Welcome to Carter's Third Quarter Fiscal 2024 Earnings Conference Call. On the call are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Chief Financial Officer and Chief Operating 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 third 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. Note that statements on today's call about items such as the company's outlook and plans 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.

Good. 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 third quarter results were better than forecasted. Our sales and earnings exceeded the high end of the guidance we shared with you in July. We believe consumers responded favorably to the strength of our product offerings and our new pricing and marketing strategies launched in the third quarter. The better than forecasted sales were driven by our U.S. retail segment. Our U.S. wholesale sales in the third quarter were at the upper end of our forecast and our international sales were at the lower end of our forecast, reflecting a slow start to cooler weather apparel sales in Canada. Earnings in the third quarter were well above the high end of our guidance. Gross profit was in line with our forecast. SG&A was lower reflecting good control over discretionary spending. Inventory levels and cash flow were better than planned. We ended the quarter with a higher cash balance, no seasonal borrowings, lower interest costs and over $1 billion in liquidity. Our best selling product offering continued to be in our baby age segment. Baby apparel sales grew 2% in the quarter compared to last year and contributed over 50% of our total apparel sales. We saw slightly lower sales in the toddler age segment. Collectively, our baby and toddler apparel sales contributed over 80% of our total apparel sales and were comparable to last year. We had a double-digit decrease in sales in our apparel for 4 to 10-year old children. It's largely a playwear product offering and contributed less than 20% of our apparel sales. We believe we have strengthened this component of…

Thank you, Mike. Good morning, everyone. On Pages 3 and 4 of our presentation, we've included our GAAP basis P&Ls for the third quarter year to date periods. On Page 5, we've summarized non-GAAP adjustments to our reported results. This year's third quarter results included a non-cash charge related to the partial settlement of a legacy OshKosh B'gosh pension plan, and last year's third quarter year to date results included charges related to organizational restructuring. I'll speak to our results on an adjusted basis this morning, which excludes these items. Turning to Page 6. We have a summary of our third quarter performance relative to the guidance we provided on our last call in July. As Mike noted, we exceeded our sales and earnings objectives for the third quarter. Our consolidated net sales were above our guidance as a result of better comparable sales in our U. S. retail business. Earnings were also higher than our guidance, driven by higher sales, lower spending, lower net interest costs and a lower effective tax rate. Turning to Page 7 and some highlights of our third quarter performance. Net sales were $758 million in the quarter, down 4% versus last year. We had lower sales in our U.S. retail and International segments, while sales in our US wholesale business were essentially comparable to last year. Operating income was $77 million at an operating margin of 10.2%. I'll speak to the components of operating margin in a moment. Adjusted earnings per share were $1.64 down 11% from last year, less than the year over year decline in operating income as a result of lower net interest expense on lower borrowings, a lower effective tax rate and fewer average shares outstanding due to our share repurchases. On Page 8, we have our consolidated P&L for…

Thank you, Richard. Turning to Page 18. Through the hard work of our team's commitment to innovation and focus on our 3 growth strategies, we are realizing positive momentum in our business. Those growth strategies are grounded in our product, delivering on our customers' expectations of style and value, our unparalleled brand reach where we are improving our experience across 20,000 points of distribution globally, and our marketing focused on acquiring new customers and deepening our connections with our existing customers. Starting on Page 19 with an update on our product strategies. Informed by consumer demand and insights, we started a meaningful shift of our retail product assortment in Q3. Over the next year, we will increase by 10 points of penetration, each our opening priced product and our best more premium fashion assortment. As Mike mentioned, both our opening priced and best categories are delivering positive comp increases. Even with this shift, a significant portion of our business resides in our better mid-tier product assortment where opportunity still remains to improve our style and value proposition. Page 20 illustrates the retail price investment we've made to be more competitive in select opening-priced categories, where we see the least price elasticity and the products are less differentiated from private label brands. These items are basket starters and represent less than 20% of our assortment primarily in the toddler and kid size segments. As an example, our opening price T-shirts and leggings last year would have been priced at $6. This year they were sharply priced at $5. As mentioned, this targeted strategy informed by our enhanced pricing capabilities is helping to drive an increase in conversion and units per transaction in stores and e-commerce versus last year, with e-commerce realizing mid-single digit increases in both metrics. Featured on Pages 21…

Thank you, Kendra. Our expectations for the full year are summarized on Page 32. As noted in today's press release, we are reaffirming our previous full-year outlook for net sales and operating income. We continue to expect full-year net sales in the range of $2.785 billion to $2.825 billion. We're planning lower sales in U.S. retail and international with U.S. wholesale sales comparable to up in the low single-digit range. We're expecting adjusted operating income in the range of $240 million to $260 million. We've raised our previous expectations for adjusted earnings per share by $0.10 to $4.70 to $5.15 to reflect a lower effective tax rate and lower net interest expense than we had previously planned. Turning to Page 33 and our outlook for the fourth quarter, we're planning net sales in the range of $800 million to $840 million. In U.S. retail, we're planning total sales down in the high single-digits to down low double digits. We have maintained our prior guidance of a comp sales decline of 9% to 12%. Our down 7% retail comp in the third quarter was obviously better than this. As Mike said, comps in October are currently running down less than 5%. If this trend continues in the more significant months of November and December, then perhaps we could have some upside to these forecasts. In U.S. wholesale, we're planning sales up in the mid-single digits to high single digits compared to last year, driven by growth in our exclusive brands. International, we're planning fourth quarter sales down in the mid to high-single digit range. Canada is driving the majority of the planned decline in international sales, more on the wholesale side of the business in that market. As I've said, we've seen an improving trend in our retail business in Canada, which represents the majority of the business, especially since the arrival of colder weather in October. With respect to profitability, we're planning adjusted operating income in the range of $70 million to $90 million and adjusted EPS in the range of $1.32 to $1.72. We're monitoring several risks including consumer demand and confidence in the context of the upcoming election. In past years, we've seen some temporary disruption to demand around presidential elections. We're also monitoring the ongoing impact of macroeconomic conditions on families with young children, and the degree of promotional intensity across the marketplace. And with these remarks, we're ready to take your questions.

[Operator Instructions] Our first question comes from the line of Ike Boruchow from Wells Fargo.

Hey. Good morning, guys. I wanted to ask about the gross margins in relation to the pricing strategies you guys are implementing. So the strategies were implemented, and I believe if I'm understanding this correctly, it was basically $30 million in 3Q, $30 million in 4Q in terms of, like, brand investment. But the gross margin decline in 3Q, was better and only down 60. But to get to your kind of full year guide, it looks like the grosses are going to be down somewhere around 300 basis points in 4Q. So just trying to understand how to kind of, like, look at 3Q in relation to 4Q and why there'd be so much more pressure if the price investment dollars is similar and how much pricing just how to think about the promo versus the comp and how you're weighing that?

Sure. So I would say the pricing investment in U.S. retail was closer to that $25 million number in third quarter Ike and a similar amount to your point earmarked for the Q4. You do have a fairly significant mix effect that's different between the fourth quarter and the third quarter. And I think that's a reasonably consistent forecast assumption for us. All along we have planned for very nice growth in wholesale that is the lower gross margin part of the business. So that is one key difference between Q3 and Q4. I wouldn't say we're planning gross margins down 300 basis points, probably close to 200 basis points, but fairly consistent pricing investment in U.S. retail $25 million each of the third fourth quarters.

But is it fair to say Richard that you're on promo or discount or pricing, whatever, however you want to characterize it, is that going to be deeper in the fourth quarter relative to what you're doing during Labor Day in the third quarter?

Typically, Ike, in the holidays with Black Friday year over year typically tends to be more promotional. I think the big progress we made in the third quarter was knocking down the prior season goods spring and summer. Our prices on the prior season goods were down about 10% in the third quarter. On the in season goods where we got sharper, just more competitive on certain key items, prices were only down about 3%. So we made very good progress moving through the prior season goods, which puts the inventory position heading into the balance of this year in better shape than it otherwise would have been.

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

Terrific. Thank you. My question is just about how that compares on the U.S. retail side look post October. In other words, like what are you lapping versus last year in November December? And then I have a follow-up after that.

In terms of comp changes, up easier comparisons, tougher comparisons. So looking at fourth quarter last year, comps were down around 6% and we're planning them down somewhere in the range of 9% to 12%. So again, it's that comp was probably one of the better comps we had in the fourth quarter last year relative to the previous three quarters last year. So we had a good fourth quarter. Typically, we have a good fourth quarter. Christmas is a kid's holiday and given our value proposition, the low price points, people are buying their Christmas pajamas in the fourth quarter. So we hope there's more upside than downside relative to our U.S. retail guidance in the fourth quarter given current trends.

Understood. If I could follow-up on that, a little bit different question, but how do we judge the ROI of the pricing investments and how are you judging it?

Return to growth in unit volume. We have been losing ground in unit volume. The whole focus of these pricing strategies and marketing strategies are to reengage the consumer who swung over to mass channel and off price retailers when inflation surged in 2022. That's where we started to lose ground. Prior to the pandemic, we had 31 consecutive years of growth, had a strong recovery in 2021, '22 started off to be a good year and then when inflation hit, consumers swung over to the mass channel and off-price retailers trying to reengage them. And it seems as though some of the strategies particularly online, we are reengaging that consumer. And we got sharper on prices starting in August and September, because we felt as though we had widened unintentionally widened the gap between our prices and the competition. The first quarter this year started out good in the market, second quarter got notably weaker, consumer confidence dropped like a rock in the second quarter. Inflation in the first quarter was being described as moderating, second quarter being described as sticky. Gas prices were trending higher. So we saw the market weaken in the second quarter, we saw our competitors dropping prices, they dropped prices because they needed to move through the goods and drive traffic to their stores because our inventory position was good in the second quarter, and we felt as though the product offering and the inventory position was in good shape. We didn't participate in those deep discounts in the second quarter, but decided to take a different strategy in the second half, particularly and we got beat Memorial Day in the 4th of July shopping holidays. We had a growth in comparable sales in Labor Day. We had a very good Labor Day. So we see just by narrowing that spread between our prices and private label competitors and other brands, the consumer responded to it and we reengaged them. The plan is to continue to reengage them in the balance of the year and then decide what's the best strategy for 2025.

And Jay, just to add to that, Mike mentioned our units, you want to see unit growth, but that is over the whole basket. So not only are these goods lifting with the reduced prices, but we're seeing these items be basket starters for her and then she's adding other items into her basket. So we're seeing a total UPT lift, not necessarily just in these items.

Yes. Transactions were up, conversion rates are better, and the comp trends are better. So that's how we're measuring the return on investment.

Our next question comes from the line of Chris Nardone from Bank of America.

How should we think about this $60 million in pricing and marketing efforts in the back half of this year, as we move into the first half? Should that stick around next year? And then just in terms of your pricing strategy, do you see risk that some of your competition could continue to get more promotional into next year? And how would you balance kind of maintaining your margins with also striving to improve the comp growth rate into 2025?

Yes. Keep in mind, Chris, that we a good portion of the pricing at least to date has been focused on improving the mix. So I think the prior season goods were probably some portion of 50% of our retail inventories at the end of the second quarter. Today they are closer to 10%. That's where you want it to be. Prior season goods, you want a better mix of fall and holiday product in the stores and online at this time of year. So if we continue to make sure that we manage inventory, we shouldn't see the level of promotions that we saw in the third quarter and some portion of the fourth quarter.

Okay. And then just on your wholesale business, as we think about the color you gave on your order book for spring, summer, how might that differ between your exclusive and non-exclusive partners?

We would expect better continue to expect better performance with the exclusive brands. That's where people are shopping these days and we're benefiting from that. We go into Target, go into Walmart, you'll see the probably the most dominant brand presence is the Carter's brand at both those retailers. So we're benefiting from that traffic. So we would expect that, that would continue to be a good source of performance for us in 2025.

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

Sorry if I just missed this, but did you say if you expect the gross margin pressure that you're seeing in the fourth quarter to continue into the first half of next year, should we expect the pricing investments. You seem happy with what it's doing from unit perspective. So should we expect the price investments to continue through first half? And then should we expect a similar level of gross margin decline? Or maybe could it be a little worse? I think you mentioned there was some AC pressure as well in the spring season. So maybe if you could just talk about the outlook, first half gross margin.

Paul, I would say probably too early to comment on specific expectations for gross margin for next year. We'll share more of those plans for you on our February call. What we've said in the past is that a number of product input costs continue to be favorable. Cotton in particular, has been favorable, that we'll -- our expectation extend into next year. Labor continues to go up, transportation costs are higher. So we are expecting in the first part of next year, that's what we have a good line of sight to, I'd say, kind of modest, low single-digit inflation in product cost. That's kind of what we're expecting right now. We're still in the process of working through fall. So we don't have line of sight to that. But we'll give you our expectations for gross margin when we get on the February call.

The opportunity, Paul, in the first half, if the consumer responds well to the spring and summer product offerings, best margin is on products selling well. So if we bought it right, and it's selling through, that's the opportunity on the margin side in the first half of next year relative to what we experienced this past year.

Got it. And then just -- can you talk about the sell-through rates at your 3 large wholesale accounts. Just what you're seeing there? What were the drivers of the slightly lower wholesale guidance for the year?

I would say on the wholesale forecast, really two things. One, I'd say good continued momentum with the exclusive brands. We had replenishment demand planned up fairly considerably in the fourth quarter. We're still planning for very good growth in replenishment, just not quite at the level that we saw before. And I'd say a little air came out of the balloon in the department store group of customers. Some orders moving to the right, a bit more in terms of order cancellations and their replenishment demand a bit down relative to our previous expectations. But those are the majority of the revisions.

In off-price sales were planning lower relative to what we thought in July.

Our next question comes from the line of William Reuter from Bank of America.

My first on the pause of your share repo. Did you say for what time period you're putting this on pause? And I guess, is it just based upon paying out in excess of 100% of your free cash flow? And will that kind of always be the kind of the guardrails for share repo going forward?

So I think in recent years, we've used our forecast for free cash flow to guide the amount of distribution of capital that we make. We're fans of returning capital. So the pause relates more to the balance of this year. As I said, we continually talk about this with the Board and as our plans come together for 2025 and beyond, we'll certainly visit it. But our forecast for free cash flow has come down a bit relative to our initial expectations coming into the year. We don't think it's appropriate to take on debt for the sole purpose of returning capital. And so since that forecast for free cash flow has come down a bit, we think it's appropriate to modify our return of capital plans, but we'll continue to revisit it.

Great. And then in terms of bigger picture, clearly these price investments were meant to kind of seed, or I guess stop the seed of share to some of these lower price point private label products that you're seeing in mass. How do you feel that you did versus the category in the third quarter? I know data points can be somewhat limited, but based upon anything you can see, how do you think your share fared?

We gained share in baby and toddler apparel. That's over 80% of what we do for a living. So we're pleased with the results.

[Operator Instructions] Our next question comes from the line of Jim Chartier from Monness, Crespi and Hardt.

Good morning. Thanks for taking my question. I'm just -- I just wanted to ask about the assortment shift towards, better, and best, and good. Is there a plan to go deeper on units in those parts of the assortment or are you adding additional products to the assortment?

Hi, Jim. This is Kendra. I would say it's both. So we will be investing more depth and breadth, and particularly our best categories, leaning into our new brands and new assortments that fit there in the good bucket. I would say it's a little bit more depth than it is breadth, but it will be both.

Great. And then in terms of the pricing promotions this year, third quarter, was that primarily focused in the good part of the assortment? Or is there some of that, or I guess in the better part of the assortment? Or is there some of that in the good part as well?

It was almost entirely in the good portion of our assortment. So those are items like T-shirts, leggings, some other kind of stock-up basket starter items that are most competitively, positioned against private label brands, where there is little differentiation in the product and where we saw private label really go deep and low on those prices. So it's mostly in the good bucket, almost entirely in the good bucket, and mostly around toddler and kid assortments as well.

And Jim, just again a refresher, what we saw in the second quarter because business generally slowed in apparel sales generally. We saw some of our competitors selling kind of basic product, T shirts and shorts for $2.50 each. I would describe that as thrift store-level pricing. And we didn't go down to that level, but we did narrow the gap between our pricing and our competitors' pricing. Once that product cleared through, their prices came up. I think another important thing to know in some cases where we lowered prices, we didn't see the unit velocity, so we raised the price back up. So this isn't a one-way street. When we lowered it and we saw a noteworthy trend change in unit velocity, we stuck with those prices where we didn't see an improvement in unit velocity, we restored the pricing.

And then any gross margin implications from the mix shift next year? You're increasing a good assortment 10 percentage points. Is that going to be a headwind to gross margin next year?

The shift in product competition doesn't have a huge impact to our gross margin rate.

It should be a net benefit because the mid-tier isn't working because it's not working, particularly in that older age segment 4 to 10 we had to get much more promotional to clear it out. The consumer just didn't see sufficient differentiation between the good, which is good-looking product and the best. It was -- it got caught in the middle and they opted for one in the other and not the mid-tier. So we had to promote it. If we get the mix right, you'll have less pressure on the margin.

Our next question comes from the line of Carla Casella from JPMorgan.

Just 2 follow-ups and one you may have answered, but I dropped for a moment. Did you say the impact to the warmer fall weather you've had has on either ending the third quarter inventory or thoughts for a third quarter and whether there could be any clearance related to that?

Well, I would say we certainly always have a weather impact. It did warm up in the final two weeks of the quarter in the U.S. and in Canada, which slowed sales a bit. I would say that over the course of the entire third quarter, we made very good progress moving through the spring and summer inventory, which would otherwise have been problematic going forward.

The natural stimulus every year. When that weather turns cooler in the second half of the year, we see a nice lift in sales. And then again, in the spring, when weather turns from cool to warm, we see a nice lift in sales. It always comes hard to predict with certainty when it comes, but as weather turns cooler in more parts of the country, we've seen business trends improve.

Okay. Great. And then just one question. Can you just remind us how much you import from China? And any thoughts you have on potential tariffs if takes the White House?

Yes. So we've been diversifying the countries of origin over time, probably the past 5 years or so, the amount of finished goods now coming out of China is less than 5%. And so we've -- even our China-based suppliers have built capacity for us in Cambodia and Vietnam, we've got first-class suppliers in India in Indonesia. So the exposure, I believe, to tariffs is significantly reduced relative to where we were, say, 5 years ago. The likelihood tariffs put on children's apparel, I don't think that will be on the short list, but time will tell.

Thank you. At this time, I would now like to turn the conference back over to Mr. Casey for closing remarks.

Thanks very much. Thank you all for joining us this morning. We wish you all and all of your families a happy holiday season, and we look forward to updating you again on our progress in February. Goodbye, everybody.

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