Welcome to the Carter's First Quarter Fiscal 2024 Earnings Conference Call. On the call are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Chief Financial Officer and Chief Operator Officer; Kendra Krugman, Chief Creative and Growth Officer and -- I'm sorry, Sean McHugh, Treasurer. Please note that today's call is being recorded. I'll now turn the call over to Mr. McHugh.

Thank you. Good morning, everyone. We issued our first quarter 2024 earnings release earlier today. The release and presentation materials for today's call are available on the Investor Relations section of our company website at ir.carters.com. Before we begin, let me remind you that statements about items such as the company's outlook are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings and the earnings release and presentation materials posted on our website. In these materials, you will find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Mike.

Thank you, Sean. 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 exceeded our sales and earnings objectives in the first quarter. Our U.S. retail sales were in line with our forecast with store sales down 1% to last year and e-commerce sales down 13% due to lower traffic. Our U.S. wholesale sales were better than planned. We had earlier and higher than planned demand for our seasonal product offerings as our wholesale customers prepared for the warmer weather ahead. Our international sales were in line with our forecast with strong demand in Mexico and Brazil offsetting lower sales in Canada. We saw an expansion of our gross profit margin in the first quarter, which reflects the benefits of lower product costs and lower inbound freight costs. Spending was lower than planned. With consumers more cautious on discretionary spending, we also curtailed spending where possible. We continue to run leaner on inventories. Inventories were much lower at the end of the quarter, and the quality of our inventories is higher. With less excess inventory, we saw a significant reduction in low-margin off-price sales. Given our progress reducing inventories, our average cash balances were higher in the first quarter. Seasonal borrowings were lower and our net interest expense was also lower. We ended the quarter with over $1 billion in liquidity, which enabled the continued return of capital to our shareholders, including a 7% increase in our quarterly dividend earlier this year. In terms of our sales trends, we saw sequential improvement year-over-year in each month of the quarter. Easter came a week earlier this year and in early Easter has historically been a stimulus to sales…

Thank you, Mike. Good morning, everyone. On Page 5, we've included our GAAP basis income statement for the first quarter for your reference. On Page 6 and non-GAAP adjustments. Last year's first quarter results included a $1.2 million pretax charge for organizational restructuring. There were no non-GAAP adjustments to this year's first quarter results. My comments this morning will include references to results which are presented on an adjusted basis. Turning to Page 7. As Mike noted, we exceeded our first quarter sales and earnings objectives, which we provided on our fourth quarter earnings call in February, higher and earlier than planned demand in our U.S. wholesale business drove the upside in our revenue performance. Our U.S. retail business posted a sequential improvement in quarterly comparable sales, which were in line with our forecast. Gross margin spending and interest income were all better than planned, which contributed to the upside in profitability we realized in the quarter. On Page 8, we have some overall highlights of our performance in the first quarter. We posted net sales of just over $660 million compared to $696 million last year. Sales were lower in each of our business segments. In U.S. retail, the decline was driven mainly by the e-commerce portion of the business. We had planned U.S. Wholesale segment sales down in the first quarter due to changes in the timing of shipments year-over-year, lower bookings in the Carter's brand and lower off-price channel sales given our clean inventory position. We previously estimated that the differences in timing of shipments might negatively affect wholesale sales as much as $36 million in the first quarter and the actual impact turned out to be much less. Sales in our International segment were down slightly versus last year. On profitability, adjusted operating income reflected strong…

Thank you, Richard. We are proud to be the top apparel brand in North America for children ages 0 to 10. To grow our share of this market, our company is focused on 5 strategic priorities outlined on Page 16. Our top priority overarching everything that we do is our commitment to delivering market-leading style and value across our brand portfolio. Second, great products requires equally inspired consumer-facing brand marketing. We are focused on driving world-class marketing and creating exceptional experiences in all of our channels. These efforts will help us execute our growth objectives through a strengthened U.S. retail business, growth in U.S. wholesale was retailer-specific tailored strategies and an expanded global footprint. Turning to Page 17. Our brands continue to deliver relevant and wearable style at an incredible value. We saw strong spring product selling early in the quarter and more recently with warmer weather moving in. The good performance was driven by our Baby and Sleepwear business across brands, our most seasonal categories like shorts, Tank top and swimwear had a slower start. As Mike mentioned, our customers are also responding well to both ends of the price spectrum, including our entry price, highest value everyday product and our more premium, higher-priced fashion assortment. In February, we launched our new Everyday Value program highlighted on Page 18. This ensures that parents who are increasingly feeling inflationary pressure can find the most essential stock-up items at competitive and consistent prices. Our Everyday Value categories have had a positive impact on sales since launch, and we have realized an increase in positive consumer sentiment around value and price clarity. At the other end of the spectrum, we are having success with our most special entire price brands in collections. Page 19 features our fastest-growing brand, Little Planet, loved for…

Thanks, Kendra. Now turning to our outlook for the second quarter and balance of the year, beginning on Page 30. Second quarter net sales are forecasted in the range of $560 million to $570 million. The majority of the planned decline in Q2 sales versus last year is driven by U.S. retail, where we're planning total sales down in the mid- to high single-digit range and comparable sales down in the high single digits. As Mike mentioned, sales in April have been soft. The earlier Easter holiday shifted some sales to the month of March and the persistent cooler weather has continued to dampen demand for warmer weather apparel. Comparable retail sales over the combined March, April month-to-date period are down about 11%, and April month-to-date comps in our U.S. retail business are running down a bit less than 20%, but we've seen a generally improving trend as we progressed through the month. Second quarter sales in our U.S. wholesale business are expected to be down in the low to mid-single-digit range largely due to a meaningful decline in planned off-price channel shipments, demand in the balance of wholesale is planned roughly comparable to last year. International segment sales in the second quarter are planned down in the mid- to high single-digit range principally due to the timing of wholesale partner shipments and lower wholesale bookings. We expect Mexico will build on its strong first quarter performance, and we'll have continued momentum in its retail comps, and we're anticipating an improving trend in Canadian comps. We're planning for gross margin expansion in the second quarter, driven by lower product and transportation costs. Additional assumptions for the second quarter are summarized at the bottom of the page for your reference. On profitability, adjusted operating income is planned in the range of…

[Operator Instructions] And our first question will be coming from Warren Cheng of Evercore ISI.

I thought the chart from the presentation, which showed the positive comps in the North, negative comps in the South for March was really interesting. Are you seeing that same difference hold up in April? And are you seeing a difference in open air versus enclosed malls again for the month of April?

I would say April was not a good month for us. Given the shift in Easter, we knew there would be a shift in Easter. We didn't realize just how the consumer behaved -- react to the cooler weather and the shift in the Easter holiday. But I'd say our comps in the first week of April were down over 30%. Second week improved to down 17%. I think the third week was down 7%. And I think this past week was just slightly negative. So you could see as you get closer to more of the country warming up, but we got clobbered in that first week of April. It was an unusual. I mean we've seen shifts in Easter for many years in the past. I don't think I've ever seen as dramatic a drop in demand given the shift of Easter. So I think it was a combination of the earlier Easter and the cooler weather. I think the more important point, Warren, is I think the consumer has pulled back. They're shopping closer to need and with the weather cool, I looked at this morning, people woke up to 40-degree weather in New York City this morning. That's not exactly lends itself to spring outfitting. So it ultimately warms up. You can never tell when it's going to warm up, it ultimately will. We've seen this in many years past, we'll see the same trend later this year. Remember last October when we were updating it. It was just too hot out. People weren't ready for the cooler weather gear, but we had a strong finish in November and December last year when people got more into the swing of the holiday shopping. But the overarching thing, I think, with the consumer under pressure, our target consumer under pressure, I think the consumer is shopping much closer to need and only when the product is needed. With the weather as cool as it's been, they just don't need the spring outfit yet, but they will.

All right. That's really useful color. And your guidance implies close to the double-digit growth in wholesale in the second half. I think that's a little higher than you're thinking in February. But I think you also flagged that you're still seeing some conservative orders from some of your partners. Can you just parse it out in a little more detail where things have been a little bit better or worse for February?

Definitely better. But the outlook for wholesale is definitely better. The replenishment has been good. The demand for seasonal goods has been good. And to your point, I would say across the board, we deal with the best retailers in the world. Many of them have been in here in Atlanta, looking at the new spring product recently spring '25. Product recently, the relationships are excellent. But the common thing, better retailers, including Carter's, are running much leaner on inventories. When you run lean on inventories, you're seeing better sell-throughs, better price realization, better margin, less clearance on the shelves at the end of the season. It's a much healthier model when you're chasing demand. So that's what we've seen. This is -- I guess this would be the fifth consecutive quarter where wholesale demand was higher than we planned. We have actually orders in start ship dates. But with the better sell-throughs that our wholesale customers are seeing on leaner inventories, they're saying if we've got the product, they just soon take it in because the day we ship it, it takes them about 4 weeks to get it on the floor. And just given their supply chain capabilities, it takes the better part of the month to get the new product on the floor. But when that new product hits the floor, the consumer sees it and it gets the register ringing. So I would say wholesale both seasonal and replenishment outlook is better than we envisioned in February.

And our next question will be coming from Jay Sole of UBS.

My question is, is the trends that you've seen over the last 90 days, has that caused you to think about maybe leaning on promotions a little bit more as a lever to drive traffic into your stores? Obviously, you had this goal and you've been very successful driving gross margin improvement. But just given the trends, especially what you're seeing in April, how do you feel about maybe trying to maintain a little bit more market share in your stores by maybe do a little bit more promotion?

Yes, Jay, I would say we were a bit more promotional in retail than we had planned. The prices were down about 4% in the first quarter in retail, largely driven by the new Everyday Value pricing strategy and the consumers responded to it. We had about a 5% lift in unit volume in the first quarter. I would say our plan in the balance of the year, pricing will be probably down low single. It won't be down to the mid-single digits that we had in the first quarter. But Jay, the key thing for us, are we competitive. And I feel as though our market analysis would suggest we are competitive. Our brands sell for about [ $1 or $2 ] above private label. Consumers expect to pay a premium for a national brand that's true in bottled water. It's true in paper towels and it's true in kids apparel, and Carter's is the best-selling brand in young kids apparel, best selling national brand in young kids apparel. So we're mindful of where we need to be competitive. The risk you get, Jay, is if we decided let's get more aggressive on pricing. Let's -- given the weaker consumer environment, let's get more aggressive on pricing. We don't -- as long as we stay competitive with private label, which is, by and large, our largest competitor, and we're mindful of what our brand is selling for -- throughout our wholesale customer base, you certainly don't want to undercut our wholesale customers. So I feel as though we're competitive. That's -- at the end of the day, that's our responsibility to make sure we're competitive. The risk getting deeper on discounts now, what do you do next year? We're trying to establish a very profitable base in our business that we can grow on in the years ahead.

Okay. Makes sense. And maybe just, Richard, if I can follow up. Just on quarter-to-date, obviously, the Easter shift is impactful in that number. And you said, I think things have gotten better over the last couple of weeks. Is there any way you can sort of maybe explain to us like a current run rate, like just based on all the ups and downs and weather and this and that, like where you see the business running today?

Yes, Jay, I would say each week has gotten better as we've gotten further away from that kind of Easter holiday shopping grid, which was not strong for the reasons that Mike mentioned. So each week has gotten better. I'd say, over the last week, we're in more of that very low single-digit down comp range for retail, but showing good signs of improvement. .

And our next question will be coming from Ike Boruchow of Wells Fargo.

A couple of questions. I just wanted to clarify something. So Mike, to the question from Jay, I thought you just said that the plan for the rest of the year retail and AUR was down low single. But I thought Richard said earlier in the prepared remarks that the plan on AUR was flat to up the rest of the year. Can you just clarify that for us?

Yes. I can in the retail business, we're planning for comparable to up AURs. I think when you factor in wholesale, which had a bit more of those strategic price reinvestments, it blends to a kind of down low single digit for the entire company. But in our U.S. retail business, expected to be comparable to up.

And down low single digit for the year.

Correct.

Okay. And I guess, what I'm trying to wrap my head around, Richard or Mike, is so understanding the headwinds that kind of took place quarter-to-date and what they are. The implied guidance to kind of get to your down high single, I think is like -- I'm sorry, down high single for Q2 is basically down low single the rest of the month, and then you're planning up low single in the back half on comp to get to that full year guide. But it seems like you're planning to see that improvement on better AUR because it was just down 4% in the first quarter. So I'm just trying to understand what are the strategies that help inflect the comp meaningfully while also doing it in a less promotional way? I'm just trying to understand exactly what under the covers -- what exactly you guys have planned that gives you that confidence?

Sure. Let me try to articulate a little bit differently. So in our retail business, this year, we have a few strategic pricing strategies that will help us deliver on our promise of value to our customer. So one of those is our Everyday Value pricing strategy, which we outlined. So that started in Q1. That will have a full year impact, but we really proactively planned for that in our business in the second half, and we -- but we started it earlier than we originally intended. But that was not a reactive strategy. That was kind of a very consumer forward decisions that we made in Q1 that impacted our AUR versus last year. The biggest 2 impacts that Mike mentioned, though, were really clearance selling in Q1. So we came into this year with more clearance than we did last year with great intention. We were missing it last year. So that shift caused an AUR decline in Q1, we won't realize that through the rest of the year. The second piece of that is to also register value with our consumer, we are going to the right price sooner. So versus last year, we're running some programs at 20%, 25% off rather than this year getting to the 40% kind of strategy price earlier on in the season. That is planned for the rest of the year in our business model. That was something that we decided to add late in Q1. Those are major shifts that we're making. So these were not like reactive run to promotions because business is soft Q1 initiatives. These were very thoughtful initiatives. It's just the impact in Q1 is greater. So we're really confident with our AUR strategy we moved through the year.

Yes, Kendra. Just one thing I would add to that. So we've been dealing with the baggage of pack and hold inventory for the past 4 years. And -- but by and large, that's behind us. So our wholesale customers and our retail team made the most out of inventory that backed up when the music stopped in March of '20 with the pandemic and then again in the middle of 2022 when inflation hits. So rather than discount the daylight side of that product, we packed and held a better part of $100 million of inventory, sold it through the lion's share of it in '23. You don't have that in '24. I would say the mix and level of inventory in '24 will be better than it has been in the previous 4 years. So we're not -- so again, with better product, you'll see better price realization. With better inventory levels, you'll see better price realization.

Got it. Super helpful. And just one quick follow-up on the guidance as well. Comparable SG&A in the second quarter, is that dollars or rate, Richard? And then just on the 2H sales and comp growth, could we expect that as means both quarters? Or are we just talking -- could that be more 4Q weighted and we're just talking in aggregate 2H?

On the SG&A point, it was more of a dollar reference. So it's more comparable dollars, not expecting leverage from a rate point of view. And on your second question again, Ike?

Just you're guiding 2H sales growth and 2H comp growth. And I'm just -- I'm asking, is that for both quarters? Or could that be more of a 4Q weighted benefit?

Yes. I think the sales growth we're planning is more weighted towards fourth quarter than it is third quarter.

And our next question will be coming from Tom Nikic of Wedbush.

I just wanted to ask about margins. So obviously, you had really good gross margin expansion in Q1 and there's cotton and some product cost benefit that you're seeing. I guess, kind of when I run through the model and you said leverage on SG&A for the back half and given where the revenues are and leverage on SG&A, it implies that there's much less gross margin expansion in the second half of the year. Is some of that -- the pricing, is it just much less raw material benefit, et cetera. Could you just help me just think about how we should think about gross margin expansion for the back half, that would be helpful.

Yes. Sure, Tom. I would say the first half and the second half are a bit different in character. In the first half, we've had the year-over-year favorability still from the transportation, the ocean transportation rates being favorable. That reverses a bit to Mike's point, we're looking more towards low single-digit increases in those rates with the new contracts, which are effective kind of now. So that hits a bit in the second half. It's not all that material, but it is a shift in rates from where we've been. You do have the strategic price reinvestment, which is a bit of a drag on margin. Last year, we were also in the second half of the year because of the dramatic progress we made reducing pack and hold inventory. We were releasing some inventory reserves so we don't have an assumption that we're going to be taking reserves down this year, which works against us from a gross margin point of view. But you have a nice mix shift as we're expecting the growth in the retail business. That is the gross margin-rich part of the business. And then you have those other factors that I mentioned around what's going on with freight rates.

Understood. And if I can just follow up on DTC. I think obviously, e-commerce has been very difficult for you several quarters in a row. And I mean, are you finding that initiatives that you take on to try to improve the retail comps that it's just easier to execute in stores than it is e-commerce? You can have a better presentation in the stores and better assortment and merchandising and things like that, but it's just -- it's tougher to crack on the e-commerce side? Or I guess like why are we seeing these like really, really persistent double-digit declines in e-commerce? And even though it seems like the stores are starting to see some improvement.

Just a couple of reactions. So the e-commerce trends, I'd say, are largely consistent with what we're seeing from Citi. Citibank came out with good analysis on 40 different levels of credit card spend over a year ago, and it caught our attention, and we started tracking the trend in e-commerce sales, what they describe as online pure-play apparel sales, all ages, including kids. And what we were struck by is the similarity between those weekly trends in our own business. And we look at it every week, it's very helpful to us, and it would suggest that year-to-date online pure-play apparel sales, all ages, the credit card data would suggest is running down about 14%, and that's about -- that's consistent with what we're seeing. So I think it's largely a macro. We have no shortage of resources focused on our e-commerce business. But the one thing you need to shop online is a credit card and with people maxed at our target consumer, how they've been affected by doubling the gas prices, higher food prices. The interest rate on our Carter's credit card is over 30%. I've heard from family members talking about the kind of interest they're paying on their credit cards. So I think it's a macro issue. I think it's a good experience. It's still a very -- our e-commerce business is still a very high-margin component of our business, but the growth has slowed. For years, it was our fastest-growing, highest-margin business, still is one of our highest margin businesses. Same thing as we look at it, we want to make sure we're competitive and that we analyze our pricing against everybody else's. And so we focused on the user experience. We focus on search engine optimization. We've engaged a new media and creative agency this year to help us drive more traffic both to the stores and to e-commerce. I think what our stores do is our stores provide the very best experience with the brands. They provide immediacy to fulfill the needs that consumers have. And again, our target consumer families with young kids, they're shopping closer to need and when they need it, they can swing by one of our conveniently located stores and pick up what they need. And you got the full breadth and you can see what you're buying because it's more important to understand the quality of the value that you're getting. But we will continue to focus on distorting the performance in our e-commerce business in the balance of the year. I think what we're dealing with is largely a macro issue. There's no shortage of ways we can improve the e-commerce experience. We're focused on the things we can control. But I think based on what we're seeing in third-party credit card data, we're dealing with largely a macro issue.

I would add to that, that our conversion remains very strong for those who do come to our website.

Yes, conversion and average transaction. The average transaction wouldn't be improving if they didn't think we were competitive. But those who come, like what they see, conversion in the average transaction are higher than last year. But traffic is the challenge. So we're focused on traffic, and we'll see whether or not we can make progress in the balance of the year. .

And our next question will come from Paul Lejuez of Citi.

Just curious if you can talk about the March, April period that you mentioned. In the week period, I think you said down 11%. Can you talk about the sellout trends that you're seeing in your wholesale partners? And specifically, what are you seeing at the big 3, Target, Walmart, Amazon versus the rest of your partners in that wholesale channel in terms of sell-out, did they see the same sort of big deceleration in April? And then second, I'm curious if you could talk about new store productivity and the recent classes of stores, how that has worked. And what does comp performance look like on average in those recent classes of stores once they enter the comp base?

So I would say, I won't comment on any retailers or wholesale customers specifically. Paul, what I would say is that what we saw in the early weeks of April, business generally was sluggish with spring selling, whether it was direct-to-consumer or over the counter at many of our wholesale customers. Spring started out slow. But as more parts of the country are warm enough, trends are improving. The benefit we got pad in the first quarter is that the wholesale customers were saying, let's get that product in early in anticipation of the warmer weather. You had a question in terms of the trends in terms of the new stores, their contribution, their performance once they start comping.

Sure. We -- in the last 4 years, including the fall of 2024, we've opened about 130 new stores. The contribution of those stores annualizes around $130 million with a really nice EBITDA. So we are still seeing the benefit of opening new stores. Very specifically, our newer stores are our best comping stores quarter-to-date so -- or in Q1. So we feel good about the comp performance. Our 2022 class achieved a 2.1 positive comp in Q1.

And I would now like to turn the call back to Mike Casey for closing remarks.

Okay. Thanks very much. Thank you all for joining us this morning. We look forward to updating you on our progress in July. Goodbye.

And this concludes today's conference call. Thank you for participating. You may now disconnect.