcome to Carter's Second Quarter 2020 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 has issued its second 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 and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company's website. On this call, the company will reference to 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 begin sir.

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 would like to share some thoughts on our business with you. Our performance in the second quarter was meaningfully better than we expected. As you may recall for the safety of consumers and our employees we closed our stores in mid March and they remained closed for nearly 80% of the second quarter. Historically our stores have provided the largest source of revenue to our business and from a market perspective in the United States nearly 80% of children's apparel was purchased in stores last year, only 20% of children's apparel was bought online. Thankfully following our store closures in March we saw a surge in online demand for our brands. We also saw significant demand for our exclusive brands with Target, Walmart, and Amazon, and other essential retailers that were able to remain open. In the second quarter we improved our marketing strategy which enabled better price realization and a higher gross profit margin. We reduced spending and inventories below prior year levels and significantly improved liquidity with a highly successful bond offering the day after our previous update with you in May. Though the pandemic has weighed on the growth we had planned this year, the impact to date has been far less than we expected. In terms of business trends we saw the largest drop in sales and earnings in April. We returned to profitability in May with sales about 80% of last year. In June our consolidated sales improved to about 90% of prior year sales and sales trends in July are consistent with June about 90% of last year. By the end of June over 90% of our stores in…

Thank you, Mike. Good morning, everyone. I'll begin on Page 2 of our materials with our GAAP income statement for the second quarter. We delivered a much stronger quarter than we had expected. Net sales were $515 million, down 30% from last year. Reported operating income was $21 million, down 68% and reported EPS was $0.19, compared to $0.97 a year ago. Our second quarter reported results for 2020 and 2019 contains some unusual items, which we have detailed on Page 3. We've treated these items as non-GAAP adjustments to our reported results for greater comparability. In this year's second quarter these items include COVID-19 related expenses, store lease impairments, and organizational restructuring costs. Recall that in the first quarter we had additional meaningful charges related to goodwill and intangible asset impairments. My remarks today will speak to our results on an adjusted basis, which excludes these items. Turning to Page 4 on our adjusted P&L for the second quarter. Again, net sales were $515 million, down 30% from last year due to lower sales across the business with the most significant sales declines occurring in our stores and in our wholesale channel due to COVID. As Mike said, a real bright spot in the quarter was exceptionally strong demand in e-commerce with triple-digit growth in both the U.S. and in Canada. While gross profit was down because of the decline in sales, gross margin rate improved by 170 basis points driven by improved realized pricing and good progress in moving through our excess inventory. Royalty income declined to $4 million from $10 million last year, due primarily to store closures in both the retail and wholesale channels. Royalty income was also down due to business model changes including product category insourcing. We managed expenses well in the quarter, we're…

Thank you. [Operator Instructions]. Our first question comes from David Buckley with the Bank of America.

Good morning guys, thanks for taking my question. First off, how are sales with your exclusive brands in 2Q compared to the rest of the wholesale channel? And then could you discuss in a little bit more detail the improved profitability in the wholesale channel during 2Q, how much was due to lower sales to off-price, and just how should we think about margins in the channel for the remainder of the year?

Yeah, as far as exclusive brands in Q2 our sales to exclusive branded customers are actually higher in Q2 than they were last year. So the remainder of the account base was obviously lower. Our Skip Hop products were comparable to last year. In terms of margin, we had good margin performance overall. There was also an inventory adjustment made which positively impacted the margins.

Okay, and then just have you -- what have you seen in states with recent surge in virus cases, have you seen the material drop off in store performance in those states?

Your connection isn’t 100% clear, but your question in terms are we seeing a drop off in states where there's been a surge in the corona virus, yes. No, doubt about it.

Okay, thank you.

Thank you, David.

Thank you. Our next question comes from Paul Lejuez with Citi.

Hi, this is Kelly on for Paul. Thanks for taking our question. I just want to dig a little more about how you're thinking about the back half of the year, the 50% of your wholesale business with your largest customers are you planning that up in the back half of the year and then when we think about the other 50% of the wholesale business, just how much should we expect that to be down? And then just what are some of the other assumptions you're making about the back half year in order to have a profitable second half of the year? Thank you.

It's like collectively we're expecting a growth with our exclusive brands in the balance of the year. Other wholesale customers who had closed doors in the second quarter we expect that they will be more conservative on their buys in the second half. We've been more conservative on buying inventory for them in the second half. So you should assume the other non-exclusive relationship, exclusive brand, the wholesale customers the demand from them we expect will be lower in the second half. We'll comment on how much lower because there's a lot of year still ahead of us. But we're assuming in our models that demand from wholesale customers other than Target, Walmart, and Amazon likely will be lower in the second half, including off price retailers.

Kelly, to that I would add that we're expecting that the stores will continue to be under pressure. I think we've been appropriately conservative around assumptions around store traffic and comps in the stores. We've assumed continued good momentum in e-commerce. So we'll see if we attract good growth in e-commerce sales and then importantly, we're planning for gross margin expansion year-over-year in second half as we continue to make progress on pricing and working through our excess inventory. Those are probably the major building blocks.

Got it, thank you. And then just when we think about the product costs this spring, do you expect to recognize the AUC benefit in spring next year or do you plan to reinvest in price to take share?

Our expectations to product cost for spring will be lower. We have no plans to lower prices in spring.

Got it. Thank you.

Our next question comes from Ike Boruchow with Wells Fargo.

Hey, good morning everyone. Good performance in a tough market. Just a couple from me, I guess the July commentary of 90% of last year, so revenue down 10, is there some more color you guys could give us just maybe by channel what exactly has transpired over the initial couple of weeks of July to get you to that 90% of last year volume overall?

I think I had shared we've got a couple of days left in our fiscal month of July and the good news is we have a strong retail comp at this point, it grew up about 3%, three comp with a couple of days to go. Our online demand continues to be strong double-digits. Our store sales are down. As Mike said they've slowed where we've got some COVID hot spots and we've got about I think about 12 or 13 stores that we had to reclose based on COVID primarily in California. But at this point in time, we've got three comp in July.

Got it, that's helpful. And then maybe for Michael or Richard, when you look out now into 2024 it's interesting and helpful to hear about the larger amount of store closings, so 115 to 200. I guess when you guys had given us your last longer-term view by 2024 you were expecting e-com to reach about 42% of DTC sales. I imagine that mix is now forecasted to be higher given the ramp and closures. But could you now kind of give us more of an updated view on where e-com penetration could ultimately reach?

Well, we hit that 20 -- we will likely hit that 2024 number this year with the store closures. But my guess is it will be -- when things settle down my guess is that e-commerce penetration will be over 40%. There is still as I shared with you in the remarks, last year about 80% of children's apparel was bought in stores. Only about 20% online. We love the accelerated growth in online. But when it comes to children's apparel people love to go to the stores, particularly our stores. It's all the things you need for a newborn to about a 10 year old child. All the essentials, essential core products in those early years of life. So stores will continue to be important. But as we look at the next few years, particularly, we have a number of leases coming up for renewal and we have to make a decision, do we reinvest for some portion of 5 to 10 years, do we invest in capital expenditures, refresh all the point of sale or do we let those leases expire and search for better locations, better co-tenancy. And so over the next few years, my guess is we'll probably close probably some portion of 80% or more of those 200 stores. So as leases expire the analysis we've done, there's no need to accelerate closures. But with a kick out provisions, our average lease terms are less than two and a half years. So we'll take advantage of those early exit options and we'll exit more stores than we envisioned we would before the COVID experience. But with the acceleration in online demand for our brands and a more favorable real estate market going forward, we're inclined to exit some of our older store locations, ones that don't lend themselves to omni-channel services, being able to pick up the product the same day after you've ordered it online, and we will search for better real estate opportunities.

Thanks, Mike.

You're welcome.

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

Good morning. Thanks for taking my question. Nice job on the quarter. I was wondering how you're thinking about back to school if schools do not reopen or maybe only reopened 50%. Maybe on the flip side though the daycare is open and that helps the non-school age children in your customer base. And then also it's kind of curious how big July normally is versus June and assuming it must be bigger given that these are normally would start to see back to school pickup?

Yeah, back to school I would say, I think Mike commented that we are off to a little slower start, as you'd expect. It's very early but we are off to a slower start. Many of the schools in fact most I think are going to go virtual so that event where mom needs new clothes for that event is a pressing need, is not there right now. So we'll see how it goes. We did cut our fall and back to school receipts. We also shifted out our product flows because we had sensed this was going to happen and we shipped out our marketing. We really haven't started back to school marketing yet. I think it's the next couple of weeks we'll kick that in. So I think it's going to be a little slower. Our actual back to school clothing and uniforms, it's a smaller business for us than our competitors. About 50% of our business is in baby so have less impact on us but that's what I think. Near-term there could be some impact on some of our playwear categories and in the OshKosh brand particularly. It's probably a situation where the demand is going to come more based on the weather changes than the actual back to school shopping event. As you remember in spring, when the weather turned we saw a big surge in demand late May, June and even through July. So I think it's going to be more of a when does the fall weather change and get cooler versus that impetus to run out and buy a bunch of back to school clothes sitting here in July and August.

And so just as a reminder, over 50% of our annual sales are in baby apparel. So all the everyday essentials, bodysuits, wash clothes, towels, bibs, blankets, sleepwear, is huge part of our business. So that business we expect will continue to be in good demand. As Brian said back to school, it can be school uniforms never a big part of our business. But as the weather turns, just like it did earlier this year and just like we've seen over many, many years, when the weather turns, when people start to think about long sleeves, long pants outfitting, we typically see a surge in demand for our brands. And I'd say in recent years, back to school for us it's kind of been a deluded experience. It spreads over multiple weeks, if not months. But when the weather turns, we typically see a surge in demand. So when we update you again in October, we'll have full visibility to hopefully have a better visibility to how we did when the weather turned.

Great, that's helpful. And then just on I guess market share in the quarter, do you think that you guys gained in the quarter I think a lot of smaller children's brands maybe had to have been shut down in the quarter and then we've seen obviously a lot of department stores shut some doors so maybe their private label is not as prevalent but do you think there is opportunity also looking forward to take some of that market share that's been taken out of the system?

So the latest data we have through the end of May suggest that we improved our market share positions through May. Again, not surprisingly because no one has. No one in young children's apparel has the relationship we have with the major retailers of young children's apparel. Walmart, Target, Amazon three of our largest customers, Coles, one of our largest customers, even though Coles and Macy's closed their stores just as we did in the second quarter, those stores were repurposed. They were shipping online purchases from their stores and the online demand from Coles, Macy's and others was robust, even though they were closed. No one has those relationships like we do with the major retailers. So not surprisingly we gain share. And to your point, going forward my guess with more store closures, more of a shift to online customers, and competitors exiting stores we believe that's an opportunity for us to gain more share in the market.

The only think I had to add, that we've had a strong number one share in baby and in toddler. And based on our age up strategy, which we started to pursue about a year and a half ago for the first time that last 12 months through May. We've gained and we now have the number one market share in the kids segment, the five to seven year old child. So we're excited about that age-up strategy seems to be working well for us and we continued to increase the lifetime value of our customers on both a four and a seven year basis.

Great, that sounds good. Thanks so much, you guys. Good luck for the rest of the year.

Thank you very much.

Thank you. Our next question comes from John Morris with Davidson.

Thanks. Mike congratulations, in such a tough environment as well. E-commerce growth, as one would imagine in this kind of environment, doing really well. But we think one of the really interesting things to track and try to get a read on is the new customer growth. And I'm wondering if you can share with us, if you track that, if you have intelligence on and you can share with us the potential or what you've seen with new customer growth on e-commerce through this period, I think that would be a really good way to underscore the strength of the brand, do you have any metrics on that?

Yeah, I don't hopefully give specific metrics. I can tell you that since the stores closed our online customers were up about 67% in the quarter. And of that, the two biggest changes were a number one new customer, some new customers that did not shop with us before. And then also kind of leads to folks that only bought in stores before that shifted their spending to online. So we're happy with the performance, I would say. I would concur with you that most importantly, the growth in new customers online was very encouraging.

Okay, that's great. And my follow up back on the gross margin strength, again, really impressive performance that it was actually up year-over-year. You pointed to a couple of different factors here that have contributed to that, price integrity. But you also mentioned the inventory adjustment. I'm just wondering if you can bucket for me the different factors and somehow quantify the contribution or rank the contribution in terms of what has led to that gross margin strength in the quarter?

I'm sure I'll try without being overly specific. So there are a lot of puts and takes in the gross margin line this quarter. I'd say one of the big positives is just the improvement in e-commerce margins. So that's a significant effect in the quarter. It's driven by the fact that we had higher realized pricing, bit of a rationalization of the ineffective promotions that we've perhaps had a year ago. That's probably the single biggest driver, the next big positive would be the fact that our inventory position has improved, the fact that sales were so meaningfully above our forecast, and the quality of our inventory has improved. We were able to move through a good portion of what we had reserved for those. Those are the two big positive effects. I'd say there's a reasonably significant negative mix effect that's on the gross profit line, gross margin line as well. That's principally due to the fact that we had far less retail store sales, which are historically very high gross margin sales. We have a bigger mix of the exclusive brand sales and wholesale. Those are great operating margin sales. They are not as robust on the gross margin line. So I'd say those are, John, the principal effects on gross margin for the quarter.

Thanks, Richard. Thanks, everybody. Good luck for back to school fall.

Thank you.

Thank you. Our next question comes from Jim Chartier with Monness, Crespi, Hardt.

Good morning, thanks for taking my questions. Just following up on the gross margin question. Richard, given healthy inventory, lower off price sales, lower product costs. Any reason we shouldn't expect gross margin up in the back half of the year?

Now, Jim right now, we're planning gross margin expansion year-over-year in second half.

Great. And then could you comment, where you're seeing sell through at your wholesale customers, excluding Walmart and Target since their stores have reopened?

Let’s say it's been robust. I'd say, for a number of them they're chasing demand and wish we had more inventory to share with them. So we would say with the reopening similar experience that we had, I think demand has been robust. Q - Jim Chartier Great and then finally, the transition to fall the last couple of years seems to have been a bit challenging, some of it I think due to weather. But anything you guys have done from a product perspective to maybe improve your performance during the transition to the full product? Thanks.

Yeah, I think a couple of things. One based on strategy and one based on the COVID situation. We shifted our policy. So we really felt that the last several years with the consumer buying trends and the heat that we brought in too much fall too early it wasn't appropriate and the selling was soft. So we shifted the fall receipts, we cut fall receipts and shifted them out. Our inventory, our fall inventory is in stores right now is down more than 50% from where it was last year. So we've extended the life of spring. We have plenty of spring goods, as you can imagine, and they're selling really well. So we're really planning on selling kind of a spring summer mix through Labor Day this year and taking the pressure off, having to sell traditionally fall weight goods in July and August. And I think that the fall product that we are going to bring in is more transitional in nature as we responded to the selling trends over the last few years. So we're optimistic that we'll do better. That said, we did cut the inventories back and we will plan it conservatively and we'll see how the other demand goes as we move through the fall season. Q - Jim Chartier Great, thanks for the color.

Our next question comes from Jay Sole with UBS.

Great. Thank you so much. I want to follow up on the gross margin question. Richard, could you maybe just give us an idea what the difference in gross margin is between retail store sale and e-commerce sale and what it was in Q2?

Well, I'd say historically there was a fairly significant delta because the shipping costs to the consumer are reflected in the gross margin line. That was the case a year ago, that spread has narrowed significantly because of the improvement in gross margin in the e-commerce business. I'd say they're relatively consistent for the second quarter of this year. In the past, there was a lot more daylight between the two.

So I guess with more of the omni-channel sales happening in Q2 buy online, ship to store, I assume that lowers the shipping costs which helps improve the gross margins, how do you project that going forward, I mean, as the environment normalizes, hopefully you think people continue to use those options to fulfill their order or does it go back to where the shipping cost that maybe you saw it last year?

So, I think the trend was positive before COVID, its accelerated because of COVID. I don't know whether it's our stores or restaurants. I think people have gotten comfortable placing their orders online, swinging by, and picking up what they need. So my guess is that trend will continue. Again, we saw a surge in it. Every quarter we'll update you on what we're seeing but we're encouraging that because we want people to order online, swing by the store, its margin accretive when they pick up the order in store. And when they come to the store, now that they're reopened, more often than not, they see something in the store that catches their eye and they increase the total purchase. So this is why we've invested it over the past few years to add these capabilities, including curbside. Curbside was accelerated because of the COVID situation our retail team did an excellent job putting in new procedures to it to provide that experience for people who might have a child or two sitting in the backseat instead of having to get them out of the car seat and make their way into the stores. They give us a call and we're happy to run the product out to the curb so they can pick up what they need and go on their way.

Very interesting. Thanks, Mike.

You're welcome.

Thank you. Our next question comes from Warren Cheng with Evercore ISI.

Hey, good morning. I just want to ask the follow up question on the focus and curbside and ship to store capabilities that really ramped up in the last few months. So first, how much of that factor into your decision of that store closure plan from 150 to 200? And second are there any metrics you can share in your productivity or comps to give us an idea, those stores that are getting a lot of curbside pickup, how much is it boosting the productivity of the stores?

Yeah well, I will tell you on the first, part of the analysis that we did, the stores that are being closed have a very low penetration of omni-channel sales. So whether they're an outlet store located 45 minutes away from where most people live, people are inclined to swing by and pick up the product, than have it shipped to their door. So the omni-channel service capabilities that the acceleration of that did weigh into stores that we will close. Those that have low omni-channel penetration are more likely to be closed. And then the productivity and comps of where it's offered, its additive. There's no question its additive.

Okay, got it thank you. And just one clarification, you mentioned it could be buyer's market coming up in the pandemic for some of these real estate opportunities. But your new store plan was unchanged, is that -- are those opportunities just not yet factored into the plan?

So, it's early. Just at this point, I don’t see any reason to take up the store opening plan. I think it's important for you to know, there will continue to be new opportunities for us to open stores. Consumers love shopping in our stores and in many cases where we're closing stores it's because a newer, better center has opened in an adjacent market with better potency, better access for consumers, and many of these stores that we're closing are older stores. And it's certainly not the same experience in a new store location. So for now, the game plan is to continue to open stores thoughtfully over time. We actually slowed down the pace of store openings this year. And just to see how the things settle in the post COVID environment.

Thank you. Good luck.

Thanks very much.

Thank you. Our final question will come from William Reuter with Bank of America.

Good morning. I just have two. The first is with regard to the accelerated store closures. Will this only be when leases expire or do you expect that some of these you may pay to get out of the leases and I guess could this be a meaningful amount of money?

No, but it'll be the former. It's when leases expire or there's a kick out option available to us. We've done the analysis. There's no need for us to accelerate store closures well in advance of the lease expiry date. We'll do it when the leases expire.

Okay, that's good to hear. And then secondarily, you were very cautious with regard to issuing debt this year to improve your liquidity. But things kind of seem okay. At what point would you consider share repurchases or other dividends, etcetera that essentially reduce your liquidity?

Sure, Bill I would say first of all we have a good portion of the year ahead of us. We have to see how the second half plays out. We do have some restrictions right now under our bank agreements that would prohibit us from distributing capital for dividends or share repurchases. If we're in such a great position as we get into next year and we have just loads of excess capital that's a discussion that we could pursue again with our bank partners and see if it would be prudent. But at the moment, we're not envisioning that we would be distributing capital until we get into next year and have a better read on the business.

Makes sense. Alright, thanks a lot.

Thank you.

Thank you. I would like to turn it back to Mr. Casey for closing comments.

Thanks very much. Thank you all for joining us on the call this morning. We look forward to updating you again on our progress in October. Until then stay safe. Best wishes to all of you and to your families. Goodbye everybody.