Good day, everyone and welcome to Carter’s First Quarter 2015 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 Sean McHugh, Vice President and Treasurer. After today’s prepared remarks, we will take questions as time allows. Carter’s issued its first quarter 2015 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 www.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 Report filed with the Securities and Exchange Commission and the presentation materials posted on the company’s website. Also 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.

Thanks very much. Good morning, everyone. Thanks for joining us on the call. Before we walk you through the presentation on our website, I would like to share some thoughts on our business with you. As you can see by the results this morning, we announced a very good performance for the first quarter. We saw good demand for our spring product offerings and exceeded the sales earnings goals we shared with you in February. Despite the highly promotional retail market, we improved price realization and offset higher product costs. Our supply chain performance improved and we saw less disruption from the West Coast port delays than expected. Currency devaluation and winter storms worked against us. We controlled spending where possible, leveraged SG&A and achieved record first quarter profits. Given our first quarter performance, together with our latest forecasts, we believe we are on track to have another good year of growth in sales and earnings and we are reaffirming the guidance provided earlier this year. As we shared with you on our last call, we got off to a good start in January and then business slowed in February with sales impacted by winter storms. In March, we saw a surge in demand for our brands and the weeks leading up to Easter. As expected, we are giving some of that growth back in April, given the shift in the timing of Easter. April traffic has been more sluggish than we expected as more spring-like weather is arriving in many parts of the country, we are seeing traffic improved. Given the strength of our product offerings and marketing initiatives, we are forecasting good direct-to-consumer comps for May, June and the second quarter. To further strengthen our business, our top priorities this year include: creating a more compelling direct-to-consumer experience…

Thank you, Mike. Good morning everyone. A reminder to begin that my remarks this morning and the discussion materials posted on our website present our business results on an as adjusted basis, which excludes items which we believe are not indicative of underlying business performance. Reconciliations of this adjusted view of results to GAAP are provided in the appendix of today’s presentation. I will begin on Page 2 with some highlights of the first quarter. We delivered a strong quarter to begin the year and our performance exceeded our expectations. At a high level, I would point to three factors which drove the outperformance to our previous forecast. First, net sales grew 5% higher than we had forecasted and included some additional wholesale volume as well as meaningful improvement in consumer traffic and net sales in our direct businesses in March, particularly towards the end of the month. Second, gross margin was stronger than we had planned. We saw good demand in the wholesale channel throughout much of the quarter as many of our customers were chasing product. Cost and delays related to congestion at the West Coast ports were less than expected and we had lower inventory related charges reflecting our very clean inventory position heading into the second quarter. And finally, the organization did a good job managing spending in response to softer demand earlier in the quarter. We expect to give back some of this expense favorability over the balance of the year as various strategic initiatives and investments in the business go forward. All of this translated to very good profitability for the quarter. Our consolidated adjusted operating income grew 24% to $87 million, while our consolidated operating margin expanded by nearly 200 basis points to 12.7%. Our growth in adjusted earnings per share was even…

Thank you, sir. [Operator Instructions] And for our first question, we will go to Taposh Bari with Goldman Sachs.

Good morning. Nice job in the quarter.

Good morning, Taposh.

Richard, I guess starting with you on the guidance for the full year. Last quarter, you had guided EPS growth to be pretty to kind of follow pretty sharp acceleration path into the back half of the year on favorable product costs, aside from SG&A timing, has anything changed to that original view as you see it now?

Well, I would say that there is some demand shift from the first quarter into the second quarter. We are still planning very good earnings growth in the second half of the year driven by gross margin expansion. Certainly, some element of SG&A as I mentioned, we are planning to spend to our full year plans. We have a number of initiatives that are really kind of kicking off at this point. And so that some of that SG&A favorability that’s occurred in the first quarter we will get back over the balance of the year. I think we are also cautious on the outlook for foreign currency rates for much of the quarter after we held the fourth quarter call in February, rates deteriorated fairly substantially. That come back more recently, but I think we have a very cautious eye towards the impact that that exchange rate may have on our business. So on balance still I would say very solid earnings growth plan for the second half of the year.

Great. And then maybe Mike for you, on the segment margin performance, it seems like every channel did very well in terms of margin performance with the full exception of Carter’s DTC and I know port delays obviously had an impact but I am surprised that that didn’t affect the rest of the business, I was hoping you can speak to why that would be?

Right. I think retail – our retail stores are probably most impacted by the West Coast port delays. They had a certain plan to – have a certain mix particularly in the month of March. We shared with you in the last call. March is one of the significant months of the year, both in sales and profit contribution and we had less than an ideal mix of spring products, particularly getting ready for Easter. And so the retail team had a deal with the mix that they had. In some cases, we had tops without bottoms, bottoms without tops. And so they had to be more promotional in the month of March to clear through what they had and enter the second quarter in a better inventory position. If you look at the spread between what the margins would have otherwise been, what they were last year and what we are reporting this morning, it’s some portion of about $4 million lower and that is equal to the amount of discounting we had to do to deal with less than an ideal inventory mix. So we would attribute most of that margin erosion to the West Coast port delays.

Great. And then last one for you guys and I will pass it along, just your philosophy, I know you are asked this question frequently, but just an update on your philosophy towards retail store growth of the Carter’s brand, I guess multi-part question here First, it feels like the retail base is a tale of two halves, you have got outlet which continues to comp negatively it seems and then strip malls where the growth lies, new store productivity looks good, the comps are positive, this can speaks to the tale of two channels there. And then separately, which metrics are you most focused on as you evaluate your new store growth strategy? Thanks.

Thanks. So, we are expecting very good growth with our retail store segment planning growth over the next 5 years of about at least 8% a year. Most of that growth will be driven by new store growth. The new stores are having – achieving our performance objectives. We are reaching more consumers. I think the thing that’s unique about our business, we are still evolving from outlets to brand store locations. And to your point, the brand stores had positive comps in the first quarter. The outlet stores had negative comps. And I think that’s a natural consequence of the evolution of our business. I think it’s important for you to know the brick-and-mortar market for specialty retail is flat, flat to down. More consumers are shifting to e-commerce. We are gaining market share through store growth. There is some cannibalization. We think it’s an expected consequence of our door growth, where we are bringing our brands closer to the consumer. Our view it’s a good trade given the new store economics. We are extending the reach of our brands and seeing higher frequency of visits from consumers. And we are seeing higher retention. So, I think we look at it as a total package. And when you put it all together, we are expecting good growth in both sales and profitability.

And the metrics that you are most focused on?

Total sales growth and profitability.

Great, thank you and best of luck throughout the rest of the year.

Thanks, Taposh.

And for our next question, we go to Susan Anderson with Friedman Billings Ramsey.

Good morning. Congrats on a really good quarter.

Thank you.

I guess just to follow-up on that, just looking at like the EBIT margins by segment. It looks like Carter’s retail was the only one that was down in the quarter. Was this driven just by like the ports and maybe a little bit more promotions because of that or is there something we should continue to expect as you guys continue to open more stores?

As it relates to the first quarter, I would say it was entirely related to the higher promotions needed to clear through the goods that arrived late because of the West Coast port delays.

Okay. And then on the Oshkosh EBIT margin, that one continues to be very strong, continues to expand. I guess, what are your thoughts now going forward for the Oshkosh segment, like where could the EBIT margin go for this one?

I think we are really encouraged by the progress being made by the strong team in Oshkosh. We had a margin mid single-digits in the last few years. And with all the work the folks are doing side-by-side are proven to business and focusing on value for the consumer and making sure that we have got compelling price points, making sure that we have got convenience, mail for her, in terms of compelling websites and door growth and making sure the product is relevant and the experience is relevant. We think we are going to have good performance. So, the possibilities for that brand, we had about $500 million business globally with about a 6% operating margin. And if we are successful with our efforts and door growth, which we believe we will be that’s a potential over 5 years for about $800 million brand with a high single-digit operating margin. So, the possibilities are very positive for OshKosh.

Great. That sounds good. And then last one on the product cost, so it sounds like from what you guys said on the call that you are maybe seeing extra capacity out there. So, does that mean like labor is getting a little bit more favorable. So, should we think about product costs maybe being a little bit more favorable as we go throughout the year this year?

I would say, labor rates are still moving up. I think the things that are working in our favor. Cotton prices continue to be low. Oil prices are low. There is sufficient capacity in Asia. We see our suppliers are hungry for our business. The beauty of our business, we have grown every year for the past 26 years. We are a manufacturer’s dream. They can count on us for good orders for them year after year. And so those will largely – our hope at least near-term, the positive inputs, cotton, oil, excess capacity will serve to offset the rising labor costs, but labor still working against us.

Got it. Okay, thanks a lot. Good luck next quarter.

Thanks very much.

And for our next question, we go to Kate McShane with Citi Research.

Hello, this is Geoff Small on behalf of Kate McShane. Congratulations on a strong start to the year.

Thanks, Geoff.

We were hoping you could elaborate on the performance of your Canadian operations both the brick-and-mortar segment, which appears to have rebounded in the first quarter as well as the trends you are seeing on the new Canadian e-commerce site?

The Canadian e-commerce site is achieving our expectations. We lost it in the second half of last year. It’s – we are reaching new consumers with the site. I think the performance of Canada. The retail portion was up about 30% in local currency. So, they had a strong quarter. These new stores are meeting our performance objectives. We will open up about 20 stores this year. And the things that are working against us – the things that are impacting the results that you see in the press release this morning are largely FX. The currency is working against us, but there is reasons to be optimistic with that as well. Recently, the exchange rate was around $1.28. I think today, it’s closer to $1.20. So, it’s a risk for the balance of the year. But if you look at the Canadian business in local currency, we are seeing good performance from that team.

Geoff, the only other thing I would add is that we are kind of through the period. Over the last year or so, we have been in the process of exiting that businesses legacy, private label brands. And so now the assortment is entirely based around Carter’s and Oshkosh, which we think is obviously the right strategy going forward. But last number of quarters have been burdened by the comparisons to the previous sales of those private label brands and we are now – we have now anniversaried that, so second quarter and beyond, it’s purely our brands.

Thank you, guys. It’s very helpful. Congratulations on a strong start to the year.

Thank you.

And for our next question we go to Steph Wissink with Piper Jaffray.

Thanks. Good morning, everyone. I will add my congrats as well. Just a quick question for you, Richard, on the Li & Fung partnership, can you just help us understand how that’s going to be reported in your P&L? Is that going to be a wholesale arrangement or is that Carters.com additive? And then Mike, I was intrigued by what you talked about with your loyalty program and I think you guys have been capturing e-mail and mailing addresses at POS for several years. Can you just give us an update on how big that customer file is today and how you are planning to port those customers that existing customer file over to the new loyalty program and kind of what the timing is of that through the back half? Thanks.

So, the Chinese e-commerce sales, as I understand it, will be reported within our international segment as e-commerce sales. So, very similar to how we launched the business here in the U.S., Steph. As we got started, we have a series of third-parties that are helping us with the infrastructure and the fulfillment, for instance, customer service, order management, same model just in China and we will report that within our international segment.

And with respect to the loyalty program where we expect to have that launched in the second half of this year, it will be cross-brand, cross-channel. So, if the consumer is shopping for OshKosh, he earns points for Carter’s and vice-versa. And it’s beautifully branded. It’s referred as rewarding moments. I won’t comment specifically on the size of our customer file, but our first quarter performance, all the key customer metrics are improving. The number of customers, retention, new customers added to the file. So, this is going to be another tool that we believe will help us improve the performance of our – both our retail stores and online businesses.

Okay, thanks for the information. Best of luck guys.

Thank you.

And we go next to Robert Ohmes with Bank of America Merrill Lynch.

Good morning. This is Dan O'Hare on for Robby Ohmes. So, can you talk about the decision to increase from – or increase to size 8? And how incremental can that be over time? Thank you.

Yes, Dan, we did a test on our stores last year of taking the sizes up to 8 to 12 in Carter’s. We have got a lot of moms and consumer feedback that they are interested in expanding the brand up. So, we did a test in a limited number of stores, with a limited number of our playwear collections and the consumers responded very favorably. The highest productive size was size 8. And given the space of our stores and how we merchandise things, we decided to move forward with adding size 8. It’s a logical move for us to extend or up to size 8, as actually child, which is younger than 8 years of age. So, we decided to extend that to all of our playwear and sleepwear product starting this fall. So, we are excited about that. We think it can be a boost for our – all of our channels actually, even some of our wholesale customers have picked it up. I won’t comment specifically on the incrementally of that, but we do think it’s one of the many tools that we are using to drive our growth in comp store sales.

Got it. And then just one more if I may. Footwear is the license category for you. How has that been performing? And how do you benefit from a sale that’s done online or in one of your own stores? Thanks.

Okay, footwear, our shoe business has been very strong in both brands, Carter’s and OshKosh. We work very closely with a licensee. We actually do a good business design of that shoe business in-house and we work with them as footwear experts in us with our brand knowledge and consumer insights to make sure we have the compelling assortments. So, both businesses have been growing. I would say, mom wants to come in and do shopping, a one-stop shop and with our side-by-side store, she has got what we believe to be the two best brands in children’s apparel. She can dress that child now head to toe. In terms of how the economics work, it is the license arrangement. But the product, we buy that from the licensee for our direct channels. So when we sell that product through our direct channels, it’s recognized as a sale and we recognize the margin on that. In addition, there is a royalty component. So when the licensee sells their product to our wholesale customers, we would recognize the royalty on that product as well.

Got it. Thanks so much.

And we will go next to Tom Nikic with Sterne Agee CRT.

Hi guys. Thanks for taking my call and congratulations on a nice quarter. I apologize if this has been asked already. I got disconnected from the call before. But can we talk a bit about the deceleration of the e-commerce business, specifically for the Carter's brand, I think you touched on it a little bit with the international demand sort of tapering, do you think that’s a function of the strong dollar or do you think that there is something else at play. And also you mentioned that the comp growth was 8%, but the total growth was 14%, what’s that non-comp portion of the e-commerce sales? Thank you.

So with respect to the U.S. e-commerce business, we have seen a demand falloff from international markets in the fourth quarter last year and again the first quarter of this year. I would say in the top five markets outside of the United States where the demand came from, China continues to be the number one. China was followed by Russia and Ukraine. And you can imagine for the reasons of – for the things that are going on in that part of the world, demand has fallen off. And from memory, I think the demand from Russia and Ukraine was down about 40% in the fourth quarter, down about 70% in the first quarter. I think it has been impacted by the conflicts going on in that part of the world and also the stronger dollar. That said, we are actually looking at better growth in the second quarter of this year from international markets. So we are encouraged by that. So the demand on our U.S. website from U.S. customers was up about 30%. So the demand on the U.S. side, very strong. We never expected big demand outside the U.S. That was an unexpected benefit of launching the e-commerce business years ago that we would see that amount of demand outside of the United States in our U.S. website. And we have taken – we are just seeing there is some pullback in that demand given the stronger dollar. But we think that hopefully, we will improve over time. We are starting to see improvement in the second quarter.

And Tom on your question as it relates to the difference between total e-commerce sales and the comp, it’s entirely I would say, a quirk of the calendars, the fact that we have the 53rd week last year. So the total e-commerce sales for Carter’s were up something like 14%. The comp is around 8%. For OshKosh, it’s 27% going down to a comp of 20%. So the fiscal period in this year’s first quarter was from January 4 through April 4 that is the comp store sales period that we are using year-over-year, that’s slightly different than the prior year fiscal first quarter, which ran from December 29 of 2013 to March 29. So there is just entirely a feature of a quirk of the calendars.

Okay, that makes sense. Thanks very much. And just a quick piece of housekeeping, did you provide guidance for year end inventory levels?

I believe I did. We are expecting year end inventories to be up in the mid single-digit range.

Alright, great. Thanks and good luck for rest of the year.

Thank you.

And for our next question, we will go to Rick Patel with Stephens Incorporated.

Good morning everyone and I will add my congrats on the strong performance.

Thank you.

Just a question on the China e-commerce launch, it looks like your research points to good demand, but can you talk about how you are going to approach marketing in that market and to what extent you are relying on partners and how we should be thinking about the expenses related to that?

I don’t think the expenses are going to be significant. We are assuming some portion of about $2 million of operating losses this year from this initiative. And over time, I think the marketing will largely be digital marketing and getting the word out through developing a customer database based on the order file. And so we view this as it’s going to ramp up at least initially slowly. We view it as a wonderful opportunity to enter the market to tap into the demand we are seeing on our U.S. website. It occurred to us, it’s about a $2 billion e-commerce market in China. And last year on our U.S. website, we had about $16 million dollars of demand, so very little effort in the United States. We have gained almost a point of market share on the China market. So the marketing efforts will be focused largely on those folks who are tapping into our website on Tmall. I am sure we will be tag teaming some good efforts with Tmall and leveraging their expertise in terms of how to best reach consumers. And we will share more with you later this year. I am not quite sure there will be much to share with you in July when we update you next. But certainly later this year, we will let you know how this good initiative is underway.

And then also a question on the execution of your OshKosh side-by-side strategy, so how difficult is it to execute openings for this brand over the long run just given that these are but side-by-side locations, I am curious, do you have to pay your Carter’s neighbors to relocate, do you have to wait for leases to come due, just some help on that strategy and perhaps the limitations as you try to add 200 stores over the long run?

We don’t see much limitations, I actually think to the contrary, I think the property owners view this as a point of differentiation in their shopping center. So when a new center is being built, we actually get prime space in the center of the wing allocated to kids apparel. And this is the traffic driver for the shopping centers, having the two best brands and the young children’s apparel sitting side-by-side. So we haven’t seen any difficulty finding the space available for these stores. I think today, all of our sites for 2015 have been locked down and a portion of our 2016 sites have been locked down. So we are not seeing any challenges finding space available for these two stores.

Thanks very much and all the best this year.

Thanks very much.

For our next question, we will go to Steve Marotta with CL King & Associates.

Good morning, everybody. Just a couple of quick questions, has the domestic competitive environment changed the promotional environment at all either from a direct-to-retail standpoint on a wholesale channel in the first quarter and in particularly, April?

No, I don’t think so. It continues to be very promotional. It always has been promotional. The only thing that probably worked against retailers in the first quarter, similar to the experience we had was the difficulties, challenges related to the West Coast port delays. Weather is never ideal in the first quarter. So it depends on when the winter storms hit. We had winter storms hit us over the important President’s Day weekend. And so what products you didn’t sell over those important shopping periods you have got to ultimately move through. But I would say our promotions year-over-year, I would say are comparable to maybe up a bit and largely because of the West Coast port delays.

Okay, that’s helpful. And Richard as it pertains to the tax rate expected this year, can you talk – is there a drift down for any particular reason or due to maybe a little bit more international income than previously expected and maybe even comment of a little bit on next year if you can?

Sure, Steve. For the full year, we are expecting an effective tax rate somewhere in the neighborhood of 36%. The rate was a bit lower in the first quarter. We had a couple of outstanding audit issues that were settled and so there were some releases that benefited the first quarter rates. So it was a bit unusually low in the quarter. It will tick back up. I would say on balance the opportunity is over the coming years as our international operations become more significant to hopefully have that effective rate move down over time. That would be a function of the commerce that we hope to do outside the U.S. and then also the benefit we get from our Hong Kong sourcing office. Those opportunities, I would say are still to come. So that rate will be somewhere around 36% I would say for the next year or so.

Very helpful. Thank you.

We will go next to Anna Andreeva with Oppenheimer.

Great. Thanks. Good morning and congratulations guys on very solid results.

Thank you.

I had a question on gross margin performance, maybe talk about some of the buckets of strength there in the first quarter, I am not sure if we missed this, but what was the AUC versus AUR relationship. And what is embedded in the gross margin for the second quarter and for the year, should we expect even bigger expansion in the back half like you guys guided previously?

I would say in the first quarter, the drivers of gross margin were solid demand in the wholesale channel. I would say bookings were modest in the first part of the year and so demand for whatever reason has been consistently very strong, quite stronger in that channel than it had been during the quarter in our own stores. And so those stores were looking for inventory. The product that we have for that channel was perhaps less affected by the port strikes than the product that was bound for our retail stores. So very good demand, very good sell-through, good product performance, the fact that we were able to sell through a lot of fall inventory, probably at a better clip than we would have otherwise because the spring product was late arriving, allowed us to be in a very good inventory position year-over-year. And so there were less of those incumbent inventory quality charges that you sometimes take at the end of a period. As Mike indicated, the overall charges that we had expected for the congestion on the West Coast with moving products through those ports were less than we had planed. So that was certainly a benefit and a source of some of the upside in gross margin. We expect good gross margin performance I would say consistent with what we told you last time in the second half. Product costs are expected to be down year-over-year. That’s the feature of cotton being lower, fuel, some things that Mike mentioned. So, I think the outlook for gross margin in the second half of the year was it continues to be very, very good. In terms of the first quarter, unit costs were up slightly and pricing was as well for the company. So, there was a bit of a positive gap between pricing and cost in the first quarter.

Okay, that’s terrific. And with the West Coast port delays, should we, Richard, expect those are behind us now and you are kind of in a clean state exiting the second quarter?

I think that’s right, Anna. It was mostly a first quarter effect. We did originally anticipate that, that would extend over into the second quarter. I would say what we are tracking right now is very modest impact on the second quarter and we are largely caught up at this point.

So briefly, we received yesterday, just something we will keep an eye on. Apparently, their truckers are striking out on the West Coast. So, we haven’t seen any impact of that yet, but it’s something to keep an eye on. That’s kind of late breaking news for us yesterday as we prepared for this call.

Got it. Okay, best of luck guys. Thanks.

Thanks very much.

And with a follow-up question, we return to Taposh Bari with Goldman Sachs.

Thank you. A couple of quick follow-ups. On the e-com question, surprised, I guess the question is what do you make of OshKosh e-com growth holding up actually accelerating? I think both Oshkosh and Carter’s had kind of tracked similarly in years past, but it seems like they are diverging. So, hopefully you can comment on that? And then quickly on FX, Richard, can you quantify the EPS impact to FX for the quarter? And then last one and I will stop is if you can quantify the amount of price you realized in the quarter versus the amount that costs were up? Thank you.

So, I would say let me just comment on OshKosh. One, OshKosh, I think we are making good progress with the brand. There is good leadership over the brand. There is a very talented team. The team has been together now for several years. We are seeing good feedback from consumers on the brands. I think it’s fair to say OshKosh has an easier comparison to prior years than Carter’s has online. That said the marketing is terrific. The experience online, in the stores, the benefit of the side-by-side, they all serve to strengthen the relationship with consumers. If you have not been in the side-by-side stores recently, it’s worth a visit just to see the progress that we have made with the OshKosh brand and we are seeing a good response. The net promoter scores on the OshKosh brand continue to improve. So, I think we are making good progress. I share Brian’s view on this. I think we have got good growth in both sales and profitability ahead with OshKosh. The more successful these stores are and the better we do online, the more scale we are creating with that business enable to lever some of the overhead associated with the brand.

And Taposh on FX in the first quarter, as I mentioned, it cost us about $6 million in the top line, probably $4ish million or so in earnings. That translates probably to a nickel or so within the quarter negatively. In terms of price and cost, I would say that unit costs were up in the low single-digit range and our pricing was up similarly. So, that was a result of the first quarter.

Okay, thanks again.

Sure.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Casey, I will turn the conference back over to you for any closing remarks.

Well, thanks very much. Thank you all for joining us this morning. We appreciate your questions and your interest in our business. We look forward to updating you again on our progress in July. Thank you all very much. Bye-bye.

And again, ladies and gentlemen, this will conclude today’s conference. Thank you for your participation.