Title

Presentation

Operator: Welcome to Carter’s Fourth Quarter Fiscal 2022 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President and Chief Operating Officer; and Sean McHugh, Vice President and Treasurer. After today’s prepared remarks, we will take questions if time allows. Carter’s issued its fourth quarter fiscal 2022 earnings press release earlier this morning. A copy of the release and presentation materials for today’s call have been posted on the Investor Relations section of the company’s website at ir.carters.com. Before we begin, let me remind you that statements made on this conference call and in the company’s presentation materials about the company’s outlook, plans and future performance are forward-looking statements.

Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company’s most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company’s website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company’s earnings release and presentation materials. Also, today’s call is being recorded. And now I would like to turn the call over to Mr. Casey.

Michael Casey: Thank you, Shannon, and good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I’d like to share some thoughts on our business with you. Another historic year is behind us. It was our third in a row. In 2020, Carter’s worked its way through a once-in-a-lifetime global pandemic and retained a higher level of profitability than most in our peer group. In 2021, we saw a strong recovery and achieved record profitability, driven by structural changes in our business and unprecedented government stimulus that supported families with young children. And in 2022, a 41-year high in inflation drove a surge in gas prices and food prices, slowed the economy and demand for our brands.

2022 got off to a good start. Early in the year, we saw high single-digit growth in our comparable retail sales through February. This time last year, our wholesale customers were placing their orders several weeks early to mitigate the risk of supply chain delays caused in part by port congestion. We expected 2022 would be a continuation of the strong post-pandemic recovery that we began to see in the prior year as consumers came out of COVID isolation had access to vaccines and began to reconnect with families and friends. By the spring of 2022, it became clear that inflation was not transitory. Inflation peaked at over 9% in June and continue to weigh on consumers in the balance of the year. When we updated you on our progress in October, we widened the range of our fourth quarter sales and earnings forecasts.

Our guidance reflected the uncertainty of forecasting holiday demand given the historic level of inflation and its impact on families with young children. Thankfully, we achieved our fourth quarter sales and earnings objectives. We saw stronger-than-planned demand in our wholesale and international segments. In our Retail segment, our comparable retail sales were down about 13%, at the midpoint of our guidance for the quarter. We were comping up against a strong fourth quarter the prior year, which was the first holiday season in the post-pandemic period. In the fourth quarter, we achieved a mid-single-digit price increase, which fully offset higher product input costs. Improved price realization enabled each of our three business segments to achieve a double-digit operating margin in the fourth quarter.

During the pandemic, we made structural changes to our business that helped us drive that margin performance including a reduction of low-margin product choices, closure of less productive stores, opening of higher-margin stores, investments in inventory management and pricing capabilities, a reduction in promotions and improved price realization. At year-end, inventories were up 15% better than we forecasted with better than forecasted earnings and inventory levels cash flow for the year was also better than we expected. For congestion on the East Coast and West Coast has largely cleared. As a result, our supply chain performance improved meaningfully in the final months of the year. For the first time since the pandemic began, we launched our new spring product offerings on time and in full.

We believe those on-time deliveries provided a much better experience for consumers as they began shopping this year. Demand for our brands improved sequentially each month in the fourth quarter with improved supply chain performance, we have better mix and the level of inventories over the Thanksgiving and Christmas holiday shopping periods. We stepped up promotions in December to work down prior season inventories. And as a result, we are entering 2023 in a better-than-planned inventory position with a higher mix of our new product offerings. Early selling of our new spring products is off to a good start. Our sales and earnings in January were better than last year and better than we forecasted. Traffic and sales slowed in our retail segment in February comparable sales are down less than 5% quarter-to-date.

January and February are two of the lightest months of the year by comparison March is one of the largest months of our year in terms of sales and earnings contribution. When we update you again in April, we’ll have March results and Easter selling which will give us a clearer view of how the young children’s apparel market and our business is trending this year. For the year, our sales in 2022 were down about 8%, and I think it’s fair to say that historic inflation weighed on families with young children by at least 8% last year. Carter’s target consumers are women and men in their late 20s and early 30s. This is typically a time in their lives when many marriages occur and family formation often begin shortly thereafter. These women and men are earlier in their careers, just starting out together and working hard to make ends meet.

Our target consumers’ household income is about $75,000 a year. We believe this segment of the population has been particularly hard hit by inflation, it’s a time in many young family’s lives when they are living paycheck to paycheck and they’re not alone. It was reported last year that nearly two-thirds of Americans were living paycheck to paycheck. That’s a historic high. In 2022, we expected a more challenging comparison to our record profitability in the prior year, driven in part by the post pandemic recovery in 2021 and government stimulus payments. While we did not expect were the combined effects of the absence of that stimulus and the surge in inflation. Our retail segment was the largest contributor to our sales and profitability last year, our Retail segment achieved a 15% operating margin, driven by better price realization and productivity improvements.

In 2022, our retail sales and profitability were weighed down by a 10% decrease in comparable retail sales. Our retail profitability was also impacted by higher ocean freight rates and inventory provisions. In 2022, we saw the best comparable sales in our mall store locations. The lowest comps were in outlet centers. As we’ve seen in years past, when gas prices surge, the outlets are most affected given their distance from densely populated areas. Our Southeast region outperformed the other parts of the United States our stores in the Midwest appear to have been most affected by weaker economic conditions. And our stores in tourist locations had a strong recovery last year with positive comparable sales as many families brought up on long-delayed vacations.

In 2022, our wholesale sales decreased 4%, reflecting lower demand from Carter’s brand customers, including department stores, club retailers and off-price retailers. Each group of retailers reduced orders when consumer demand slowed and inventory backed up last year. We also saw a higher rate of order cancellations last year from our wholesale customers due to late deliveries from Asia. Understandably, as consumer demand slowed last year and their inventories grew to higher-than-desired levels our wholesale customers canceled orders for our planned shipments that were running late. In 2022, our international sales grew to over 14% of our total sales. This segment of our business was least affected by the government stimulus in 2021 with sales down only 2% last year.

We saw lower demand in Canada driven, we believe, by inflationary pressure on consumers, similar to our experience in the United States. We also saw lower demand from some of our multinational wholesale customers who curtailed inventory commitments given the slowdown in demand they experienced last year, most notably in Europe. We saw growth in Mexico and with smaller wholesale partners representing our brands in over 90 countries. For 2023, we are forecasting lower sales and earnings. We expect to see the largest decrease in sales in earnings in the first half this year with decreases heavily weighted to the first quarter. We’re comping up against good growth in our U.S. wholesale and international sales in the first quarter of 2022. We expect our trend in sales and profitability to improve beginning in the second half of this year.

In the second half of last year, we experienced unusually high wholesale order cancellations caused by late deliveries from Asia. We also saw a suspension of replenishment orders in the second half last year which helped our wholesale customers reduce elevated inventory levels caused by the unexpected slowdown in consumer demand. With better on-time shipping performance in a better inventory position this year we expect wholesale order cancellations will return to historically low levels. We are also forecasting lower product costs and ocean freight rates, which we expect will contribute to growth in our second half earnings. For the year, the largest decrease in demand in 2023 is expected from our U.S. wholesale customers with wholesale sales planned down about 10% this year.

The largest decreases are expected from our department store customers and off-price retailers. We have also temporarily suspended shipments to Buy Buy Baby given the challenges they are currently working through in their business. Our exclusive brand sales are planned down slightly this year, which we believe reflects conservative planning by those retailers rather than higher than desired inventory levels. We have visibility to our inventory levels in the Wholesale segment with the benefit of significant order cancellations and suspension of replenishment orders in the second half last year. Our wholesale customers have a better level and mix of inventories as they begin 2023. Our U.S. retail sales are planned down about 6% this year. That’s in line with the projected decline in the young children’s apparel market.

Nearly 70% of young children’s apparel is purchased in stores. Our stores are the number one source of new customer acquisition. We plan to open over 50 new co-branded stores this year. Since the pandemic began, we have been closing more low margin stores upon lease expiration and opening new higher margin stores in high traffic centers. Since 2019, we have closed over 100 low margin stores, which has reduced our retail sales by over $100 million in improved profitability by over $10 million. Our new stores opened in 2022 and 2023 are expected to contribute about $40 million in sales this year with high-teen operating margins. Our stores increasingly provide a higher service level to online shoppers, including the same day pickup of digital purchases.

In 2022, 35% of our online transactions were supported by our stores up from 28% the prior year. These are margin accretive transactions and they drive traffic to our stores. In the years ahead, we expect our stores will support a higher percentage of our online transactions. eCommerce continued to be one of our highest margin businesses driven in part by our low return rate. Net of exchanges, our online return rate last year was about 3% that’s a fraction of the apparel industry return rate. We believe our low return rate is an indication of the strength of our product offerings, compelling value proposition, and consistently good experience, consumers have with our brands. Our international sales this year are planned comparable to last year growing to 15% of our total sales in 2023.

Consistent with our experience last year, we are expecting growth in Mexico. We’re making good progress opening larger co-branded stores in Mexico. We plan to open 12 stores this year and expect to more than double our square footage in Mexico in the years ahead. Our wholesale partner in Brazil, Riachuelo opened its 48th Carter store this past year and is planning continued store expansion this year. We expect sales in Canada will be slightly lower this year. That said, we’ve seen our competitors in Canada downsize this past year. As they downsize, our marketing team is focused on acquiring their customers, which may further strengthen our number one market share position in Canada this year. Our international wholesale sales are also expected to be slightly lower this year.

We’re planning lower sales in the Middle East, Central America and Europe, those decreases are expected to be largely offset by growth in Brazil and Argentina. Collectively, our international wholesale customers outside of North America contributed over $100 million in sales last year and those sales were margin accretive. Assuming continued moderation and inflation, improving consumer confidence and growth in the economy, we are forecasting a return to more stable growth in our business beginning in 2024. Prior to the pandemic, Carter’s achieved 31 consecutive years of sales growth and during the market disruption over the past three years, we believe Carter’s achieved top quartile operating margins relative to our peer group. In the years ahead, we believe our growth in sales will be driven by the growth of our exclusive brands selling through the most successful retailers in the world Target, Walmart, and the Amazon.

Our exclusive brands are traffic drivers to these retailers and provide product to offerings, which are complementary to the private label brands. Last year, our marketing and sales teams worked collaboratively with Target and Walmart to refresh our branding in their stores in on target.com and walmart.com. Every week, over 100 million people shop in Target and Walmart stores. We expect that consumers shopping for young children’s apparel will now see a stronger presentation of our Carter’s brand in those stores in the years ahead. Our new eco-friendly Little Planet brand for babies and toddlers is growing ahead of plan with our wholesale customers. Little Planet is one of our more innovative product launches in recent years, utilizing organic cotton and recycled materials to provide a beautiful and sustainable product offering for families with young children.

Little Planet is sold through Target, Kohl’s, Amazon, and Babylist, as well as through our retail and international segments. Sales of our Little Planet brand doubled last year and the wholesale distribution of Little Planet is expected to expand from less than 500 doors last year to over 1,500 doors in wholesale this year. We expect that our growth in the years ahead will also be driven by new store openings. Given our progress with improved price realization, more attractive store opening opportunities in the United States are now available to us. As our competitors downsize given challenges in their businesses, we plan to capture those new market opportunities with what we believe are the best looking and most profitable stores in young children’s apparel.

We believe our stores enable the success of our eCommerce business last year. U.S. eCommerce sales were 37% of our total U.S. retail sales, and as we grow our physical brand experience, we expect to extend the reach of our brands in new markets and further improve the convenience of shopping in our stores and online. In international markets, we expect our growth will be driven through new omni-channel capabilities in Canada and Mexico, expansion through our wholesale partner Riachuelo in Brazil, and growth with other wholesale customers representing our brands in over 90 countries through over 1,200 points of distribution and 100 websites globally. In recent years, we’ve improved our marketing capabilities, including leveraging our loyalty and credit card programs to better understand and service consumers through more personalized marketing.

We expect that these new capabilities will also be used to extend the reach of our brands to an increasingly diverse demographic through our multi-cultural marketing initiatives. And with a nearly 40-year high-end weddings last year, many delayed during the pandemic. We expect that the favorable trend in birth that began during the pandemic may continue in the years ahead. Baby apparel represents over 50% of our total apparel sales. It continued to be our strongest performing product offering last year with sales down only 3%. Our Carter’s brand has the number one market share in newborn baby apparel with over 5 times the share of our nearest competitor, and we believe it is uniquely positioned to benefit from a favorable trend in births. We expect that our profitability in the years ahead will be driven by a higher mix of omni-channel sales, a better mix of higher margin stores, and a greater concentration of our wholesale business with fewer, better and growing retailers.

We expect our profitability will also be driven by improved pricing and inventory management capabilities and a favorable trend in product costs and ocean freight rates, more effective brand marketing and continued return of capital through share repurchases. In summary, we achieved our fourth quarter objectives. Near-term, we expect sales and earnings will be affected by persistent inflation, which continues to weigh on consumer demand and is causing more conservative inventory commitments by our wholesale customers. We expect that the trend in our sales and earnings will improve in the second half this year and we expect more stable growth thereafter as inflation moderates, the global economy improves and consumer confidence rebuilds. Given the near-term pressure on sales, we are reigning in discretionary spending this year and focused on margin preservation and cash flow.

We expect to generate over $300 million in operating cash flow this year, which we believe supports our planned investments in e-commerce capabilities, store growth, distribution capabilities and related technology investments. We made good progress with our return of capital initiatives last year, including $300 million in share repurchases. We plan to continue distributing excess capital to our shareholders this year. Over the past 10 years, we’ve distributed $2.8 billion of excess capital through dividends and share repurchases, which represented over 100% of our free cash flow during that time period. We believe Carter’s is the best-in-class in young children’s apparel. Our Carter’s brand is sold in over 20,000 points of distribution globally and on the most successful websites for young children’s apparel.

Our Carter’s brand is the best-selling brand online in North America together with our wholesale customers, the online retail sales of our brands last year exceeded $1.2 billion. Carter’s is a market leader. No other company in young children’s apparel has the scope of product offerings, depth of relationships with the winning retailers and a long track record of success for many years, serving the needs of multiple generations of consumers. We believe we’ve weathered historic market disruptions in recent years better than most, and we are well positioned to benefit from the market recovery in the years ahead. I want to thank our employees throughout the world, who enabled a stronger than planned fourth quarter and for their commitment to help Carter’s achieve its growth objectives this year.

Richard will now walk you through the presentation on our website.

Richard Westenberger: Thank you, Mike. Good morning, everyone. Beginning on Pages 2 and 3 of our presentation materials, we’ve included our GAAP P&Ls for the fourth quarter and full year period. Page 4 summarizes adjustments to our GAAP results for the fourth quarter and fiscal year for both 2022 and 2021. I draw your attention to two items in particular. In the fourth quarter of 2022, we recorded a non-cash pre-tax charge of $9 million to adjust the carrying value of the Skip Hop trade name. This adjustment is due to lower forecasted sales and earnings for the Skip Hop business, in part due to changes in its wholesale customer base, including recent developments regarding the outlook for Buy Buy Baby. Earlier in 2022, we recorded a $20 million pre-tax charge related to the early repayment of debt, which we raised in the early days of the pandemic and fortunately proved to be additional liquidity, which we did not need.

This information is included for your reference, this morning, I will speak to our results on an adjusted basis excluding these items. On Page 5, we have some overall metrics for our performance in the fourth quarter. Net sales were $912 million, a decline of 14% versus last year. Sales exceeded our previous guidance due to stronger than planned demand in our U.S. wholesale and international businesses. Our retail and wholesale businesses in the U.S. accounted for most of the sales decline versus last year as high inflation continued to weigh on consumer spending and many of our wholesale customers took aggressive action to manage their inventory positions. Our fourth quarter earnings also exceeded our prior guidance reflecting higher sales, good management of spending, and a lower tax rate.

Q4 operating income was $119 million, representing a 13% operating margin, which was comparable to the prior year. Adjusted EPS of $2.29 was down only slightly from last year as lower interest expense, the lower tax rate and lower shares outstanding largely offset the decline in operating income. On Page 6, we have a bit of a scorecard on how we performed in the fourth quarter relative to what we thought was possible when we updated you on our last call in October. Overall, our consolidated sales, profitability and cash flow were well above the objectives we set forth in October. Our full year performance is summarized on Page 7. Our 2022 sales and profitability declined versus 2021, reflecting the adverse effects of inflation on consumer demand and on a number of elements of our cost structure.

Despite what proved to be a very challenging environment in 2022, we were pleased that we achieved a full year adjusted operating margin of 12.1%. We use operating margin as a key metric in evaluating the performance of our business and as Mike said, we believe 12% represents top quartile performance among the peers we track. Moving to Page 8, we have our P&L for the fourth quarter. As I mentioned, net sales declined 14% to $912 million. We were pleased with our continued progress in pricing, which was up about 5% overall given what turned out to be intense promotional activity by many of our competitors across the industry. Our adjusted gross margin held in well versus last year down 80 basis points. Year-over-year gross margin benefited from a higher mix of U.S. retail sales and the absence of spending on air freight, which we incurred a year ago to expedite delayed product.

Higher costs related to e-commerce shipping and higher ocean freight rates continued to weigh on gross margin in the quarter. We saw continued improvement in the performance of our supply chain as we move through the second half of the year. While transit times from Asia remain elevated congestion at both east and west coast ports has eased considerably. We’re seeing lower spot prices in the transportation market and expect to see a benefit from a decline in these costs beginning in the second half of 2023. Expenses were well controlled in the fourth quarter. SG&A declined $59 million or 16%. Despite lower sales, we achieved 80 basis points of leverage on spending versus last year. The decline in spending was driven across a number of areas, but most notably lower performance based compensation, marketing and lower distribution and fulfillment costs.

Adjusted operating income in the quarter was $119 million, representing an adjusted operating margin of 13%, which as I mentioned earlier was comparable to the prior year. Below the line, interest in other expenses were $6 million lower than 2021, principally due to the retirement of $500 million of pandemic related senior notes in the second quarter. Our effective tax rate was 20.2% in the quarter compared to 21.5% in the prior year. The lower rate in 2022 reflects in part a lower mix of earnings generated in the U.S. Our weighted average share count was meaningfully lower than a year ago due to our share purchases in the past year. On the bottom line, adjusted diluted earnings per share were $2.29 nearly comparable to $2.31 in the prior year.

Our full year P&L is included on Page 9 for your reference. We’ve made a number of changes in how we run the company during the pandemic, better focusing our product assortments, improving price realization and managing inventories more effectively driven by these changes and in part by the unprecedented amount of government stimulus we achieved record profitability in 2021. Our sales in each of our business segments declined in 2022 with our U.S. retail business accounting for the largest share of the decrease. Again, full year adjusted operating margin was 12.1% compared to last year’s record of 14.4%. Weighing on profitability in 2022 were meaningfully higher ocean freight rates, which proved to be an industry wide issue this past year, higher inventory provisions and fixed cost deleverage due to lower sales.

These headwinds were partially offset by continued progress in improving realized pricing, lower provisions for performance based compensation and the benefit of closing low margin stores and significantly less spending to expedite product from Asia via air freight. On Page 10, we summarized some highlights of our balance sheet and cash flow. Carter’s continues to have a very strong balance sheet. Total liquidity at year end was over $900 million, including over $200 million in cash on hand and the vast majority of our $850 million revolving credit facility available to us. Our leverage is low 2.6 times on a lease adjusted basis, which provides us with significant financial flexibility and is a distinct advantage in the current environment.

Q4 ending inventory was $745 million up 15% year-over-year and I’ll speak more about inventory in a moment. We generated over $300 million of operating cash flow in the fourth quarter, bringing our full year operating cash flow to $88 million. Full year operating cash flow declined versus last year due to lower earnings, higher inventory and changes in the timing of vendor payments. We are forecasting strong operating cash flow in 2023 of over $300 million as inventory levels are planned to decrease, particularly pack and hold inventory. Lastly, we returned $418 million to shareholders in 2022, comprised of $118 million in dividends and $300 million in share repurchases, which represented 9% of shares outstanding at the beginning of 2022. Turning now to Page 11 with some additional detail on inventory.

The 15% increase in year-end inventory was less than we had forecasted. Throughout 2022, we took action to better align our inventory with the trend changes we saw in consumer demand and to respond to higher order cancellations from wholesale customers, which were also responding to weaker than planned demand. One such action was to pack and hold some inventory that we determined we would sell in the future beyond the season for which it was originally intended. We employed this strategy successfully in response to the demand decline, which occurred during the pandemic. Our pack & hold inventory at the end of 2022 was approximately $100 million comprised mostly of fall and winter 2022 product, which we expect to sell in 2023. During the pandemic, we sold through about the same level of pack & hold inventory at good margins and we’re anticipating similar favorable results again this year.

The quality of our inventory overall is strong. We entered 2023 in a better position than a year ago with less prior season carryover and an improved mix of new product. Our forecasts reflect lower year-over-year inventory balances in each quarter of 2023. Higher product costs also contributed to the year-over-year increase in inventory. Product costs for the first half of 2023 are planned up in the mid-single-digit range. The outlook for product costs for the second half and beyond looks favorable with the reduction in global demand leading to lower input costs and greater factory capacity. Turning to Page 13, a summary of the performance of our business segments in the fourth quarter. Despite the negative impact high inflation had on demand and operating costs, we maintained a strong consolidated adjusted operating margin of 13% and each of our business segments achieved a double digit adjusted operating margin in the fourth quarter.

Our full year segment performance is included on Page 14 for your reference. Our consolidated adjusted operating margin was 12.1% and similar to the fourth quarter, all segments achieved double-digit adjusted operating margins in fiscal 2022. On Page 15, we’ve summarized some of the performance drivers for each segment in the fourth quarter. U.S. retail sales declined 13% as inflation continued to weigh on consumer demand. Comparable sales declined 13% within the down 10% to 15% range we indicated on our third quarter call. This decline in retail comps was up against a plus 15% retail comp in last year’s fourth quarter. We saw a noticeable improvement in trend in consumer traffic and demand late in the year near to Christmas holiday. In Q4, we ramped up our promotional activity in December somewhat in order to work through some excess inventory, but overall, we continue to make progress in improving pricing with average unit retail pricing up mid-single digits.

U.S. retail’s adjusted operating margin was 17% compared to 19.5% last year. Higher product and transportation costs and expense deleverage more than offset the benefits have improved price realization and lower performance based compensation. In our U.S. wholesale business sales declined 18% versus a year ago. Transportation delays particularly earlier in the quarter at the East Coast ports continued to be an issue in the fourth quarter. These delays in concert with lower consumer demand in their businesses and in some cases mandated inventory reduction actions led to order cancellation rates above historical levels. However, order cancellations overall in the fourth quarter were lower than we had forecasted and replenishment demand was stronger than expected.

Some customers asked for Spring 2023 product to be shipped in December versus in January as originally planned, and this new Spring product is now selling well at wholesale. U.S. wholesale’s adjusted operating margin was 12.7% compared to 14.1% in the prior year. Better pricing, lower spending on air freight and lower compensation expenses were more than offset by higher product costs, higher ocean freight rates and expense fee leverage on lower sales. Fourth quarter international sales declined 12% with a decline of 8% on a constant currency basis, given the strength of the U.S. dollar. Sales in Canada declined 11% on a reported basis, but were down only 4% on a constant currency basis, largely due to lower wholesale demand. Sales in Mexico grew 11% on a reported basis with growth of 7% on a constant currency basis driven by strong growth in the direct-to-consumer component of the business.

The adjusted operating margin for the International segment was 16% in the fourth quarter, up 30 basis points compared to 2021. This improvement reflects better price realization and lower performance based compensation, which were partly offset by higher product and transportation costs. On the next few pages, we have some highlights of some of our recent marketing efforts. On Page 16, on recent calls, we’ve highlighted our eco-friendly Little Planet brand. Today’s consumers, especially millennial and Gen Z parents want to shop with brands that they believe share their values. In particular, sustainability is very important to today’s parents, and this is at the heart of Little Planet’s DNA. In 2022, we expanded into toddler product and we’ve added swimsuits and outerwear made from recycled materials.

We have meaningful growth planned for Little Planet both in product assortment and distribution. We believe that in less than two years, Little Planet has become one of the top three organic and sustainable brands in young children’s apparel in the U.S. Also, Little Planet was recently named the Best Affordable Organic Baby Clothing Brand by Glamour Magazine. On Page 17, our partnership with Hilary Duff continues. Hilary is an extremely popular millennial actress, singer and mother of three children. As our Chief Mom Officer, Hilary has been a great ambassador of the Carter’s brand. We saw a strong demand for the apparel collection developed in partnership with Hillary last winter and the latest Hillary apparel collaboration for Spring just launched online and includes a new signature print and an on-trend neutral aesthetic.

On Page 18, our engagement efforts also continue on social media. Carter’s leads the children’s apparel category on social media, including on TikTok in followers, views and overall engagement, keeping our brand front and center on the platforms where new parents are engaging. On Page 19, our marketing team continues to find creative ways to drive awareness and relevance of the Carter’s brand. The day after the Super Bowl, we were ready with clever billboards in both Kansas City and Philadelphia, shown here as the humorous message to the victors in Kansas City. On the next page, we’re in the Easter season and no one gets families ready for special holidays and celebrations better than Carter’s. Shown here are some beautiful outfits for Spring and Easter and on Page 21, we have some of the beautiful new offerings for the recent Valentine’s Day holiday, for St. Patrick’s Day in a few weeks and matching family PJ’s for Easter.

On Page 22, Target and Walmart continue to be important destinations for parents. Our products are in great in-stock positions at these retailers, and we’ve recently refreshed the branding for both the Just One You and Child of Mine brands adding greater prominence and visibility in store. On Page 23, our Simple Joys brand at Amazon had a great holiday season. Simple Joys is the best-selling children’s apparel brand on Amazon with a broad assortment with offerings from baby up to big kid. We added sizes 4 through 8 last fall and the Simple Joys assortment recently expanded to include baby gear and toys. Turning now to Page 25 in our outlook for 2023. We are happy to be turning the page on a new year at Carter’s. Well, it’s a new year some of 2022’s challenges persist including forecasting demand in this environment.

Given the uncertainty of the environment, we’re focused on what we can control. Overall, we will focus on productivity, earnings and cash flow. In this environment, we have a special focus on our cost structure with a number of initiatives underway to tightly managed discretionary spending. We’re going to remain conservative in forecasting demand and our inventory commitments. Importantly though, we will continue to invest in a number of areas, including in our people, our product assortments and our e-commerce and omni-channel capabilities. We’ll also expand our portfolio of highly productive and profitable retail stores and continue investing in improving our marketing personalization capabilities. Some further context for our outlook is summarized on Page 26.

We are planning full year 2023 sales and earnings down. Like other retailers and consumer companies we’re watching the economy and the health of the consumer. Consumers of our products are families with young children, and they continue to be affected by inflation and the price of many essentials, including energy and food. High interest rates have also meaningfully increased the cost of borrowing, whether for homes, cars or credit card purchases. Our wholesale customers are approaching 2023 cautiously as well. Given the slowdown in consumer demand last year, many of these retailers have reduced their orders for coming seasons. Below the sales line we are planning for gross margin expansion as we’re assuming continued progress in pricing and a benefit from lower product and transportation costs.

We plan to keep tight control of spending with overall SG&A dollars planned comparable to 2022. Below the line, interest expense is expected to be higher driven by higher variable interest rates under our credit facility and a higher effective tax rate driven by a greater mix of income in the U.S. EPS is expected to benefit from a lower number of average shares outstanding. Importantly, we’re planning for much stronger performance as we move through the year. We’re assuming that sales will improve as the weight of inflation on consumer demand moderates. We believe our products represent less discretionary purchases, which are central to raising children and thus cannot be deferred indefinitely. Comparisons to 2022 also become less challenging as we move through the year.

Building on our planned improvement in demand, we’re planning for meaningful gross margin expansion driven by the factors listed here. Since the pandemic, the company has made solid progress in expanding our gross margin and our intention is to continue our momentum and focus on driving profitable sales. Overall, while sales and profitability are planned down in the first half, we’re planning for solid profit growth in the second half of the year. We’ve summarized our specific objectives for fiscal year 2023 on Page 27. We’re expecting 2023 net sales of approximately $3 billion, adjusted operating income of about $350 million and adjusted EPS of approximately $6.15. As Mike mentioned, we’re planning U.S. retail sales down mid-single digit U.S. wholesale sales down about 10% and international sales roughly comparable versus 2022.

Operating cash flow is expected to return to a more normalized level above $300 million as we sell through pack & hold inventory from last year. Our outlook for the first quarter is on Page 28. Last year got off to a very strong start, particularly in the first two months of the year. We had strong growth in the first quarter last year in our Wholesale and International businesses. This was before the impact of high inflation on demand throughout the market became so evident. We obviously faced a very different landscape today. So comparing to that relatively strong first quarter last year, We’re expecting first quarter will represent the largest decrease versus 2022 in sales and earnings, with year-over-year performance expected to improve as we move through the subsequent quarters of the year.

In terms of our specific expectations, we’re planning for sales in the range of $630 million to $650 million, adjusted operating income between $30 million and $40 million and adjusted EPS of $0.35 to $0.55. Some of the key assumptions for the first quarter are summarized here. We’ve had a relatively good start to the year, but as Mike mentioned, March is ahead of us, and that’s one of the most significant months of the entire year. Our teams are very focused on delivering a strong finish to the first quarter. And with these comments, we’re ready to take your questions.

See also 11 Most Undervalued Financial Stocks and S&P 500 Dividend Aristocrats List.

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

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

Michael Casey: It’s a combination of both. I’d say in the wholesale business, we expect to see significantly better performance because the number of order cancellations, including replenishment automatic replenishment orders which were suspended in the second half. On the Retail segment, we’ll see the benefit of the new stores kicking in the second half. So, I’d say it’s a combination of both. Year-over-year comparisons in recent years have been distorted by the pandemic, by the stimulus, by inflation. But the improving trend, I would say, are some fundamental benefits from the new stores, some of the structural changes that we’ve made in recent years, but also going to benefit from some, what I would say, highly unusual decisions by our wholesale customers, which I think will serve them well in 2023.

But in the second half of last year, when the impact of inflation became clear on consumers and their business has slowed, they were aggressively canceling orders where they could so that they would end the year in a better inventory position with our brands, which they have so that they would give themselves a better start to the new year, which they have. So, I’d say it’s a combination of both.

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

Michael Casey: The outlets are some of our most profitable stores. We’re in all the major outlet centers, and we’re usually the number one and number two brands in kids apparel in those outlet centers. But as we’ve seen over many years, when gas prices spike, consumers pull back and they shop closer to home, when gas prices normalize or the consumer gets used to a new normal, the outlet businesses do well. Some of our best outlets are in tourist locations and those they performed well. And in terms of returning to store growth, we’ve made significant improvement in price realization. We’ve got a new pricing capabilities, both talent and technology. We’ve been running, but for what we’re dealing with right now with this pack & hold inventory because of the slowdown in demand last year.

We’ve been running leaner on inventory, buying more conservatively, which has enabled us to drive higher price realization as well with the better price realization new store opening opportunities are available to us. And so we are returning to store growth. The returns on investment in these stores is rich. It’s the number on source of new customer acquisition and 70% of kids apparel is bought in stores. So we’ve got the best-looking stores in kids apparel. Some of our competitors are closing stores, downsizing, exiting certain markets, particularly up in Canada, and we have an opportunity to take advantage of those decisions, those downsizings, those competitors exiting markets by opening more stores, which when we open stores, it strengthens our e-commerce performance.

So they work hand in hand.

Warren Cheng: Thanks, Mike. Good luck.

Michael Casey: Thanks, Warren.

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

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

Brian Lynch: Jim, I would say, overall, we’re calling wholesale down about 10%. I want to accentuate what Mike said about inventories. Inventory is in really good shape in wholesale. We’ve got a lot less carryover. Spring has shipped earlier. There’s a better mix of inventory and we’ve got about two-thirds of the orders in hand for wholesale for the year. About 5% of what’s left to go is seasonal. We’ve got some winter bookings to get and then the replenishment business. So these folks are planning very cautiously though. I’d say given inflation impact on the consumer. They’re planning very cautiously. They’re planning for high sell-throughs. First half, we’ve got planned down mid-teens. Second half, we’ve got planned down just mid-single digits and say, first half is impacted by lower bookings and timing.

And we did ship some spring price out, I think, as Richard noted in December. So but most of them expected about our fall bookings are slightly better in fall, but folks are still being conservative. One of the underlying good guys, I think we’ve got is a much improved supply chain performance, which should have a good impact on the wholesale business. We’re expecting less cancels in the back half, better replacement businesses because some of the folks shut that off last year. So overall, I think we’re planning good sell-through. The sell-through has been good so far. They’re really off to a good start. And I think we’re in a really good place right now. We’re just €“ we’re calling it down because of the forward bookings. EBIT is stronger than the others.

I’m planning EBIT down low single digits. We’ve removed that Buy Buy Baby business, which was about 3% of wholesale from our planning assumptions. And then department stores are the most challenging part at this point.

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

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

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

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

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

Jim Chartier: Great. Thank you.

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

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

Richard Westenberger: Sure. Well, we’re planning good gross margin expansion in the first quarter, Jay. I think it’s going to be stronger in the second half of the year, given some of the benefits we’re looking forward to in terms of lower transportation costs, lower product costs. That’s a bit more muted here as we enter the year. But we still do have a benefit from spending less on air freight in the first quarter. We were still spending a bit on that. It was kind of carry over first quarter of last year. We’re going to have a better mix of U.S. retail sales in the quarter, which is the gross margin-rich part of the business, less wholesale sales, which tend to be a little lower gross margin and as we’ve been talking about continued progress on pricing.

So the actions that we took late last year are going to continue into this year. I’d say we’re probably going to have a bit more still of a drag from inbound freight. So those higher ocean freight rates will continue as we move into these early months of the year. And hopefully, we’re going to get some relief in the back half.

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

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

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

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

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

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

Richard Westenberger: Sure.

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

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

Michael Casey: Tom, I would actually say Carter’s is very competitive. And we have teams that look at our pricing relative to the market daily, and we feel as though we are competitive I think our advantage is we’ve got 1,000 beautiful stores in North America. So that when we back up on inventory, we can clear that product through those stores. A significant decrease in the wholesale. A component of the decrease in wholesale this year will be the off-price retailers. So they’re a good source of moving excess goods. But this year, we’re we are going to move some of the pack & hold inventory through more than half of the pack & hold inventory through our own stores as opposed to moving it through the discount channel. So you shouldn’t view our progress on price realization is that we’re trying to get paid more for our products relative to the market.

I think we’re competitive. That’s our job. Every day, we need to be competitive, and we believe we are. So I don’t think we you should assume that what we’re seeing in the forecast that we have for this year is that we’re focused only on price realization. Improving price realization. Pricing is a function of how the product is selling, how you buy it, whether you put it conservatively and given the nature of what we do for a living, we sell essential core products, that consumers purchase frequently. And so we have a handle each year on what we expect the demand will be last year was thrown out of balance because there the unexpected surge in inflation. But we are competitive. We are participating in the promotional environment but historically, if you look at our business over many, many years, this has always been a margin-rich business given the nature of what we do and the quality of the wholesale customers that we have and the productivity and profitability of our retail business.

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

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

Tom Nikic: Understood. Thanks and best of luck this year.

Michael Casey: Thank you, Tom.

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

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

Michael Casey: In what way, Will?

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

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

Michael Casey: The component of our business that I think will update you with every call this year. And we’ve asked ourselves, what’s the value of on-time shipping performance. So we haven’t had on-time shipping performance since the pandemic began. And you had 100 ships or more off the coast of, off the coast of Los Angeles. So we’ve seen with significantly improved on-time shipping performance in the fourth quarter, particularly for spring, our new spring product offerings. We were with one of our largest wholesale customers earlier this year and they describe the strength of the product offering and the timing of the deliveries and how it’s currently selling, their word, not my transformational. So we’ve asked what is the value of on-time shipping performance, getting the right product to the right place at the right time.

And so we’ll see that for €“ we hope consistently through the balance of this year. And so we’re €“ as we see more of that, I think that potentially could be an upside to our models this year. But it’s too early to call. As I shared with you, January and February are two of the lightest months of the year. And when we update you in April, we’ll have a more clear view on how the market is improving and how our business is trending.

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

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

Unidentified Analyst: Great. Thank you.

Michael Casey: You’re welcome.

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

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

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