Welcome to Carter's Fourth Quarter Fiscal 2022 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 Chief Operating Officer; and Sean McHugh, Vice President and Treasurer. After today’s prepared remarks, we will take questions if time allows. Carter's issued its fourth quarter fiscal 2022 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.

Thank you, Shannon, and 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. Another historic year is behind us. It was our third in a row. In 2020, Carter's worked its way through a once-in-a-lifetime global pandemic and retained a higher level of profitability than most in our peer group. In 2021, we saw a strong recovery and achieved record profitability, driven by structural changes in our business and unprecedented government stimulus that supported families with young children. And in 2022, a 41-year high in inflation drove a surge in gas prices and food prices, slowed the economy and demand for our brands. 2022 got off to a good start. Early in the year, we saw high single-digit growth in our comparable retail sales through February. This time last year, our wholesale customers were placing their orders several weeks early to mitigate the risk of supply chain delays caused in part by port congestion. We expected 2022 would be a continuation of the strong post-pandemic recovery that we began to see in the prior year as consumers came out of COVID isolation had access to vaccines and began to reconnect with families and friends. By the spring of 2022, it became clear that inflation was not transitory. Inflation peaked at over 9% in June and continue to weigh on consumers in the balance of the year. When we updated you on our progress in October, we widened the range of our fourth quarter sales and earnings forecasts. Our guidance reflected the uncertainty of forecasting holiday demand given the historic level of inflation and its impact on families with young children. Thankfully, we achieved our fourth quarter sales…

Thank you, Mike. Good morning, everyone. Beginning on Pages 2 and 3 of our presentation materials, we’ve included our GAAP P&Ls for the fourth quarter and full year period. Page 4 summarizes adjustments to our GAAP results for the fourth quarter and fiscal year for both 2022 and 2021. I draw your attention to two items in particular. In the fourth quarter of 2022, we recorded a non-cash pre-tax charge of $9 million to adjust the carrying value of the Skip Hop trade name. This adjustment is due to lower forecasted sales and earnings for the Skip Hop business, in part due to changes in its wholesale customer base, including recent developments regarding the outlook for Buy Buy Baby. Earlier in 2022, we recorded a $20 million pre-tax charge related to the early repayment of debt, which we raised in the early days of the pandemic and fortunately proved to be additional liquidity, which we did not need. This information is included for your reference, this morning, I will speak to our results on an adjusted basis excluding these items. On Page 5, we have some overall metrics for our performance in the fourth quarter. Net sales were $912 million, a decline of 14% versus last year. Sales exceeded our previous guidance due to stronger than planned demand in our U.S. wholesale and international businesses. Our retail and wholesale businesses in the U.S. accounted for most of the sales decline versus last year as high inflation continued to weigh on consumer spending and many of our wholesale customers took aggressive action to manage their inventory positions. Our fourth quarter earnings also exceeded our prior guidance reflecting higher sales, good management of spending, and a lower tax rate. Q4 operating income was $119 million, representing a 13% operating margin, which was…

Thank you. [Operator Instructions] Our first question comes from the line of Warren Cheng with Evercore ISI. Your line is now open.

Hey good morning. Thanks for taking my question. I wanted to make sure I understood the dynamics that are underlying that the intra-year outlook for sales trends to improve in the second half? So how much of that is sort of lapping the unusual things that happened last year with the early rising product and the elevated cancellations? And how much of it is improvement in underlying trend?

It’s a combination of both. I’d say in the wholesale business, we expect to see significantly better performance because the number of order cancellations, including replenishment automatic replenishment orders which were suspended in the second half. On the Retail segment, we’ll see the benefit of the new stores kicking in the second half. So, I’d say it’s a combination of both. Year-over-year comparisons in recent years have been distorted by the pandemic, by the stimulus, by inflation. But the improving trend, I would say, are some fundamental benefits from the new stores, some of the structural changes that we’ve made in recent years, but also going to benefit from some, what I would say, highly unusual decisions by our wholesale customers, which I think will serve them well in 2023. But in the second half of last year, when the impact of inflation became clear on consumers and their business has slowed, they were aggressively canceling orders where they could so that they would end the year in a better inventory position with our brands, which they have so that they would give themselves a better start to the new year, which they have. So, I’d say it’s a combination of both.

Thanks. That’s really helpful. And my follow-up is just on the store footprint here. It sounds like the omni-channel [ph] continues to underperform, but you’re actually getting back to net openings this year because of some of the opportunities you’re seeing elsewhere. Can you just comment on those two pieces? Do you feel comfortable that your outlet channel is going to be in a good position after the actions you’re taking this year? And then where are you seeing those opportunities in the U.S. in the U.S. retail channel?

The outlets are some of our most profitable stores. We’re in all the major outlet centers, and we’re usually the number one and number two brands in kids apparel in those outlet centers. But as we’ve seen over many years, when gas prices spike, consumers pull back and they shop closer to home, when gas prices normalize or the consumer gets used to a new normal, the outlet businesses do well. Some of our best outlets are in tourist locations and those they performed well. And in terms of returning to store growth, we’ve made significant improvement in price realization. We’ve got a new pricing capabilities, both talent and technology. We’ve been running, but for what we’re dealing with right now with this pack & hold inventory because of the slowdown in demand last year. We’ve been running leaner on inventory, buying more conservatively, which has enabled us to drive higher price realization as well with the better price realization new store opening opportunities are available to us. And so we are returning to store growth. The returns on investment in these stores is rich. It’s the number on source of new customer acquisition and 70% of kids apparel is bought in stores. So we’ve got the best-looking stores in kids apparel. Some of our competitors are closing stores, downsizing, exiting certain markets, particularly up in Canada, and we have an opportunity to take advantage of those decisions, those downsizings, those competitors exiting markets by opening more stores, which when we open stores, it strengthens our e-commerce performance. So they work hand in hand.

Thanks, Mike. Good luck.

Thanks, Warren.

Thank you. Our next question comes from the line of Jim Chartier with Monness, Crespi, Hardt & Co. Your line is now open.

Good morning. Thanks for taking my question. Just curious, in terms of your wholesale guidance for this year down 10%, what’s your assumption for sell-through at wholesale? And how much of the decline is related to just inventory destocking?

Jim, I would say, overall, we’re calling wholesale down about 10%. I want to accentuate what Mike said about inventories. Inventory is in really good shape in wholesale. We’ve got a lot less carryover. Spring has shipped earlier. There’s a better mix of inventory and we’ve got about two-thirds of the orders in hand for wholesale for the year. About 5% of what’s left to go is seasonal. We’ve got some winter bookings to get and then the replenishment business. So these folks are planning very cautiously though. I’d say given inflation impact on the consumer. They’re planning very cautiously. They’re planning for high sell-throughs. First half, we’ve got planned down mid-teens. Second half, we’ve got planned down just mid-single digits and say, first half is impacted by lower bookings and timing. And we did ship some spring price out, I think, as Richard noted in December. So but most of them expected about our fall bookings are slightly better in fall, but folks are still being conservative. One of the underlying good guys, I think we’ve got is a much improved supply chain performance, which should have a good impact on the wholesale business. We’re expecting less cancels in the back half, better replacement businesses because some of the folks shut that off last year. So overall, I think we’re planning good sell-through. The sell-through has been good so far. They’re really off to a good start. And I think we’re in a really good place right now. We’re just – we’re calling it down because of the forward bookings. EBIT [ph] is stronger than the others. I’m planning EBIT down low single digits. We’ve removed that Buy Buy Baby business, which was about 3% of wholesale from our planning assumptions. And then department stores are the most challenging part at this point.

Okay. Thanks. And so what did sell-through look like in fourth quarter and then you mentioned exclusive brands. What percentage of wholesale did your exclusive brands account for in 2022?

2022 is about 49% of wholesale sales. This year, we’re planning it to be over 50%. I think 52%, 53% is a number for this year.

Okay. And then what did wholesale sell-through look like in fourth quarter for you?

Is very good. Again, as Mike pointed out, based on several factors, demand that people were seeing and then the supply chain challenges that were in the industry and that we had inventory was curtailed. And so we worked with our accounts and chose to pack and hold a good amount of inventory into this year. They slowed their replenishment businesses. And I think everybody’s goal was to get as lean as they could going into this year. And we do not have an inventory problem at all in the wholesale business. It’s very clean and the sell-throughs have been really good through fall and early spring has been very positive.

And Jim, I think we saw a similar trend at wholesale as we saw in our own retail business. There was a trend change kind of a surge in demand that happened right around cross the consumer clearly shopped closer to the holiday this year. A year ago, they probably shopped earlier in the quarter because they were hearing stories about inventory and product not being available given the delays in transit from Asia, but very good results, particularly near the holiday this year.

Great. Thank you.

Thank you. Our next question comes from the line of Jay Sole with UBS Equity. Your line is now open.

Super. Thanks so much. I’m just wondering if we could talk about the first quarter guidance a little bit. Is it possible to give us a little bit of a sense of specifically how you think the gross margin is going to look and sort of what the impact is going to be from, say, cotton versus freight and other factors and how that will impact the year-over-year change. Thank you.

Sure. Well, we're planning good gross margin expansion in the first quarter, Jay. I think it's going to be stronger in the second half of the year, given some of the benefits we're looking forward to in terms of lower transportation costs, lower product costs. That's a bit more muted here as we enter the year. But we still do have a benefit from spending less on air freight in the first quarter. We were still spending a bit on that. It was kind of carry over first quarter of last year. We're going to have a better mix of U.S. retail sales in the quarter, which is the gross margin-rich part of the business, less wholesale sales, which tend to be a little lower gross margin and as we've been talking about continued progress on pricing. So the actions that we took late last year are going to continue into this year. I'd say we're probably going to have a bit more still of a drag from inbound freight. So those higher ocean freight rates will continue as we move into these early months of the year. And hopefully, we're going to get some relief in the back half.

And product costs will still stay elevated in the first half will start to moderate in the second.

Got it. Okay. And then maybe if we can just talk about your assumption for SG&A dollar growth as we go through the year. I guess we can sort of back into what you're implying for the first quarter. If we think about gross margin up a little bit, but sort of how should SG&A dollars, the growth rate trend as we get into the second quarter and then through the back half of the year?

Well, it's planned, as we mentioned, comparable for the year. It's up very slightly, I would say, in the first quarter and then it looks pretty favorable as we get into the second half.

Okay. So in other words, comparable, you mean in terms of rate or do you mean in terms of dollars?

Now in terms of dollars, I think leverage is going to be a tougher story, just given the decline in the top line that we're planning. But from a dollar perspective, that's what we're controlling. The rate is going to be what it is relative to the top line, but the dollars we're planning comparable for the full year. So I think the organization has responded well to the challenges that we're having that the industry is having and our teams have had a good track record historically of raining and spending when we need to, given the environment.

Okay, got it. That’s helpful. Thanks Richard. Appreciate it.

Sure.

Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo Securities. Your line is open. Ike, your line is open. Please check your mute button. Our next question comes from the line of Tom Nikic with Wedbush Securities. Your line is now open.

Hey, good morning guys. Thanks for taking my question. I just want to ask, I know that inventory management and price realization has been very important to you. Obviously, you're operating in a very, very promotional environment and this kind of discounts all over the place out there. Like how do you think about balancing being competitive in the marketplace while also maintaining your pricing discipline? And do you see market share risk from not participating in some of the promo activity that many other brands are undertaking.

Tom, I would actually say Carter's is very competitive. And we have teams that look at our pricing relative to the market daily, and we feel as though we are competitive I think our advantage is we've got 1,000 beautiful stores in North America. So that when we back up on inventory, we can clear that product through those stores. A significant decrease in the wholesale. A component of the decrease in wholesale this year will be the off-price retailers. So they're a good source of moving excess goods. But this year, we're we are going to move some of the pack & hold inventory through more than half of the pack & hold inventory through our own stores as opposed to moving it through the discount channel. So you shouldn't view our progress on price realization is that we're trying to get paid more for our products relative to the market. I think we're competitive. That's our job. Every day, we need to be competitive, and we believe we are. So I don't think we you should assume that what we're seeing in the forecast that we have for this year is that we're focused only on price realization. Improving price realization. Pricing is a function of how the product is selling, how you buy it, whether you put it conservatively and given the nature of what we do for a living, we sell essential core products, that consumers purchase frequently. And so we have a handle each year on what we expect the demand will be last year was thrown out of balance because there the unexpected surge in inflation. But we are competitive. We are participating in the promotional environment but historically, if you look at our business over many, many years, this has always been a margin-rich business given the nature of what we do and the quality of the wholesale customers that we have and the productivity and profitability of our retail business.

Understood. Thanks. If I could follow up quickly on the wholesale channel. It sounds like you're fairly happy with the sell-through that you've been seeing. I'm just curious, in the inflationary environment, which is kind of pressuring the budgets for young parents. Do you think there's any impact that you're seeing from customers maybe trading down to private label or anything like that?

I'd say it's a bet. Private label makes up around 21% of the nearly $30 billion market. Our share of the largest private label brand is about twice of the largest private label brands. So we've seen a bit of that. But with the more consumers going to Target, Walmart and Amazon, particularly for the grocery part of their businesses, we benefit from that. We benefit from that traffic. So that's why our exclusive brands had the performance. Our exclusive brand sales were up 6% last year. So even in a down market. We benefit from more people going to those major retailers. So I would say there's been a bit of a trade down yes.

Understood. Thanks and best of luck this year.

Thank you, Tom.

Thank you. Our next question comes from the line of Will Gartner [ph] with Wells Fargo. Your line is now open.

Hey guys. How are you? Thanks for taking my question. Can you guys just unpack just the cadence of retail in the U.S. retail? We talked about wholesale, but just the retail business, how you're thinking about it. Sorry, 1H versus 2H?

In what way, Will?

No, in terms of growth, like how are you thinking about first half versus second half?

Yes. We plan first half, more challenging in the second half. I think that we've got some easier compares in the second half, and we're expecting a lot of things – a lot of changes from last year, our supply chain performance better, on-time delivery. Our pricing capabilities kicking in an inflation softening a little bit in the second half. So we're planning the year now, our plant comps down about seven points. Overall retail business down about 5% when you put the new stores in. And again, the second half, we'll have the new stores kicking in and what we believe strategies that we're putting forth to do better, and we think the consumer will be in somewhat better place. But we're planning inventory conservatively. We're not reaching for the stars or given the uncertain environment, but we think we've got a good planning assumption that. We'll have a gradual recovery as we move through the year.

The component of our business that I think will update you with every call this year. And we've asked ourselves, what's the value of on-time shipping performance. So we haven't had on-time shipping performance since the pandemic began. And you had 100 ships or more off the coast of, off the coast of Los Angeles. So we've seen with significantly improved on-time shipping performance in the fourth quarter, particularly for spring, our new spring product offerings. We were with one of our largest wholesale customers earlier this year and they describe the strength of the product offering and the timing of the deliveries and how it's currently selling, their word, not my transformational. So we've asked what is the value of on-time shipping performance, getting the right product to the right place at the right time. And so we'll see that for – we hope consistently through the balance of this year. And so we're – as we see more of that, I think that potentially could be an upside to our models this year. But it's too early to call. As I shared with you, January and February are two of the lightest months of the year. And when we update you in April, we'll have a more clear view on how the market is improving and how our business is trending.

Great. Maybe I could just squeeze one more in. Could you just talk a little bit about market share? How are you thinking about it for this year? You're planning the business down. Just maybe talk about how you guys are performing – thinking about performance against the overall category?

Yes. So we're expecting about mid-single-digit decline in the young kids apparel market. So we think our performance will be in line with, if not better than the market.

Great. Thank you.

You’re welcome.

Thank you. This concludes the question-and-answer session. I would now like to hand the call back over to Michael Casey for closing remarks.

Okay. Thank you, Shannon. Thank you all for joining us on the call today. We look forward to updating you on our progress in April. Goodbye.

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