CARTERS INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Acknowledged Mike Casey's retirement after 30+ years with the company. Board initiated external search for permanent CEO.
• Fourth quarter performance was stronger than forecasted, with sales and earnings above high end of guidance. 2025 profitability outlook is more challenging.
• Core baby and toddler apparel offerings (80% of apparel business) grew market share in US in 2024. Higher-priced and elevated products (Little Planet, PurelySoft, licensed) performed well. Personalization capabilities and rebranded loyalty program launched. Wholesale business achieved record sales of exclusive brand products in 2024. Canadian and Mexican businesses had strong fourth quarters.
• Significant non-cash pre-tax charge of $30 million related to impairment of OshKosh B'Gosh brand trade name. Adjusted operating income in fourth quarter was $115 million with 13.4% margin, adjusted EPS $2.39.

Segment Performance

• US Retail: Fourth quarter net sales were part of the consolidated $860 million. Had investments in pricing and marketing. Full-year net sales were $2.8 billion, down 3%, with the majority of the decline related to lower sales in the US retail segment. US retail had a high single-digit decline in comparable sales in the first half, but saw improvement in the second half with 2% unit volume increase in the second half and 4% in the fourth quarter.
• US Wholesale: Had a strong quarter with year-over-year sales growth of 7%. Record sales of exclusive brand products in 2024, with growth driven by exclusive brand customers. Sales to department store customers continued to trend lower, and off-price channel sales were down over 50% in 2024. Wholesale had an operating margin over 20% in the fourth quarter.
• International: Canadian business had a good fourth quarter with a 6% comp, and Mexican business had an 8% increase in comps. However, the stronger US dollar negatively affected international segment results, offsetting growth in local currency. The stronger US dollar is expected to be a headwind in 2025.

Guidance

• 2025 sales expected in range of $2.780 billion to $2.855 billion, comparable to 2024 net sales at high end and down about 2% at lower end. Fiscal year 2025 includes a 53rd week estimated to represent net sales of approximately $30 million.
• US retail sales expected comparable to down mid-single-digit, with comp sales down low single-digit to mid-single-digit, expecting improving comparable store sales trend in second half. US wholesale sales expected in range of up low single digits to down low single digits, with full-year growth of exclusive brands planned. International sales planned comparable to up low single digits.
• 2025 operating income expected in range of $180 million to $210 million, compared to $287 million in 2024. Gross margin expected down approximately 150 to 200 basis points. SG&A planned up very modestly, up low single digits, with meaningful increase related to restoring variable compensation programs. Effective tax rate expected higher at approximately 23.5%. Adjusted earnings per share expected in range of $3.20 to $3.80. Expected to generate around $200 million of operating cash flow in 2025. CapEx forecast $65 million, up about $10 million over last year.
• Q1 2025 sales expected down mid-single digits versus first quarter last year. US retail comparable sales planned down mid to high single digits due to later Easter holiday. US wholesale planned down in high single digits. International sales down in mid-single digits. Operating income expected in range of $30 million to $35 million, adjusted EPS in range of $0.45 to $0.55.

Risks

• Level of promotional intensity in the marketplace and outlook for improvement in inflation and consumer sentiment impacting consumer demand.
• Possible implementation of new or higher tariffs.
• Further strengthening of the US dollar and possible higher transportation costs due to industry capacity constraints and continued geopolitical issues.

Question and Answer Q: Jim Chartier asked Kendra about the dramatic change in inventory assortment as modernizing and minimizing risk of alienating core consumers. Kendra responded that in baby/toddler, it's a shift into more style-forward categories, not a dramatic change, and it won't alienate existing customers. She also talked about kid segment needing more investment.

A: Kendra Krugman: "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."

Q: Jim Chartier asked Richard about what's different in pricing action in back half of 2024 that drove better unit volumes versus previous two and a half years. Richard responded about industry's dramatic pricing action, good holiday season, and focus on key market share events.

A: Richard Westenberger: "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."

Q: Unidentified Analyst asked about challenges on retail side and when comp return to growth. Richard responded about traffic being principal issue, conversion results lifted in fourth quarter, and plans to build on assortment improvements and marketing.

A: Richard Westenberger: "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."

Q: Chris Nardone asked Richard about confidence pricing actions will stabilize in back half and level of pricing decline in wholesale order book outlook. Richard and Kendra responded about planning assumption, opportunity in wholesale exclusive brands, and off-price and department store sales expectations.

A: Kendra Krugman: "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." Richard Westenberger: "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."

Q: Kelly Crago asked about metrics for pricing investments in US retail and what drives comp improvement back half-weighted. Richard responded about looking at unit velocity, store traffic, and house file metrics.

A: Richard Westenberger: "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."

Q: William Reuter asked about sourcing changes and kids segment opportunity. Richard and Kendra responded about reducing China sourcing, diversifying fabric sourcing, and near-term investments in kids segment categories.

A: Richard Westenberger: "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." Kendra Krugman: "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."