Welcome to Carter's First Quarter Fiscal 2025 Earnings Conference Call. On the call are Doug Palladini, Chief Executive Officer and President; Richard Westenberger, 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'll now turn the call over to Mr. McHugh.

Thank you, and good morning, everyone. We issued our first quarter 2025 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 expectations 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 will 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 Doug.

Thank you, Sean. Good morning, everyone. After almost two decades at Vans and V.F. and the past three years building my own practice as a consultant, Board member and executive coach, it feels just great to be back in a brand leadership role with Carter's, one of America's most iconic companies. I'm sincerely grateful to the Carter's Board of Directors for the faith they have placed in me to return Carter's to growth, and I very much look forward to earning the trust of all of our valuable stakeholders, including consumers, employees, key accounts and yes, our investors. At Vans, I was able to help the brand grow from $350 million in sales to more than $4 billion from a mostly California skate brand to a global lifestyle brand. And from an experiment for V.F. into the company's leading source of revenue and profit. Along the way, we were able to dramatically deepen consumer connectivity and loyalty, grow our brand equity and P&L performance commensurately and expand D2C to about two-thirds of our global business top line, all of which applies directly to what I hope to achieve here at Carter's. My remit is clear, to return Carter's to growth. And not just any growth, by the way, but quality, sustainable, long-term and accretive growth. We are not going to buy sales. Our goal is to earn them. We're not going to BOGO our way to sales growth. Our goal is to increase profitability. Our ideal is to grow Carter's consistently and sustainably. April 3rd was my first day of work. I'm well underway in my analysis of the company and our potential opportunities. Based on what I have gleaned so far, I can tell you that our drive for maximum financial efficiency must be balanced with strategic and surgical investment. Our historic focus on maintaining a certain level of operating margins must be paired with a focus on making quality products that resonate. Our transactional efforts must be equaled by emotional loyalty drivers and above all else, we must honor and revere that most human of life's milestones, raising children. As I get up to speed on our business and assess what must be true for a return to growth, we are going to suspend forward-looking guidance at this time. I strongly believe in the tenet that we do what we say, and I'm assessing what is required to meet that commitment. In addition, the current tariff situation has introduced substantial uncertainty, greatly complicating our ability to accurately predict Carter's financial outlook. Our leadership team is already hard at work on a clear, simplified and focused strategy of priorities and commensurate investments with the goal of returning our brands to accretive growth as soon as possible, and I look forward to articulating that strategy soon. I will now turn the call over to Richard, who has done commendable work bridging the gap between Carter's leaders, to walk you through our first quarter results.

Thank you. Doug, glad to have you with us, and welcome to your first Carter's earnings call. Good morning, everyone. Before we walk through the presentation on our website, I'd like to share some overall thoughts on our business with you. It's only been about 60 days since our last call with you in late February, but there's been a tremendous amount of activity here at Carter's and of course, in the broader marketplace in that time. We'll try to give you a good update on everything this morning. At the top of the list, of course, is Doug's arrival as our new CEO. As you've heard, Doug has a tremendous background in brand management and a strong track record of driving growth. He's jumped right in with all of us. And as he said, he's taking the time required to come up to speed on our business and to align on the initiatives, which we believe will return us to sustained growth. Today, we'll focus on our first quarter performance. We had a good first quarter. Sales and earnings were in line with our plan and consistent with the outlook we shared with you on our last call. While we achieved our plan, first quarter results were below last year, and our objective is, of course, to be driving growth. It's difficult to imagine a more tumultuous market backdrop than we've experienced over the last couple of months. The plans which have been announced to impose record tariffs on virtually everything being imported into the United States have led to renewed concerns about inflation, significant declines in consumer confidence and dramatic market volatility, especially for retail and consumer companies such as Carter's. Our objective is to continue to execute amid these broader market and consumer backdrops. Carter's has proven…

Thank you. [Operator Instructions]. Our first question comes from the line of Jay Sole with UBS. Your line is now open.

Great. Thank you so much. I have two questions. First, Doug, it's your first call, obviously, as Carter's CEO. I'd love any initial thoughts you have about what you've seen as you've gotten into the business and gotten to know the company and the opportunities you see to improve the financial performance. And then secondly, I want to ask about the Slide 13 in the slide deck that has the 2025 estimated annual effective tariff rates. Of these potential rates, say, for example, 44% on Vietnam, is that based on the rates as of today, given the current pause versus the reciprocal rates that were announced in -- on April 2? Or is this something -- because the number doesn't -- if you can explain where these numbers come from. Is this as it stands today or theoretical? And if it is theoretical, sort of can you talk about what the impact would be today just based on the rates that exist out there right now? Thank you so much.

Yes. Thanks, Jay. I'm not going to get into too much detail, as I said, looking forward down the road to really sharing a revised strategy with you all. But what I would say is that I'm truly honored to be at the helm of these iconic brands. I'm seriously inspired by the people and the culture here, and I already have myriad reasons to believe in our future success. There's a lot of strength in our brand assets, our market distribution, and we have substantial equity with generations of consumers. So I look forward to adding a lot of specificity as we move forward. Richard, do you want to take the second part of that?

Sure, Jay. On Page 13, this was an attempt to be helpful. And what we've done is we've gone kind of item-by-item through the various import codes and such, looking at what the reciprocal tariffs would mean and kind of aggregating that up. So obviously, China has been hit particularly hard. That's relatively low, as I said, in terms of our country of origin, but significant exposure for Vietnam, Cambodia and Bangladesh. So you can see it's going from an initial low kind of teens, low-double digit tariff rate to something that would be much, much more meaningful. So this is a bit of a hypothetical. It does assume that the reciprocal tariffs that the administration has proposed do become effective. That's obviously not the case at the moment with the pause that's in effect. So we certainly have done our measure of internal quantification of it. It would be a material increase to our product cost. But since it is hypothetical, and we're certainly hoping that cooler heads, more rational heads will prevail and that agreements will be reached, we're not going to quote a number today. But just wanted to make the point that for a company that I think has done an excellent job diversifying its sourcing base, creating broad-based capabilities around the world, reducing our reliance on China for all the right reasons, this would be punitive to us, and it would be for, I think, everyone in the apparel industry. So hopefully, that's helpful. That's what it was intended to be.

Okay. Understood. That is sort of based on the April 2nd reciprocal rates. All right. I think making that clear is super helpful. So thank you so much. I'll pass it on.

Yes. Thanks for helping us clarify, Jay.

Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open.

Hey, good morning everyone. Good to talk to you, Doug. A couple of questions for me. I'll just give them in order. I guess the first question is the China exposure you guys are citing the less than 4%. Maybe, Richard, I mean, is that a number that can go to zero? Is that a number that's kind of like you need what's produced there, so that's as low as it can go? I'm just kind of curious like over time, can that number move lower? How should we think about that?

Yes. Sure. I would say in terms of our branded apparel, there's very, very little that's left in China. It's largely our accessories vendors, our third parties who produce licensed products for us. Footwear is a good example. Some of that product is still manufactured in China. We've been working with those licensed vendors to continue to migrate their production to other countries, and that's underway as well. So I think it can go down from here, but that probably will take some time. And then Skip Hop is probably more dependent, as I mentioned, than we would like it to be on China. A lot of that business is resident in China, particularly the components that have to do with electronics. I think the capabilities to produce those products have been slower to ramp up in the other countries, but we're continuing to actively work on that as well.

Got it. And then two more. So I know you're not going to get into guidance and specifics, but I guess I'll try to ask something at a high level. Just well, first, when are you expecting the tariff impacted goods to begin to hit your shelves? And then how are you thinking about mitigation efforts near term and long term? And then a follow-up to that is just, are you expecting to price out the pressure? And how are you thinking about price elasticity and potential declines in volume or total revenue as a repercussion of what you might need to do just to kind of maintain or keep the gross margins steady?

Sure. I kind of would say we're importing products on kind of a continuous basis. I think the first imports will be subject to these tariffs kind of the middle of May from memory. But we probably have on order, on hand, something like 150 days of supply across our various businesses. So like a lot of other retailers, we have inventory in stock that's not subject to the tariffs. And so we have a little bit of time before it really bleeds into the cost structure. The mitigation efforts, I would say, have been pretty effective in what's been implemented so far. So we have raised prices on some items, particularly related to Skip Hop. We have partnered with some of our vendors to share some of those costs. We are continuing to move production around to lower tariff geographies. So those mitigation actions have already been taken in some cases. We would have to do more of that. Pricing is the big question mark. I think there would be some measure of that, that we would have to implement. I don't know that I'm going to probably say much more at this point because it's still, we're in the realm of speculation at this point. But this would be a material increase to our product costs. And I think like everybody in the industry, we're trying to figure out exactly how much can the consumer bear. It probably makes sense to perhaps do it on some products versus others, and that's all part of the analysis that we have underway.

Got it.

And we will look at our unit investment to offset price increases as necessary with minimal impact or minimal liability.

Got it.

Yes. I would say one other step that we have taken is taking a look at our kind of late year inventory commitments. We have scaled those back slightly. Just out of prudence, we probably don't think we're going to need as many units as we thought of initially, and I think that reduces a bit of our exposure also.

Got it. Thank you guys.

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Your line is now open.

Hey, thanks guys. Hey Richard, just building on that last comment on scaling back inventories. Can you quantify that for us? How much are you pulling back in second half inventory relative to your plan? And I'm also curious what you're seeing from your big retail partners, specifically the big three? Have you already started to see some order cancellations and that's what's driving you pulling back? Or are you just anticipating that you might see some of those cancellations? And then just second, I'm just curious, what product is already on hand? Are you already fully stocked? You have product for back-to-school? And I guess, how much is still on the come for holiday? If you could just maybe talk about the timing of what you're receiving and when?

Yes. I would say most of what we have on hand is spring/summer inventory. The fall/winter product would start to arrive in kind of late May, June and the holiday product would come after that. So the balance of our inventory receipts clearly are still ahead of us. But we have a good portion of our business, as you know, that's on replenishment. So we have those products on hand kind of at all times. I would say the inventory adjustments largely relate to our own businesses, our own U.S. retail business. And I would say it's fairly modest in the scheme of things. We're committed pretty far out at this point. So it's kind of the late holiday winter deliveries that we're talking about impacting. I don't think I'm going to quantify for you exactly how much that is. And so it largely relates to our own retail business. I would say our momentum in wholesale continues to be good. We continue to have an active dialogue with our wholesale customers. I think they're approaching the situation with a great deal of caution as well. There's great uncertainty to all of them and all of their business models as well. We have not seen any meaningful trend towards reduced inventory commitments coming from the wholesale channel, not a significant trend towards order cancellations, but we're obviously watchful for that. But everyone is uncertain right now, the prospect of having to raise prices. And I think just looking at what's happened in the consumer backdrop as well the last couple of months, we've seen consumer confidence drop extremely rapidly and significantly over the last couple of months. And I think our wholesale customers are trying to evaluate the health of their consumer and what their outlook will look like for the balance of the year.

Paul, to add on to -- go ahead.

Sorry, go ahead.

I was just going to add on to what Richard was saying. We have a robust time and action calendar that the teams are managing. So we will hold off on any decisions around units or cancellations or pricing as long as we possibly can.

Yes. And just to clarify, to be clear, the back-to-school season would be the first sort of full season that would be subject to tariffs, that would have products subject to the new tariffs?

I think more of that assortment would be subject to it because that product will be imported later.

Got it. Okay, good luck guys.

Thank you, Paul.

Our next question comes from the line of Chris Nardone with Bank of America. Your line is now open.

Thanks guys. Good morning. First, I wanted to ask on the Retail comp improvement you saw over the last two months. I know you've probably received an impact from the Easter shift. But is there a way you could parse out how much of the improvement is coming from products where you have been more sharp on price? And then Kendra, just given the changing macro dynamics since we last spoke, are there any changes to your strategies to help drive some improved performance in your Retail business in the back half of the year?

Sure. So we have some signals that are -- some significant signals that our product strategies are working that we've spoken about over the last few calls. Where we've leaned into fashion with styling and fabric and details, our customers are responding, and we're seeing that in our conversion rates in our stores that are very positive versus last year, and our sell-throughs are up across channels. We're also -- the more competitive pricing, to answer that question, is driving UPTs at Retail specifically. It's not a big portion of our assortment that is like super sharp pricing that we've made adjustments on, but we are seeing the UPTs lift on those products. And the consumers are adding additional products to those baskets. So it's not that those opening price point styles are standing alone. Our marketing strategies are also driving new customers to our channels, driving new customers that are very style-centric and baby customers. So that has been a great metric that we're seeing. Regarding macro trends, they're certainly having an impact on our business. It's hard to know exactly how much. I would say that we have some typical channel shifts across our retailers and our channels that we normally see. But also, there is likely a little bit of pull forward of demand as consumers are planning ahead to avoid tariff-related price increases. In the back half, we have some significant inventory investments in the kid category, which is where we've seen the most challenging portion of our business, both in breadth and depth investments in kid that will help to continue the momentum in product. But other than that, the same strategies we've been working towards will continue in the back half to drive our business.

Got it. Okay. That's very helpful. And then just a quick follow-up for Richard. If we put tariffs to aside for a second, can you just talk about your visibility you're having to other costs such as cotton, freight and labor? Maybe if you can just talk through the cadence as we move through the year, which may be good guys, bad guys, anything that can help us think through our margin forecast?

Sure, sure. Well, the outlook for cotton has been pretty benign. It's somewhere in the low $0.60 range. I was looking at some data the other day. Apparently, crop yields around the world have been good. And so that is taking some price pressure out of the system. So I think the outlook for cotton is actually very favorable at the moment. And we've procured all of our cotton for the balance of the year. So I think we're in good shape there. I think on labor, we have seen a trend towards labor inflation. We'll see what happens with the global economy. That tends to drive kind of the outlook for labor rates in Asia. And I think it's been a bit mixed. We had seen some pressure there. I was looking at some data across a couple of other countries, and it looked like it had moderated a bit. So we're still planning for a bit of inflation there. I think wages tend to only go in kind of one direction. And I would say on transportation costs, freight costs, we've got some modest inflation kind of going forward. We just finished renegotiating our ocean freight contracts. I think you were aware that we had that going on. And I think the procurement team and the supply chain teams did an outstanding job with those renegotiations. I think the rate impact that we're expecting this year is only a couple of million dollars across our P&L. So that's obviously very manageable. We had some extraordinary costs last year, probably $12 million, $13 million of unusual costs, I would say, in transportation related to rerouting vessels, some of the surcharges, the disruption that was coming out of the Middle East and such. We don't expect to have those costs this year. So even with a bit of rate inflation in our new contracts, it's a fairly modest dollar amount exposure to the P&L.

Okay, thank you. Good luck guys.

Thank you, Chris. Good luck.

Thank you. [Operator Instructions] Our next question comes from the line of William Reuter with Bank of America. Your line is now open.

Hi, good morning. I have two. So the first, in the event that the tariffs had been eliminated last week, would you have still pulled guidance? Meaning, I guess, with the change in management and consumer uncertainty, was that a large part of the decision to pull guidance? Or is it mostly related to the tariffs? And who knows where that's going to go?

Yes. I think both factors contributed to it, Bill. I would love to be in that 0-tariff world that you just described. That sounds pretty attractive at this point. But I think it's not uncommon to have a new CEO come in and take the time that's required to assess what's underway. So I think likely we would have made the same decision.

Yes. I'd like no tariffs, too. Secondarily, I think in your prepared remarks, you mentioned marketing was down a bit. It was higher a little bit year-over-year last year. I think it was expected to be flat this year in '25. Is that still the expectation? Or are you going to pull back a little bit? Or is your plan to pull back a little bit given the kind of uncertainty around consumer confidence, et cetera?

I think the previous plan is still the case around anticipated marketing expenditures. The comment related to the portion of marketing costs that remain in the unallocated bucket and don't get pushed out. So that tends to be more technology costs and personnel costs and such, but not really the consumer-facing portion of marketing. So those costs are resident in the business segment. So it's a bit of an accounting geography.

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

Thank you, Bill.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Doug Palladini for closing remarks.

Thank you all for your time and your interest in Carter's. Despite all the uncertainty we reviewed today, I've been incredibly impressed by the drive and the acumen our people are exemplifying every day, and we really look forward to sharing future strategic specificity as we move forward. Thank you all.

This concludes today's conference call. Thank you for your participation. You may now disconnect.