Welcome to Carter's Second 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 Product 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 second 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, and thank you for joining us today. Just over 100 days ago, I began my journey as Carter's CEO and President. It's both an honor and privilege to lead this company in its iconic brands, and I'm more energized and inspired than ever about our potential. In the short time I have been here, I've visited as many Carter's stores, key accounts, distribution centers, regional offices and factories as possible, to hear directly from our teams where our greatest opportunities lie, and how best to get after them. I have also listened to feedback from many new, existing and lapsed consumers. And based on my learnings, I've been able to develop a clear picture of what success will look like as we move forward, returning all Carter's brands to growth that is long-term, sustainable and profitable. Carter's brands are truly iconic and our legacy is a source of trust and strength. Our teams possess talent, acumen and drive, all necessary to unlock the company's next tranche of success. And our market leadership affords Carter's unparalleled competitive advantage. I'm going to share some details around the road map to future success shortly. But first, Richard is going to discuss our 2025 second quarter and first half results, which I believe offer proof that we have stabilized our business, and put in a position to grow again. Richard?

Thank you, Doug. Good morning, everyone. With the first half of the year now behind us, it's clear we're navigating an unsettled world and marketplace. As the year has unfolded, tariffs have emerged to present significant uncertainty and challenges to planning our business. We're obviously not unique in this higher tariffs are an issue across the industry. The incremental baseline tariffs, which have been implemented were not especially meaningful to our results in the second quarter, but they're expected to have a much more significant impact on our business going forward. Not to mention any additional reciprocal tariffs, which might be additive to what's already been imposed. I've been pleased, though, with how our team is actively responding to these new challenges. Over the years, there's been no shortage of unexpected events that we've had to respond to, whether it was the sudden emergence of record high cotton prices, record inflation or the market exit of significant wholesale customers. Carter's has staying power, and I'm confident we'll work through whatever the current environment throws our way. My comments on our second quarter and first half performance will track to the presentation materials, which are posted to the Investor Relations portion of our website. So beginning on Page 2 of our materials. On Page 2, we have our GAAP basis P&L. Sales in the second quarter were $585 million. Our second quarter reported profitability included $8 million in charges, which I'll comment on in a moment. Our Q2 reported operating income was $4 million. Our first half GAAP P&L is on Page 3. On first half sales of $1.2 billion, our reported operating income was $30 million. First half reported profitability included $17 million in charges. We detailed the second quarter and first half charges on Page 4. We've treated these…

Thank you, Richard. Our Q2 and H1 results show me that Carter's business is stabilizing as we control what we can. I also believe that we now have the necessary foundation in place to return Carter's to long-term, sustainable and profitable growth. As mentioned at the beginning of today's call, I'd like to spend some time talking about what I've learned during my first 100 days plus in this role, and where I intend to take Carter's moving forward. Also, in today's presentation materials, we've provided links to a brand video and illustrative PowerPoint deck to bring this narrative to life. Everyone I've met since my April 3 start date has a story to share about Carter's or Oshkosh, something they war as a baby that their moms stored away as a keep sake a dress or a pair of overalls passed down through generations or a favorite outfit, they have their kids wearing right now. Phones come out, photos and memories are shared, the fondness and warmth are palpable. It's exactly the powerful emotional response to our brands that any company leader would covet and it reinforces the tremendous privilege Carter's has as a part of people's lives during such a meaningful time when families are having babies and raising young children. Our return to growth will be predicated upon this place of honor, backed by 160 years of cumulative trust and fueled by a commitment to serve a new generation of young families with brands and products that emphasize high quality, modern design and exceptional value. I think our newly crafted company purpose to embrace the wonder of childhood and uplift those shaping the future captures this position perfectly. I'm also inspired by the talent and potential of many leaders and teams across the Carter's organization, and we…

[Operator Instructions] Our first question comes from Jay Sole of UBS.

Doug, thank you for all the comments today. I'd love to ask you, given everything that you talked about and everything you've learned in your first 100-plus days, what kind of sales growth opportunity do you see going forward for the company? What kind of annual sales growth rate do you think you can deliver? What kind of EBIT margin do you think you can get the company to over, say, a 3- to 5-year period? And generally speaking, if you had an earnings goal, what kind of earnings do you think the company should be able to deliver?

Jay, thank you for your questions. Yes, I have a lot of earnings goals and sales goals, but we're not going to share specific numbers today. I can tell you -- I can just reinforce what I said. We have substantial and meaningful reasons to believe that we can return to growth that, that growth can be profitable and sustained over time and that it's accretive. It's accretive for our brands. It benefits our consumers. That's what we're really focused on. And yes, and that's what we're driving toward right now.

Got it. Understood. And maybe if I can ask one for Richard. Just talking about tariffs, you gave the number. I think it was $125 million to $150 million gross. Can you just talk about how -- and you gave some ideas about how you're going to offset the impact, whether it's changes to the product assortment, customer with vendors, et cetera. Can you dive in a little bit and maybe give us an idea of like what the biggest potential offset would be? Is it price increases? Is it something else? And how much over time of that $125 million? It sounds like you can offset a lot of it, but like over what time frame and sort of what might be the impact to next year?

Right. And this is Jay, our best kind of analysis to date on this. Obviously, the landscape is anything but certain on this. It seems like every day, there's a new announcement or different interpretations even among the countries who are negotiating this. So it's been tough even to try and run the scenarios that we've shared this morning. I do think probably the most meaningful opportunity is price just in terms of the magnitude of the dollars just given the size of our business. That's not the only tool that we intend to employ here. The other ones that were listed in the presentation are very important to us as well. We've had good partnership with our vendors. We are sharing some of the price -- some of the tariff costs with our wholesale partners. We have raised our prices. It's tougher to do near term, obviously, because we have goods that have been ticketed. We have goods that have been sold in. And that's the reference to the impact -- the expected impact for the second half of 2025. It's just tougher for us to cover near term. But as I said, we're committed to growing the profitability of the company. We have a long heritage of being a high operating margin business. We have no interest in running a lower-margin business, particularly due to tariffs. And if this is something that's going to be a permanent increase to our cost structure, we have to find a way to cover it. And that's why our ambition is for '26 and beyond that we would find a way to completely mitigate what we're estimating. The analysis gets a little circular because there's a lot of data that suggests that you lose some unit intensity when you raise prices, and that, therefore, then affects the number of units that you're importing into the country that are subject to tariffs. So we'll see where it all lands. As I said, I'm pleased with how aggressive our teams have been in responding into this challenge. And it's the challenge of the moment. And I think it's one for the industry as well. As the leader in young kids apparel, we expect to lead in this regard as well, and we'll be as aggressive as we can with it over time.

If I could just add one note, I really want to applaud the agility of our supply chain team. They've done incredible work diversifying our existing sourcing base, and we will continue to be agile. So as we get clarity on what's happening with the tariff situation, we can move among the countries of sourcing that we have. And I think we have tremendous agility, and it is a competitive advantage for us. So I would just add that as an important factor that's working in our favor, irrespective of the uncertainty.

Our next question comes from Paul Lejuez with City.

This is Kelly on for Paul. Doug, I was wondering if you could just double-click on your plans on the U.S. retail business. I think you talked about closing some stores as leases come up. I guess when we think about sort of the net stores, 800 and change in the U.S., would you expect those stores -- the store count to move lower? And just any color on where you're seeing opportunity to close stores versus opening stores and just more detail around your U.S. DTC strategy.

Yes. Thank you, Kelly, for the question. The first thing I would tell you is that I really believe in this new multifaceted algorithm that we have that is proprietary to our company. It's a more analytical look at our fleet than we've ever had before. So we have more inputs, I think we're making much more intelligent choices. That said, all options are on the table, closing more stores, moving stores, opening new stores, relocating, remodeling. We're going to look at every possible option available to us, and we're going to use all the insights to decide what's best moving forward. The other thing that we're really leaning into, as I discussed, is this fleet segmentation strategy. It's going to be very important for us as we want to deepen consumer connectivity and be more resonant with the product assortments in each point of distribution to ensure that our outlet stores, our in-line stores, our more upmarket stores reflect the consumer who's shopping in those spaces. We believe there's a tremendous opportunity there. And you're already seeing us distort assortments in different stores to try new things to appeal to consumers with good results, by the way, as we've detailed today. So we'll continue to test and learn, and we'll continue to employ all the information available to us to make the most informed choices possible. And yes, that's probably the most detail I can give right now.

Kelly, just to add briefly on to that. We are continuing to see good real estate opportunities. I think to Doug's point, we're increasing the analytical rigor around those new site selections. But our last two classes of new stores are the best performing in the fleet at the moment. So we're encouraged by that. Of the 100 stores that Doug mentioned around closing, they represent probably around $75 million, $80 million of revenue. We actually think there's an OI gain that we get when you factor in the fact that we're going to transfer some of those sales from closed stores to the existing store base. It's really about improving the productivity of the existing store fleet. That's our focus, but that doesn't mean we don't have opportunities to continue to expand over time and open new stores.

Any timeline for when you expect to close the 100 stores?

Over the next several years, as the leases expire, we've gone through the analysis that there's really not a strong NPV case to be made for closing the stores before lease expiration. We have some situations where we have lease kickouts. That would be kind of a handful of locations is our expectation. We're continuing to read it, but we think the best decision is to have these stores close at their lease expiration. So it's over the next several years that we'll hit the 100 stores.

Got it. And just last question on pricing. So you've made these pricing investments in U.S. DTC. They seem to help the comp. You also made some investments in pricing in the U.S. wholesale channel. I think units were up 6%, sales were flat. I guess how do we square that with your planned price increases in the back half of the year? Like have you started to raise price and you're seeing a good consumer response? Like how flexible are you on pricing here? And what feedback are you getting from your wholesale partners?

Right. So we have begun to raise prices, including in the wholesale channel. That was something that started late last month as we started to ship fall product. I'd say the dialogue with our wholesale customers has been very constructive. This is an issue, as I said, that's not unique to Carter's. They're seeing it in their own private label sourcing. They're seeing it from their other vendors. I think it's just understood that there has to be some measure of sharing. They've responded really well. So that's how we're handling it in the wholesale channel. We have probably more flexibility in our own retail channel, obviously, to change prices dynamically based on what we're seeing. And as I mentioned in recent weeks, we're actually seeing competitors raise their prices. So it's our intention to probe up where we can. We'll obviously read the situation with what -- how the consumers respond. Interestingly, the best performing part of the assortment is our best set of products, the products that have the most added benefits and features and carry the highest price points. So clearly, our consumers recognize when we've added to our assortments, we've added features and benefits, they're willing to pay for that, and that's why we're leaning into that part of the assortment in particular, that helps on the pricing front as well. And we -- just to add to that, we are seeing reasons to believe that our consumers are appreciating those opportunities. Again, I referenced specifically Little Planet and Purely Soft, which is a Carter's assortment as examples of where we're seeing real achievement there. It's helping bring new consumers in more often, as well. So it's not just what we have to raise prices on. It's what we want to raise prices on. So we are being more proactive and directive ourselves already.

Our next question comes from Jim Cartier with Moness, Crespi & Hardt.

Doug, you've talked about the need to invest to drive sustainable profitable growth. Can you quantify or give us a sense of how meaningful those investments would be? And are those investments near-term dilutive to margins?

So I'm not going to quantify the investments. I will tell you that historically, I do not believe we have invested sufficiently in demand creation and reaching our consumers with the best possible stories. That's a real opportunity for us going forward. Where we are already investing more, the MROI and the return on the investment is outstanding. And that I will just reiterate the two places where I believe demand creation investment is going to yield the greatest upside for us. One is store traffic and website traffic and the other is consumer loyalty. And again, that return on invested capital, as we model it, is very high, both in terms of revenue and operating income. So we think we can continue to justify these increased investments, and we believe that they will drive growth that is profitable for us.

Great. And then in terms of investing behind the best product and the best performing parts of the assortment, where does kind of second half stand in terms of the changes that were made year-over-year relative to the first half?

Yes. I will tell you that the assortments are continuing to expand in the best bucket. Again, our reasons to believe are showing us that there's real resonance with our consumer with these products. And so there's no reason to slow down. So you will see more inventory and you will see higher AURs. You will see more of this product in a more expansive way. To reiterate something that Richard said, I think you will see more newness more frequently from us throughout our platforms as well in the second half.

Yes, breadth and depth of investment.

Our next question comes from Chris Nardone with Bank of America.

So Doug, just with your fresh view on the business, I'm curious to hear why you think the category has been relatively weak over the last several years and just how the competitive landscape in the category has changed. Maybe you can put into context how much the category has grown and your confidence in really getting this business back to growth.

Yes. We know the market is down approximately 2% overall. But what we've seen is the primary change in the landscape is around private label, when you go into a lot of our key account partners, you will see much greater investment for them in our category. I think that's primarily what we're seeing is growth from them. But I would also tell you that as I have met with a lot of these key accounts directly, what they have told us is they expect us to grow our business as their primary baby and toddler national brand. So yes, more competition from private label in these key accounts, but also more of an opportunity for us as the leader. And we definitely are leaning into that and plan to continue to build on that as well. Yes. The other note I would have for you just is to keep an eye on international because there's a lot of bright signs there for us as well. And we are, again, are leaning on our awareness. 160 years of trust means something, in a lot of places around the world, and we benefit from tremendous awareness, especially around quality. We find that, that's something where we outpace all the other brands. And that's true outside of the United States as well. Richard spoke to our results in Canada, Mexico, and I talked about Brazil, all good examples there.

Got it. Very helpful. Then just a quick follow-up on the wholesale business. I noticed the exclusive business, two of the three are growing. Has there been any material change in sell-through or just the health of inventory in the channel? And then also you're pushing more of your best product into the market, is there opportunity to expand shelf space with Little Planet, Purely Soft and your newly launched brand? Like how big of an opportunity is that over the next couple of years?

So Chris, I'd say that there is an opportunity for us to broaden the availability of our brand portfolio in the wholesale channel. And that's something that Doug has been helping us prioritize. I think there is an opportunity to see greater penetration of Little Planet. The new brand that we've launched this week, Otter Avenue, we're only days into it, but we think that's a great opportunity where it's a differentiated product. It's a white space in the market. And so we think that's an opportunity with a number of our wholesale customers over time as well. I would say on balance, sell-throughs have been good. We're kind of early into kind of fall/winter selling. That will start to ramp up here in coming weeks. We'll get a better read on back-to-school here with our key customers in the next number of weeks. But on balance, as I said in my remarks, the outlook for demand in the wholesale channel has held up very well for fall/winter product. And so I'm encouraged about what the next few months could mean in that segment of the business.

Yes. And I would just also refer back to my comments about redrawing our wholesale landscape, because I think you will see, as I said, more of our brands in more accounts and more doors as we move forward. And traveling the country, visiting these accounts directly with our wholesale leader, we clearly have that opportunity and that invitation from our key accounts.

Our next question comes from Irwin Boruchow with Wells Fargo.

A couple of questions from me. I guess I know there's no guidance on revenue. But I guess just when we think big picture in the back half of the year, which channel, whether it's direct-to-consumer or wholesale, would you expect to outperform in the back half? And then I guess to both channels, would you expect the rate of change on revenue from where we are today to worsen or stay the same as you push price, now you're talking about pushing price a little bit more aggressively than you were in the first half?

I'd say on balance, we have higher revenue growth planned in the second half relative to the first half, and that would be led by the largest business for us, which is our direct-to-consumer business. So we have, I'd say, probably more direct control over what gets executed in our own retail business than we do in the wholesale channel. We've sold in, obviously, fall/winter -- those bookings were planned kind of comparable year-over-year. We have replenishment demand planned up slightly in the second half. So I think the outlook across our channels and of course, continued momentum to Doug's point, in international. We've been on just a great street there. And so I would expect that demand profile to continue in our International segment. So on balance, forecasting some acceleration of revenue growth in the second half. We do have an extra week in the second half, just to be transparent on that. We're in a 53rd week year. So that contributes to the second half as well.

Got it. And then I guess just to move to margin. So on the $35 million that you guys talked about, it's roughly, I think, 200 basis points in the back half. I guess just, Richard, just you're talking about AURs that were down 4%, now you're planning up low singles. Can you just do the math for me? If AURs are up low singles, how much of that roughly 200 basis points 2H headwind gets offset?

Well, I'd say it's a portion. I don't know if I'll be as discrete as all the basis points, but we -- as I said, it's just tougher to cover the impact from the tariffs near term with pricing. There's some measure of an offset, but it won't completely offset the impact. The $35 million is the net effect after taking some benefit from pricing, other offsets in terms of vendor sharing and such. That's the net amount. To your point, though, we are planning AURs up in the second half, and so that's less of a drag. There's also -- if you recall from just our guidance earlier in the year, the dynamics was expected to shift a bit independent of tariffs between first half and second half. First half was a bit more of that drag from lower AURs in the retail business, far less so and actually prices planned up in the second half. What becomes a bit more of a swing factor is product costs themselves are higher in the second half, independent of tariffs, and that's conscious on our part. That's where we've made investments in the product. That's what's driving momentum with the consumer. And so that comes through a bit as well, discretely looking at product costs.

Okay. So the $35 million is after the assumed price increases should go in.

That's the headwind. That's correct.

Okay. Great. That's helpful. And then my last one for Doug. Bigger picture, I think just to go back to the first question of Jay's question, I think, obviously, we're all interested in long-term earnings power and growth and all that. But I'd like to ask more for the short term, honestly. I mean it seems like you guys are in reset mode in '25, and that likely goes deeper into '26. You're dealing with tariffs, you have to accelerate investment. Is there any way to frame where you see the bottom of margin or profit dollars as you look to hit stabilization, I assume, in the next 12-plus months? Just any other help you can kind of give us would be great.

Yes. I really don't think that there's much more detail we can provide beyond what we've already said. I would just reinforce a couple of things to you. My primary long-term objective is long-term sustainable, profitable growth. All three of those things must be true for Carter's to win. We've given back some market share in the past few years. We have a very clear plan to win that back, and we're going to win that back with product that is profitable. And so -- and again, we're already seeing reasons to believe that we can do that, and that's resonating with our consumers. The newness that we're putting in the marketplace is yielding the best results that we have. Our wholesale partners are encouraging us to grow with them as they grow this part of their business. Their dedication to what we do is a big part of their future success as well. So long-term, sustainable, profitable growth. I know it sounds like a broken record, but that's short term, midterm and long term, what we're focused on here.

And our last question comes from Paul Kearney with Barclays.

I guess with the outlook for AURs to increase low single digit in the back half, what is your expectation for promotions in the market? And relative to competition, are the planned price increases in line with what you are already starting to see competitively in the market?

I think it continues to be a very promotional marketplace. I don't know if it's more so than it has been. As I said, we are starting to see some indication of response from -- across the industry, across the competitive set to presumably tariffs. And so we will read that. I think our retail team, in particular, does a great job in kind of scraping the competitive price information out there and making sure that we are competitively priced. That's our mission is to not be an outlier. We want to be competitive. But our brands are worth more, and we think that we'll have the ability to successfully price up to cover. So that's kind of how we're thinking about it.

And then my second is when you think about improving the store productivity in the DTC business, I know you can't quantify it, but can you help maybe rank some of the shifts in SG&A spend between, maybe taking out some costs and what are the bigger buckets of reallocating and reinvesting between marketing or product or anything else? Just ranking some of the puts and takes on SG&A to improve the productivity long term.

Sure. Well, I would say, in general, stores are expensive to operate. They have a high fixed cost structure. They're SG&A intensive. And so as we look to close 100 stores, that SG&A comes out of the base. And these are stores that are kind of marginally productive. They're making a few million, they're losing a few million. They're at the margins by definition. So that SG&A comes out of the base. We have a good ongoing productivity program. I think we've done in general, a good job managing SG&A over the last number of years. We're trying to keep a lid on on hiring where we can, organizational costs. We have a great indirect procurement program, where we've become much more disciplined in how we go to market and procure the things that we need to run the enterprise. We would like to find more savings there. And I think a destination would be in some of the marketing investments that we've talked about. We want to drive more demand in the business. So that would be an area of possible reinvestment over time.

Yes. I would just add and reinforce a couple of things that I said. Our in-store metrics are performing much better quarter-over-quarter, too, for multiple quarters now. Our opportunity is driving greater traffic. There's a lot of ways to do that, better real estate decisions all the way through demand creation. And -- but that's the unlock for us, right? So that is one of the two key investment buckets I talked about. We need to bring more people into the stores, onto our websites -- and then once there, I think we're doing a much better job of converting them and keeping their loyalty.

Okay. Last one, if I can just squeeze one more in. I think just on tariffs, you mentioned you expect to mitigate them in 2026 and beyond. Does that mean you expect to fully offset them in 2026? Or should we be looking to 2027 for additional offsets?

Our intention, Paul, would be to offset them fully in 2026. So we'll have more to say over time, but that's the direction we've given to the organization and the teams are moving out against that priority.

That's all the time we have for questions. I'd like to turn the call back over to Doug Paladini for closing remarks.

Yes, we're at time. So I'll be very brief here. Thank you all for your time and interest in Carter's. Hopefully, you've seen as I do, that our business is stabilizing, and that we are in a position to grow again. We see myriad reasons to believe that we're moving into a phase of long-term sustainable and profitable growth. But please remember, we're just getting started. I look forward to sharing much more with you, as we move forward. Thank you.

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.