Welcome to Carter's Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Senior Executive Vice President, Chief Financial Officer and Chief Operating Officer; Kendra Krugman, Senior Executive Vice President, Chief Creative and Growth Officer; and Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its fourth quarter and fiscal year 2023 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, and the company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a discussion of the 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 and releasing -- earnings release posted on the company's website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of non-GAAP financial measurements to GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, the call is being recorded. I would now like to turn the call over to Mr. Casey. Mr. Casey, you may begin.

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 had a strong finish to the year. In the fourth quarter, we saw a sequential improvement each month in our comparable U.S. retail sales and earlier than planned demand for our new spring product offerings. Earnings and cash flow in the quarter were better than planned. Our earnings per share in the fourth quarter were up over 20% with margin expansion in each of our three business segments. It was our strongest growth in quarterly profitability in over two years. Our fourth quarter profitability was driven by the strength of our product offerings, on-time deliveries from Asia, better price realization, lower product costs and good control over discretionary spending. We made good progress in the fourth quarter, working down inventories that backed up in 2022 when inflation surged to historic levels and consumer demand slowed. Substantially, all of the $100 million of pack and hold inventory that was carried over from 2022 was sold through profitably last year. Given the success of that inventory reduction strategy, our inventories were down 28% by year-end. Lower inventories and higher profitability in the quarter drove cash flow from operations to over $500 million in 2023, which was much better than we planned. That strong cash flow enabled us to fully invest in our growth strategies last year, and we returned over $200 million of excess capital to our shareholders through dividends and share repurchases. Recall that our fourth quarter got off to a slow start with demand for our cold weather apparel, weighed down by record high temperatures in October. As weather cooled, we saw an improved…

Thank you, Mike. Good morning, everyone. I'll cover our presentation materials this morning, beginning on Page 2. On Pages 2 and 3 of the presentation, we've included our GAAP basis P&L for the fourth quarter and full year. The next page summarizes our non-GAAP adjustments in the fourth quarter and full year periods for both this year and last year. In this year's fourth quarter, we had a benefit from the settlement of Carter's claims in the credit card antitrust litigation. In the fourth quarter of 2022, we recorded a charge to adjust the value of the Skip Hop trade name. Our adjusted view of results excludes these items in both periods, and I encourage you to review this reconciliation page. This morning, my comments will include references to results which are presented on an adjusted basis. On Page 5, we have some overall highlights of our performance in the fourth quarter. As Mike said, we were pleased with how the quarter and year finished up. Demand in our U.S. retail business improved as we moved through the quarter, particularly after Thanksgiving. Sales in U.S. wholesale were stronger than we had planned. Many of our wholesale customers have been running lean on inventory and we have several customers request shipment of new spring product earlier than we had planned. Fourth quarter profitability was especially solid driven by significant year-over-year gross margin expansion and lower spending. Our balance sheet is in great shape. We've made very good progress reducing inventories. We have well over $1 billion in liquidity, and we generated over $500 million in operating cash flow for the year. Our fourth quarter adjusted P&L is on Page 6. Sales in the quarter were $858 million, down 6% from last year, largely consistent with the decline in the overall U.S.…

[Operator Instructions] Our first question comes from the line of Warren Cheng with Evercore ISI.

First question is just on margins. It seems like the magnitude of the gross margin expansion steps down a bit in the first quarter. To the freight and AUC tailwinds that were pretty strong in the second half of the year. So did those step down in the first quarter? And then how should we think about how those play out in the second half as they start to anniversary some of the tailwinds from last year?

I would say we're planning for margin expansion, Warren, in both first half and second half of 2024. I would expect it to be stronger first half. We're still not fully anniversary down on those more favorable inbound ocean freight rates in the first half. So that's a benefit. Our assumption is that rates will continue to pull for the balance of the year more -- in a more stable fashion, but it's not quite the same benefit. What kicks in, in a more meaningful way for us are lower product costs in the second half of the year, more of the input costs are coming through lower as there's more capacity in Asia. So our supply chain team has done an excellent job negotiating those lower product costs. So I'm bullish on the outlook for gross margin.

That's really helpful. And then my follow-up, can you give us a little more detail on what you saw from some of the price reductions that you tested in the fourth quarter? Where did you sharpen the price points? What was the response? And how should we see some sharper price points roll out through the year?

Warren, it's largely on the opening price point product. The everyday essentials, just have a more consistent experience throughout the year on what those price points would be. So given the progress with cost reduction, we took some of that cost reduction, put it into product benefits and where we thought it would be helpful, we've gotten sharper on price points in the magnitude of $1 or $2 for certain key items, still $1 or $2 above private label because when we raised the prices, private label, generally during the inflationary period, raised prices as well. I would say, during the worst of the early days of inflation, when we lowered prices, we did not see a meaningful change in unit velocity. So we stuck with the pricing that we -- what we had because product costs were higher, we kept the prices higher. But with product costs lower now, we saw that as an opportunity to get sharper on some key price points.

Our next question comes from the line of Tom Nikic with Wedbush.

I wanted to follow-up on the product costs. So looking at the cotton chart, comp has started to move upwards again. I think it's up about 25% in the last couple of weeks, approaching $1 again like -- Richard, is there kind of like a level at which, like you're still comfortable with cotton prices? Is there kind of a level like above which like it starts to become a problem? Just I guess, kind of how do we think about cotton vis-a-vis the recent increases?

Well, Tom, we've been watching the same kind of movement in the commodity prices that you're noting and that you've noted in your research as well. At this point, we've secured our cotton as that's going to be in our 2024 assortment. So it would be more of a forward implication for 2025 products at this point. So not concerned as it relates to the next 12 months. A lot can happen here as the year plays out. But again, our supply chain teams have done a good job kind of putting us in a good position to enjoy lower product costs, including lower cotton inputs for the 2024 product assortments.

Richard, and, our Head of Supply Chain, Karen Smith, will be in Asia, next week, meeting with all of our suppliers. We've had good top-to-top meetings with them earlier this year, virtually earlier this year. I think that we would describe that the cost environment is fairly stable. And cotton is an important input cost, so is oil for polyester. I'd say on labor, it's kind of mixed. Labor rates went up in Bangladesh this past year. But probably the biggest driver of cost near term. In near term, again, to Richard's point, we have visibility through largely winter of this year starting to get some indication of spring next year is capacity, manufacturing capacity. And our sense is we've had suppliers come here to Atlanta asking us for more work. But as every major retailer, including Carter's has gotten leaner on inventories and being more cautious on inventory commitments to drive better sell-throughs, price realization and margins that has opened up capacity. So as the suppliers are eager to fill that capacity, they've been very helpful meeting our cost and margin objectives. So near term, I would say our visibility through the balance of the year is good. And as we move through the year, we'll give you some indication of what we think is possible going into '25.

Understood. And if I could also add one more. So I would like to ask about U.S. wholesale. So sounds like you expect growth in the mass channel with the exclusive brands. I think you said a big, sort of 50% decrease in the off-price channel. Where does that leave the department store channel? I guess that's kind of the third leg a stool in U.S. wholesale?

I’d say it’s mixed. Some will be up, some will be down. And on the off-price, just to put it in context, we’ve never had a big off-price business. So if the mix last year was 4% of our $1 billion wholesale business, it will be closer to 2% this year. It’s always been a relatively low number. But in the department stores, I would say the department stores are showing some progress. We have visibility every day to how the department stores are doing. Again, they are trying to recover from the pandemic. They -- when they close stores, just like we closed stores for several weeks in 2020, a lot of the business swung over to the mass channel, which has helped us because we’re the largest supplier of kids apparel, the national brands in kids apparel to Target, Walmart, Amazon. But the department stores saw kind of this shift in traffic from their businesses over to the mass channel. But I’d say the department stores are showing some good signs of recovery. We see the spring selling. We see the over-the-counter selling and the arrow is pointing up there. So their businesses are recovering nicely, and we’ll benefit from that to some extent this year, and I think, more importantly, in the years ahead.

Our next question comes from the line of Jay Sole with UBS.

Maybe if you can just kind of dig in a little bit more into the guidance that you've given for U.S. retail for Q1 and in the full year. I think you said that quarter-to-date, it's running down 8%. That's the comp so far and you're guiding down mid-single to high single. And then for the full year, coming to positive low single digits. I know, Mike, you talked about a lot of different initiatives to help the business. Can you just maybe give us an idea of which those initiatives are going to be the biggest drivers of sales and how they're going to sort of layer on as the year goes on to help drive that improvement in the comp trend?

Sure. I'll give you the top two. One starts with talent and the other one is in product. So it was less than a year ago, we made some significant changes in our retail organization and with changes that followed were in the merchandising, design and marketing teams. And we're starting to see the benefit of that in spring. I think we expect to see more of that benefit as we move through the balance of the year, particularly in fall and holiday. But our business is heavily weighted to the second half. So it's talent, it's product. Some other things, Jay, we have a better mix of stores. We're going to close more low-margin stores this year, and we'll open up higher-margin stores. We've got new marketing capabilities that we've invested in this past year in terms of a new media agency. We'll have the first full year benefit of that media agency that guides us on the highest and best use of our marketing spend each year. We have a new creative agency that's been engaged for this year. So I think there's a number of good initiatives that we believe will enable us to have a kind of a glide path back to growth in comparable sales. That's our focus. We have to demonstrate that we can improve comparable sales this year. That is our focus. We expect we'll see progress with that objective as we move through the year. But I would say the top two, starts with talent. And then that very talented team is focused on elevating the style of our product offerings and the value proposition. So that's what you'll hear. Those will be the themes that we'll share with you our progress with as we move through the year.

Got it. Maybe if I can just follow up on that. You mentioned how you're going to redesign the store format instead of side-by-side, instead of organized by brand, more organized by age. Given some of the challenges out there in the industry, is your expectation that you might be able to take share, maybe especially in some of the older kid categories as you go through the year?

That’s possible because the -- what we’ve done with that new side-by-side model has created a better experience for that family shopping for about a 4- to 10-year-old child. And so we’ve seen a nice lift in the older age segment product offering and we’ve actually seen a better performance on the baby and toddler. The lion’s share of our business is in baby and toddler, about 80% of our total sales. The older age -- like we’ve had this age of strategy to make sure that the product is relevant for that slightly older child. In years past, we’d have an all in one box. Both we would have newborn to apparel for a 10-year-old child on the Carter’s side and we’d have a similar mix. We have baby at [indiscernible] up and then a product offer for up to a 10-year old on the OshKosh side. We think it makes -- you test, you test and learn, but the test we did last year putting baby and toddler all brands on one side and kid apparel, all brands on the other side has shown some promise. So that will be the model going forward.

Our next question comes from the line of Ike Boruchow Wells Fargo.

Mike, a couple of quick questions. I'll throw them all out at once. Just number one, from a modeling perspective. I think, Mike, you said that the e-com comps for the year were down 20% -- sorry if I missed it, but what was the e-com comp in 4Q specifically? Then second question to kind of piggyback off of what Jay asked around retail improvement through the year. I wanted to ask about wholesale. First of all, I think you mentioned a shift and again, I'm sorry if I missed it, but can you quantify the shift that benefited 4Q and that's hurting 1Q? Just trying to understand organic wholesale, what that growth rate is in the first quarter? And how are you kind of planning that organic wholesale growth through the year? Because it does seem just like retail, you're expecting a nice step-up in demand. I'm kind of curious how much visibility you have there.

So Richard will help you with the wholesale question, but the comp for e-com in the fourth quarter was down 19%. What we're encouraged by is that the trend we saw in the fourth quarter improved sequentially. It improved sequentially in each month from October, November, December and then even into January. So we've seen four consecutive months where the e-comm comp has improved since October. October was the toughest because comps grow at record levels in October. There just wasn't as high a demand we saw for our fall and holiday product offerings. But we're encouraged that we've seen four consecutive months of improvement in the e-commerce trend. And year-to-date, our e-commerce is down 10%. It was down 20% last year, now down 10% year-to-date. And then on wholesale in terms of the shift, Richard?

Yes. On the amount that benefited Q4, it was just under $20 million of additional spring product that shipped kind of year-over-year. And then there's also an effect in the first quarter, some volume that will now push out, and that was about $15 million. Those are the two components of the roughly $35 million, $36 million that I referenced. For wholesale overall, we are assuming higher revenue growth in the second half from memory. It’s up mid- to high single digits in the second half of the year. So much stronger second half performance is what we’re calling for.

Our next question comes from the line of Jim Chartier with Monness, Crespi, Hardt.

What's your outlook for the children's apparel market for 2024?

I would say stable. It’s about a $28 billion market in the United States. The market data we have, it's fairly stable. Births are fairly stable. We're seeing an increase in births of moms who are over 29 years old. Moms who are 25 to 29, that's down a bit. And then we saw like a 2% drop in new moms under 25. Biggest drop there in teenage moms, and we're -- that's okay by us, right? So that's -- we're seeing the increase in births to moms who are older. People are waiting, waiting a little longer until they get a little bit further along in their careers, but -- those who are having children a bit later have the ability to spend more on their kids. So I would say, the birth trends and market trends are fairly stable, thankfully.

Do you expect kind of flattish than kind of overall industry apparel sales?

That's what we're assuming. And given our broad distribution in the market, we believe that we have an opportunity to have growth in a market that's fairly stable.

Great. And then what did sell-through at wholesale look like in 2023? And did it improve at all kind of later in the year?

I would say the sell-throughs were good. We saw very good growth in our replenishment business in the fourth quarter. I think the replenishment trends were up about 9% in the fourth quarter. So that's where -- there's two business. I think you understand, Jim, there's kind of a seasonal business. There's a replenishment business. Directionally, it's two-third seasonal, one-third replenishment. But our wholesale customers were very cautious on the seasonal commitments for 2023. They had to make those decisions when inflation surged in the mid part of 2022. So they said, and we're not quite sure how long this inflationary cycle is going to last. So they pulled back on some of the seasonal commitments for '23. That's what weighed on our growth last year. But the replenishment is all about how the registers ring in. So those five packs and blanket sleepers, wash claws bids, all that stuff is being purchased, the register sends a signal to us to keep those fixtures in stock. So we were encouraged by the strong replenishment business in the fourth quarter.

Our next question comes from the line of Paul Lejuez of Citi.

This is Kelly on for Paul. I just want to follow-up on the retail business and the progression of retail comps throughout the year. Just given the Easter shift in 1Q this year versus I think 2Q last year, is it fair to assume that 2Q comps are still down and then kind of implies up mid-single digits for comps in 2H. Just wanted to clarify how we should be thinking about that? And then I have a follow-up.

Kelly, it's Kendra. We expect a slight benefit in Q1 versus Q2 with Easter shift, but it wouldn't impact the half.

I do think we're planning the comps down in the first quarter but you will see we expect that the comps will improve as we move through the year.

Got it. Okay. And then my second question, just a follow-up on the off-price impact to your wholesale sales in F '24. I think you said it's about 2% of wholesale, that's going to be down 50%. So is it around a $15 million headwind in F '24. I just want to make sure I'm not…

I'm rounding for you. So it's a $1 billion business. So off-price sales were some portion of 4% last year, it would be closer to 2%. So it's in round numbers about $20 million.

Got it. Got it. And then just lastly, if there's any way to kind of give us a little bit more color on how much you expect SG&A dollars to be up this year, whether there's any impact being felt more in the first quarter versus other quarters is how we should be thinking about that line item as we move throughout the year?

Kelly, I'd answer more in the context of the halves. I'd say low single-digit SG&A growth in dollars in the first half and something more like mid-single-digit growth in dollars. The second half of the year, as you know, is the bigger volume period. We've got more of our initiatives kicking in and such more of the effect of new stores and such in the second half. So that's how I would plan it.

Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back to Mr. Michael Casey for closing remarks.

Thank you very much. Thank you all for joining us this morning. 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. Everyone, have a wonderful day.