Welcome to Carter's Second 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 Sean McHugh, Treasurer. Please note that today's call is being recorded. I'll now turn the call over to Mr. McHugh.

Thank you, and good morning, everyone. We issued our second quarter 2024 earnings release earlier today. The release and presentation materials for today's call are available on our Investor Relations website at ir.carters.com. Before we begin, note 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 also 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.

Thanks, 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. Our sales in the second quarter were in line with our forecast. We saw good growth in our U.S. Wholesale sales in the quarter. Our U.S. Retail and International sales were lower than expected. Earnings in the second quarter were meaningfully higher than planned driven by a record gross profit margin. We continue to curtail spending, which enabled growth in operating income for the quarter. Cash flow through June trended better than planned. We ended the quarter with lower inventories, a higher cash position, no seasonal borrowings, lower net interest costs and over $1 billion in liquidity. Our continued focus on margin preservation and cash flow enabled over $90 million to be distributed to our shareholders through dividends and share repurchases in the first half this year. For the first half, our earnings per share were up 13%. Sales were down 5%. In the second quarter, we saw a good response to our new summer product offerings, including our Americana-themed collections outfitting children for their summer holiday picnics and [praise]. Our best-selling products included our new Little Planet and PurelySoft collections each have elevated styling and fabrications. Sales of our Baby and Toddler product offerings were comparable to last year. Our playwear sales were lower, which we believe reflects the slow start to spring selling earlier in the quarter and the more discretionary nature of those product offerings. In the second quarter, we saw higher and earlier demand in our U.S. Wholesale segment. Our growth in Wholesale was driven by our exclusive brands. During this inflationary cycle, we are benefiting from consumers choosing the ease of…

Thank you, Mike. Good morning, everyone. On Pages 3 and 4, we've included our GAAP basis P&Ls for the second quarter and first half. On Page 5, we have a summary of minor non-GAAP adjustments to our prior year second quarter and first half results. We had no adjusting items in this year's second quarter or first half. Turning to Page 6. We have a summary of our performance relative to the guidance for the second quarter, which we shared on our last call in April. Our consolidated net sales were in line with our forecasted range. Sales in our U.S. Wholesale business were better than we had planned, largely as a result of higher and earlier than planned demand for seasonal product. The outperformance in Wholesale offset lower than planned sales in U.S. Retail and International, which I'll discuss further in a moment. Our profitability, both operating income and EPS were above where we had guided, which was a result of good gross margin performance, lower spending and a lower effective tax rate. On Page 7 and some overall highlights of our second quarter performance. Net sales were $564 million in the quarter, down 6% versus last year. We had lower sales in our U.S. Retail and International segments that posted year-over-year growth in U.S. Wholesale driven by the exclusive brands portion of the business. On these lower sales, operating income was $39 million, representing growth of 4% over last year, with good expansion in our operating margin. And earnings per share grew 19%, driven by our growth in operating income, lower net interest expense and a lower effective tax rate and a lower average share count versus last year. On the next page, we have our consolidated P&L for the second quarter. Our gross margin rate on the…

Thank you, Richard. As Mike mentioned, we remain focused on our three transformative strategies outlined in April. These priorities are grounded in consumer insights from both our current customers and tomorrow's new parents. We believe this focus will enable us to grow our share of North America young children's apparel market, in which we maintained the number one position. Our first strategic priority is to deliver market-leading style and value. Our brands portfolio enables us to lead the market with specific assortments that respond to a range of trends and consumer behaviors. Second, with an increased focus on marketing effectiveness and consumer experiences, we are deepening our relationship with our customers across every touch point. And last, our brand reach is unparalleled and a significant point of differentiation. Our brands are available wherever families with young children are shopping, meeting the needs of each specific shopping occasions. Diving deeper into our product strategies and the progress with our style and value transformation, Page 18 features our top-selling Carter's Newborn Essentials. This category across our Carter's brand has delivered positive comps versus last year and is an important indicator to the health of our business and underscores Carter's enduring brand relevance with new parents. Our Newborn Essentials assortment, breadth and value are unmatched in the market where Carter's brands have earned a 28% share in the zero to 12-month apparel segment. Also, we are seeing strong selling in our premium-priced products that lean heavily into fashion trends and more elevated fabrics. Page 19 highlights the latest Carter's elevated baby collection featuring on-trend transitional neutral in must-have styling. Turning to Page 20. Customers are positively responding to our new Oshkosh back-to-school launch, the premium fashion denim and bottoms are selling especially well. Noted on the next two pages, Little Planet and PurelySoft,…

Thank you, Kendra. In discussing the revisions to our outlook for the balance of the year, I think it's helpful to provide some context. Beginning on Page 34, we've included some well-reported data on the health and sentiment of the consumer. From our perspective, we believe the macro backdrop and state of the consumer have declined since we held our last call in late April. Shown here is the University of Michigan Consumer Confidence metric, which is published monthly. Since the time of our call in late April, consumer confidence has declined each month. The recent preliminary data point from July is the lowest since November 2023. We've historically seen a strong correlation between consumer confidence and demand in our business, our strongest retail performance in the recent past in March of this year and also last December, corresponded to the meaningful uptick in consumer confidence, which occurred in those months. On Page 35, while inflation may have moderated somewhat, its effects continue to be seen across a range of spending categories, which are very important to families caring with young children. As Mike commented, we've revised our outlook for the second half in light of the changes in market conditions since our last call. And on Page 36, we've summarized the key changes in our second half outlook. The most significant revisions relate to our U.S. retail and international businesses. In U.S. retail, we're taking steps to strengthen our value proposition by making adjustments to our pricing and promotional strategies. While we will get sharper on prices on a portion of our retail assortments, we won't participate in the extreme discounting we are seeing in the marketplace. There are a number of examples of those in our industry who have pursued an overly aggressive approach on pricing, this has…

Thank you. [Operator Instructions] Our first question comes from Jay Sole with UBS. Your line is open.

Great. Thank you so much. Mike, I'm just wondering if you can give us a little bit more detail on the price decreases you're planning to make? Are they – what you plan on doing in Wholesale versus Retail? And I think Richard said that it was going to be on part of the assortment in retail. Can you just tell us why some products and not others? And then, Richard, if you can give us some help on gross margin in Q3, like how much lower you expect it to be year-over-year. That would be great? Thank you.

So our pricing had been comparable year-over-year in the quarter that we – we clearly got beat on some of the holidays Memorial Day, 4th of July, we saw the market get very aggressive on pricing, things that we would typically sell like a T-shirt for $5, we saw some of our competitors selling it for $2.50. Those are thrift store level pricing. It's unusual to see that kind of pricing. I think it just reflects that the pricing that those retailers felt as though they needed to have to drive traffic for the store. So traffic continues to be the issue. The negative comps we're having are, by and large, driven by traffic. We sold fewer units direct to the consumer in the first half but we sold significantly more units through our exclusive brands. So it's a function of where people are shopping. But when we saw the pricing in the second quarter where it got kind of down and dirty we decided in the second half to be more aggressive. So that $40 million had to break down the $40 million adjustment to our second half profitability. Probably half of it relates to just getting sharper on price points on some of the opening price point product offerings we have that where we saw the market move lower. And if something was $5, it might be $4. We're talking about $1 or $2 at most, just to get a little sharper on price points. So half of the $40 million is just getting sharper on price points, see if it takes us to a better place. It improves the trend in our performance relative to the guidance we're giving this morning. The other half of the $40 million is just make sure we don't get backed up…

And on third quarter gross margin, Jay, we're expecting a year-over-year decline of about 50 basis points to 70 basis points, I would say. The good guidance would be – despite the price decreases, we're planning margin expansion in Retail and in Wholesale, largely driven by lower product costs, lower off-price activity in the third quarter. The factors that start to work against us a bit throughout the second half are higher transportation costs. So as Mike mentioned, we are seeing some higher surcharges and such related to kind of peak capacity coming earlier this year. Some importers are trying to get ahead of some tariffs that are going into effect this fall. Those tariffs don't affect us, but others are kind of getting in early to try and get their products here to the United States. So freight, which has been a good guy starts to reverse a bit, become a bit of a headwind. We also, throughout the second half of last year, we're releasing reserves as we made progress reducing inventory. That's not a benefit this year. But on balance, forecasting between 50 and 70 basis points in the third quarter down year-over-year.

Okay. That's super helpful. Thank you so much.

Sure.

[Operator Instructions] Our next question comes from Warren Cheng with Evercore ISI. Your line is open.

Hey, good morning. I wanted to dive in a little bit on the difference you're seeing between retail and wholesale. So it seems like the trends really slowed down in retail. You lowered your second half comp outlook. It looks like by over 10 points. You really haven't seen that slowdown in wholesale. Is this a replenishment versus discretionary dynamic we're seeing I'm just trying to think about true demand for the category here. Any insights on the channel difference?

Yes. Again, Warren, I would share with you, in the first half, we sold 3 million fewer units direct-to-consumer in the United States. Unit volume was down 6%. But in our exclusive brand, the unit volume went up 7 million units, more than double the decline in units we saw direct-to-consumer. It's a function of where people are shopping. So the weakness in our Retail business, we saw in the first half was largely traffic, we're reflecting in our revised forecast for the year, the risk that those traffic trends may continue into the second half. To help improve the traffic trends, we're investing $40 million in price, $10 million in brand marketing. So I would say the market data, I think the data I saw that the market is probably down some portion of 2%. And I think it's a function we're seeing a channel shift given where people are shopping these days. They're where the mass channel retailers are doing well. The off-price retailers are doing well, especially retail – at least our specialty retail business is under some pressure.

Thanks, Mike. And then another channel question here. Can you step back and give a little diagnostic on why e-com continues to lag the stores pretty persistently here. It's really exciting to hear about the addition of Allison and Raghu go to the team. Can you just give us a little more on their experience and what they'll be focused on as they come aboard?

Sure. So again it's been a consistent experience, this kind of mid-teen decline in e-commerce demand. And e-commerce for many years was our fastest-growing, highest-margin business still is a very high margin, very profitable component of our business. We've been tracking Citi comes out with a weekly spend analysis, 40 different spending categories. And dog food, cosmetics, all different things people spend money on. But there's a line item online pure-play apparel purchases, all ages, including kids, that has consistently the broader scope of apparel purchases online has been down mid-teens. So we've been tracking to that for the past 1.5 years. And I think it's a function of the consumer pulling back. In years past, if you got a text, you got an e-mail, you’re inclined to open it and say, "Oh my, there's a sale, Geez, I wasn't even thinking of buying something. But with that text or e-mail, I'm going to do some shopping. And I think the consumer is just less responsive to some of that unsolicited marketing stimulus. And our e-commerce business for years still is kind of a stock up kind of experience. So you don't go – it's not like Amazon, you go to buy one thing and it gets shipped to you in ours, you buy in six or seven units every time you're shopping online. So that's it's better part of a $70 transaction. We just see fewer people making that type of transaction with this. Again, it's a traffic issue. By comparison in the stores, stores provide immediacy and just the nature of behavior during this – consumer behavior during this inflationary cycle. You're shopping closer to need, buying what's needed and really only when it's needed. And so stores provide immediacy. You can go to one of our beautiful stores and pick up what you need. The average units per transaction in our stores is about four units per transaction. That has stayed consistent. But even there, the traffic has been lower. We're seeing fewer visits. But those who visit the conversion rate, the average transaction, the AUR is about the same, at least that was our experience in the first half.

Thanks, Mike. Good luck.

Thanks, Warren.

[Operator Instructions] Our next question comes from Ike Boruchow with Wells Fargo. Your line is open.

Hey. Good morning everyone. Question on the gross margin – hey, Mike. On the gross margin guide, maybe I'm taking the guide for the year too literally for comparable, but Richard, if you're saying gross margins are down 50% to 75% in Q3, does that imply that they're down substantially more in Q4? Because to get to flattish gross margin, you basically need the back half to be down like closer to 200 basis points. So again, am I overthinking the comparable? Could it still be up a little bit? I mean just kind of walk us through the actual gross margin plan.

No, you're spot on Ike. Forecasts have us gross margin declining 200-some basis points in the fourth quarter, so more dramatic than the third quarter. I would say that the factors that I mentioned for Q3 continue to apply in terms of product cost are a good guy through the fourth quarter. What works against us through the fourth quarter, are those inbound transportation costs start to be higher year-over-year. We do have higher inventory costs, which again is that comparison to inventory releases a year ago, which we're not expecting to repeat. In the fourth quarter specifically, I would say, mix works against us reasonably dramatically. So about half of that decrease in gross margin, I would say, is mix related. So we're planning very good growth in the Wholesale channel. That's been consistent. The Wholesale outlook, I would say, is the least affected by our revisions to our outlook. So we had always planned for very strong growth in fourth quarter wholesale, good response to our fall, winter bookings. And we do have a bit more of off-price channel activity planned in fourth quarter, which is not great on the gross margin line as well. That just reflects some of those excess units in retail now that we will anticipate clearing in the fourth quarter. Those are kind of the puts and takes, but it is a more severe year-over-year decline in gross margin planned in fourth quarter versus Q3?

And the $40 million, if I'm just doing the quick math, that's roughly like 250 basis points of a headwind to you guys in the back half. Is that pricing more like decline more weighted to the fourth quarter? Or is it kind of like going into place right now and you're just kind of offsetting it with more good guidance in the third quarter than you have in the fourth quarter.

I would say the plan is we will likely be more promotional over the holidays. The next big holiday is Labor Day, and then we certainly would be more promotional over the year-end holidays.

Got it. And then, Mike, maybe just – and it's probably too early, but any initial thoughts on AUC user product costs into early next year, just kind of looking at the freight, freight's very topical right now. Obviously, you guys don't renegotiate for a while. But how are we thinking about overall product costs early next year based on whatever visibility you guys have now?

Just two data points. We negotiated inbound freight costs through say, the second quarter of next year and those rate increases from memory were somewhere around 2%. So we're pleased with the outcome of those rate negotiations. We had a good update from one of the cotton experts here in Atlanta, last couple of weeks or so. And the crops are good. If you look at the cotton futures, the cotton futures are trending lower than the current prices. So the outlook on the – one of the key input costs for us as the outlook is currently favorable. So it's early. In October, we'll have more visibility to better part of the first half of 2025 product costs. But the freight, we have visibility to and cotton, most of what we do for a living is cotton-based and the outlook on cotton futures currently is good.

Best of luck, guys.

Thank you.

[Operator Instructions] Our next question comes from Tom Nikic with Wedbush. Your line is open.

Hi. Good morning guys. Thanks for taking my question. I wanted to ask about the comments that stores opened since 2020 are a little bit more resilient than the older stores. What is it about those doors that's different? I mean, is it just that they're newer, so they're going through the maturity curve? Are they in better real estate, like just, I guess, what would you attribute the relative outperformance of the newer cohort of stores?

Yes. So Tom, the whole focus, the real estate strategy is to open in better centers, better co-tenancy, better traffic patterns. In many cases, it's a new center, anything new, draws people to that center. So our focus is as long as we continue to find good real estate opportunities where the unit economics are attractive. We will continue to open stores. We believe in stores. We like stores. Stores are our number one source of new customer acquisition, very best expression of the brand. I believe our stores inspire our wholesale customers. We take our wholesale customers into our stores where they see the full expression of the brand. And on the flip side, we'll continue to close stores. Rarely do we close the store early because 97% of our stores are cash flow positive. So rarely do we close the store before the lease expires. Rarely do we take advantage of the kick out clauses that in the event we signed up to a store that is not going to perform the way we expected rarely we leave early. So even this year, we came into this year initially assuming we'd open up 40 stores and close 10, we're going to close 30 stores this year because as the leases come up, we look at what the opportunity is to stay, what kind of investment would have to be made to freshen it up after a 10-year period. So we will continue to open stores and close stores based on what the real estate opportunities are and what the traffic patterns are on the legacy stores.

Understood. Thanks Mike. And best of luck for rest of the year.

Thanks very much.

[Operator Instructions] Our next question comes from Paul Lejuez with Citi. Your line is open.

Hi. This is Kelly on for Paul. Thanks for taking our question. Just one question on the pricing adjustments in retail. Is it that 20% of the product assortment is getting a mid-single-digit price decrease? Or is that the net impact of it all?

Yes, Kelly, that's the net because if you said 4% on $11, it would be about $0.40 right? So it's – you don't make a $0.40 adjustment to T-shirt. The changes will make – will be some portion of buck or two on key items, opening price point items where the consumer being strapped, there's probably no shortage of consumers opting for some of our competitors selling T-shirts and shorts for $2.50. Our T-shirts and shorts won't be $2.50, but we will get sharper on prices to respond to what's going on in the market.

Got it. And then I was just curious if you're viewing these price investments more as a temporary adjustment reflecting the weakness of the consumer? Or do you believe them to be more permanent?

We currently view it as temporary. We're doing what we need to do because we were less promotional, I would say, in the first half – and we achieved our first half profit objectives. We don't think lowering prices is a good long-term strategy. It's very short-term. But that's the world we live in right now with the consumer under some financial pressure. So we've made significant progress since the pre-pandemic period in terms of improving price realization, improving margins, record gross profit margin in the second quarter, largely through inventory management. Largely through just being smart on the buys, improving the beauty of the product offering, buying the unit smarter, picking – making smart bets on the inventory buys. We'll continue to do that. But we're doing we're going to take a different approach to the second half. Our initial reaction was perhaps we have to do a significant cost reduction. We said it's just probably the time to lean it. Let's get sharper on price points where we need to and let's invest in brand marketing to attract more people to the brand, drive more traffic to our stores and websites. So I view the pricing adjustments as temporary.

Kelly, on the other side of the price spectrum also, while we're investing in getting sharper on prices in the opening price bucket, we also are growing the penetration of our assortment in the best price bucket as well. So our more premium products, where we can probe on price and have – and grow our range of pricing. So that is a margin offset on the other side.

Got it. Thank you. And just given that you're seeing sort of a share shift or traffic kind of moving more towards the wholesale business and you're seeing some traffic weakness in retail – just curious, any initial thoughts on your store opening closing plans as you think about next year?

Just a couple of reactions. So we're thrilled that consumers when they go to Target, Walmart and Amazon, we've got the best-selling brand and young kids apparel there. So as I look at the unit volume what we didn't sell directly to the consumers in terms of the unit decreases direct-to-consumer. We more than picked up on people shopping at our other wholesale customers. That's the beauty of our business. We've got an unparalleled multichannel market presence. So wherever consumers are shopping in a meaningful way. We've got a strong presentation of our brands. And again, going back to the earlier point, if we have a line of sight to stores that real estate opportunities that exist for us in 2025. We're pursuing those opportunities. And we'll share more with you as we get later into the year, early next year in terms of how many store openings. But our plan is to continue to open stores and open stores in good centers where there's good co-tenancy, good traffic patterns, good center and where we reach more consumers. So we've been developing new store models that are focused on the strength of our business, which is Baby and Toddler. Baby and Toddler’s apparel sales represented over 80% of our sales. We carry the older age ranges largely as a convenience to family shopping with a younger and an older child. But we're going to have what we call these Best of Baby stores that we're seeing some early and good readouts. So we're testing new formats and I think a good portion of those stores next year will be in those new store formats to focus on the core of our brands, the most productive components of our brands. Keep in mind, in the second quarter, our Baby and Toddler apparel sales were comparable to last year. The weakness was in the older age ranges.

Got it. And if I could just squeeze in one more here. I think you made a comment earlier in the presentation about your Carter – the growth of the Carter's flagship brands. Did you see the Carter's brand and department stores grow in Q2? And just how should we think about that exclusive versus flagship Carter's brand growth in the back half of the year?

So the Carter's flagship brand largely sold to department stores and club retailers. So we've got some tailored strategies. Kendra referenced the initiative with Kohl's and the Babies"R"Us, which I thought was a smart move on their part, trying to replicate the success they had with Sephora with Babies"R"Us. Babies"R"Us used to be a $100 million customer for us high-margin customer for us. So we're tailoring the strategies for the department store and club store retailers, and we're starting to see some good traction with those initiatives. There's another big opportunity with the off-price channel. I think our unit volume in the off-price channel was down about 70% in the first half, only because we're very clean on inventory. But I've gotten no shortage of calls from our off-price wholesale customers asking us for more product. And the challenge there is we want to make sure it's a good margin for us and a good margin for them. So that's another opportunity that we're pursuing to tailor a strategy that is good for the off-price channel and good for our business.

Thank you.

Thank you. Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to Mr. Casey for any closing remarks.

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

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.