00:03 Welcome to Carter's Fourth 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 will take questions as time allows. 00:30 Carter's issued its fourth 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. 00:46 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. 01:19 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 conference is being recorded. 01:35 And now, I'd like to turn the call over to Mr. Casey. Please go ahead, sir.

01:40 Thanks very much. Good morning, everyone. Thanks 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. Carter's had a very strong finish to the year. Sales and earnings were much better than we planned. Sales in the fourth quarter exceeded $1 billion, up 11% on a comparable week basis. The quarter got off to a strong start, with high-single digit sales growth in October. It's been a perennial experience for us in years past, as weather changes with the seasons, it stimulates a need to shop for new outfits for children. 02:18 The fourth quarter was one of our best holiday shopping periods. On a comparable week basis, we saw over 12% growth in the November-December sales period. Demand came early in November, driven by a stronger product offering, very effective marketing and media reports encouraging consumers to shop early for the best selection. Recall in 2020, as we approach the Thanksgiving and Christmas holidays, we were told by medical experts not to gather with families and friends, not to travel to see parents and grandparents, to stay at home and to stay safe. 02:58 By comparison, as we prepared for Thanksgiving and Christmas last year, consumers were clearly more comfortable getting out to shop. Parking lots at shopping centers and airports where full again, and thankfully more people reconnected with family and friends over the holidays. With those special holiday gatherings, children's outfits needed to be refreshed. And with the best-selling brand in kids apparel, we saw over 10% growth in each of our baby sleepwear and playwear product offerings in the fourth quarter. Thankfully, our supply chain kept our stores in a good inventory position. The shelves were full…

21:05 Thanks, Mike. Good morning, everyone. I'll begin on page 2 of our presentation materials with our GAAP P&L. Net sales grew 7% in the fourth quarter, our reported operating income increased 3% and reported EPS increased 2%. On page 3, we had minimal non-GAAP adjustments in the fourth quarter. Adjustments for full fiscal years 2021 and 2020 are summarized here. In 2020, we had significant adjustments related to COVID, restructuring costs and charges for intangible asset impairments. 21:40 On the next page, we had a strong fourth quarter with sales and profitability that exceeded our prior forecast. Sales grew 7% to over $1 billion with each of our businesses, retail, wholesale and international growing over last year. When adjusting for the extra week in 2020, sales grew 11%. As anticipated, profitability was down in the quarter year-over-year with adjusted operating income down 5% and adjusted EPS down 6%. I'll cover more of the drivers of fourth quarter performance in a moment. 22:13 Our adjusted P&L for the fourth quarter is on page 5. I've mentioned the strong growth in sales and gross margin was 46.4%, which was down 70 basis points from last year, but ahead of our plan for the quarter. With strong demand and good sell-throughs during the quarter, particularly in our holiday product offerings which enabled improved price realization in our US retail businesses. 22:36 Higher transportation costs, both air freight and increased ocean container rates weighed on fourth quarter gross margin. SG&A was up about $34 million or 10%, a portion of this was volume related corresponding to the strong sales growth in the quarter. Given our strong performance in the fourth quarter and for the full year, we made additional provisions for performance-based compensation to recognize our employees and we also stepped up our…

42:46 Thank you [Operator Instructions] Our first question comes from Chris Nardone with Bank of America. Your line is open. Please go ahead.

43:09 Thank you, guys, and good morning.

43:10 Good morning.

43:11 Relative to your -- good morning. Relative to your fiscal '22 outlook, can you just discuss the cadence on when you're expecting the supply chain situation to improve and when you're price increases will kick-in? And in particular, if you can give us some cadence on the gross margin throughout the year that would be very helpful? Thank you.

43:31 Hi Chris. So we're expecting gradual improvement through the year. What we're most encouraged by is the production levels in Asia are improving. This time last year many suppliers that we do business with had very -- their employees very low vaccination rates, vaccination rates were probably less than 20%. Today Cambodia, Vietnam, other parts of -- other major countries for us the vaccination rates are over 90%, the attendance rates are over 90%. So production levels are meaningfully better than they were last year. So that -- we expect that that will continue to improve through the balance of this year. The issue we have is that, transportation delays for all the things that you've read about, particularly on the West Coast ports. But even recent articles would suggest things are improving on the West Coast, we're expecting gradual improvement. 44:25 Maersk is one of our largest transportation providers they reported recently they are expecting things will continue to be sluggish in the first half, things will improve in the second half, time will tell, time will tell. But we're -- I think we've worked our way through the worst of the pandemic. We had transportation delays last year, I mean, 2020 was the worst of it, '21 was better than '20 and '22 this year will be better than last year, but I think it will be gradual improvement. Price increases, yes, probably we have price increases every quarter this year. So we've taken our prices up for spring in full product offerings and to help us achieve our margin objectives we've taken pricing up more than the cost increases are going up. And with respect to margin -- the margin profile, Richard?

45:16 Yes, I'll take Chris. Gross margin is expected to be a bit lower in the first half of the year and higher year-over-year in the second half. There's couple of factors affecting that, the impact of store closures is more pronounced in the first half of the year. So retail will be a bigger part of our mix in the second half. So it's -- that's the margin -- gross margin rich part of the business. Also the impact of higher transportation costs, specifically air freight was more localized to the second half of last year. So that pressure moderates and should benefit gross margin in the second half.

45:45 Yeah. Even on the first quarter we've taken some of the product that late fall deliveries in the fourth quarter last year. The cancellation rate in the fourth quarter was about half of what we thought it would be, but it wasn't 0. So some of the late fall arriving product, you can keep moving fall to the right, so we will clear out the residual of the fall, product offering that came in late in the first quarter. So, off-price sales will be a bit elevated, still relatively small as a percentage of total sales. But in 2021 off-price sales were like a less than 1% of our total sales and that'll be closer -- that'll be probably less than 2% in the first quarter, but they will be elevated year-over-year in the first quarter. Just to clear out whatever was left of the full product offering from last year.

46:35 Got it. Thank you.

46:36 You are welcome.

46:40 We'll go next to Paul Lejuez at Citi. Your line is open. Please go ahead.

46:45 Hey guys, This is Kelly Crago on for Paul. Thanks for taking our question. Just curious if you could parse out for us what's happening in the wholesale business. US wholesale sales beat expectations in the fourth quarter, but for the year we're still down about 7% relative to 2019 levels. So I'm just curious what's driving that? It seems like even the department stores at this point are feeling more optimistic about their businesses. So just curious what's happening there and how we should be thinking about the wholesale business in F’22?

47:16 Yes, Kelly. We feel good about wholesale, I think when compared to 2019, it's down about $70 million, $75 million, really 2 reasons for that. One is, we did meaningfully less off-price sales last year, better inventory management with the team, so that was about half of it. And then the rest was, we really reduced our exposure to troubled retailers. They are the folks that we did business with before we do less and some of them have gone out of business. So those are really the 2 main reasons. But our outlook for '22 is very good. We expect good demand this year, full year sales are planned up about mid-single digits. I think our forecast show we're going to growth with 6 of our top 7 accounts. 47:52 And as Mike has said, price increases all the way through fall have been received well by our wholesale customers and we would expect that our operating margins even return closer to that pre-pandemic level. So should be a good year, off-price sales are going to be comparable, I think to last year's lower run level, replenishment business has been good, that's about a third of our business now, which makes it more predictable. And then we're working hard to improve the service levels caused by transportation delays that Mike articulates. So overall, we feel good about the wholesale business. 48:19 Wholesale is a much healthier business today than it was in 2019. A lot of retailers had leaned forward on inventories, heavy with inventories and 2019 what they learned, just like we learned during the pandemic, you can run with a lot less inventory, leaner on inventory. And when you're leaner on inventory you're driving a higher margin business. So it's a much healthier wholesale business than it was in 2019.

48:43 Got it. Good to hear there. And then just -- second question, just could you help us understand how you're thinking about the first quarter? I mean, you did give us some detail there, but the sales down mid-single digits I think is worse than you were expecting. So what do you see in the business currently and are you seeing that sort of trend so far in the first quarter? How did it look in January as you went up against the smaller stimulus? And if you're not seeing the business down as much as you're guiding to, just curious what you're assuming for March given that upfront stimulus played a big role in the business last year?

49:21 Yes. Just a few things Kelly, just few words. First-quarter is the smallest part of our year and stimulus did help, nearly $2 trillion poured into the economy in the first quarter of last year and that got the register ringing, we're right next to the fancy [Fips] (ph) mall right next door to us here in Atlanta. A number going over in April you had lines 20 deep trying to get into Tiffany and Gucci, a quite Rooney's anything from Gucci, but their lines never saw anything quite like it. So we had all this money get poured into the economy, so that helped us and good, because a lot of it was focused on families with young children. We benefited from that. What I point you to for the first quarter, our profits in the first quarter of this year are planned up 50% relative to the first quarter of 2019. 50:05 So again, our business is fundamentally stronger, more profitable, and so I don't worry too much about first-quarter trends. I would say, January we have a very strong fourth quarter. January, we said was a little softer because I think the Omicron, when we came back from the holidays most of our colleagues got someone of their family got wiped out from Omicron. So we saw some of the dip in our business at the tail end of last year and then in January. February was a bell ringer, February was particularly good, President's Day weekend was very, very good for us, but January and February are relatively small compared to what's ahead of us. 50:42 March is -- will be the largest month in the context of sales in the first half of this year. As we get closer to March the weather starts to turn, more parts of the country warm up, family start to change the wardrobes out for the more warmer weather gear. You get them a little bit closer to Easter. Easter is a little later this year. It's like two weeks later, might have been the first week of April last year and you benefit from that when it's the first week of Easter in the first quarter, we don't get that benefit this year, but we'll get it in the second quarter. 51:14 By time we update you again at the end of April, Easter will be behind us. Weather will have turned in more parts of the country, we'll have better visibility on how product is flowing from Asia, consumer receptivity to the price increases. So it's very -- it's early, by the time we update you next time we'll have more of a sense for how the year is getting underway.

51:35 Got it. Best of luck. Thank you.

51:37 Thanks Kelly.

51:41 We'll go next to Susan Anderson with B. Riley. Your line is open. Please go ahead.

51:45 Hi, good morning. Thanks for all the details today. I was curious, just on the long-term goals. It looks like maybe the biggest change is just on the operating margin line, maybe if you could talk about the buckets that have changed versus I guess your goal of 13% pre-COVID and the biggest drivers of kind of moving that up. And then also on the top line, it looks like you're -- I think you're expecting wholesale to grow mid-single-digit versus retail low single digit. So just curious what's driving that greater wholesale growth, its space gains or other dynamics going on? Thanks.

52:21 Sure. So as Richard share with projecting $4 billion in sales now by 2026, that we've raised that outlook relative to what we shared with you a year ago and it's -- we're projecting mid-single-digit growth in our wholesale and international sales, low single in the retail. And as it relates to retail, it's largely going to be driven by eCommerce. So if there we're projecting call it -- I'll rather use round numbers here, Susan, but call it, we're projecting over $0.5 billion growth in sales over $200 million of that will come from retail, largely driven by eCommerce, but half of that was the growth in eCommerce will be supported by our stores, what we call omnichannel sales, that's where people have the benefit of shopping at home and love the convenience of swinging by our stores to pick up the product at one of the stores located close to their home. 53:10 And then in wholesale projecting over $200 million in growth and that's largely driven by the exclusive brands. That's what people are shopping. So during the pandemic, there was a disruption, more people started to shopping at Target, Walmart Amazon and we benefited from that and we expect we'll continue to benefit from that. And then international projecting over $100 million of growth 70% of that growth in international will be driven by Canada and Mexico, the balance from multinational retailers, Costco, Walmart, Amazon and then smaller international relationships. Individually small -- there was other retailers but collectively a margin rich business. On the earnings, projecting over $600 million in operating income, projecting margin expansion in wholesale and international. 53:55 Keep in mind, we got clobbered wholesale margins last year because we are lifted as -- much product as we thought would be helpful…

55:56 Great. That’s really helpful. And then if I could just add one follow-up. Did you guys say what AUR was for 2021 versus I guess unit growth?

56:05 Sure. We have that close by. So for the year for '21, the pricing was up 8 and the units were up about 7, 15 for the year.

56:20 Great, that's really helpful. Thanks so much again, good luck this year.

56:24 Thanks very much. Susan

56:29 Our next question comes from Jim Chartier at Monness, Crespi, Hardt. Your line is open. Please go ahead.

56:36 Good morning, thanks for taking my question. I'm curious what you're seeing from a promotional activity in the market. Have you seen any promotions returning? And then what's your assumption for retail promotions in 2022.

56:51 I would say, Jim, that the market continues to be less promotional throughout '21 as people -- people were chasing, get the goods in and demand was really good. We walk back as we've said, many times we walk back ineffective promotions and the couponing and really focused on driving price realization and improving our brand in emotional content versus highly promotional. So I would say the market overall was less promotional. We expect it to be the same going forward here everybody's dealing with transportation delays and there has been significant inflation with some of the input costs. I think every good retailer going to try to get paid more for the goods.

57:30 Great. And just trying to following up on the previous question about wholesale growth. I guess, how far out into the future are you planning with your key wholesale accounts? Are you looking out 2, 3 plus years? Could you talk about visibility into mid-single-digit growth?

57:47 Well, we have our 5-year plans and it's based on input from our wholesale customers. So we have a good multi-year growth plans for our key wholesale customers.

57:56 Great. And then finally, could you just talk about Mexico? How big is that business today? And then remind us what you see as the ultimate market opportunity there?

58:05 That's about a little over $50 million in revenue today, Jim, and we're looking to basically double the store business. So over the next 5 years, we'd expect it to be a much more significant contributor.

58:17 Great, thank you.

58:18 Welcome.

58:23 And our final question will come from Jay Sole with UBS. Your line is open. Please go ahead.

58:29 Great, thank you so much. My question is just on the first-quarter guidance, how much is the later Easter this year being in the middle of April versus early April last year impacting your guide? Let's just start with that one.

58:43 I'd estimate $10 to $15 million of a volume that shifting, Jay.

58:50 Okay. And then I guess just in terms of -- you talked a little bit about off-price on the 5-year the 2026 objectives. How do you see that business trending within the guidance of mid-to-single -- mid-single-digit US wholesale growth. I mean do you see off-price becoming a smaller percentage of total business and actually shrinking or do you see sort of growing at the level that you guys you see for US also.

59:14 So shrink as a percentage of sales over the next 5 years.

59:18 Is it possible to quantify that, like, is it going to go from like 7 percentage to say what it's going to be?

59:26 Yes, Jay, I would just say that it's less than 2% of our total consolidated sales today, it will be less than that 5 years from now.

59:36 Got it. Okay, super helpful. Thank you so much.

59:37 Your welcome, Jay.

59:40 And now I'd like to turn the conference back to Mr. Casey for any additional or closing remarks.

59:45 Okay, well thanks very much. Thank you all for joining us today. We enjoyed our time to get to look forward to updating again on our progress in April. Goodbye.

59:54 Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect now and have a great day.