CARTERS INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Third quarter results better than forecasted, sales and earnings exceeded guidance.
• U.S. retail drove better sales, baby apparel contributed significantly.
• Launched new marketing campaign focused on early childhood special moments.
• Reaffirmed annual outlook for sales and profitability, with potential upside in fourth quarter depending on retail trends.
• Store initiatives: opening 40 high margin stores, closing 30 low margin stores; increased investments in store remodels.
• Invested in technology for inventory allocation and marketing personalization using AI.

Segment Performance

• U.S. Retail: Net sales declined 6% in Q3. Baby apparel sales grew 2%, contributing over 50% of total apparel sales. Toddler age segment had slightly lower sales. Opening price point products had low single-digit growth, best product offerings had over 50% growth, mid-tiered down over 10%. eCommerce comps improved from down 14% in H1 to down 5% in Q3.
• U.S. Wholesale: Sales comparable to last year. Growth in exclusive brands, lower sales to department stores, significant reduction in low-margin off-price sales. Operating margin over 21%, down 90 basis points.
• International: Third quarter sales declined 9% reported, 6% constant currency. Canada was impacted by warmer weather, Mexico had 9% retail comp growth.

Guidance

• Reaffirming annual sales outlook: forecasting $2.8 billion in annual sales, with U.S. retail expected to contribute ~50%.
• Fourth quarter net sales expected $800M-$840M. U.S. retail comp decline 9%-12%, but October trends improving. U.S. wholesale up mid-single to high single digits. International down mid to high single digits.
• Adjusted EPS raised to $4.70-$5.15, reflecting lower effective tax rate and net interest expense.

Risks

• Monitoring consumer demand and confidence around upcoming elections, which could temporarily disrupt demand.
• Macro-economic conditions affecting families with young children, impacting apparel spending.
• Promotional intensity across the marketplace, which could offset potential upside in fourth quarter.

Question and Answer

Q: Hey. Good morning, guys. I wanted to ask about the gross margins in relation to the pricing strategies you guys are implementing.

A: Sure. So I would say the pricing investment in U.S. retail was closer to that $25 million number in third quarter Ike and a similar amount to your point earmarked for the Q4. You do have a fairly significant mix effect that's different between the fourth quarter and the third quarter. And I think that's a reasonably consistent forecast assumption for us. All along we have planned for very nice growth in wholesale that is the lower gross margin part of the business. So that is one key difference between Q3 and Q4. I wouldn't say we're planning gross margins down 300 basis points, probably close to 200 basis points, but fairly consistent pricing investment in U.S. retail $25 million each of the third fourth quarters.

Q: Terrific. Thank you. My question is just about how that compares on the U.S. retail side look post October. In other words, like what are you lapping versus last year in November December?

A: In terms of comp changes, up easier comparisons, tougher comparisons. So looking at fourth quarter last year, comps were down around 6% and we're planning them down somewhere in the range of 9% to 12%. So again, it's that comp was probably one of the better comps we had in the fourth quarter last year relative to the previous three quarters last year. So we had a good fourth quarter. Typically, we have a good fourth quarter. Christmas is a kid's holiday and given our value proposition, the low price points, people are buying their Christmas pajamas in the fourth quarter. So we hope there's more upside than downside relative to our U.S. retail guidance in the fourth quarter given current trends.

Q: How should we think about this $60 million in pricing and marketing efforts in the back half of this year, as we move into the first half? Should that stick around next year? And then just in terms of your pricing strategy, do you see risk that some of your competition could continue to get more promotional into next year? And how would you balance kind of maintaining your margins with also striving to improve the comp growth rate into 2025?

A: Yes. Keep in mind, Chris, that we a good portion of the pricing at least to date has been focused on improving the mix. So I think the prior season goods were probably some portion of 50% of our retail inventories at the end of the second quarter. Today they are closer to 10%. That's where you want it to be. Prior season goods, you want a better mix of fall and holiday product in the stores and online at this time of year. So if we continue to make sure that we manage inventory, we shouldn't see the level of promotions that we saw in the third quarter and some portion of the fourth quarter.

Q: How should we think about this $60 million in pricing and marketing efforts in the back half of this year, as we move into the first half? Should that stick around next year? And then just in terms of your pricing strategy, do you see risk that some of your competition could continue to get more promotional into next year? And how would you balance kind of maintaining your margins with also striving to improve the comp growth rate into 2025?

A: Yes. Keep in mind, Chris, that we a good portion of the pricing at least to date has been focused on improving the mix. So I think the prior season goods were probably some portion of 50% of our retail inventories at the end of the second quarter. Today they are closer to 10%. That's where you want it to be. Prior season goods, you want a better mix of fall and holiday product in the stores and online at this time of year. So if we continue to make sure that we manage inventory, we shouldn't see the level of promotions that we saw in the third quarter and some portion of the fourth quarter.

Q: My first on the pause of your share repo. Did you say for what time period you're putting this on pause? And I guess, is it just based upon paying out in excess of 100% of your free cash flow? And will that kind of always be the kind of the guardrails for share repo going forward?

A: So I think in recent years, we've used our forecast for free cash flow to guide the amount of distribution of capital that we make. We're fans of returning capital. So the pause relates more to the balance of this year. As I said, we continually talk about this with the Board and as our plans come together for 2025 and beyond, we'll certainly visit it. But our forecast for free cash flow has come down a bit relative to our initial expectations coming into the year. We don't think it's appropriate to take on debt for the sole purpose of returning capital. And so since that forecast for free cash flow has come down a bit, we think it's appropriate to modify our return of capital plans, but we'll continue to revisit it.

Q: Just 2 follow-ups and one you may have answered, but I dropped for a moment. Did you say the impact to the warmer fall weather you've had has on either ending the third quarter inventory or thoughts for a third quarter and whether there could be any clearance related to that?

A: Well, I would say we certainly always have a weather impact. It did warm up in the final two weeks of the quarter in the U.S. and in Canada, which slowed sales a bit. I would say that over the course of the entire third quarter, we made very good progress moving through the spring and summer inventory, which would otherwise have been problematic going forward.

Q: Good morning. Thanks for taking my question. I'm just -- I just wanted to ask about the assortment shift towards, better, and best, and good. Is there a plan to go deeper on units in those parts of the assortment or are you adding additional products to the assortment?

A: Hi, Jim. This is Kendra. I would say it's both. So we will be investing more depth and breadth, and particularly our best categories, leaning into our new brands and new assortments that fit there in the good bucket. I would say it's a little bit more depth than it is breadth, but it will be both.