Title

Presentation

Carter’s, Inc. beats earnings expectations. Reported EPS is $2.59, expectations were $1.87.

Operator: Welcome to Carter’s fourth quarter fiscal 2024 earnings conference call. On the call are Richard Westenberger, Interim Chief Executive Officer, 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 will now turn the call over to Mr. McHugh.

Sean McHugh: Thank you and good morning, everyone. We issued our fourth 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’ll 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 Richard.

Richard Westenberger: Thank you, Sean. Good morning, everyone. Thank you for joining us this morning. Before I cover our fourth quarter results, I want to take a moment and acknowledge the news, which we announced earlier this year, that Mike Casey had decided to retire from Carter’s after 30 plus years with the company and more than 16 years as our CEO. I know I speak for our board of directors and our thousands of employees in thanking Mike for his years of service to Carter’s and his many contributions to our company. As noted in our press release this morning, our board has initiated an external search to identify a permanent CEO for Carter’s. The board has been active in this task, and we look forward to introducing our new leader once the search process has been completed.

Before Kendra and I walk through our presentation materials, I’d like to share some overall thoughts on our business with you. Our fourth quarter performance was stronger than we had forecasted, with sales and earnings above the high end of the guidance, which we provided on our last earnings call this past October. While Q4 was stronger than expected, our outlook for 2025 profitability is expected to be more challenging for reasons that we will cover with you this morning. In Q4, consumer confidence rose after the noise of the presidential election subsided in early November, and our sense is that the industry experienced favorable holiday selling and a positive end to the year. While our results for full-year 2024 were not everything we had hoped for coming into the year, there are a number of positives to point to across the business.

As a reminder, we’re focused on three fundamental areas, which include elevating the style and value of our product offerings, improving our marketing capabilities and effectiveness, and leveraging our unparalleled multichannel market presence. On product, our core baby and toddler apparel offerings, which represent roughly 80% of our total apparel business, continue to be the best performing and most consistent part of our assortment. After several years of declining share, we grew our share of both the baby and toddler markets in the US in 2024. As we will discuss this morning, in reaction to what we saw in the marketplace, particularly in the latter part of the first half, we took significant action in the second half to increase the value and price competitiveness of a portion of our product assortment.

These actions drove a meaningful list across several important retail performance metrics and contributed to stabilization of unit volume overall. On style, our higher-priced and elevated product offerings, including Little Planet, PurelySoft, and licensed product, have continued to perform very well, and we believe these products are attracting a new segment of consumers to our business. In marketing, we brought new personalization capabilities online this past year, which we believe are driving incremental sales and helping to deepen relationships with our customers. We also rebranded and relaunched our loyalty program in 2024. Over 90% of our US retail sales are transacted through our loyalty program. Through our wholesale business, we work with the largest retailers of children’s apparel in the country.

We achieved record sales of our exclusive brand products in 2024, leveraging the clear consumer shift to the mass channel attracted by the value and convenience which these retailers offer. Outside the United States, our Canadian business, which holds the largest market share in that country, had a good fourth quarter, as did our business in Mexico, where consumers continue to respond well to the new store and online capabilities, which we have developed. Now turning to some more details of our fourth quarter performance and the presentation materials posted on our website. On Pages two and three of the materials, we’ve included our GAAP basis P&Ls for the fourth quarter and full-year. On the next Page, we have a summary of our non-GAAP adjustments.

The most significant adjustments, both in the fourth quarter and for the full-year, was a $30 million non-cash pre-tax charge related to the impairment of the OshKosh B’Gosh brand trade name. We reduced the value of the OshKosh trade name as part of our year-end assessment of the values of intangible assets on our balance sheet. Our lower near-term outlook for sales and profitability for OshKosh resulted in a reduced value of the trade name versus its previous carrying value. This morning, I’ll speak to our results on an adjusted basis, which excludes these adjustments. On Page 5, we’ve summarized our performance relative to the expectations we shared on our last earnings call in late October. As I said, we met or exceeded the objectives we set forth for the fourth quarter, both in sales in total and in each of our business segments and in profitability.

We have some overall highlights of our fourth quarter performance on Page 6. Our consolidated net sales of $860 million were up slightly over last year. Fourth quarter was our largest quarter of the year, representing about $100 million more in sales than our volume in the third quarter. As planned, we had strong year-over-year growth in our US wholesale business, which was offset by lower sales in US retail and slightly lower sales in international due to the negative impact of currency exchange rates. Fourth quarter adjusted operating income was $115 million, representing a 13.4% adjusted operating margin. And adjusted EPS was $2.39, down 13% from last year. Our fourth quarter adjusted P&L is on Page 7. On the $860 million in net sales, our gross margin was 47.8%, down 90 basis points from last year.

We invested approximately $30 million in the fourth quarter in more competitive pricing on a portion of our assortments in US retail. Recall that we made a similar roughly $24 million investment in the third quarter. The impact of these lower prices on gross margin was largely offset by lower product costs in the quarter. The balance of the decline in gross margin was due to higher year-over-year freight rates and a higher mix of wholesale sales versus last year. Spending was up 5% over last year. We had higher costs related to new stores, marketing, charitable giving, and professional fees. Fees increases were offset by a significant reduction in variable compensation costs, about $10 million versus last year. As mentioned, operating income was $115 million.

Below the line net interest expense was comparable with last year. Year-over-year, we incurred additional costs of approximately $2 million related to unfavorable movements in foreign currency exchange rates. Our effective tax rate in the quarter was 18.8% versus 22.8% last year. The decrease was driven by a higher proportion of income generated outside the United States and the impact of the changes in foreign currency exchange rates, specifically the strengthening US dollar relative to the Mexican peso. Again, all this nets down to adjusted EPS in the quarter of $2.39. Our business segment results are summarized on Page 8. The decline in our consolidated adjusted operating income of $21 million was driven by lower profitability in US retail and higher corporate expenses.

Driving the increase in corporate expenses were higher charitable giving and higher costs related to health insurance and consulting. Offsetting these increases were, as I’ve said, lower provisions for variable compensation which are tied to our performance. Now turning to some additional perspective on our business segment results, beginning with US retail on Page 9. As we first told you on our second quarter call last July, we made a decision to make some meaningful investments in the second half in our US retail business in order to improve our performance from what we experienced in the first half. Specifically, we invested $65 million, $55 million in lower pricing and $10 million in additional brand marketing. In the first half, we had a high single-digit decline in our US retail comparable sales, and actually through July we were running down about 10%.

We saw the marketplace for children’s apparel had become significantly more promotional in response to weak consumer demand as the effects of inflation continued to affect families with young children and building inventory positions across the industry. As a result, we felt that some portion of our product assortments were not priced as competitively as they needed to be given what consumers were seeing in the marketplace. On approximately 20% of our assortment products, which are the most comparable to what consumers would find at other retailers, we lowered prices by $1 to $2. In both the third and fourth quarters, we saw an increase in the unit velocity of these items. About $20 million of the overall second half investment in pricing related to these key item basket starters.

Overall, we’ve seen good stabilization of unit volume, and US retail units were up – were down about 6% in the first half, and were up 2% in the second half and up 4% in the fourth quarter. We also made an investment in brand marketing to improve new customer acquisition and retention. We saw an improvement in both customer acquisition and retention rates. Improvement in these metrics is important because we believe they are key drivers of future comparable sales. Our fourth quarter retail comps represented a continued improvement from what we posted in the third quarter and a meaningful improvement over the 9% decline in the first half. Our retail and marketing teams also successfully developed compelling promotional events during the quarter, especially during the key Black Friday selling period during which we achieved a positive 5% comp.

Part of the second half pricing investment was made in support of these key market share events. In the first half of 2025, we will have some residual impact of carrying forward these lower prices from the second half of last year. Pricing in retail is expected to then be more comparable in the second half. At this point, we believe we’ve taken the action we need to on pricing. Continuing to lower prices is not envisioned to be a component of our longer-term strategy. Obviously, we’ll keep an eye on the competitive environment in this regard. I’m encouraged by the impact these pricing and marketing investments have had on attracting consumers back to our retail business. Our customer counts were up in Q4, and this re-engagement is critical for our long-term growth, but these gains have come at a significant impact to our profitability.

While we plan to maintain competitive pricing and utilize targeted promotions to drive consumer engagement, our primary focus is on enhancing our product assortments and improving our marketing initiatives, as well as other strategies to grow market share and improve profitability. On pricing, in recent years, we’ve made progress in adding greater sophistication to our approach, including the use of technology. I see a significant forward opportunity to use price more strategically, especially when considering the diversity of our product assortment, brand portfolio, and the geographic breadth of our store portfolio. Fortunately, we have a creative and innovative team which is leaning into multiple levers other than just price to drive the business, some of which we’ve begun to see some good progress.

These include our merchandising and product presentation initiatives in-store, and meaningful enhancements to our online and mobile app experiences. On Page 10, we summarize the fourth quarter performance in our wholesale and international businesses. US wholesale had a strong quarter, as planned, with year-over-year sales growth of 7%. Approximately $8 million of sales in the quarter represented a timing benefit as certain product launches, which occurred in the third quarter last year, moved into fourth quarter this year. We had strong growth in sales to our exclusive brand customers, capping off very strong full-year performance in this part of our business. As I said earlier, exclusive brand sales reached a record level in 2024. Sales were lower to department store customers, continuing the trend we’ve seen there.

We were in a low excess inventory position for much of the year, which led to lower sales to the off-price channel, which were down over 50% in 2024. Wholesale continues to be a very profitable part of our business, with an operating margin over 20% in the fourth quarter. Our international businesses delivered good performance in the fourth quarter. Our retail businesses in Canada and Mexico had strong performance. Canada posted a 6% comp and Mexico delivered an 8% increase in comps. The stronger US dollar has negatively affected our international segment results, offsetting growth in local currency in the quarter. We believe the stronger US dollar will be a headwind in 2025 as well. We’ve summarized some highlights of our full-year performance on Page 11.

Our full-year net sales were $2.8 billion, down 3%. The majority of the decline was related to lower sales in our US retail segment. Full-year operating income was $287 million, down 13% as a result of lower sales. Gross margin for the year was up 60 basis points, and spending was well controlled, increasing 1% over 2023, while still supporting investments in our retail businesses and in marketing. Full-year EPS was $5.81, down 6% versus last year. We’ve summarized some balance sheet and cash flow highlights on Page 12. Our balance sheet is in good shape. Year-end inventories were down 6% versus last year, and the quality of inventory entering the new year is high, with less carryover of fall, winter products than a year ago. We have substantial liquidity, both cash on hand and availability under our credit facility, and it was a good year for cash generation.

We generated nearly $300 million in operating cash flow, which supported continued investment in the business and the return of meaningful capital to our shareholders. Kendra will now take us through an update on our product and marketing initiatives.

Kendra Krugman: Thank you, Richard. Starting on Page 14, here at Carter’s, our customer is at the heart of everything we do, and we know this next-generation consumer is increasingly more style-focused, diverse and digitally native. She demands both value and convenience. With that in mind, we continue to lean into our customer-centric strategies to enable our return to growth. These efforts are organized around our three areas of focus noted on Page 15, product, delivering incredible style and value, marketing, acquiring new customers, and deepening our relationship with existing consumers, and leveraging our unparalleled brand reach, with more than 20,000 points of distribution worldwide. Our customers rely on us for our expertise in the baby and toddler segments, which is our greatest point of strength and differentiation.

We are America’s number one most trusted brand in young children’s apparel. And to reiterate Richard, in 2024, we grew our US market share and baby and toddler apparel, helped by a record year with our exclusive brands and Q4 retail growth in baby. Going a bit deeper into our 2025 product strategies, we are on a journey to modernize our assortments. We will drive this by delivering growth through relevant style, expanding our House of Brands, and increasing depth and breadth in strategic segments and categories. All of these product strategies will be supported by new capabilities to improve operational efficiency and productivity. First, in delivering relevant style, we know that trends are moving faster than ever, from Paris to the playground highlighted on Page 16, and our Carter’s and OshKosh brands newness and relevant style are working.

As we move through the year, we are increasing our investment in trend forward assortments and also in additional product flows to help drive frequency and increase customer spend and conversion. Our spring collections feature on-trend styles, with new fabrications and trim details such as our easy to wear linen-like fabric and crochet sweater knits. Many of these beautiful crafted collections are exclusively offered through our retail channels. Next, moving to Page 17, our House of Brands delivers customers a range of stylish, high quality and brand-centric product assortment, while also achieving market-leading value. Importantly, our multi-brand customers spend 3.5 times more per year than a single brand customer. In 2025, we expect our new brands and line extensions to grow nearly 40% in retail sales versus 2024.

Included in that growth, our new PurelySoft collection shown on Page 18 is offered across channels and is expected to be one of our biggest contributors of sales growth this year. Customers love the ultra-soft, super stretchy premium fabric as much as they love PurelySoft’s exceptional value. Our new limited-edition prints have been well received and additional retail exclusive drops will flow throughout the year. And turning to Page 19, Little Planet, our quickly growing and most sustainable brand achieved double-digit sales comps in 2024. This growth was realized through increased velocity, broader distribution and additional assortment range, including size extensions into toddler and little kid. The broader size range generated strong digital demand in 2024, and is expected to roll out to stores this year.

We have a history of successfully building and launching brands in our portfolio. And early this fall, we plan to continue our House of Brands expansion with another launch through our digital channels and select stores. This elevated brand is being developed with the curious toddler in mind. Our expectation is that the stylish assortment will provide us an avenue to reach new consumer segments, as well as increase the lifetime value of our existing customers. Moving to Page 20, our kids segment has underperformed our total business, in part due to a reduction in our assortment offering. We’ve recognized the need to increase our inventory position in this four to 14 size range and are making investments in the back half of 2025, with additional depth and breadth in categories like fashion denim, girls tops, active, and licensed properties.

The kids segment remains an important part of our business. It represents the largest segment of the market we compete in and helps us to better meet the needs of our multi-child customer. To help us execute all of our product strategies, we have made and will continue to make meaningful investments in our enabling capabilities. One important capability is our new allocation tool. This AI-enabled technology will help us get the right product assortments into the right stores at the right time. We are also leveraging a dynamic demand forecast tool to improve buying and in-season sell-through management. We will begin to realize these benefits in the second half of 2025. Additionally, we are transforming our concept to consumer process with the help of outside market-leading experts.

This is a comprehensive end-to-end evaluation that begins with consumer insights, runs through the entire product development process, and ends with the customer purchase. Through this process transformation, we are enabling core capabilities across functions, with intention to increase productivity, improve organizational efficiency, and accelerate our go to market timeline to better respond to customer needs. Next, moving on to our marketing strategies on Page 21. We are constantly evaluating our media mix and personalization efforts to most effectively and efficiently talk to new and existing customers. Our AI-enabled personalization technology is helping to drive an increase in engagement and retention. Our annual retention rate is up versus last year.

In 2025, we plan to further develop and increase our personalization capabilities across all channels with an emphasis on our mobile channels, where we saw a significant lift in subscribers year-over-year. On Page 22, through market research, we know that more than ever before, new moms rely on their friends and social media influencers to inform their purchases. In response, we continue to shift our marketing investment into social media channels and are reaching entirely new groups of moms through our influencer partnerships. This was recently brought to life with our innovative Carter’s playground experience at New York Fashion Week. This playful event drew in leading fashion influencers and media outlets who stopped by with their young tots in toe to experience our latest runway-inspired trends.

They captured their mini me’s in our latest styles to share with their fans, generating millions of impressions in less than 24 hours. Turning to Page 23, today’s style-oriented consumer expects a shopping experience as inspiring as the product she’s buying. Creating market-leading brand experiences across our channels is a critical component of our marketing strategy. As part of this effort, we launched numerous digital experience enhancements in Q4, including upgraded navigation improvements to our search engine optimization, new mobile app discover and deals destinations, and a new gifting experience. We also continue to innovate and test store experiences and formats to anticipate the evolving needs and expectations of the next-generation consumer.

Finally, turning to Page 24, our product and marketing strategies extend into our wholesale channel to provide a consistent and inspired brand experience. We have strong wholesale partners who help us meet the needs of our customers wherever they are shopping, including at Target, Walmart, and Amazon, where once again, collectively, our 2024 record sales were driven by both assortment and inventory expansion. And now, I’ll turn it back to Richard to cover our business assessment and financial outlook.

Richard Westenberger: Thank you, Kendra. Turning to Page 26, for the past several months, we’ve been engaged in a comprehensive review of our business. We’ve had some very good outside industry experts who have helped us in this effort. This review validated a long list of positive attributes of Carter’s, a number of which are summarized on this page. We’ve had a long successful history as the leader in the young children’s apparel market. However, as summarized on the next page, and as we’ve noted previously, our performance in the past few years since emerging from the pandemic has been more challenging, particularly in our US retail business. There have been a number of external factors which have affected our business. First, the overall children’s apparel market has not been growing significantly.

On average since 2019, the young children’s apparel market has grown less than 1%. There are also certainly demographic factors at work, such as a declining birth rate among Americans, a shift of consumer shopping behavior in favor of mass channel retailers, and the sudden onset of inflation across the economy, which has had a significant impact on our target consumers, families with young children. We’ve also seen the rise of other brands in the market, including the active and athletic-oriented brands and the emergence of numerous small digitally-native brands. Within our wholesale business, we’ve seen strong demand for the exclusive brands which we’ve developed for Walmart, Target, and Amazon. The just one-year Child of Mine and Simple Joys brands now account for over 50% of wholesale segment sales.

The strong exclusive brands demand has been offset though by lower demand from other customers, including some which exited the market entirely. This group of retailers includes the department stores which have historically been very good customers for the flagship Carter’s brand at good margins. On the next page, we summarized some thoughts on our ambitions and objectives for the business going forward. In a market which isn’t growing significantly, it’s imperative that we grow through capturing more of the market. We believe the growth of the company will be driven by our direct-to-consumer business. As mentioned, we have a strong historical position in the market. Our brands are well known and trusted by consumers. That said, our research shows there is an opportunity to appeal to a broader group of consumers.

Carter’s family of brands and OshKosh B’Gosh are rich in attributes which are very important to consumers, quality, function, durability, and of course, value. Our opportunity is to strengthen our appeal with Gen Z consumers, increasingly the part of the population having and raising children. Additionally, we believe there is a meaningful opportunity to serve consumers who are driven more by style and less by promotions and price, and we see an opportunity to connect more fully with multicultural consumers. As Kendra referenced, we’re pursuing a House of Brands strategy Over time, we will develop this strategy further as a way of reaching more of the marketplace, including some consumer segments which we do not serve today. Little Planet is a very good example of this approach.

In a relatively short period of time, through the creativity of our internal design and merchandising teams, we’ve created what we believe to be the leading sustainability-oriented brand in the market, which provides a new and distinct growth path for Carter’s. We have a number of product initiatives focused on improving the style and value of our apparel offerings. We have a history of successful brand-building at Carter’s, and we expect to do more of this in the future. In retail, we are increasingly focused on improving the productivity of our existing store fleet. We stepped up the pace of store remodels this past year and have seen a nice lift in sales from these investments. While we believe new stores continue to perform well and generate good returns, we think we will be managing a relatively constant number of stores of our current model over the next several years, with closures offsetting new and relocated store locations.

And we see significant potential in making improvements to our operating model. As Kendra referenced, these include improving our product and brand development processes to be faster, nimbler, and to respond to changing consumer preferences more rapidly than we do currently. We’ve also begun investing behind this foundational operating model work, which I believe has significant potential to drive our business going forward. Wholesale will remain an important part of our strategy. Our broad distribution through our multi-channel business model, which includes our wholesale business, is a key advantage for us. We expect the wholesale customer landscape will continue to evolve. Our priority in wholesale has always been to develop strong product offerings and partnerships with those retailers winning with consumers.

Of course, we’ll continue to pursue opportunities to improve productivity throughout the business and manage spending prudently, as we’ve always done. In terms of our financial outlook for 2025, on Page 30, we’re expecting sales in the range of $2.780 billion to $2.855 billion, comparable to 2024 net sales at the high end and down about 2% at the lower end of the range. Fiscal year 2025 will include a 53rd week, which we’ve estimated to represent net sales of approximately $30 million. We’ve provided some perspective on expected sales by segment as well. In US retail, we’re expecting sales to be comparable to down mid-single-digit, with comp sales down low single-digit to mid-single-digit. We’ve planned for an improving comparable store sales trend as we move through the year, with the second half expected to benefit from an overall improved inventory position and additional progress with our product and promotional strategies.

Our US wholesale sales are expected to be in the range of up low single digits to down low single digits, and we’re planning for full-year growth of the exclusive brands again in 2025. And international sales are planned comparable to up low single digits. As we’ve discussed, the stronger US dollar versus the peso and Canadian dollar will weigh on the profitability of our businesses outside the United States. We’re planning 2025 operating income in the range of $180 million to $210 million, compared to $287 million in 2024. We have a good handle on the factors which are contributing to our outlook for lower operating profit, but clearly we’re not satisfied with the performance of the business. And there’s several factors driving our planned operating income in 2025.

We expect the gross margin will be down approximately 150 to 200 basis points in 2025. Approximately $20 million relates to targeted residual price reductions in retail in the first half, as we’ve discussed. Another $10 million relates to changes in customer mix within wholesale. About $10 million relates to FX as a result of the stronger US dollar, and then higher product costs, which includes select investments in additional make, higher freight rates and tariffs are estimated to represent collectively about $10 million in higher costs. Where possible, for items such as tariffs and FX, our plan will be to offset some portion with pricing and other actions. Overall, SG&A for 2025 is planned up very modestly, up low single digits. within SG&A, there is a meaningful year-over-year increase of approximately $30 million to $35 million, which relates to restoring our variable compensation programs, which are tied to performance to a more normalized target level.

Given our performance in 2024, these provisions were far less than they have typically been. We believe this is an important investment in engaging and retaining our team, but it does disproportionately impact the P&L in 2025. This plan, refunding of variable compensation, represents about three points of SG&A growth year-over-year. Below the line, we’re planning that our effective tax rate will be higher than in 2024 at approximately 23.5%. As typical, there are a number of moving pieces contributing to this higher rate, including FX, higher international tax rates, and several compensation-related items. We’re planning adjusted earnings per share in the range of $3.20 to $3.80. We’re expecting to generate around $200 million of operating cash flow in 2025.

And our current forecast for CapEx is $65 million, up about $10 million over last year. About half of the increase in CapEx relates to the replacement of systems and equipment in our distribution centers, which are intended to improve capabilities and efficiencies going forward. The balance of the increase relates to technology improvements largely in retail and enterprise systems, and for new stores in Mexico. Our expectations for the first quarter are summarized on Page 32. Sales are expected to be down mid-single digits versus first quarter last year. In US retail, comparable sales are planned down mid to high single digits versus 2024, in part due to a later Easter holiday this year. We had a good January in retail, with sales above plan.

In the last week or so, we’ve seen some winter weather disruption across the country. Quarter-to-date comparable sales in US retail are currently running down about 7%, with e-commerce sales above plan and stores a bit behind. March is particularly significant to the first quarter, representing roughly 50% of planned first quarter sales. US wholesale is planned down in the high single digits due to lower demand, with the department stores and changes in the timing of shipments year-over-year. International sales are down in the mid-single digits, in part due to the stronger US dollar. On profitability, we’re planning operating income in the range of $30 million to $35 million, and adjusted EPS in the range of $0.45 to $0.55. similar to our full-year outlook, there are a handful of items which account for the majority of the plan decline in operating income, including the residual targeted price investments in retail, lower sales volume, and higher inbound freight rates.

Our Q1 effective tax rate is expected to be particularly elevated in the high 20% range. Here again, a number of factors are at play, but primarily it’s due to a negative impact related to stock-based compensation. Key risks that we’re monitoring include the level of promotional intensity in the marketplace and the outlook for improvement in inflation and consumer sentiment and the impact these factors have on consumer demand. It’s clear from recent headlines that consumers continue to be very concerned about inflation and tariffs, and the Federal Reserve is less bullish on further interest rate reductions right now. Other risks include the possible implementation of new or higher tariffs, further strengthening of the US dollar and possible higher transportation costs due to industry capacity constraints and continued geopolitical interest.

To reiterate, we’re not satisfied with the performance of the business. Our potential is far greater. We have considerable brand assets, market position, and overall resources, and our team feels the appropriate urgency to deliver improved performance. I’d like to thank our employees across the company for their dedication and tireless efforts. They continue to approach their work with determination and great passion for our brands and our mission of serving families with young children. I’m grateful for their hard work. And with those remarks, we’re ready to take your questions.

Operator: [Operator Instructions] And our first question comes from the line of Jim Chartier with Monness, Crespi, and Hardt. Your line is open. Please go ahead.

Jim Chartier: Hi, thanks for taking my question. Kendra, can you just talk about how dramatic the change in the inventory assortment will be as you modernize it? And then how do you kind of minimize the risk of maybe alienating the different – the core consumer as you do that? Thanks.

Kendra Krugman: Yes, that’s a great question. I think that there’s a different answer depending on what segment we’re talking about. But in baby in particular, we’ve been on this journey for a little bit of time, and you’re seeing it in the results of our business. This is truly – it’s not a dramatic change in the baby and toddler segments. We’re leaning more into our best categories of business, collection-based products that must have product categories, and then we’re being more intentional with our good buckets of product categories, so your stock-up essentials, both in baby and in toddler. Kid is where we have the most opportunity to really push forward, and that’s where we’ve not made the changes yet. So, that’s to come.

And I would say it’s a 20-point shift into more style-forward categories versus something that we would say is more legacy to our brand. I don’t think it will alienate any existing customers. I think it will actually help us retain customers longer to compete more directly with competition that is moving forward faster than us.

Jim Chartier: Great. And then Richard, previously you talked about promotional activity not really driving unit volumes over the last two and a half years. And so, kind of what’s different in terms of the pricing action you took in the back half of this year, which did drive better unit volumes versus what the dynamic had been the last two plus years?

Richard Westenberger: Well, I think what we saw in the marketplace was just the fairly dramatic pricing action that some of our peers and competitors in the industry were engaged in. And so, where we took action was on those elements of the assortment most comparable to what they were seeing and very easy to compare across our assortments, perhaps less differentiation between our branded product and the equivalent private label product. And I think it also converged with just a good holiday season as well, particularly in the fourth quarter. As I mentioned, I think the industry had a good fourth quarter. I think the consumer had some renewed optimism once everything around the election settled down. And I think our team did a good job around putting the actual promotions together, the messaging, the items that were featured.

These really are kind of the key items that everyone needs on a continuing basis. I think the consumer responded well. I think there’s a bit of an art to putting these promotions together. A lot has to do with how the message and the offer is communicated. We really focused on the key market share events around Labor Day, around Black Friday. Increasingly, the consumer seems to wait for those promotions, and I think we put more of our dry powder and energy into those events and it resulted in the nice lift to unit velocity that we saw.

Jim Chartier: Great. Thank you.

Operator: Thank you. And one moment as we move on to our next question, our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open. Please go ahead.

Unidentified Analyst: Hey, this is Robert on behalf of Ike. Just a quick question. Maybe you can talk a little bit more about the challenges on the retail side and when you can expect or when we can expect to see the comp return to growth.

Richard Westenberger: Hi, Robert. Good morning. Well, I think our principal issue really is driving traffic to the retail business. I think we continue to believe that the experience for consumers in our stores and online is the best in the category, but over a multi-year period, really since emerging from the pandemic, as we said in the remarks earlier, that has been our challenge, and I think that’s a combination of things. I think it is certainly the architecture of the product offerings themselves. So, Kendra went through some of the assortment changes that we’re making. We want to create compelling reasons for folks to come to our direct business. Clearly, since the pandemic and even going into the pandemic, I think the mass channel business models were inherently strong.

I think there’s some elegance to the consumer to be able to do all that one-stop shopping in a single trip, getting groceries and housewares and consumables and apparel in one stop. That’s been a very powerful model. Fortunately, we’ve got our exclusive brands business that allows us to participate in that channel shift, but increasingly it’s around improving the assortment and driving traffic back to our stores. I think marketing is an important element of that. We did step up marketing in the latter part of 2024. Some of that was brand marketing. Our intention is to build on that over time. We’ve kind of held that level of investment here in 2025 as we’ve planned the business, but I think there is an opportunity. One of the key findings coming out of the review that we’ve been conducting of the business, is that we do under-index relative to what some of our peers are spending on brand marketing.

I think we’re going to let the assortment improvements kind of catch up a little bit with that work. Some of the in-store experiences that we’re working on, we’ll have some of that work catch up a little bit and my guess is that we’ll lean a bit more into marketing over time. But the fundamental issue in retail really is traffic. I’ve been really pleased with the conversion results that we see. Those results significantly lifted in the fourth quarter in particular. So, consumers, once they come, they enjoy the experience, they like the products that they find and they convert to purchases at a pretty high rate. So, that would be my high-level summary.

Unidentified Analyst: All right, thank you.

Operator: Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Chris Nardone with Bank of America. Your line is open. Please go ahead.

Chris Nardone: Great. Thanks guys. Good morning. So, Richard, can you elaborate on what is giving you the confidence that pricing actions will stabilize as you reach the back half of the year? Is there something you’re seeing in terms of pricing pressures alleviating from your competition? And then also what’s the level of pricing decline that’s embedded in your broader wholesale order book outlook?

Richard Westenberger: Yes, Chris, at this point, it is a planning assumption. I think we’re going to have to see how we get through the first half. Part of what drove the price competition that we saw in the marketplace last year was that the industry had a poor spring, and it’s hard to draw a lot of conclusions. I think from January and February business, it tends to be a clearance period for us and for the industry. Certainly, that’s been the result of our kind of year-to-date sales so far in 2025. It’s really oriented around kind of clearing activity and kind of cleaning up inventory. I think March will tell the tale as it relates to the Easter holiday and some of that important spring selling. But it’s our assumption that we certainly feel like our products are competitively priced.

We had had several years of raising prices and perhaps we were a little slower to kind of recalibrate to just some sharper price points. So, I think we’ve taken the action we have to, but obviously we have to swim in the competitive waters that we find ourselves in and we’ll have to evaluate that as we get into the second half. But that’s our assumption for now. I would say pricing in wholesale is down modestly and our assumptions for 2025. That’s a combination probably more leaning into some additional product make and benefits to improve the assortment there, much as we’re trying to do in the retail assortment.

Chris Nardone: Great. That was very helpful. And just a quick follow-up on your wholesale business, specifically your exclusive brand business. I think sales are up 20% during the fourth quarter, obviously strong results. Is there still an opportunity to add shelf space with your two largest wholesale partners in 2025? And what’s the outlook for your off-price and department store business within your guidance for the full-year?

Kendra Krugman: I’ll answer the first part of the question. Regarding shelf space, yes, we believe that there is still opportunity. We are still underpenetrated at particularly Walmart and Target in our toddler segment. So, similar product growth categories or growth opportunities for us exist – that exist in retail also exist for us in exclusive brands. So, I would say we continue to look for opportunities to expand both store count and existing categories as well as with new categories and segments.

Richard Westenberger: Yes, Chris, the growth in the wholesale segment will be driven by the exclusive brands. That continues to be the engine within that part of our business. So, that will account for the majority of the growth. We do have growth planned with some of the other segments from memory clubs. We do have some growth planned in the promotional channel. Off-price sales are expected to be, I think, roughly comparable. They were down about 50% in 2024. I think those will strike a bit more of a normalized level. You always have some measure of activity in that off-price channel. We do have an upfront component of the business in the promo channel. And so, that is expected to grow somewhat. And then we have the department stores continuing to be planned down, which just reflects, I think, sort of broader issues with their business models at the moment.

Chris Nardone: Great. Thank you, and good luck.

Operator: Thank you. One moment as we move on to our next question. Our next question comes from the line of Paul Lejuez with Citi. Your line is open. Please go ahead.

Kelly Crago: Hi. this is Kelly on for Paul. Thanks for taking our question. It sounds like you’re leaving some flexibility on the level of pricing investments you’re making in US retail this year. I guess, what metrics are you looking to with these pricing investments to help dictate your strategy as you begin to lap these pricing investments in the second half? Thanks.

Richard Westenberger: Kelly, I’d say there’s a few things we look at. We look at certainly the unit velocity, to the previous question we got. We look at whether it’s driving store traffic. We look also at the house file metrics in terms of whether it’s bringing consumers shopping with us, both new customers and retaining the ones that we’ve had historically a relationship with. So, there’s a few things, but we look to actually have a return on that investment that it’s driving some incremental velocity of the units. And hopefully with the items that we’ve taken pricing action on, it’s meant to be the start of the transaction, that these are the more basic items while they’re in the store, they’re online, hopefully they’re adding additional items because it’s the sharp value of those basket starter items. It’s our hope that they’re adding other elements to the purchase basket as well. That’s kind of how we’re thinking about it.

Kelly Crago: Got it. And then just a question on both us retail and US wholesale kind of flowing through the year. So, you expect that the comp improvement largely to be back half-weighted, and I guess talk about sort of what drives that against tougher comparisons. And then on the wholesale side, could you quantify how much the timing shift negatively impacted 1Q and how that kind of flows from there as we move past 1Q and how your fall, winter order books are looking Thanks.

Richard Westenberger: Yes, sure. On retail, we are planning for an improving comp trend across the year. And from memory, our assumption is that we actually get to a positive comp in the fourth quarter in our planning assumptions. That has a lot to do with just the planned improvements in the merchandise assortment and also the overall level of inventory. So, when we made our inventory commitments for the first half of 2025, which goes back quite a bit of time right now, that was in a different pricing environment. That’s when we were planning for actually growth in AUR, much more significant growth in AUR. And so, there’s some pretty well-worn history here that tells us that unit velocity slows when we raise prices. And so, we had cut back on the inventory buy for the first half.

So, the inventory position is not as optimal in the first half. That improves meaningfully as we move into the second half. And part of it also is what Kendra referenced, the investment behind the kid business, the bigger sizes, the products for the older children that are part of a household. One of the interesting aspects of the research that we’ve done indicates that increasingly, our customers do have more than one child. We had made some decisions to cut back that bigger kid part of the assortment some time ago. And I think that had a bit of a disproportionate effect on sales certainly, and that’s a big business for us. But we had cut back there and increasingly that customer’s coming in, they’re looking for solutions, not only for a baby and toddler, but they’re looking for solutions for their older child as well.

So, we’re reinvesting back in that kids business, which is fully 400 some million dollars of business for us. It’s a meaningful part of the assortment. So, all that gets better in the second half. We think that drives some improvement. AURs, as I mentioned, stabilize in the second half. As it relates to wholesale bookings, we have down slight bookings slightly in the first half. And then we’re still in the process for the second half. So, I won’t comment on second half bookings. We’ll have more perspective on that on the call here, just in another month or so in April. But I would say there continues to be conservatism on the part of the department stores, and that’s reflected in our kind of placeholder assumptions for bookings. The momentum continues to be around the exclusive brands.

And on the timing shift on Q1, I actually don’t recall what that was, Kelly. We’re happy to follow up with you on that.

Kelly Crago: Got it. Thank you. Best of luck.

Operator: Thank you. [Operator instructions]. And our next question is going to come from the line of William Reuter with Bank of America. Your line is open. Please go ahead.

William Reuter: Good morning. My first question is on sourcing. You guys have done a great job of reducing your sourcing from China. You’re below 5%. You continue to source the majority from Asia. I was wondering if you’re looking at this point about doing any sort of changes to your sourcing. It’s clearly a pretty uncertain environment in terms of what types of tariffs could be put in place.

Richard Westenberger: Yes, Bill, thanks for the question. I agree with your observation. I think our supply chain team has done extraordinary work in reducing our dependence on China and diversifying our sourcing base. When I joined the company a number of years ago, we were probably well over 55% of the apparel assortment was sourced in China. And China’s historically been a great place to have those products made. For a lot of different reasons over the years, we started to diversify away from China, really because the labor cost situation. China had become a bit uncompetitive price-wise. I think the manufacturing community had wanted to move away from apparel to high tech and other industries. What we found, though, interesting was that a number of our apparel suppliers in China built capacity in countries outside of China, so, Vietnam, Cambodia, Bangladesh.

And to your point, we’re down sub 5% in terms of the apparel assortment that is now sourced in in China. The opportunity continues to be on the fabric side of things. So, most of the fabric continues to be processed in China, and then that fabric is sent to those other countries. We have a program that is intended to diversify and reduce our dependence on China fabric as well. So, I would say that’s probably the most meaningful thing. We continue to move production around as we see opportunities. We have a great network of strategic vendor partnerships in those other countries like Bangladesh, like Vietnam, like Cambodia. We’re continuing to build out those relationships. India has emerged as a significant source for us. So, we’re building that opportunity.

I think you’ll see more production migrating to India over time. But the team has done a nice job. I think we have a well-diversified sourcing model. There’s never any easy days in the supply chain. They’re always managing a lot of complexity, but we have reduced our exposure to China pretty considerably.

William Reuter: Got it. And then just a follow-up from me, I feel like kids has always represented a big opportunity. It’s also incredibly competitive. What are you doing this time around that will make it less risky in terms of entering, I think you did mention you’re going to be investing some units there. You clearly have some styles that you’re more excited about, but how do we think about what’s different this time around?

Kendra Krugman: We are in the very early stages of building that strategy that is totally comprehensive, but in the near-term, getting the right assortment to the right stores is necessary. So, that’s what you’re hearing about in the back half. We have an investment in categories of the business that are working for us. So, that’s fashion, denim. It’s active. It is our licensed character product categories and licensed sports. So, those are all areas that we are expanding both our breadth and depth in select stores and online for the back half. So, that’s one near-term investment. And then going forward, our new concept to consumer process that will speed up our decision-making and get us closer to market, that will help inform our decisions in kid, particularly in girl where we are going to have to be more reactive to consumer trends. So, that will help us as we think about 2026 and forward. But we have a lot of work to do, so still in early stages.

William Reuter: Got it. That’s all for me. Thank you.

Operator: Thank you. This concludes the question-and-answer portion of today’s conference. I will now turn the call back to Mr. Westenberger for his closing remarks.

Richard Westenberger: All right. Well, thank you, everyone, for joining us this morning. We look forward to updating you on our progress on our next call. Thank you, everyone.

Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect.