Welcome to Carter's Fourth Quarter 2018 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 fourth quarter and fiscal 2018 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 report 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. I would now like to turn the call over to Mr. Casey.

Thanks very much. 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. We exceeded the sales and earnings goals that we shared with you in October. We had a very strong finish to the year with high-single-digit growth in our retail and wholesale businesses. Our analysis suggests that young children's apparel was a good source of growth for many retailers in the fourth quarter, particularly during the holiday shopping periods. In our retail business we achieved the strongest growth in comparable fourth quarter sales in five years driven by positive store comps and double-digit growth in ecommerce sales. The quarter got off to a good start as weather turned cooler. We saw strong demand for our fall product offerings with comparable sales up 9% in October. On a combined basis, sales in November and December grew nearly 5% including good growth during the Thanksgiving and Christmas holiday shopping periods. Our retail segment contributed nearly 70% of our sales growth in the fourth quarter. We continued to see the strongest traffic to our co-branded stores with comparable sales in the quarter up about 10%, up nearly 6% for the year. These stores offer consumers the convenience of shopping two of the best known brands in children's apparel in one convenient location. We continue to assess the performance of our various store models. With the success of our co-branded stores and convenience of shopping online, we are seeing fewer visits to our legacy outlet stores. Over the next five years, we plan to close over 10% of our stores in the United States as the leases expire. These are lower-margin stores, many in declining outlet centers. There's no compelling…

Thank you Mike, good morning everyone. I will begin on Page 2 with our GAAP income statement for the fourth quarter. Rest of my comments will speak to our results on an adjusted basis. Our GAAP results for both this year and 2017 included some unusual items which are detailed in this morning's press release. The items that I draw your attention to would be a minor charge in this year's fourth quarter related to the transition of our business model in China. Fourth quarter 2017 included a significant net gain related to the adoption of the new tax reform legislation. Our adjusted results exclude these unusual items in both periods for greater comparability. Our full year GAAP P&L is included on page 3. Today's presentation and earnings release include reconciliations of our GAAP basis results to the adjusted basis of presentation, I encourage you to review this information as you evaluate our results. Moving to Page 4 with some highlights of Q4 and fiscal 2018. We had a strong finish to the year. Fourth quarter consolidated net sales grew 6% with solid growth in both our U.S. retail and U.S. wholesale segments. Adjusted earnings per share grew 22% to $2.84 reflecting largely comparable operating income and lower effective tax rate and the benefit of share repurchases. Higher sales, lower SG&A, and a lower tax rate drove the outperformance and EPS relative to our prior guidance. For the full year consolidated net sales grew approximately 2% and were adversely affected by the bankruptcies of Toys "R" Us and Bon-Ton. Recall that we had planned operating income for 2018 to be comparable with 2017 as we had intended to reinvest approximately half of the earnings upside generated by the reduction in the U.S. corporate tax rate back into the business. Our…

[Operator Instructions]. We will take our first question from Susan Anderson of B. Riley FBR. Please go ahead.

Hi, good morning. Congrats on a really nice quarter. I was wondering if you could talk about the older kids’ business, it sounds like it continued to be strong in the quarter. I guess have you seen that business get competitive in terms of promotions with the Gymboree liquidations, and do you think that you'll be able to maybe take some market share from Gymboree even though you're not necessarily in the malls except through wholesale? And then also I was curious are you seeing any of those in-mall wholesale customers potentially want to take on more older kid products from you guys?

Couple of things. On the age up, we launched that Carter's Kids line last fall. We supported it with great marketing and added -- in adding those sizes, we can address a child up to about 10 years old. So the product sold really great from toddler through size 14. Our sales grew high-single digits last fall, most of it from adding those new sizes 10 to 14. I think we did about an extra $14 million in the fourth quarter. So we continue to drive that initiative with great product, things like sibling dressing and events and uniform and denim all places we think we can gain share. So it's a good nice opportunity for growth. As far as Gymboree, Mike said you know we think that's a potential $100 million opportunity to capture market share. Their liquidation has become -- it's begun in earnest, so first half could be a little bit disruptive for us, but we've got 200 stores located in the same center as Gymboree. 150 of those are in outlets and they also had a meaningful presence in the malls. So, we've got only about 50 mall locations, our performance there has exceeded expectations, so we're going to look at malls as a potential growth opportunity given this void in the market and some more attractive rents we're seeing. As far as wholesale, I would say the biggest incremental business we've got there is toddler. We dominate in baby, a lot of folks have our toddler business but several new -- several customers last fall intensified the toddler component of the business with us, so we're happy about that performance, and overall we think this is a good vehicle growth for our company. Again Mike said we tend to have about 90% of the moms buy the Carter's brand when they have a child, and if we can keep those folks in the brand another year or two, all the way through a 10-year-old child, we think that will be a good thing for our company.

Great, thanks, that's very helpful. And if I could add one follow up just on Toys "R" Us, I think you guys said we captured about 85% of the 40 million, yet obviously the wholesale and retail sales were very strong in the quarter. So I guess maybe if you could just give some color on why you didn't think you reached the 40 million, and then also just what do you think the opportunity could be in 2019?

Just a couple of reactions; one, the market data would suggest that consumer purchases of our brands was up over 2% last year, so when we reference what we recaptured it was based on our shipments to replenish some of those sales. And replenishment business I would say trended better in the fourth quarter than it had been say in the third quarter. It just didn't reach the level that we had expected. You have seen the holiday performance reported by a number of retailers. We had very good holiday performance in that nine-week November-December shopping period. We had very good nearly 5% comp, and if you lined up our same nine weeks to the major retailers’ nine weeks, which was about a week later, their period ended the first week of January, our comps were up closer to 6%. Not every one of our customers had that kind of performance during that nine-week period. So depending on the performance they had determines what kind of replenishment we would see in our own business. But I would say by and large we were happy with the fourth quarter, and we expect based on the current trends in our replenishment sales which is the high margin component of our major retailers business and our business, if those trends continue we'll see more of a recapture in 2019.

Great and it sounds like that lack of replenishment was more department stores versus mass?

Yes, that's fair to say.

Great, thanks so much. Good luck next quarter.

Thanks very much.

Thank you. We will take our next question from Heather Balsky of Bank of America. Please go ahead.

Hi, thank you for taking my question. I was hoping you could talk a little bit first on your plans around SG&A spending for 2019, and then layering on top of that what level of comps do you need I guess over the next few years to leverage operating expense, how should we think about that dynamic in terms of how you plan to spend? Thank you.

Hi Heather, as it relates to SG&A, we're planning actually for leverage in 2019. It’s been quite a number of years since we set a plan like that. We have I think made some very good steps to constrain discretionary spending just reflective of the lower top line outlook for the business, continuing to invest in important areas, marketing, technology, that kind of forward consumer facing sides of the business, I’d say overhead areas of the business is extremely well controlled. So we're planning for low single-digit growth in SG&A and rate leverage. As it relates to where do we leverage in the retail business typically it's at that kind of 3% total retail comp level, that's the level that allows us to leverage the cost bases of the business.

Thank you. And just one follow up, in 4Q you talked about some expedited shipping initiatives, I'm just curious how those tested in the fourth quarter and how you are thinking about that going forward?

Yeah, we did make some investments in expedited shipping. I'd say in a couple of different respects, one we wanted to try and increase the processing time through our distribution center and then once we got the products into the shipping stream themselves we spent a bit more on increasing the speed of delivery. I'd say we're still reading those results, I think we are kind of at parity with a number of our competitors now whereas a year ago we felt like we were delivering those e-commerce orders a bit more slowly than perhaps our peer group. So I think we're very comfortable, still looking for ways to get product to the consumers as quickly as we can. We do have some initiatives as it relates to testing fulfillment for instance from some of our retail stores, we will have those capabilities later this year and we will give that a good test. But clearly the consumer has elevated their expectations in terms of the speed with which they expect to get that product and we're trying to respond accordingly.

Thank you very much.

[Operator Instructions]. We'll take our next question from Ike Boruchow of Wells Fargo. Please go ahead.

Hi, good morning everyone. Thanks for taking the question. Two questions, first one is just on the guidance for Q1, could you maybe give us a little bit more color about what retail comp is embedded in the 1Q guide, just curious how we should expect the later [indiscernible] you guys and then obviously help you when we get to second quarter?

We had a good start out of the gate in Q1 in all of our channels. I will just say wholesale particularly good and we've had some softer business in our retail business the last few weeks. So run down a little bit, a little bit of a negative comp there at this point. We've planned Q1 down low single-digits and we're running slightly behind that right now. Keep in mind it's January and February the lightest month of the year. March is as big as January and February combined. We've got a later Easter this year which just puts about 2 points of comp into Q2. So we're monitoring some of the weather things, the tax return situation what have you but we're planning a low single-digit comp for the quarter at this point, down low single-digits.

The best way to think Ike -- the best way to think about it is what is the type of comp we are planning for the four months of the year which takes this drama already out of it, it is about a three comp.

Perfect, that's helpful. And just quick follow-up maybe for Richard, there is more color on the China model and what's changing would be helpful. I get that there's a lot of changes going on right now, maybe what were the sales and the EBIT losses last year that you had with your prior partner and then what we should expect for sales and EBIT contribution potentially this fiscal year, just trying to understand the changes in the model and how it affects the P&L a bit better?

Sure, so the previous model we had kind of a disjointed effort we think approaching that market. So we were running the e-commerce channel which is our website on T Mall [ph] and then we had a partner which was a wholesale relationship for us so we sold product to that partner and then they sold it through the retail stores that they operated. From memory sales in China last year were about $12 million so we're transitioning to a new model which is more of a royalty relationship so, that $12 million will come out of the base of our net sales and we will earn royalty income from that partner on their sales of product in China over time. As Mike said this is one of our longstanding suppliers so they will actually source the product which is a little different. We were previously sourcing that product in some cases unique product for China which brought with it a great deal of complexity because that was product that was unique just to China. For that new partner who has that great expertise both in terms of manufacturing the product and also importantly experience with retail distribution of young children's apparel in China we think that will be a great advantage for us. As 2019 is a year of transition we're not planning I wouldn't say for material contributions of royalty income, that's probably more of a 2020 and beyond. So I'm not expecting a significant contribution in 2019. We did incur significant losses in China in 2018. The amount that ran through our P&L was probably $5 million or $6 million and then we had another 5 million or 6 million of additional charges that we have treated as adjusting items. So that apart of $11 million or $12 million of losses and that's a combination of taking charges related to that and that unique inventory for China and also just severance as we unwind the team and resources that we have put in place in that market.

Got it, thanks.

This new model what we hope to do is replicate the success that we had in Canada. We had in Canada and Mexico so we started both of those relationships in Canada and Mexico through licensing arrangements. We partnered with someone who grew up in those countries and knew how to operate in those countries and had demonstrated expertise in running retail businesses and sourcing operations and that's now what we have in China. So we are as fortunate to have the experience that we've had in Canada, Mexico, and China it will be a nice source of growth for us over time.

Thanks Mike

You're welcome

We'll now take our next question from Jim Chartier of Monness, Crespi, and Hardt. Please go ahead.

Good morning, thanks for taking my questions. So, on the Toys "R" Us disruption with most of the demand being recaptured by Wal-Mart, Target, and Amazon who have exclusive brands, now that you've got more time to plan how much of an opportunity do you see to try to recapture that? And how much of a disruption was it to have kind of Carter's lost sales and not be able to meet the demand with the exclusive brands?

It was highly disruptive. Toys "R" Us had been a very good customer of ours for years, a good margin customer because it was primarily focused on baby. And not surprisingly as we analyzed the results we saw nice slip in our stores but most of the business went to the exclusive brands primarily because those retailers sell the things at Toys "R" Us was selling; diapers, formulas, strollers, other things that we do not sell directly to consumers. And thanks to a number of our Carter's brand customers don't sell to consumers. So we're not surprised by the results. The encouraging thing is we're -- our brands are sold wherever people are shopping for young children's apparel. So people do shopping in other places and thankfully we've seen a nice lift in those exclusive brands. But we have also seen -- we're also planning good growth with our Carter's brand customers in 2019 going forward. So, in some ways it's the Toys "R" Us closures, Bon-Time, Sears disruptive. We're encouraged by going forward, there's going to be fewer, better, stronger retailers and we do business with all of them. So that should be a nice source of growth for us.

Jim I was just going to also add to that, the shift is something we've worked on. We've got the great business with Amazon, we grew our Amazon business about 50% last year in our first full year they are now top 10 customer and our exclusive brand Simple Joy is doing great doubled over last year. As a matter of fact Simple Joy has won the most requested fashion brands on Amazon's Christmas wish list last year and we just signed a new longer term agreement in January to extend our exclusivity with Simple Joy. So those are the types of changes we've made in the company. We continue to have channel shifts, we monitor them but we want to make sure we're there to -- wherever mom want to shop for her young children's apparel and as Mike said we're going to have to fewer stronger retailers. We've got great relationships with all of our partners but as that exclusive brand shift started to happen we're thrilled that we do have those brands and we have those relationships with those folks as well.

Great, and then you guys referenced potential disruptions from China tariffs. Can you just remind us what percentage of your product will be sourced from China in 2019 and where do you see that overtime?

It's somewhere around 25% percent comes from China and that's largely for apparel -- for Skip Hop at a much higher percentage, closer to 100% of Skip Hop's product comes from China. The tariffs in 2018 were not meaningful, if some of the categories I think even this year it's probably -- the impact is probably somewhere less than $4 million to $5 million bucks. So it's not overly significant, it's not 0. We already pay tens of millions of dollars in duties for products coming in from China. So thankfully the tone of the dialogue on those tariffs has improved and we hope it's not a meaningful exposure for us in the balance of the year and going forward.

And then just lastly you mentioned acquisition potential going forward a number of times, so can you -- so on Skip Hop the most recent acquisition can you just give us a sense of where revenue will be in 2019 versus when you purchased it a couple years ago and where is operating profit next year versus where you want it? Thanks.

Sure, Skip Hop is performing well. We had real strong sales growth last year of about 30%. I think Richard said that we're going to grow that about 20% this year. We finished last year about $125 million with Skip Hop and we purchased a $100 million business in 2017. We still feel that we can double that business in the first five years of ownership. I would say the profit size is not optimized yet, we had investments in talent and systems and of course we had the Toys "R" Us impact that also played in with Skip Hop as well but we've got a real strong product agenda in 2019. We're looking forward to continued growth. We have opened several different accounts, got some great new products and our direct business is also growing rapidly. So we feel very confident about the Skip Hop business.

Great, thanks and best of luck.

Thank you.

Thank you and we will now take our next question from Jay Sole of UBS. Please go ahead.

Great, thank you. Mike you mentioned if you were stronger retail partners in your wholesale business can you give us an idea of what percentage of your wholesale business right now is your top five customers?

We would say it is probably better part of 60% to 70% of our top five. Yes, they are about -- it's a high percentage.

If you anticipate that number will increase over the next couple years?

They may, there are still some major retailers who are working hard to find relevance with consumers today. So my guess is there will be further consolidation.

Got it and then may be just on the square footage, you gave that nice slide on page 13 showing your store plans, does the store count growth correlate with what you expect the square footage growth to be or just because you're doing more dual branded stores will there be a relatively greater increase in square footage relative to store count?

The typical model we have right now is 4,000 to 5,000 square feet. Something we have not built into the model is this new Gymboree opportunity. We're going to test a smaller mall store format and it's worked beautifully for us up in Canada. We have smaller store formats up in Canada. We have some smaller formats in the United States and there's a smaller store format in Mexico. So we've got a line of sight to what makes sense in the malls and so going forward it might be more stores but the square footage may be smaller.

Got it and then maybe one last one, Richard, just on the gross margin in 4Q, can you just maybe parse out some of the drivers in a little bit more detail to what really changed versus last year?

Jay your question is for the fourth quarter gross margin or for 2019?

No for fourth quarter, the quarter we just finished.

I think the major factor really has to do with the mix of the business so within wholesale we still have the effects of the loss of the Toys "R" Us and Bon-Ton which was very good margin business for us. We were relatively more promotional in e-commerce that's still good margin business for us but it's not quite up to our plans. We've seen a real issue around freight costs being higher, the cost to serve that e-commerce business has been increasing. I mentioned the additional investment in expedited shipping but really the operational costs around e-commerce have been in some pressure and some of those costs run through the gross margin line so that was a bit of a pressure there. We also saw some additional off price channel sales in the fourth quarter that was a feature of just being a little heavier on some of that Toys "R" Us related inventory that we were clearing through. So those were some factors that probably puts a little bit more pressure on gross margin than is typical for us.

Got it, thank you so much.

Thank you and we'll take our next question from Laurent Vasilescu from Macquarie. Please go ahead.

Good morning, thank you very much for taking my question. I want to follow up on Jay's gross margin question, curious to know how we should model the gross margin down for the first quarters, it is probably down 150 bps and then how should we think about the gross margin overall for the year and then maybe any color on the tax rate for the year?

I would say we are planning gross margins down in the first quarter. I'd say the planning assumption for 2019 is more comparability year-over-year so we're looking for more comparable gross margins for the full year period. The factors that are affecting Q1 certainly would be the slow start to the year. The factors that I mentioned as it relates to higher freight expenses, there is a bit still of that comparability issue on Toys "R" Us in the first quarter where again that was very good margin business if not in the base at the moment but expecting good performance and actually some gross margin expansion in the second half of the year. Effective tax rate will be similar as well to 2018 in that low 20% range.

Okay, very helpful and then I think it was called -- the adjusted SG&A level by 120 bps reflecting expense levels in all segments. And I think also lower provisions for performance based compensation, could you potentially quantify that provision and then how do we think about any -- are there any one time investment we should consider for the first quarter?

Yeah, in terms of SG&A in the fourth quarter I believe the year over year reduction in that provision for performance based compensation is about $9 million so we did not achieve our performance objectives for the year. A good portion of that relates to the unexpected bankruptcies of Toys "R" Us and Bon-Ton but the decrease in the provision that benefited the full year actually I should say is about $9 million. It is a smaller number for the fourth quarter. Your second question as relates to investments for the first quarter I don't think there are any unique investments. We continue to spend on some of our technology initiatives. We're working on some of the ongoing integration efforts with Skip Hop. We're transitioning some of our distribution and adding additional distribution capabilities on the West Coast and service of the Skip Hop brand -- our normal business. Some of the projects that we're doing in the first quarter nothing unusual.

Okay, very helpful, thank you. And just last question here, last February I think he was called that the international should grow by 300 million and e-commerce ago by 400 million over the next five years. With today's call outs for the five year plan with international going about 100 million can you parse out by region and then is e-commerce still expected to grow by $400 million over the next five years?

Well on international we trim the previous forecasts by about $100 million and that's entirely China because the new model that we have with China is a licensing model, those sales will not be coming through. Our sales line item and then we do contain and expect growth in e-commerce so we probably trimmed that by some portion of a $100 million as well relative to our forecast last February simply because we're seeing some pressure with international demand on our U.S. website. That's been a good source of growth for us over the years and just based on our experience this past year we're seeing lower demand from international consumer shopping on our U.S. website which our analysis suggest is directly attributable to the stronger dollar and the weaker exchange rates. We've seen that not only online but in our stores. Lower internationally.

Thank you very much for all the color.

Our pleasure.

That concludes today's question-and-answer session. Mr. Casey I would like to turn the call back to you for any additional or closing remarks.

Okay, thank you. Thank you all for joining us this morning. We appreciate your interest in our business and we'll look forward to updating again on our progress in April. Good bye everybody.

This concludes today's call and thank you for your participation. You may now disconnect.