Welcome to Carter's fourth quarter fiscal 2024 earnings conference call. On the call are Richard Westenberger, Interim Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, Kendra Krugman, Chief Creative and Growth Officer, and Sean McHugh, Treasurer. Please note that today's call is being recorded. I will now turn the call over to Mr. McHugh.

Thank you and good morning, everyone. We issued our fourth quarter 2024 earnings release earlier today. The release and presentation materials for today's call are available on our investor relations website at ir.carters.com. Note that statements on today's call about items such as the company's outlook and plans are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings and the earnings release and presentation materials posted on our website. In these materials, you'll also find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Richard.

Thank you, Sean. Good morning, everyone. Thank you for joining us this morning. Before I cover our fourth quarter results, I want to take a moment and acknowledge the news, which we announced earlier this year, that Mike Casey had decided to retire from Carter's after 30 plus years with the company and more than 16 years as our CEO. I know I speak for our board of directors and our thousands of employees in thanking Mike for his years of service to Carter's and his many contributions to our company. As noted in our press release this morning, our board has initiated an external search to identify a permanent CEO for Carter's. The board has been active in this task, and we look forward to introducing our new leader once the search process has been completed. Before Kendra and I walk through our presentation materials, I'd like to share some overall thoughts on our business with you. Our fourth quarter performance was stronger than we had forecasted, with sales and earnings above the high end of the guidance, which we provided on our last earnings call this past October. While Q4 was stronger than expected, our outlook for 2025 profitability is expected to be more challenging for reasons that we will cover with you this morning. In Q4, consumer confidence rose after the noise of the presidential election subsided in early November, and our sense is that the industry experienced favorable holiday selling and a positive end to the year. While our results for full-year 2024 were not everything we had hoped for coming into the year, there are a number of positives to point to across the business. As a reminder, we're focused on three fundamental areas, which include elevating the style and value of our product offerings,…

Thank you, Richard. Starting on Page 14, here at Carter's, our customer is at the heart of everything we do, and we know this next-generation consumer is increasingly more style-focused, diverse and digitally native. She demands both value and convenience. With that in mind, we continue to lean into our customer-centric strategies to enable our return to growth. These efforts are organized around our three areas of focus noted on Page 15, product, delivering incredible style and value, marketing, acquiring new customers, and deepening our relationship with existing consumers, and leveraging our unparalleled brand reach, with more than 20,000 points of distribution worldwide. Our customers rely on us for our expertise in the baby and toddler segments, which is our greatest point of strength and differentiation. We are America's number one most trusted brand in young children's apparel. And to reiterate Richard, in 2024, we grew our US market share and baby and toddler apparel, helped by a record year with our exclusive brands and Q4 retail growth in baby. Going a bit deeper into our 2025 product strategies, we are on a journey to modernize our assortments. We will drive this by delivering growth through relevant style, expanding our House of Brands, and increasing depth and breadth in strategic segments and categories. All of these product strategies will be supported by new capabilities to improve operational efficiency and productivity. First, in delivering relevant style, we know that trends are moving faster than ever, from Paris to the playground highlighted on Page 16, and our Carter's and OshKosh brands newness and relevant style are working. As we move through the year, we are increasing our investment in trend forward assortments and also in additional product flows to help drive frequency and increase customer spend and conversion. Our spring collections feature…

Thank you, Kendra. Turning to Page 26, for the past several months, we've been engaged in a comprehensive review of our business. We've had some very good outside industry experts who have helped us in this effort. This review validated a long list of positive attributes of Carter's, a number of which are summarized on this page. We've had a long successful history as the leader in the young children's apparel market. However, as summarized on the next page, and as we've noted previously, our performance in the past few years since emerging from the pandemic has been more challenging, particularly in our US retail business. There have been a number of external factors which have affected our business. First, the overall children's apparel market has not been growing significantly. On average since 2019, the young children's apparel market has grown less than 1%. There are also certainly demographic factors at work, such as a declining birth rate among Americans, a shift of consumer shopping behavior in favor of mass channel retailers, and the sudden onset of inflation across the economy, which has had a significant impact on our target consumers, families with young children. We've also seen the rise of other brands in the market, including the active and athletic-oriented brands and the emergence of numerous small digitally-native brands. Within our wholesale business, we've seen strong demand for the exclusive brands which we've developed for Walmart, Target, and Amazon. The just one-year Child of Mine and Simple Joys brands now account for over 50% of wholesale segment sales. The strong exclusive brands demand has been offset though by lower demand from other customers, including some which exited the market entirely. This group of retailers includes the department stores which have historically been very good customers for the flagship Carter's…

[Operator Instructions] And our first question comes from the line of Jim Chartier with Monness, Crespi, and Hardt. Your line is open. Please go ahead.

Hi, thanks for taking my question. Kendra, can you just talk about how dramatic the change in the inventory assortment will be as you modernize it? And then how do you kind of minimize the risk of maybe alienating the different - the core consumer as you do that? Thanks.

Yes, that's a great question. I think that there's a different answer depending on what segment we're talking about. But in baby in particular, we've been on this journey for a little bit of time, and you're seeing it in the results of our business. This is truly - it's not a dramatic change in the baby and toddler segments. We're leaning more into our best categories of business, collection-based products that must have product categories, and then we're being more intentional with our good buckets of product categories, so your stock-up essentials, both in baby and in toddler. Kid is where we have the most opportunity to really push forward, and that's where we've not made the changes yet. So, that's to come. And I would say it’s a 20-point shift into more style-forward categories versus something that we would say is more legacy to our brand. I don't think it will alienate any existing customers. I think it will actually help us retain customers longer to compete more directly with competition that is moving forward faster than us.

Great. And then Richard, previously you talked about promotional activity not really driving unit volumes over the last two and a half years. And so, kind of what's different in terms of the pricing action you took in the back half of this year, which did drive better unit volumes versus what the dynamic had been the last two plus years?

Well, I think what we saw in the marketplace was just the fairly dramatic pricing action that some of our peers and competitors in the industry were engaged in. And so, where we took action was on those elements of the assortment most comparable to what they were seeing and very easy to compare across our assortments, perhaps less differentiation between our branded product and the equivalent private label product. And I think it also converged with just a good holiday season as well, particularly in the fourth quarter. As I mentioned, I think the industry had a good fourth quarter. I think the consumer had some renewed optimism once everything around the election settled down. And I think our team did a good job around putting the actual promotions together, the messaging, the items that were featured. These really are kind of the key items that everyone needs on a continuing basis. I think the consumer responded well. I think there's a bit of an art to putting these promotions together. A lot has to do with how the message and the offer is communicated. We really focused on the key market share events around Labor Day, around Black Friday. Increasingly, the consumer seems to wait for those promotions, and I think we put more of our dry powder and energy into those events and it resulted in the nice lift to unit velocity that we saw.

Great. Thank you.

Thank you. And one moment as we move on to our next question, our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open. Please go ahead.

Hey, this is Robert on behalf of Ike. Just a quick question. Maybe you can talk a little bit more about the challenges on the retail side and when you can expect or when we can expect to see the comp return to growth.

Hi, Robert. Good morning. Well, I think our principal issue really is driving traffic to the retail business. I think we continue to believe that the experience for consumers in our stores and online is the best in the category, but over a multi-year period, really since emerging from the pandemic, as we said in the remarks earlier, that has been our challenge, and I think that's a combination of things. I think it is certainly the architecture of the product offerings themselves. So, Kendra went through some of the assortment changes that we're making. We want to create compelling reasons for folks to come to our direct business. Clearly, since the pandemic and even going into the pandemic, I think the mass channel business models were inherently strong. I think there's some elegance to the consumer to be able to do all that one-stop shopping in a single trip, getting groceries and housewares and consumables and apparel in one stop. That's been a very powerful model. Fortunately, we've got our exclusive brands business that allows us to participate in that channel shift, but increasingly it's around improving the assortment and driving traffic back to our stores. I think marketing is an important element of that. We did step up marketing in the latter part of 2024. Some of that was brand marketing. Our intention is to build on that over time. We've kind of held that level of investment here in 2025 as we've planned the business, but I think there is an opportunity. One of the key findings coming out of the review that we've been conducting of the business, is that we do under-index relative to what some of our peers are spending on brand marketing. I think we're going to let the assortment improvements kind of catch up a little bit with that work. Some of the in-store experiences that we're working on, we'll have some of that work catch up a little bit and my guess is that we'll lean a bit more into marketing over time. But the fundamental issue in retail really is traffic. I've been really pleased with the conversion results that we see. Those results significantly lifted in the fourth quarter in particular. So, consumers, once they come, they enjoy the experience, they like the products that they find and they convert to purchases at a pretty high rate. So, that would be my high-level summary.

All right, thank you.

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Chris Nardone with Bank of America. Your line is open. Please go ahead.

Great. Thanks guys. Good morning. So, Richard, can you elaborate on what is giving you the confidence that pricing actions will stabilize as you reach the back half of the year? Is there something you're seeing in terms of pricing pressures alleviating from your competition? And then also what's the level of pricing decline that's embedded in your broader wholesale order book outlook?

Yes, Chris, at this point, it is a planning assumption. I think we're going to have to see how we get through the first half. Part of what drove the price competition that we saw in the marketplace last year was that the industry had a poor spring, and it's hard to draw a lot of conclusions. I think from January and February business, it tends to be a clearance period for us and for the industry. Certainly, that's been the result of our kind of year-to-date sales so far in 2025. It’s really oriented around kind of clearing activity and kind of cleaning up inventory. I think March will tell the tale as it relates to the Easter holiday and some of that important spring selling. But it's our assumption that we certainly feel like our products are competitively priced. We had had several years of raising prices and perhaps we were a little slower to kind of recalibrate to just some sharper price points. So, I think we've taken the action we have to, but obviously we have to swim in the competitive waters that we find ourselves in and we'll have to evaluate that as we get into the second half. But that's our assumption for now. I would say pricing in wholesale is down modestly and our assumptions for 2025. That's a combination probably more leaning into some additional product make and benefits to improve the assortment there, much as we're trying to do in the retail assortment.

Great. That was very helpful. And just a quick follow-up on your wholesale business, specifically your exclusive brand business. I think sales are up 20% during the fourth quarter, obviously strong results. Is there still an opportunity to add shelf space with your two largest wholesale partners in 2025? And what's the outlook for your off-price and department store business within your guidance for the full-year?

I'll answer the first part of the question. Regarding shelf space, yes, we believe that there is still opportunity. We are still underpenetrated at particularly Walmart and Target in our toddler segment. So, similar product growth categories or growth opportunities for us exist - that exist in retail also exist for us in exclusive brands. So, I would say we continue to look for opportunities to expand both store count and existing categories as well as with new categories and segments.

Yes, Chris, the growth in the wholesale segment will be driven by the exclusive brands. That continues to be the engine within that part of our business. So, that will account for the majority of the growth. We do have growth planned with some of the other segments from memory clubs. We do have some growth planned in the promotional channel. Off-price sales are expected to be, I think, roughly comparable. They were down about 50% in 2024. I think those will strike a bit more of a normalized level. You always have some measure of activity in that off-price channel. We do have an upfront component of the business in the promo channel. And so, that is expected to grow somewhat. And then we have the department stores continuing to be planned down, which just reflects, I think, sort of broader issues with their business models at the moment.

Great. Thank you, and good luck.

Thank you. One moment as we move on to our next question. Our next question comes from the line of Paul Lejuez with Citi. Your line is open. Please go ahead.

Hi. this is Kelly on for Paul. Thanks for taking our question. It sounds like you're leaving some flexibility on the level of pricing investments you're making in US retail this year. I guess, what metrics are you looking to with these pricing investments to help dictate your strategy as you begin to lap these pricing investments in the second half? Thanks.

Kelly, I'd say there's a few things we look at. We look at certainly the unit velocity, to the previous question we got. We look at whether it's driving store traffic. We look also at the house file metrics in terms of whether it's bringing consumers shopping with us, both new customers and retaining the ones that we've had historically a relationship with. So, there's a few things, but we look to actually have a return on that investment that it's driving some incremental velocity of the units. And hopefully with the items that we've taken pricing action on, it's meant to be the start of the transaction, that these are the more basic items while they're in the store, they're online, hopefully they're adding additional items because it's the sharp value of those basket starter items. It’s our hope that they're adding other elements to the purchase basket as well. That's kind of how we're thinking about it.

Got it. And then just a question on both us retail and US wholesale kind of flowing through the year. So, you expect that the comp improvement largely to be back half-weighted, and I guess talk about sort of what drives that against tougher comparisons. And then on the wholesale side, could you quantify how much the timing shift negatively impacted 1Q and how that kind of flows from there as we move past 1Q and how your fall, winter order books are looking Thanks.

Yes, sure. On retail, we are planning for an improving comp trend across the year. And from memory, our assumption is that we actually get to a positive comp in the fourth quarter in our planning assumptions. That has a lot to do with just the planned improvements in the merchandise assortment and also the overall level of inventory. So, when we made our inventory commitments for the first half of 2025, which goes back quite a bit of time right now, that was in a different pricing environment. That's when we were planning for actually growth in AUR, much more significant growth in AUR. And so, there's some pretty well-worn history here that tells us that unit velocity slows when we raise prices. And so, we had cut back on the inventory buy for the first half. So, the inventory position is not as optimal in the first half. That improves meaningfully as we move into the second half. And part of it also is what Kendra referenced, the investment behind the kid business, the bigger sizes, the products for the older children that are part of a household. One of the interesting aspects of the research that we've done indicates that increasingly, our customers do have more than one child. We had made some decisions to cut back that bigger kid part of the assortment some time ago. And I think that had a bit of a disproportionate effect on sales certainly, and that's a big business for us. But we had cut back there and increasingly that customer's coming in, they're looking for solutions, not only for a baby and toddler, but they're looking for solutions for their older child as well. So, we're reinvesting back in that kids business, which is fully 400 some million dollars of business for us. It’s a meaningful part of the assortment. So, all that gets better in the second half. We think that drives some improvement. AURs, as I mentioned, stabilize in the second half. As it relates to wholesale bookings, we have down slight bookings slightly in the first half. And then we're still in the process for the second half. So, I won't comment on second half bookings. We'll have more perspective on that on the call here, just in another month or so in April. But I would say there continues to be conservatism on the part of the department stores, and that's reflected in our kind of placeholder assumptions for bookings. The momentum continues to be around the exclusive brands. And on the timing shift on Q1, I actually don't recall what that was, Kelly. We're happy to follow up with you on that.

Got it. Thank you. Best of luck.

Thank you. [Operator instructions]. And our next question is going to come from the line of William Reuter with Bank of America. Your line is open. Please go ahead.

Good morning. My first question is on sourcing. You guys have done a great job of reducing your sourcing from China. You're below 5%. You continue to source the majority from Asia. I was wondering if you're looking at this point about doing any sort of changes to your sourcing. It's clearly a pretty uncertain environment in terms of what types of tariffs could be put in place.

Yes, Bill, thanks for the question. I agree with your observation. I think our supply chain team has done extraordinary work in reducing our dependence on China and diversifying our sourcing base. When I joined the company a number of years ago, we were probably well over 55% of the apparel assortment was sourced in China. And China's historically been a great place to have those products made. For a lot of different reasons over the years, we started to diversify away from China, really because the labor cost situation. China had become a bit uncompetitive price-wise. I think the manufacturing community had wanted to move away from apparel to high tech and other industries. What we found, though, interesting was that a number of our apparel suppliers in China built capacity in countries outside of China, so, Vietnam, Cambodia, Bangladesh. And to your point, we're down sub 5% in terms of the apparel assortment that is now sourced in in China. The opportunity continues to be on the fabric side of things. So, most of the fabric continues to be processed in China, and then that fabric is sent to those other countries. We have a program that is intended to diversify and reduce our dependence on China fabric as well. So, I would say that's probably the most meaningful thing. We continue to move production around as we see opportunities. We have a great network of strategic vendor partnerships in those other countries like Bangladesh, like Vietnam, like Cambodia. We're continuing to build out those relationships. India has emerged as a significant source for us. So, we're building that opportunity. I think you'll see more production migrating to India over time. But the team has done a nice job. I think we have a well-diversified sourcing model. There's never any easy days in the supply chain. They're always managing a lot of complexity, but we have reduced our exposure to China pretty considerably.

Got it. And then just a follow-up from me, I feel like kids has always represented a big opportunity. It's also incredibly competitive. What are you doing this time around that will make it less risky in terms of entering, I think you did mention you're going to be investing some units there. You clearly have some styles that you're more excited about, but how do we think about what's different this time around?

We are in the very early stages of building that strategy that is totally comprehensive, but in the near-term, getting the right assortment to the right stores is necessary. So, that's what you're hearing about in the back half. We have an investment in categories of the business that are working for us. So, that's fashion, denim. It's active. It is our licensed character product categories and licensed sports. So, those are all areas that we are expanding both our breadth and depth in select stores and online for the back half. So, that's one near-term investment. And then going forward, our new concept to consumer process that will speed up our decision-making and get us closer to market, that will help inform our decisions in kid, particularly in girl where we are going to have to be more reactive to consumer trends. So, that will help us as we think about 2026 and forward. But we have a lot of work to do, so still in early stages.

Got it. That's all for me. Thank you.

Thank you. This concludes the question-and-answer portion of today's conference. I will now turn the call back to Mr. Westenberger for his closing remarks.

All right. Well, thank you, everyone, for joining us this morning. We look forward to updating you on our progress on our next call. Thank you, everyone.

This concludes today’s conference call. Thank you for participating, and you may now disconnect.