Ladies and gentlemen, welcome to Carter's Third Quarter 2019 Earnings Conference Call. On the call today are Mr. Michael Casey, Chairman and Chief Executive Officer, Mr. Richard Westenberger, Executive Vice President and Chief Financial Officer, Mr. Brian Lynch, President, and Mr. Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its third quarter 2019 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. And now I would 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 our sales and earnings objectives for the third quarter, excluding the impairment charge related to our Skip Hop brand. Our growth was driven by our wholesale and retail businesses. We continue to see an acceleration in demand for our exclusive brands, which are sold through the largest retailers of young children's apparel in the United States. Target, Walmart and Amazon are 3 of our top 5 customers and they are clearly benefiting from the closure of Toys "R" Us last year and Gymboree earlier this year. We saw improved price realization in the third quarter, and we were less promotional giving a given a lower mix of clearance and off-price sales. The level and quality of our inventories are in line with our plans and in good shape heading into the holiday season. Our latest data for the young children's apparel market in the United States reflects a 5% decline in spending this past year, which we attribute to fewer annual births. Annual births in the United States have been declining since the Great Recession began in 2008. Over that same time period, our sales and earnings have more than doubled, driven by the strength of our brands, product offerings and broad market presence. Thankfully the most recent data, projects stabilization and improvement and annual births with a peak population of men and women in their late 20s and early 30s, which is the age when many begin to start a family despite current market challenges, given the trends in our business and excluding the impairment charge, we believe we are on track…

Thank you, Mike. Good morning, everyone. I'll begin on Page 2 with our GAAP income statement for the third quarter. Our reported results for the third quarter and year-to-date periods included unusual items in both 2019 and 2018, which are detailed in our press release and presentation today. As shown in the P&L on Page 2 and as Mike has mentioned, we took a charge in the third quarter related to the write down of the carrying value of the Skip Hop tradename. Including this charge, our operating income in Q3 declined about $20 million compared to last year with diluted earnings per share down about 12%. On Page 3, we have provided some context on the charge in the quarter. We acquired Skip Hop almost 3 years ago in early 2017. As part of the acquisition purchase accounting, we recorded several intangible assets on our balance sheet, assigning just under $60 million of the purchase price to the Skip Hop tradename. We are required to regularly assess the carrying value of the intangible assets on our balance sheet. And in the third quarter, we determined that the value of the Skip Hop tradename was impaired. This was the basis of the $31 million noncash charge we took in the quarter. The reduction in value was driven by lower actual and forecasted sales and earnings for Skip Hop relative to our previous expectations. Several factors have worked against us in the time we have owned Skip Hop. Some of which are summarized on Page 3, certainly the loss of Toys "R" Us, which was Skip Hop's largest wholesale customer and more recently, the imposition of significant tariffs on China imports, are 2 of the most noteworthy. As Mike said, we continue to believe that Skip Hop is a very good…

Thank you. [Operator Instructions] Our first question will come from Ike Boruchow with Wells Fargo.

Hey, good morning, everyone. Two questions. The first one is just on and apologies if you guys went through this, I missed it. But so the miss in the quarter relative to plan was on the retail comp in the U.S. But on the guidance, it looks like there's a slightly revised lower profit for the wholesale business for the year and you maintain profit for retail. So I'm just kind of confused because it looked like wholesale was good and retail was a little weaker but the guidance is coming down on wholesale versus retail. Can you help me understand what's going on there?

Yes. We'd say we have a slight change in our forecasted mix of products and that carries with it some changes in the margin and profit outlook for the fourth quarter, primarily for wholesale.

Tariff's hitting the fourth quarter as well.

Got it. So the second is on tariffs. So 2 quick questions. One, you said $4 million for Q4. Is the $30 million an annualized number or should we think it's $34 million because...

No. It's less than $30 million, and that's for 2020 full year. In fact, this year, in '19, it's closer to $7 million.

Got it. And then the last question on tariffs what I had is. Just can you separate 4A and 4B? Just how much of that number is the tariffs that are on the come for December versus what's already been announced for September?

It was about $4 million for List 3 and $3 million for List 4.

I guess what I'm getting at is, we know what's already in place now, if December's tariff did not go into place, what would that number move lower to?

Yes. My understanding is, if the October delayed tariff action as well as December 15 action which has not been commented on recently, were to not occur, that would reduce the full impact in 2020 by about $4 million.

Okay. Thank you so much.

You're welcome.

Thank you. Our next question comes from Susan Anderson with B. Riley FBR.

Hey, good morning. Thanks so much for taking my question. Nice job on the quarter. I was curious on the SG&A line, I think you maybe had a spending shift $4 million to $5 million from second into third. Did that get postponed again in the fourth? Or did that flow through in the third quarter?

I'd say the majority of the favorability in spending was just good old-fashioned discipline, Susan, just given the trend of the top line, we were able to control discretionary spending or maybe a modest amount of marketing that we shifted from Q3 to Q4. But I wouldn't say it's significant.

Okay. Great. And then I was wondering if you can maybe talk about the performance of your mall-based stores versus your other stores? I was just curious, did you see any benefit from the shutdown of Gymboree in those mall-based stores? If performance was noticeable at all versus an off-mall?

Yes. The mall stores are some of our best performing stores. We did see improvement in the mall stores, where we were co-located with Gymboree. And so we're we'll probably open up some force of 25 mall stores this year, and we're going to proceed with caution in the next 4 or 5 years. But we identified earlier this year an opportunity to explore some portion of about 100 new mall opportunities. We always had a bias against malls because strip centers felt more like outlets to us and we've had a good experience in the outlets over the years. We have the #1 market share and #2 market share in the outlet centers. So we evolved from the outlet into strip centers. While we stay away from outlets malls rather. Malls at the beginning mall stores at the beginning of this year we're only some portion of about 6% of our total store portfolio. So I would say, we're underpenetrated intentionally over the years. We stayed away from the malls. But only about 6% of our stores at the beginning in the year were in malls. We see an opportunity over time to increase that mix. If we opened up all 100 new mall store opportunities that we identified earlier this year, the mix of our mall stores to the total portfolio would still be less than 20% 5 years from now. So we're going to go down that path. The stores we have, we've had a good experience, especially during these seasonal transitions when it's unusually hot or unusually cold during those seasonal transitions. The malls are typically the mom and dad's choice for shopping for kid's apparel. And I think we benefit from having we would benefit from having a higher mix of mall stores over time.

Great. And last one, if I can ask one more. On the performance of baby versus toddler versus older kids, I think you had said baby was a pressure point, which I believe may be all year. Just curious if that's improved at all though? And then also, maybe if you could talk about I think toddler, you mentioned was at double-digits but then versus the older kids, the performance there?

Right. So overall, I think it's what's important to note, the baby apparel market, the latest data that we have, the market for baby apparel dropped from about $9 billion to $8 billion this past year. So the market has been down. That said, our baby apparel sales this year will be comparable year-over-year. So we view that positively. What we've seen is very good growth with the our exclusive brands with Walmart, Target and Amazon. So the baby apparel business is for us, lower growth than we like it to be. But I think it's a function of fewer births over the past 10-plus years. But I think we're holding our own in terms of market share. In terms of baby apparel, we have 5x the share of our nearest competitor. Toddler as a company grew over 4% year-to-date. The strength has been this come from this Age Up initiative that we launched a couple of years ago. We've seen the highest growth in our 4 to 14 age segment. That's been a good source of growth for us. So our merchants, our designers, our sourcing team, they've all done a good job developing a product offering that skews to a slightly older child up to about a 10-year-old child. They the number one request we've had from people shopping with us over the years, they wish they could stay with the brand longer. So we developed a product offering that enables them to stay with our brands longer and they've responded positively to it. The strongest growth has been in the older-age segments.

Like I just said, that the wholesale accounts, that's part of the Age Up strategy are also leveraging our brands to grow their toddler business with the Gymboree opportunity. We've had good business at Kohl's and Macy's, but last year, Amazon added Toddler age segments, which is doing really well. We've got incremental distribution in Walmart this year, which I'll remind for toddler, they're expanding in 2020. And now we gain placement in Target for spring of 2020, with a just one you ran for toddler in addition to our growing business with the OshKosh brand at Target. So certainly excited about Age Up, not only for our retail business with the new sizes, but in wholesale, more of a toddler play. And they're reaching out to us and we feel good about that.

Great, nice job. Good luck this holiday.

Thanks very much.

Thank you. Our next question comes from Paul Lejuez with Citi Research.

Hey, thanks, guys. Just wanted to talk about the, what you call, I think the pull-forward of demand. I guess I'm just trying to understand the difference between how you would differentiate between a pull-forward demand and just better demand earlier than expected. Is there anything that you're seeing that would make you think that better demand wouldn't continue in that wholesale business? So that's question one. And then on the retail side, curious on the launch of the credit card, how much of that helped the business, what percent of sales did it represent that part of label credit card? And where do you hope that would go in 4Q versus 3Q? Thank you.

Yes. So in terms of I would describe what we saw in wholesale in the third quarter as earlier demand. Our wholesale customers, they have to transmit their orders weeks in advance of when they actually need it on their floor to work it through their distribution centers and out to the stores. Well, our experience over the years tells us, when you get new product that hits the floor, it drives better selling. So I think they and in anticipation of a good holiday season, they wanted to get the product on the floor sooner. If the product sells well, that may lead to better demand than we're currently forecasting for the fourth quarter, just not the way we're planning it right now. But if the selling is good that may provide an opportunity for better demand than we're currently forecasting for the fourth quarter. And on the credit card, I would say the impact on the third and fourth quarters won't be material this year. We just launched this recently. We're encouraged by its performance since the launch, consumers clearly embracing it. But I would not say, it would have a material impact on our performance this year. More to share next year.

And could I just one follow-up. Can you talk specifically about the outlook business? How did the outlook stores performed versus the rest of the retail business?

Yes. Interesting, The outlets did okay in the third quarter, the performance was actually in line, if not slightly better than the total chain.

Thank you very much. Good luck guys.

Thanks very much.

Thank you. Our next question comes from David Buckley with Bank of America Merrill Lynch.

Good morning, guys. Thanks for taking my question. Just on the gross margin outlook for fourth quarter, given the price increases, just curious why don't you expect to see margin improvement there? Then how you see gross margin by channel in the fourth quarter? And whether the promotional environment is having any impact on your outlook?

Yes. I'd say overall, as I said, we're planning comparable gross margin. I would say the underlying gross margin trend has been positive and that is expected to continue in fourth quarter. We're expected to continue to make progress in improving our realized pricing, which was a real success story for us in the third quarter. We do think that, that will continue. We're expecting a meaningfully lower level of off-price channel sales. We had an outweighted amount of that a year ago, we don't think that repeats in the fourth quarter. We get a mix benefit from growing our retail businesses, which are the gross margin-rich portion of the portfolio. But also, the offset that we have is the fact that these incremental tariffs are going to come in to the tune of about $4 million. So that depresses the overall consolidated gross margin. I would say, the underlying trend in terms of how we're running the business in terms of core profitability is continuing to improve.

I agree. Thank you.

Welcome.

Thank you. Our next question comes from John Morris with D.A. Davidson.

Thanks, My congratulations on a great start to fall here. A little bit more color if you would on the pricing progress that you all are making. I'm hearing but I don't want to read too much into this. Are you characterizing it as coming a little bit sooner in terms of the traction that you're picking up in pricing? Is it coming across both retail and wholesale, so pretty even. And any other kind of read-throughs on that for us? It sounds like you're expecting that to continue. And where all that might be coming from?

Yes. So just a bit of background here. So we saw higher product cost for 2019. We took more pricing action in the second half, third quarter was going to be the highest hurdle to cover the cost increases and we achieved those objectives. So our pricing and cost in the third quarter were each up about 4%. And so we achieved our pricing objectives. And it was a function of taking the prices up thoughtfully and the other thing is just the quality of inventory. So the price realization was better, largely because we are doing a better job this year, buying the inventories, buying them more conservatively, being smarter on the buys. So the price realization, the third quarter was good. We the pricing will not be up as much in the fourth quarter because now you'll start to the mix of spring 2020 product and the product costs for spring 2020 are lower year-over-year.

All right. Great. And the kind of contribution, I don't know, to the extent that you can quantify it so far for buy online, pickup in store. The advantages that you're beginning to see there. I'm just wondering if it you anticipate that that's going to be a meaningful factor in Q4 and/or into next year? I know it's still little bit early. So just wanted to kind of get a little bit color there.

Yes. We're excited about the buy online, pickup in store. We've really added multiple visually enabled capabilities over the last couple of years, including 2 of them in the third quarter. So we launched buy online, pickup in store where they can come in and get the product in about 2 hours after they order it. It gives faster service to the customer, lower cost for us. And when they come in a store, we're experiencing about a quarter of the time they buy additional product, which is great. So I would say it was low single-digit portion of the online orders out of the gate, which was good, it was on plan. Overall, when you put all these initiatives together between that to deliver from store that Richard mentioned that we're piling on the West Coast in Q4 and hope to roll out, as well as the endless aisle program and the buy online, ship to store that we launched in the last couple of years. All 4 of those collectively. We're currently seeing about 20% of the orders placed online are utilizing these new capabilities in total. And we think it's going to be 30% next year around there. So we feel good about it between that. The launch of the website the relaunch, I should say, of the website and then also while we're relaunching the seamless checkout process in Q4. And then the credit card that we launched. All those collectively, we feel good about and expect them to drive the business. And I think they will be more meaningful to our results next year.

Great, thanks Good luck for holiday.

Thank you.

Thank you. Our next question comes from Jim Chartier with Monness, Crespi, Hardt.

Thank you for taking my question. First, I want to on Simple Joys, I know that margin there has kind of lagged as you ramped the business. But I guess how long is this a new business like that take to ramp to maturity? How long did Walmart and Target take after you launched those businesses? Thanks.

Well, Simple Joys, we feel really good about that relationship. In fact, the teams are out there meeting with the group this week to have an excellent meeting. So the retail sales this year have more than doubled with Simple Joys, and I would say, the pace has even increased through Q3. The margins have improved with scale. The business is growing and they're going to expand to the EU 5 countries next year. I think we see those margins now reaching a point where they're accretive to CRI. So we feel good about that. And we expect them to continue to improve with scale.

Great. And then you mentioned in the script international spending on your e-commerce side and in stores improved, but not as much as expected. So much of a shortfall was that relative to your expectation for your retail comps in third quarter? And how much of a drag will it be in fourth quarter?

I wouldn't say it was meaningful. It started recovering in the third quarter, but would the forecast on exchange rates where I don't think the fourth quarter will be as good as what we envision when we updated you in July. So it's one of the reasons why we've tempered the guidance for the fourth quarter.

Yes. It's about 20% of the business online. The trend improved in Q3 over Q2, but it was still below what we had planned based on what's going on with currency.

Right. Okay. And then finally, your Labor Day weekend last year, which was a tough weekend for you. How did that perform? I know said September overall was challenging, but how the Labor Day specifically work out for you?

Yes. It was not good. I would say the weather over Labor Day this year was comparable. The last year, there was no stimulus. There was no cooler weather trends in any part of the country that would encourage people not to go out and shopping for their fall outfits. So I would say, Labor Day this year, where as we were hoping for better performance because of an easier comparison, the weather was comparable prior, so the shopping behaviors were comparable year-over-year. And unlike last year, we started to see cooler weather arrive later September into October. Even October month-to-date, we're up against about a 10 comp last year. And we're comping up 1, which we'd say comping up one against a comp of up 10 last year is good performance. But we had a tough comparison. We're hopeful that as we move into the balance of the quarter, cooler weather arrives in more parts of the country and they will be on track to achieve a two to three comp for the fourth quarter.

Thanks. Best of luck for Holidays.

Thanks very much.

Thank you. Our next question comes from Jay Sole with UBS.

Great, thanks so much. Just if you think about your wholesale portfolio, the last few quarters you talked about Toys "R" Us. It's come up on this call, that was a headwind and some of the other retail partners that have closed a lot of stores has also been a headwind. Looking at the portfolio as it stands today and thinking about next year, how do you evaluate how store closures might impact your wholesale business looking out into 2020?

Yes. We tried Jay to go out and look at all those things. It's there's a lot of moving parts in wholesale. I would say, overall, we feel really good about this year. And we plan to have a good year with this low single-digit growth. And that's considering we had about $15 million from TRU in the base in 2018. And as Mike said, the growth is driven by exclusive brands. There are significant channel shifts going on. The top retailers are getting stronger. We are proud about the fact that we think we're going to have record sales with 4 of our top 5 accounts and they're going to collectively grow double-digits this year. So the teams are doing a great job there. And then in the mall-based department stores are around 11% of our sales now. So there has been a rotation and a channel shift. There's no question. Replenishment business is overall a good, that's about 30% of our business and that's been driven by exclusive brands and then, of course, Amazon is doing well. As we look into next year, I commented on toddler. We've got an incremental toddler placement we feel good about. I think that the online businesses at all of our accounts are going to continue to grow, Amazon should continue to grow. But we'll be firming up those plans soon. We'll share more with you in February. But at this moment, we are still planning low single-digit growth at our wholesale business going forward based on all the puts and takes in the industry.

Got it. Okay. That's great. And then maybe, Brian, just to follow-up on that. Richard, in the PowerPoint mentioned a bunch of plans to really highlight the gifting opportunities for Carter's. Could you just remind us of how you felt about gifting in 2018? And maybe what you feel about the plans and strategies for 2019? And if it represents an opportunity to drive incremental comp in your stores this year?

Yes. I think gifting is a key opportunity we're focused on. One of our key strategies in the company, one of the 5 pillars of growth is really the winning baby. It is it does represent a little more of a challenge based on what Mike talked about with the market. But we put, I would say, significant efforts forward. We remodeled the front of about 400 stores this fall with this summer, I should say, with a new baby experience to showcase the layout product that we do have. We relaunched the site with a key focus on gifting. I think if you go on the site and see the gifting experience, it's beautiful. Significantly improved over what we had in the past and we'll continue to showcase that. But baby is a key opportunity. I think gifting is something we can continue to do a better job of, and we're looking at making more personalized efforts around that strategy as well going forward.

Got it. And I guess with Skip Hop, it's been some real successes. Maybe I saw a couple of surprises that you're talking about today. How does it impact your view of M&A going forward? Does it make you more interested in doing M&A or less interested? What's your feeling right now?

M&A is still on the shortlist of things that we think are opportunities to provide better returns for our shareholders. We've looked at a few things this past year, passed on them. We look for things in the kids kinds space doesn't necessarily have to be apparel. We would love to have another durables brand to complement Skip Hop and but we'll focus continue to focus on good brands in the kids space, with good management teams, track record of growth, something that would be accretive to earnings. So the experience with Skip Hop generally has been good. And I would say, we've invested significantly in the first few years to enable it to grow and it has grown, the sales are up over 50% since we acquired it. So it hasn't the experience with Skip Hop has not changed our view on M&A going forward.

And then a last one. Did the website relaunch have any impact on sales? Was there any disruption or cause any slowdown in the sales that might see what you might see improvement in the fourth quarter and beyond and next year, you lap it in 3Q?

No. Consumer embraced the changes right out of the box. We had actually expected there might be some short-term disruption as they got used to the site and we were surprised to see that there was no disruption. So the performance in the third quarter and online was very good for us.

Okay, got it. Thank you so much.

You're welcome.

Thank you. Our next question comes from Warren Cheng with Evercore ISI.

Good morning thanks for taking my questions. I wanted to follow-up on Susan's question about the stronger trends on the non-baby side where you have some new tools this year to go after some of the opportunity that's opened up. So the first is, where is the Age Up product available today? And what are the plans to scale that out in 2020? And then the second is, is the OshKosh launch in Target, is that something some of your mall-based wholesale accounts might be interested in?

I think there's 2 things. In terms of Age Up, that strategy is for older sizes and for toddler. We talked about adding sizes in the past. We added size 8 a few years ago and it became about $100 million in revenue over 3 or 4 years. We just added one size in the Carter's brand. So fastest growing part of the business is this Age Up strategy, this 4 to 14 range. The product is available primarily in our retail channel, both online and in our stores. We have had some folks in wholesale pick it up primarily in sleepwear, they do a very good job of older-age sleepwear. But in wholesale, I would say, our Age Up strategy to grow beyond baby is more of a toddler strategy, which I shared earlier with the placement that we have and some really great retailers and then the additional distribution we're getting both this fall and next fall. So we feel good about that. It's the best part of the company at this point in terms of growth. And then OshKosh at Target is doing well. We do have OshKosh in several other accounts overall, and we do expect to grow the brand.

And then just one follow-up. You made the comments that the wholesale exclusives are accretive to margins. Was that overall margins? Or wholesale margins?

That's the overall. They are margin accretive to the company.

Thank you.

You're welcome.

Thank you. Our next question comes from Tiffany Kanaga with Deutsche Bank.

Hi, thanks for taking our questions. As I also think out to 2020 and beyond and you mentioning in your prepared remarks an expectation for good growth in sales and earnings next year. What would you list as the most significant drivers overall at wholesale as you just discussed, but really more broadly? Behind what would still be an implied reacceleration in earnings growth to get back on track with your 5-year plan to CAGR of 7%?

We're not planning if you're talking about sales growth or earnings growth at 7%?

Yes. The earnings CAGR.

Yes. So right now our expectation is that we will have low single-digit growth in sales, mid-single-digit growth in operating income and higher single-digit growth in EPS. And again, there are a number of margin opportunities that enable us to have better operating income growth relative to sales, we'll have a higher mix of co-branded stores, fewer margin-dilutive stores that we will close over the next 5 years. We'll close at least 100 stores over the next 5 years. We expect to see a benefit from Amazon scaling, from Skip Hop showing progress. There's a number of inventory management disciplines that'll be margin drivers for us. And then in EPS, our plan is to continue to be in the market, repurchasing shares. And so those are our current model assumptions. And next February, based on our experiences this year, we'll refresh those assumptions. But we're expecting good growth in sales and earnings next year.

All right, Thank you very much.

You're welcome. Thank you. That concludes our time for questions and answers. I will now turn it back to Mr. Casey for closing remarks.

Well, thank you all for joining us on the call this morning. We look forward to updating you again on our progress early next year. Goodbye.

Thank you everyone. This concludes today's teleconference. You may now disconnect.