Welcome to Carter's Fourth Quarter 2019 Earnings Conference Call. On the call today are Mr. 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 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 Web site 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 Web site. On this call, the company will reference various non-GAAP financial measurements. On pages 2 and 3 of the presentation, the company has included GAAP income statements for the fourth quarter and full year 2019, and 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. Please go ahead.

Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our Web site, I’d like to share some thoughts on our business with you. Earlier today, we reported sales of $1.1 billion for our fourth quarter. That’s the strongest quarterly sales ever reported by our company. Our growth in sales was driven by our retail and international businesses. We saw good demand for our brands over the holidays with comparable retail sales in the United States, up over 2% in the combined November-December time period. E-commerce drove the growth in our retail sales. Online sales grew to 36% of our total retail sales in the quarter, up from 32% last year. As expected, U.S. wholesale sales in the fourth quarter were a bit lower than last year. We had a nearly 40% decrease in off-price sales which were elevated last year due to Toys "R" Us and Bon-Ton closures. That decrease in sales was largely offset by double-digit growth in our exclusive brand sales to the largest retailers of young children's apparel, which are Target, Walmart and Amazon. Our growth in international sales in the quarter was driven by a strong finish in Canada with comparable retail sales up about 8%. Earnings in the quarter were lower than last year and reflect the impact of lower traffic to our U.S. retail stores. Increasingly, consumers are choosing the convenience of shopping with us online. E-commerce continues to be our fastest growing and highest margin business. With respect to business trends, demand was a bit inconsistent in October as consumers slowly transitioned into cooler weather outfitting. We had positive retail comps in October and better comps in the holiday shopping period. Our store traffic in the United States lagged average…

Thank you, Mike. Good morning, everyone. Fourth quarter capped off another eventful year for Carter's, so let me begin on Page 4 where we have summarized a few highlights of 2019. By the challenging retail in young children's apparel market we were able to deliver growth both on the top and bottom line. We continue to grow our direct-to-consumer business, particularly in the e-commerce channel. We invested in improving our Web site and building out our omni-channel capabilities, and we strengthened our store portfolio by opening a number of new productive cobranded locations. Our exclusive brands available at Target, Walmart and Amazon also posted very notable growth. In 2019, we also achieved record operating and free cash flow which enabled us to continue to return meaningful capital to our shareholders through dividends and share repurchases. On Page 5, we faced some headwinds in the past year as the young children's apparel market in the U.S. declined about 6%. Despite this backdrop, we increased our industry-leading market share in the U.S. by 40 basis points to 13.8%. Our full year adjusted P&L is included on Page 6 for your reference. Full year net sales were just over $3.5 million with $401 million in adjusted operating income and adjusted EPS of $6.46 which represented growth of 3% over 2018. Turning to Page 7 and our adjusted P&L for the fourth quarter, fourth quarter consolidated net sales were $1.1 billion, up 1% versus the prior year which was consistent with our previous guidance. Our U.S. retail and international businesses drove our growth in the quarter. Our adjusted gross margin was 42.5%, down 70 basis points versus last year reflecting higher inventory provisions and higher tariffs on product from China. Royalty income with $7 million in the quarter, down about $3 million versus last…

Thank you. [Operator Instructions]. Our first question today will come from Paul Lejuez with Citi.

Thanks, guys. During the quarter, retail was a little bit stronger than wholesale and within wholesale you had lower sales to off-price. Just trying to understand the gross margin pressure a little bit more. A couple of those things – both of those things are in theory tailwinds to gross margin. So maybe just a little bit more detail on what were the inventory-related costs that hurt gross margin in the fourth quarter? How much was cash impacting you and just maybe quantify how we should think about that line item in the future quarters? Thanks.

Sure. So I’d probably say overall for gross margin it was a little below expectations for the company in total. We did take some additional inventory provisions in our retail business, some of that related to a higher strength provision based on our physical inventory observation. In the last few years we’ve introduced some additional operational complexity to our stores. We think that was what was underneath that. That’s obviously a real cost to the business. We did make progress in terms of realized pricing in the fourth quarter just not quite to the same level that we had initially planned. Within wholesale, there’s lots of different dynamics that affect gross margin. Certainly we have some changes in customer mix; I’d say some lower sales to some of our traditionally higher margin customers in the quarter. We had some bad debt expense that we took. That’s why we have a SG&A pressure. And we did take some additional inventory provisions related to some fabric liability in the wholesale side of the business. So I’d say the outlook for gross margin in 2020 is good. We’re planning expansion in gross margin. I’d say near term in the first quarter, we’re planning more comparable gross margins but we are expecting expansion for the balance of the year and that’s based on, as Mike said, we negotiated favorable product cost for 2020 and we are seeing continued progress in our pricing initiatives.

Paul, you asked about the tariffs, so we had – tariff impact last year was about $4 million, $1 million of which happened in the fourth quarter. Our best estimates now, the tariffs for 2020 will be around $14 million and about $4 million in each of the first two quarters and about $3.5 million in the third and fourth quarters.

Thanks. So just a follow up, I think you mentioned the overall kids market declined 6% at age 0 to 10. Can you talk about what happened on a unit basis? Also if we can maybe talk a little bit about the age up initiative where you’re seeing the great success, maybe the size of that business for you and growth in that segment of the kids market.

I’d say in terms of the market, I would say it was a combination of just fewer children in that age range and I would say some portion of about 4% or 5% of it was on price. And as we looked at the market data, the total market was down around 6%. The baby apparel market was down more than that. I would say that’s inconsistent with the experience we have. But the market data is the best information we have. I still say that the market data reflects a little bit of a disruption from Toys "R" Us and Babies "R" Us going out of business. Those were big baby apparel retailers. And then with Gymboree going out of business. I think that either you have a lot of pantry loading where people loaded up and had carts full of things that held them over for more than just the immediate near-term outfitting needs. So our hope is that we see the dust settle a bit on that market data and the market stabilizes a bit more in 2020. Second part of your question, Paul, was what?

The age up.

In terms of the age up, we feel good about that strategy, Paul. It’s really a way for us to increase the lifetime value of the customers that we acquire, one that when the moms and dads have a baby and we look for that to be a good growth opportunity for our company. I think we mentioned that we’d added several sizes in Carter’s and one additional size in Oshkosh that accounted for about $100 million of new sales in 2019. You asked about success where we have in retail. Our largest growth in 2019 was from the strategy our kids sizes for age 5 to 10-year-old children, that was up high single digits in our retail business last year, so good growth there. And then in wholesale, the age up strategy is more of a toddler strategy. We’re up about 10% in sales in our toddler sizes for the wholesale business last year. We implemented a plan to help them capture some of that because we are the market leader in toddler. We added toddler in Amazon a year and a half ago. We added toddler sizes with our Child of Mine brand in Walmart last fall and we’re expanding towards the spring. And then just this spring we’ve added toddler with our Just One You brand in Target, including new swim category. So 2020 will be the first time that all exclusive brands will have toddler placement and we’re excited about the growth opportunity as a lynchpin for the age up strategy.

Thanks, guys. Best of luck.

Thanks very much.

And next, we’ll move to David Buckley with Bank of America.

Hi, guys. Good morning. Thanks for taking my question. So the 2% to 3% sales growth guidance for the year, how should we think about the contribution from retail and wholesale? And then wholesale specifically, how are you planning the first half sales? It sounds like there's a timing shift happening in 1Q.

We’re planning wholesale shipments in the first quarter down, but then up again in second quarter and then low single-digit growth for the full year. I’d say we’re also planning low single-digit growth in retail and mid single-digit growth in the international business for 2020.

Okay. And then what gives you confidence in the sales and EPS acceleration after the first quarter?

I think the second half of the year as our business has changed and wholesale has become a little bit smaller piece of the pie, we’re a bit more of a direct-to-consumer business than we’ve been historically. So more of that business is done in the second half of the year. That is the margin-rich part of the business. We think we will have some of the progress and fruits of our labor around pricing initiatives as well as inventory productivity. There’s also a strong forward benefit to share repurchase that comes later in the year which helps that EPS metric.

Okay. Thank you very much.

Welcome.

And next, we’ll hear from Ike Boruchow with Wells Fargo.

Hi. Good morning, everyone. Two questions. The first one maybe for Mike. On the supply chain, so I appreciate all the color and totally understand that your visibility is very limited right now. But I’m trying to understand if things were to worsen or just not improve the next time we hear from you, is the risk more on the side of there would be order cancellations and revenue risk and is it more that or is it more a function of your average unit cost and freight cost of shipping and maybe things that were on boats go on planes and it’s more of a cost issue? I’m just kind of curious how to think about what the risks are when we think about that?

I’d say it’s the former. If the product comes late, especially in a tougher retail environment, there’s always a risk that some of our wholesale customers will say, we no longer need the units. I think it’s important for you to understand less than 15% of our units are being currently sourced from China. And every year for years there was always a question, what was the retention of the factory workers after the Chinese New Year’s holiday? And everybody was expected back around the 10th of February and because of the travel restrictions people got back later. So we’re anticipating right now that production will be delayed some portion of three weeks or more. And our suppliers are working through it. We’re in close contact with all of our suppliers. And depending on the different locations, people back and working and northern part of China people are still slowly getting back to work. What’s unknown today is what I’ll say is the ripple effect. So a lot of our suppliers rely on their fabric suppliers. We don’t source fabric. We source finished product. And a lot of the textile mills are spread throughout China, including northern China and those areas are more affected than textile mills in southern China. So what’s unknown is whether or not they will be able to get the fabric from the suppliers they had planned to get it from or whether or not they have to go to other parts of the world, including India, to get the fabrics. That yet is unknown. The other thing is just we’re anticipating that there will likely be some port congestions as everybody catches up and gets the product to the docks that there may be some congestion there. So we’ve got good people. Thankfully unlike the…

Got it. And then just a quick follow up for Richard. I guess real quickly, I’m sorry if I missed it, could you quantify the 53rd week for us? And then the more important question is, just when we talk about e-comm penetration over time and e-comm profitability, I think you mentioned in your multiyear plan you expect e-comm to go to low 40s from I think low 30s today. It’s gone from low 20s to low 30s, but as you’ve done that the overall margin at retail I think is down about 100 basis points. And I know you’ve talked about e-comm being 20% plus margin over the years. Can you give us an update where we are today with profitability, because that mix in and of itself should drive margin expansion for retail and for gross margin, but I feel like we haven’t been seeing that? So I’m just kind of curious what’s been happening and then what the outlook is as that mix continues to go forward?

Sure. As it relates to your comments, we’ll take that first. We have an extraordinarily profitable e-commerce business. The margins are north of 20%. They have come down in recent years with what we’ve seen in the marketplace around consumer expectations for free and fast shipping. That’s provided a fair amount of pressure on that operating profit for e-commerce. Our models show that we will continue to be able to improve e-commerce profitability over time. We mentioned the initiative to deliver product from stores. We think that is a bit of an unlock as it relates to getting product particularly to consumers further away from our core distribution center here in Georgia. So I’m optimistic that there are opportunities for us to continue to improve the profitability of e-commerce. That team has done a good job in terms of reducing the amount of excess inventory. Their inventory buys have become more accurate over time. We continue to enjoy extraordinarily low return rate which helps the profitability of our business online relative to other retailers. I would say that the pressure that we’ve had in the retail segment over the last number of years has been more based in the stores and the fact that we have not been able to drive a consistent store count in the brick and mortar stores. There’s a number of initiatives on that side of things as well. We have been improving I’d say the quality of that portfolio to some of the older less productive stores which have been a drag on the operating performance of the segment. Those are going to start to fall out of the base. So I’m optimistic on the outlook for margin in the retail segment and that’s kind of a character of the complexion underneath. As it relates to the 53rd week, it’s the week that we’ve pegged as the week after Christmas. The estimates for the top line are I’d say in a range of $25 million to $30 million. It’s not a particularly profitable week as we have measured it or forecasted it, largely a clearance week in our retail channel. So it might represent a marginal amount of profitability, call it breakeven to $1 million or $2 million of operating income. That’s kind of how we scoped it at this point.

Thanks, guys.

Welcome.

And we’ll move on to Susan Anderson with B. Riley FBR.

Hi. Good morning. Nice job in 2019. I was wondering if you could talk a little bit more about pricing and product cost for 2020. It sounds like maybe you expect a little bit more pricing but then flattish product cost for 2020. And then also it sounds like maybe you’re starting to close the gap on those lower margin channel for the exclusive brands. Maybe if you could talk a little bit about the progress you’re seeing there and expectation for 2020?

Sure. As it relates to product cost, as Mike said, we did have favorable negotiations with our vendors. And for the 2020 assortments, our supply chain team did a great job in taking advantage of the marketplace situation and the growth that we bring to those vendors. So we have negotiated lower product cost for 2020. That mixes in based on the products that we’re assorting into slightly higher product cost in terms of the assortment itself. But for like-to-like product, they are down I’d say in the low single-digit range. We are planning for more improvement in pricing, still modest though. We’re not talking 10% or 20% increases in pricing. We’re talking similar low single-digit progress with the favorability in product cost that we’re expecting kind of widens out that nice spread between pricing and product cost. We have bought inventory I would say more conservatively in 2020, particularly in the second half of the year. So I think that would remove some of the historical pressure that we sometimes have when we get backed up with inventory. So we followed some of those successful practices that we’re seeing on the part of some of our wholesale customers where they’re buying inventory more conservatively, looking to get better sell-through, better realized pricing. That’s kind of how we’re thinking about it.

I think a key point on that, one of the key initiatives of this $100 million productivity is pricing. It’s price realization. It’s not taking prices up on the same product we sold last year, but it’s improved price realization through better inventory management. And the high – we sell nearly 500 million units a year. There’s probably – we probably source 1 billion, but with a lot of our multipacks, there’s 500 million selling units, including multipacks. Nickels and dimes for us equate to $25 million to $50 million of improved profitability. So the focus is buying inventory more conservatively, reducing SKUs, focusing on fewer, better styles, co-branding all of our stores so the consumer has a great experience, convenient experience shopping for the two best brand names known in kids apparel. So that’s our focus, improving price realization by a nickel or more – nickels and dimes are $25 million to $50 million of improvement and profitability. That’s a key initiative for us going forward. So less product in the clearance rack at the back of the store.

Great. That’s helpful. And then also just kind of where you’re at with improving the margin on some of those exclusive brands and kind of closing the gap with some of those other higher margin channels?

Yes, I’d say we’ve made very good progress in improving the margin structure of Simple Joys. That’s the one that had lagged because it was a newer business for us. We’ve been in business, to Mike’s comments, with Target and Walmart nearly 20 years, so those businesses have significantly more size and scale than Simple Joys does. But the Simple Joys team has done a terrific job in improving the profitability of Simple Joys exclusive brands in total are a very margin-rich business for us. We’ve been pleased with that.

Great. Thanks so much. Good luck this year.

Thank you.

And next, we’ll hear from John Morris with D.A. Davidson.

Thanks. Good morning, everybody. Congratulations on a great year.

Thank you, John.

On Q1, a little bit more color about where you see SG&A coming in? It sounds like there’s some – these SG&A investments that you’re talking about, maybe if you can give us a little bit more color on those and how you see SG&A coming in, wondering to what degree the pressure is there?

I’d say we have modest growth in SG&A that we’re planning for the first quarter. And it does reflect some of the investments that we have been making in technology. Some of those new capabilities has now been put in service, so we now have some higher depreciation expense that’s coming through. We are continuing to spend on our Web site and our mobile experience in that channel which we think is really important to tracking those consumers. We’re spending on some of the new tools around inventory management and assortment management, the digital design tool that Mike referenced. We’re spending on information security which is an important initiative obviously for every public company to invest in. And then I’d say there’s a few things more timing related in terms of timing of spend for some marketing and store-based programs which is falling a bit more into Q1 than perhaps a little bit later in the year previously. But we do expect to see the benefits of our productivity initiatives over the course of 2019. That will have offset some of the flow through of the higher investment spending.

And then a quick follow up. I think you had mentioned that you had fallen a little bit short – I think we were talking about sort of gross margin in Q4 had fallen a little bit short in terms of your expectations of pricing capture in Q4. Any reasons behind that in particular, just kind of the slowdown that you talked about in retail or sort of a little bit more color there?

Well, I would say the business came late for us, so I think the Black Friday selling period was perhaps not as robust as we had thought. So the consumer continues to shop closer and closer to the holiday. That’s what we experienced this year. So I would say in the U.S. retail business and in Canada, we perhaps got a bit more promotional than we had originally anticipated and that had an effect on the gross margin line as did some of the additional inventory provisions that I mentioned. We did make progress in realized pricing. It just was not to the extent that we had originally planned.

Great. Thank you.

Welcome.

And that will conclude today’s question-and-answer session. At this time, I would like to turn the call back over to Mr. Casey for any additional or closing remarks.

Thanks very much. Thank you all for joining us on the call this morning. We look forward to updating you again on our progress in April. Goodbye.

And that will conclude today’s call. We thank you for your participation.