Good day, and welcome to Carter's Fourth Quarter 2020 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 todays prepared remarks, we will take questions as time allows. Carter's issued its fourth quarter 2020 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 in this conference call and in the company's presentation materials about the company's outlooks, plan and future performances 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 and quarterly reports filed with the Securities and Exchange Commission and the presentation material 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 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 website, I'd like to share some thoughts on our business with you. It was a year ago this week that we reported our 31st consecutive year of sales growth. In 2019, we achieved record levels of sales, earnings per share and cash flow. As you may recall 2020 got off to a good start for us with mid-single-digit growth in sales through February 2020 was forecasted to be another good year of sales and earnings growth. By mid-March a global pandemic and national emergency had been declared and the lives of people throughout the world were disrupted. In the months that followed we worked to keep our employees and our store customers safe from the virus. We reduced spending, negotiated lower product costs and improved liquidity. We significantly reduced our exposure to excess inventories caused by temporary store closures. And by curtailing inventory commitments, we were able to improved price realization and margins last year. When the pandemic hit, we accelerated the execution of new capabilities to support the same-day pickup of eCommerce orders in our stores, curbside pickup and the direct shipment of eCommerce orders from our stores. We engaged remotely with our wholesale customers, leveraged our investments in digital product imagery and secured higher bookings for our product offerings this year. We also engaged more deeply and effectively with consumers through social media, building a virtual community of families with young children. During the pandemic, we added over 2 million new eCommerce customers and with the support of our wholesale customers, the online sales of our brands exceeded $1 billion last year. The pandemic was a challenging experience for all of us, but it also…

Thank you, Mike. Good morning, everyone. I'll begin on Page 2 with our GAAP income statement for the fourth quarter. Net sales in the quarter were $990 million, down 10% from the prior year. This year's fiscal year included a 53rd week, so the fourth quarter consisted of 14 weeks versus 13 weeks last year. This extra week represented $32 million in additional net sales in 2020 and contributed roughly $1 million of operating income. Reported operating income was $134 million, a decrease of 18% and reported EPS for the fourth quarter was $2.26, down 20% compared to $2.82 a year ago. On Page 3 is our GAAP income statement for the full year. Obviously, sales and earnings this past year were meaningfully affected by the global pandemic. Net sales for the year were just over $3 billion, a decline of 14%. Reported operating income was $190 million, down nearly 50% and reported EPS for the year was $2.50, down 57% from $5.85 in 2019. Our fourth quarter and full year results for both 2020 and 2019 contained unusual items which are summarized on Page 4. We've treated these items as non-GAAP adjustments to our reported results to enable greater comparability and to provide what we believe is a clear view into the underlying performance of the business. My remarks today will speak to our results on an adjusted basis which excludes these unusual items. On Page 5, we've summarized some highlights of the fourth quarter. It was a strong finish to what's obviously been an eventful and challenging year. We met our expectations overall for our financial performance in the quarter. We saw good continued momentum in several important parts of our business. ECommerce comparable sales were strong, up 16% in the U.S. and up 47% in Canada. Our…

We have Ike Boruchow of Wells Fargo. Please go ahead.

Hey, Mike. How are you? I guess I'll ask two, one for Mike, one for Richard. Just Mike, there been lots of media and editorial about the birth rate. I mean I totally appreciate what your comments are around you've grown your business despite a headwind on the birth rate the last several years, but it just seems like there is a much more pronounced decline in the birth rate. Can you just kind of talk about maybe how that might impact your business, not longer term, of course, but maybe over the next 12-plus months? Have you seen anything in your zero to two category the kind of related to that? And then Richard, is it possible to just dig in a little bit more on the Q1 revenue guidance. I mean, is it wholesale, is it retail, is it eCommerce normalizing? It's just -- I'm having a little trouble trying to see why your revenue wouldn't be a little bit better in the first quarter. Any help would be great.

Sure, sure. So Ike with respect to the births, we have not to date seen any meaningful change in the performance of our baby business. Keep mine, a very high percentage of our business with Walmart, Amazon and Target is focused on baby and that's been the strength of our business this past year. Online demand for our baby apparel has been terrific. That said, the intent is up on this. There is, over the years, over many years we've seen a correlation between strength to the economy and impact on birth rates and we've all known people in our -- in this past year in our family or friends have delayed marriages and when you delay marriages more often than not you're delayed delaying starting a family; so we're keeping it eye on. Best information we have is as there might be 300,000 to 500,000 fewer children born in the United States this year. It's not going to happen on January 1, but at some point during the course of this year, we may see fewer births and our best analysis would suggest typically a family will spend some portion of about $700 on a newborn child in that first year. So, $700 per child on that range of 300,000 to 500,000 fewer births, it's a potential exposure for the market of some portion of $200 million to $350 million. We own a third of the newborn market, say that zero to 10-year-old child. We own a third of that market. So, for us, it's some portion of $70 million to $100 million revenue exposure. Again if that all happened on January 1st, which it won't. And so anyways, we're going to keep an eye on it. With every quarterly call, we'll update you on what we're seeing. But to date we haven't seen any meaningful change in the performance of our baby product because of that exposure. I actually say Little Baby Basics, which is the core of our Carter's brand. Particularly in the baby space, there is nothing more beautiful in the market that our Little Baby Basics. I would say that's probably the best performance we've had this past year and probably three or more years. So that -- so we'll let update you as we go through the year. And we are mindful that is an exposure that's been taken into consideration in the guidance that Richard's sharing with you this morning and we'll see what impact, if any, it has on us in the balance of the year. Richard?

Yes. Ike I would say on first quarter revenue, I would say our ambitions had been higher until recently and it's really the effect of these product delays that have caused us to be a bit more modest. We are planning, I would say for some slight growth in wholesale and in our U.S. retail business. Stores are planned down in the U.S. and eCommerce is planned up in the first quarter. And right now we have international plan down. We still have significant store closures in Canada. We still have some stores closed in Mexico. So those are kind of the building blocks. A lot will have to do if we start to see a better trend on the arrival of product then perhaps we could have some additional shipments go particularly in wholesale. But right now, we're being conservative on that.

Thank you. [Operator Instructions] We will now take our next question from Paul Lejuez of Citi. Please go ahead.

Hi, guys. This is Kelly Crago on for Paul. Good morning. A question on your assumed sales transfer on your closed stores. Number one, where do you think that that -- those sales will go? Is it other Carter's stores, is it online, is it to your wholesale accounts and what have you seen in the past? And then just the second question is around the competitive landscape, how is the commercial environment looking this spring?

Yes. So a couple of things, Kelly. I think in terms of store transfer, we've experienced that transfer in the low 20s, 20% to 25% transfer. We've got good data on that. And that's transfer within our retail channel. So our stores and our online business and we've seen in both. We do a good job marketing to those customers and making sure they know the next closest store and of course driving our online business. So I'd say we plan probably 25% transfer rate on that and that's in the direct channel space. In terms of promotional environment we've been less promotional. We walked back in effective promotions. We really focused on our loyalty program and our Carter's credit card and I think the marketing team has done a really good job of increasing the brand and emotional content in all of our consumer marketing going from promotion to emotion and really focusing on emotion. So we feel good about that. I think if you look back in Q4, I would say that at least the folks that we sell to that the wholesalers were less promotional. Inventories are low in the channel. Everybody we sell to actually wants more inventory right now. So I think folks are doing a good job managing their business, getting price realization, higher margins as we've all plated tight and conservative given the uncertainties.

And Kelly, one thing I would just share with you on these store closures. Nearly all of these store closures are being done upon lease exploration because we've been in these centers for 10 years. We've been following the traffic patterns. And increasingly, we're analyzing to what extent our support -- our stores support eCommerce customers. So we're looking at these omni-channel sales. What percentage of our customers are opting to pickup their online purchases the same day at a store located closer to their homes. So after 10 years in the center when the lease comes up for renewal, increasingly, we're saying listen there are better opportunities available to us in adjacent market. So substantially all of these closures are at the end of a 10-year lease, and we're just opting to exit as opposed to reinvest into a center where the co-tenancy has changed, the traffic patterns have changed and so -- and we see better opportunities to open in adjacent markets.

Got it, thanks. And just to quickly follow up on Ike's question around the sales assumptions in 1Q. I guess, how -- why would sales be flat in 1Q with March being the easiest comparison? I think you mentioned that sales were positive in January. I'm not sure what you said about February, but just is that is related to the supply chain disruptions is there any way to quantify that and how long you think that will continue? Thanks.

March is a significant month Kelly. So we typically look forward to March. It's bigger than January and February combined. I would say the product delay disruptions have been acute in wholesale. And as we get closer to the month of March, I think some issues have emerged in retail. We're just a bit more cautious about what may be on hand, particularly in the stores. We're probably in a bit better shape to do the business online at this point.

Thank you. We will now take our next question from Susan Anderson of B. Riley. Please go ahead.

Hi, good morning. I guess, just looking at gross margin and SG&A for first quarter, can you maybe just -- it sounds like you expect gross margin to be up. I'm curious, how much the supply chain issues is going to cause some pressure there if at all? And then also on the SG&A, are you still expecting that to be pressured in first quarter like fourth quarter? Thanks.

I'd say on SG&A, we are expecting SG&A to be up slightly. It won't be up at the same level as we saw in the fourth quarter. We are continuing to make our investments. You do have, I'd say, a more normal pattern of accruing expenses across the year, where we were suspending things last year just given as the pandemic started to become evident we started to turn things off. So, I think you'll see a more typical accrual of expenses including for things like performance-based compensation. Gross margin, we are planning for, I'd say, nice expansion gross margin in the first quarter. Recall last year in the first quarter, we took substantial charges for excess inventory and just the fact that we're not -- that we're comparing against those charges, I think will help gross margin. We're also expecting that we'll continue to make progress on pricing. We're also going to have progress, we believe, on product costs. So this should all be benefits to the gross margin.

Okay, great. That's helpful. And then, if I could just add a follow up. Just looking at the five-year top line and EBIT goals that you laid out, I think that gets you maybe just doing a quick math to a low-teens EBIT, and I think historically you had always talked about a 14%. So just curious, if anything's changed there that changes that goal longer term such as a mix shift to some of these other channels. Thanks.

Sure. The best outlook would suggest our latest models are focused on a 13% operating margin. We'll have a higher mix of eCommerce sales, which is our highest margin business. We will have a lower mix of lower margin stores and we expect to make continued progress on price realization through a stronger product offering, more effective marketing, inventory management. So we've got some good initiatives. So, yeah, this is -- we're trying to be cautious given the things we don't know this year, but the trend in our business both in sales and profitability is up.

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

Great. Thank you so much. Maybe, Richard, just wondering if you can elaborate a little bit on the full year guidance. Just given the 1Q this year should be pretty well above point you last year and 2Q probably should be the similar story because the compares are obviously very easy. The full year guide sort of implies that the back half of the year will be significantly below 2020. Just wondering sort of what are the components, you mentioned the birth rate, Mike mentioned the birth rate, what are some other factors that are sort of implied in that back half guidance for this year?

Well, I don't think we were specific on back half guidance first of all, Jay, and that was a bit intentional. We're so early in the year and there is still so much uncertainty, but I think we have to provide for some degrees of freedom here that the year may play out a bit differently than we have it planned. I think certainly the first half, as we said in the remarks this morning, is expected to be the bigger source of revenue and earnings growth. And that does track very directly to the disruption a year ago when the stores were closed. We're up against significant eCommerce comps here in the first half. I would say it was a bit later in the year though when we started to make some of the more fundamental changes to our promotional strategy. So you saw the big gross margin gains that we achieved in the second half of the year. So from a pure comparison point of view, we're certainly hoping that the stores are going to be open all year that would be a benefit. We're hoping that wholesale rebounds certainly in first half and some of that would accrue to second half. There are a lot of timing differences, but I think we're going to have to point out as we move through the year. 2020 was an unusual year in terms of things coming and going in the P&L and I think '21 is going to be a bit of a mirror of that. So it's a tough year to plan. There are going to be differences in timing for instance of wholesale shipments. Little Baby Basics, for instance, which is a significant launch for us at wholesale, was a second half event last year and that will -- if it proceeds on its more normal timing will be more of a first half activity. So there's going to be lots of puts and takes between the periods and we'll do our best to lay that out for you. But I wouldn't say that we're necessarily pessimistic about the second half and I think we're going to have much better line of sight here as the months unfold.

Yes. Fall deliveries too were pushed to the right because stores started reopening in June and usually we're shipping fall deliveries beginning in May and fall is the biggest part of our year and some of those deliveries will begin in the first half this year versus second half last year.

One thing I would add, Jay, just would be that our announced store closures do affect the second half as it relates to planned revenue. So there are 100 some stores that we're closing. Most of those store closings are weighted toward the first half. So those stores will be out of the base for second.

Got it, understood. That's helpful. And maybe one more question from me, just on the high single-digit international growth forecast over the long-term. Within long-term guidance, you mentioned Canada, Mexico and Amazon growing internationally. Can you maybe give us some idea of what that Amazon piece might mean to that and what about China at this point? Is there any update on sort of the progress to reset that market?

Yes. So, we're expecting the Internet -- very good growth in international. I would say 60% of that growth will be driven by Canada and Mexico. Those businesses performed extremely well last year particularly in the fourth quarter despite a lot of store closures. About 30% of the growth in international come from wholesale including Amazon, the other multinational retailers and these partners. We have got bookings for the second half of this year from those smaller retailers throughout the world. It has historically been a very good margin wholesale business for us; so 30% from wholesale in the balance from Skip Hop International. The Amazon business, we're expecting very good growth. That business is off to a very good start. We've had a partner in Europe for years -- an online partner in Europe for years and I would say the growth has been OK. It hasn't been significant. In the short amount of time we've been doing business with Amazon and their launch of Simple Joys into Europe, the performance with Amazon has far surpassed than other partner that we've had for better part of the last five or more years. So, we're expecting very good growth with Amazon in international over the next five years.

Thank you. There are no further questions at this time. I would like to turn the conference back over to Mr. Casey for any additional or closing remarks. Thank you.

Okay. So we thank you all very much for joining this -- joining us this morning. We're going to update you again in about eight weeks. So by that time, we'll have March behind us. It's the largest month that we have in the first half of the year and we'll have a good sense for just how the year is getting under way and how we're overcoming some of these transportation delays from Asia. So, we look forward to update you again in April. Until then, goodbye, everybody. Take care, stay safe. Bye-bye.