Welcome to the Carter’s Third Quarter 2021 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’ll take questions as time allows. Carter’s issued its third quarter 2021 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 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’re in the final week, so the much stronger year in recovery than we had forecasted earlier this year. Our fourth quarter is off to a good start, whether it’s turning cooler, Christmas shopping’s underway and we’re seeing strong demand for our brands across all channels of distribution. For the past 20 months, we’ve worked our way through a hopefully once in a lifetime global pandemic. We were faced with store closures and school closures, travel restrictions and lockdowns, high unemployment and shipping delays. Like other challenges and years past the financial crisis back in 2008, the great recession that followed and the cotton crisis in 2011, Carter’s employees use these periods of disruption to strengthen our company and emerge stronger from them. Forecasting sales this year at about 98% of the pre-pandemic level in 2019. Over the past two years, we’ve intentionally edited out lower margin sales. We focused our product offerings on fewer, better and higher margin choices and reduced skews by about 20%. We then increased the mix of higher margin, longer lifecycle products, including our new organic brand Little Planet and our Bold Basics product offering. We ran leaner on inventories and reduced low-margin clearance and off-price sales. Relative to 2019, our sales forecast this year reflects the closure of over 100 low margin retail stores, a $50 million reduction in clearance sales, a nearly 50% reduction in low margin off-price sales and lower demand from international guests who historically were drawn to our low margin clearance sales. By focusing on higher margin products, closing low margin stores, running leaner on…

Thank you, Mike. Good morning, everyone. I’ll begin on Page 2 with our GAAP income statement for the third quarter. Net sales were $891 million up 3% from last year. Reported operating income was $124 million up 9% and reported EPS was $1.93 up 4% compared to a $1.85 a year ago. Our third quarter results for 2021 and 2020 included unusual items, which we summarized on Page 3. We’ve treated these items as non-GAAP adjustments to our reported results to enable greater comparability and insight into the underlying performance of the business. The adjustments were not meaningful and this year’s third quarter. Last year’s adjustments totaled $6 million in pre-tax expenses. As I speak to our results on an adjusted basis today, these unusual items are excluded. Page 4 summarizes our third quarter performance over the past three years. As Mike noted, while we saw a strong demand for our brands in the third quarter. Top line sales performance was constrained by delays across the global supply chain. These delays had particular impact on our U.S. wholesale business, where we’ve estimated we achieved about $70 million less in sales than we had planned. Despite this challenge better than planned gross margin and expense management enabled us to exceed our earnings objectives. For the third quarter, we posted record gross margin rate and gross profit dollars. Our adjusted operating margin was also strong at nearly 14%. As shown in the chart, despite lower revenue, we exceeded our 2019 pre-pandemic profit performance in 2021. Given our strong liquidity and improved profitability we resumed share repurchases in the third quarter when including dividends paid are cumulative return of capital to shareholders through the third quarter was $145 million. Moving to Page 5 and our adjusted P&L for the third quarter, building on…

Thank you. [Operator Instructions] We’ll take our first question from Paul Lejuez with Citi.

Hey, thanks guys. You guys quantified the wholesale impact to sales. Curious, maybe I missed it. Did you quantify the impact to the retail channel, if there was any significant impact? And do you expect any impact in that channel in the fourth quarter? And then second, just curious, the drivers of that 6% retail comp that you mentioned. Could you just talk about those comp metrics. Thanks.

They did a terrific job working through it and the retail team, they had a focus on making the most out of the product that they had and managing the promotions. I think the comp was driven by strong over the counter performance and better price realization. So children’s apparel is the only thing we do with our large wholesale customers, children’s apparel is a component of what they do. And so I think our focus over the years, executing at a high level is reflected in the retail performance in the third quarter. And the outlook for the year, we’re expecting a good comps from the retail segment in the fourth quarter as well.

Mike, I don’t know if it was my mind, but you might’ve cut out. You cut out, at least to me, I didn’t hear, you answered the retail impact. What did you quantify that at all?

The retail team was certainly impacted by the late delays. I think they navigated well against the challenges, because they achieved their plans in the third quarter.

Got it, thanks. And just one follow up, you talking about price increases for next year. How are you planning units for next year? What sort of elasticity of demand do you expect out of you’re taking prices up by, I think, you said mid single digits.

Well, we’ll let you know more in February. We’re still working through the plans for 2022. We are expecting to raise prices at least in the first half by mid single digit. We’re in the process of working through the cost for the second half of 2022. So I’ll share more with you, but we are planning good growth in both sales and profitability for 2022.

Got it. Thanks, Mike.

You’re welcome. Thank you.

We’ll take our next question from Susan Anderson with B. Riley.

Great, good morning. I guess, just really quick on the wholesale impact from supply chain, was it just that they couldn’t get the product to their stores, as quickly as the retail side? And then I think you mentioned $70 million in sales was missed is all this being shifted into third quarter, you talked about maybe some risk of cancellation, which is in your guidance. So just curious what portion of that potentially could get canceled and how much is basic versus seasonal product.

Yes, I’ll answer that. In wholesale, the demand for the product continued to be really good. We’ve had few cancels to date as Richard share with you. And that Q3 decline was directly attributed to late arriving production. We were not able to get about $70 million of the product to the wholesale account. And you just some rough math, if we had shipped that $70 million, we would have been up about 20% the last year and above 2019 levels. So I think Richard shared about 50% of that product already shipped in October, small portion of that may end up canceling, but most of it we expect to go. So we should have a good Q4, plan in Q4 mid to high single digits. We’ve got some cancellations planned in the business and it’s a fluid situation with the ports. We’ll see where it turns out, but we’re optimistic that overall we’re going to have a good Q4.

Well, the late product was heavily weighted to fall, the fall season. We expect that both our retail stores, our retail business and the wholesale customers will have a good selection of Christmas related product. But fall is the late deliveries – in the third quarter we’re heavily weighted to fall product.

We’ll take our next question from Jim Chartier with Monness, Crespi, Hardt.

Good morning. So just following up, so, Brian, I think you said wholesale would have been up 20% in third quarter. And it looks like, it would have been upwards 2019, but then your fourth quarter guidance, even with kind of the benefit of that shift implies like a 10% decline versus fourth quarter of 2019. Just curious, what the difference is between those two quarter?

I think we’re making assumptions on, obviously, what’s going to move into the fourth quarter and what’s going to ship versus cancel. And then as I said, we’ve got a real fluid situation with the poor tier folks. And so we’ve got a really good order book for Q4, but in our guidance reflects the fact that we may have some additional cancels or products that we ended up packing holding for next year.

For the full year, we were not planning on getting all the way back to 2019’s level for wholesale. And some of that is by design in terms of not driving as much off price channel activity that we had back then. So it’s a little dated the comparison to 2019. We are going to have good growth year-over-year over 2020. So this will be a multi-year recovery as Mike described it in the past. It gives us more opportunity to build back over time.

Great. And then I think typically you start shipping some spring orders late in fourth quarter. Do you expect some of that to shift into first quarter? And then you mentioned the double digit inventory growth at year end expected in part due to strong first half 2022 demand. Just curious what the wholesale order book looks like for spring.

Yes. The spring order book is good. And I think, we’re planning to be uploaded mid single digits in wholesale. We’ll see how things turn out in terms of shipment flow, but I think we’ll have a good spring, we’re planning for a good spring. Some of it will move over into spring some of the fall winter, we’ll slide over some of it we’ll pack and hold. But in terms of the discreet, spring summer order book which kind of defines the first half in wholesale. We’ll show more in the next call, but I would say that we’re planning on good growth and low to mid singles in that business.

We move the spring orders up a couple of weeks, see if we can’t get ahead of some of these supply chain delays.

Great. And they just on the new leases that you’re signing, what’s kind of the length of those, and what’s the flexibility to exit those. And then what percentage of leases are up for renewal in 2022.

10 year leases with five-year kick outs and probably, we renegotiated about 25% of the leases this year, I guess, is we’ll renegotiate some portion about 25% of leases next year.

Great. Thanks and best of luck.

Thank you.

Our next question comes from Ike Boruchow with Wells Fargo.

Hey, good morning, everyone. I guess, maybe Richard just on the higher inventory provisions in wholesale this quarter. I understand the revenue and the timing shifts, but I guess, can you just kind of give some context on that? I mean, we continue to hear about lower markdowns and better pricing and what have you in gross margin in the space. But I’m just kind of curious, what drove higher provisions are maybe you’re up against an awkward conflict, just trying to understand that. Just trying to understand the wholesale margin this quarter, it just seemed a little low versus what we would have expected.

Sure. Well, I would say that there’s really two dynamics within the inventory costs that largely hit the wholesale segment. It’s about $11 million or $12 million year-over-year swing. Two elements. One, a year ago, we were releasing inventory reserves. So we don’t have that benefit this year. And we did take some incremental new reserves just anticipating some order cancellations late in the quarter. I wouldn’t say, it’s all that material, but we’d have to take our best evaluation of how we see things at the time that we end the quarter. And we’ll have better visibility as we move through the quarter, but we did take some incremental provisions just for things that we think probably will end up being canceled by our customers.

The biggest dividend, the wholesale margins in the third quarter were air freight. Air freight was heavily weighted to support our largest wholesale customers from memory was around $15 million. Then you have this impact of not competing against inventory releases in the last year. The benefit of that last year didn’t repeat this year, and then you also have a higher compensation provisions reflected in the wholesale margins.

Got it. And then taking a step back Mike for you. It’s a good problem to have, you gave us your new multi-year margin target earlier this year and you’re way above that already, so five years early, so congrats. But I guess the question is, how much of the gains you’re seeing this year are more transitory. Should we be expecting that you believe there’s a build off of 2021 into next year. Or is there a rebased it’s going to be necessary? I know you’re not going to give guidance explicitly, but just to help us kind of understand how to frame out the next 12 months would be helpful?

We view 2021 is a new base to grow off of. So with the models we’re putting together show good growth in sales and profitability off the 2021 base. So a lot of these changes were accelerated. We always envisioned there was an opportunity to run leaner on inventory. And some of those initiatives were well underway before the pandemic hit. Our retail team was buying about 90% of their forecast for memory for fall 2019. And so some of these disciplines were in place, but running leaner on inventory, editing out low margin clearance, sales, improving price realization. That’s been one of the more significant changes that we’ve made in their business and that our merchandising design team edited out lower margin skews focused on longer life cycle product that doesn’t wind up on the clearance rack after 13 weeks. So a number of those structural changes we’ve made in the business, which I would say are substantive and give us a benefit in the years ahead.

Got it. Thank you.

You’re welcome.

Our next question comes from Jay Sole with UBS.

Great. Thanks so much. Maybe just wondering if you dig into gross margin a little bit, how much was the air freight expense in the quarter and how much are you seeing it impact the fourth quarter? If we can start there, that’d be great.

It was about $16 million in total in the third quarter. Most of that, the vast majority 15, call it affected the U.S. Wholesale segment. For fourth quarter, we’re planning about $15 million.

Nearly $40 million for the year.

Understood. And then maybe if we can talk about buybacks, you mentioned you repurchased about 2.5% of the outstanding shares in Q3. What can we expect for Q4, maybe just high level for buybacks?

Jay, I think I’d rather report our progress and then signal exactly our intent. I think, we bought back a meaningful amount in third quarter, and I think that should be a positive signal of how we’d like to use excess capital going forward. We believe in the growth story of the company, and we think this will be a good way to use some of our – what is typically, once we get past all the noise and anniversarying the crazy numbers from the pandemic, this is a business that generates significant cash. We have a history of returning that cash to shareholders. We’d like to continue to be in that mode.

Okay. And then maybe one more, like, if I can ask you about RFID, it sounds like pretty interesting initiative for your retail business. But is there an element of the Walmart and Target relationship that the RFID will help in? What kind of financial benefit do you think that RFID will bring to the business?

That’s the beauty of having built these relationships with Target than Walmart over the past 20 years. We’re a better company because of those relationships and we’ve learned from them. They’ve implemented RFID over the years. And for a specialty retailer, I think it’s rare to have RFID. But it’s been a recommendation from our retail team for the last few years. And we decided to make the investment and it’s rolling out now. I’ve been in the stores recently, our store associates are thrilled with the technology that they have. In the stores, it makes the work much more efficient, enables them to provide a higher service level to our customers. What we’re most excited about is, we’ve got some portion of $7 – 700 beautiful stores from Maine to Hawaii, and now we’ll have a higher level of visibility to what inventory they have in their stores. So if we’ve got a family with young kids in Seattle and they order online, we can see which one of our beautiful stores in the Seattle area have what they need and we could package it up in the store and ship it to them. They’ll get it quicker than getting it from browse open in Georgia. And those transactions are margin accretive. So their margin accretive to an already margin rich e-commerce business. So there’s – we’re excited about it. It’s some portion of about a $10 million investment and it’ll have a – we expect a multiple that investment in terms of return over the next five years.

Got it. Super helpful. Thank you so much.

You’re welcome.

Our next question comes from Warren Cheng with Evercore ISI.

Hey, good morning guys. It’s glad to hear – good morning. Glad to hear that early holiday demand has been good start. But I just wanted to better understand, if demand sides, okay, but the congestion continues to worsen how margins would play out. How long could that impact be? How much of your assortment is seasonal versus core? And you commented in your prepared remarks that you could use pack and hold and own retail a couple of new levers to manage those clearance levels. I just wonder if you could elaborate on that as well?

Yes. The big challenge with pack and hold was last year. So we had well over $100 million of pack and hold inventory. When stores closed at the beginning of the pandemic, that was never a big part of our business. We sold through what we ordered, but with that disruption last year, we learned a new skill and I think we navigated through it beautifully. And in terms of demand, I would say is robust. I wouldn’t say, it’s a good. I’d say, it is robust. Consumers are out, they’re shopping, they’re spending. If we had more inventory, the sales would have been higher. And but as we go forward, the risk is really on any fourth quarter cancellations, if fall continues to come in late. You can’t move a lot of fall to the right. You can move spring to the right. You can move summer to the right. But at some point you have to say, if the fall goods aren’t here, we’ll work with our wholesale customers to determine how much they need, given the selling window remaining. How much should be packed and held in brought up in next year and how much should be canceled. So those are the scenarios that we’re working through and we’ve worked that risk of cancellations into our fourth quarter forecast.

Thanks. And for my follow-up, I wanted to ask about your comment that Cambodia and Vietnam are expected to improve next year. Can you just remind us how much of your production is back online today? And later you’re hearing from your production partners in terms of when the rest might – may come – might come back online.

Well, both Cambodia and Vietnam are back online. I’d say Cambodia is making more progress than Vietnam. Based on their vaccination rates, we’re speaking with our suppliers daily. We have a visibility to what their attendance rates are, what their production levels are. Vietnam, it’s only about 20% of the units are sourced from Vietnam and now the slight this past week, it’s some portion of 20% of that 20% is ramping up more slowly, just because of COVID related restrictions in Vietnam and access to the vaccine. So Vietnam will be a slower build given the fact that some 20% of Vietnam is ramping up more slowly, but the factories are back open and trying to get people back in and complying with the COVID related restrictions. But both are up back up and running.

Thanks guys. Good luck.

Thank you.

We’ll take our last question from Tom Nikic with Wedbush Securities.

Hey, good morning, everyone. Thanks for squeezing me in here. I wanted to follow up on the gross margins. I think it sounds like a lot of the games that you’ve expect to keep – I kind of want to talk about the seasonality of it. I think this – in 2021, 1H gross margins were really exceptional. And I think 2H is going to be a little bit more modest, more like in the mid-40s. Do you kind of think, like, you get back to like a more normal seasonality in future years, where it’s a little more like evenly spread between first half, second half. Or do you think, like, if you look out to 2022, you’ll hold some of those exceptionally strong gross margins in the first half of the year.

I would say, there’s certainly a seasonality in the business. And the comparisons for last 18 months have been really challenging, because you have things moving around. You have ordered timing differences between the quarters, wholesale orders can move significantly between quarter end dates and create issues. I guess, the way I’d answer your question is we expect to build on the progress that we’ve made this year. These are as we’ve turned to structural, fundamental changes we’ve made the business. We think we’re running a stronger business. So you look for the silver lining in difficult situations. And I think the pandemic has had some of that for us. We are running the business with less inventory. I think we have a more rational promotional strategy, which still presents significant and compelling value to consumers. So our intention would be not to go backwards on gross margin. I think some of these disciplines, the entire organization I think is energized around how we’re running the business. And there’s no intent to go backwards. I think certainly comparing anyone period to a prior period is a little challenging, because you can have some things moving around that the name of the game for us is improving from where we are today.

Understood. Thanks. And if he get outcast and start making music together again, that’d be great.

Thank you, Tom.

That concludes today’s question-and-answer session. Mr. Casey, at this time, I will turn the conference back to you for any additional or closing remarks.

Okay. Thanks very much. Thanks for joining us this morning. We appreciate your interest in the company. Look forward to updating again on our progress in February. Until then, best wishes to all of you and to your families over the holidays. Goodbye, everybody.

This concludes today’s call. Thank you for your participation. You may now disconnect.