Q3 2023 Carter's Inc Earnings Call
Speaker 1: transcript
Speaker 1: Or.
Yes.
Speaker 2: transcript
Speaker 2: Welcome to Carter's 3rd Quarter Cisco 2023 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer, Richard Westenberger, Executive Vice President and Chief Financial Officer, Brian Lynch, President and Chief Operating Officer, and Sean McHugh, Vice President and Treasurer.
Yeah.
Welcome to Carter's third quarter fiscal 2023 earnings conference call on the call today are Michael Casey, Chairman and Chief Executive Officer, Richard Westenberger, Executive Vice President and Chief Financial Officer.
Ryan Lynch, President and Chief operating Officer, and Sean Mchugh, Vice President and Treasurer.
Speaker 2: transcript
Speaker 2: After today's prepared remarks, we will take questions as time allows.
After today's prepared remarks, we will take questions as time allows.
Speaker 2: transcript
Speaker 2: Carter's issued its third quarter fiscal 2023 earnings press release earlier this morning. A copy of the release and presentation materials for today's call have been posted on the investor relations section of the company's website at ir.carders.com.
Carter's issued its third quarter fiscal 2020 earnings press release earlier this morning.
A copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the company's website at IR Carters dotcom.
Speaker 2: transcript
Speaker 2: Before we begin, let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook, plans, and future performance are forward-looking statements. As a result, may differ materially from those projected, and the company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Before we begin let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook plans and future performance are forward looking statements actual results may differ materially from those projected in the company does not undertake any obligation to publicly update or revise any forward looking.
Statements, whether as a result.
Future events or otherwise.
Speaker 2: transcript
Speaker 2: For discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the Presentation Materials and Earnings release posted in the company's website.
For a discussion of factors that could cause actual results to vary from those contained in the forward looking statements. Please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials and earnings release posted in the company's website.
Speaker 3: transcript
Speaker 3: On this call, the company will reference various non- GAAP financial measurements. A reconciliation of these non- GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. And now I would like to turn the call over to Mr. Casey. Thanks very much, Chris. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you.
On this call the company will reference various non-GAAP financial measurements, a reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials also today's call is being recorded and now I would like to turn the call over to Mr. Casey. Thanks, very much Chris Good morning every.
Thank you for joining us on the call before we walk you through the presentation on our website I'd like to share some thoughts on our business with you.
Speaker 3: transcript
Speaker 3: We achieved our third quarter sales and earnings objectives. For the fourth consecutive quarter, we saw higher than planned demand in our U.S. wholesale sector.
We achieved our third quarter sales and earnings objectives for the fourth consecutive quarter, we saw a higher than planned demand in our U S wholesale segment.
Speaker 3: transcript
Speaker 3: That higher demand drove our best quarterly growth in earnings since 2021.
Higher demand drove our best quarterly growth in earnings since 2021.
Speaker 3: transcript
Speaker 3: in our U.S. retail segment. Its third-quarter profit contribution was in line with our forecast on lower than planned sales.
In our U S retail segment, it's third quarter profit contribution was in line with our forecast and lower than planned sales unseasonably warm weather in September weighed on our retail sales in the United States and Canada.
Speaker 3: transcript
Speaker 3: season, believe warm weather in September , weight on our retail sales in the United States and Canada. It was reported to be the warmest September on record.
Reported debate with the warmest September on record.
Speaker 3: transcript
Speaker 3: The late arrival of cooler weather in Canada also drove lower sales in our international policy
The late arrival of cooler weather in Canada also drove lower sales in our international segment.
Speaker 3: transcript
Speaker 3: In the third quarter, we saw better price realization and profit margins, which were driven by the strength of our product offerings, lower ocean freight rates, and a better level and mix of inventory.
In the third quarter, we saw better price realization and profit margins, which were driven by the strength of our product offerings lower ocean freight rates.
Better level and mix of inventories.
Speaker 3: transcript
Speaker 3: We continue to make good progress right-sizing our inventory levels in the quarter. Inventories grew last year when inflation peaked at historic levels and consumer demand slowed.
Continue to make good progress right sizing our inventory levels in the quarter inventories grew last year when inflation peaked at historic levels and consumer demand slowed.
Speaker 3: transcript
Speaker 3: Our inventories at the end of the third quarter were down over 30% and expected to trend lower by year end.
Our inventories at the end of the third quarter were down over 30% and expect it to trend lower by year end.
Speaker 3: transcript
Speaker 3: Our progress with inventory reduction has improved our cash flow relative to last year by over $400 million through September .
Our progress with inventory reduction has improved our cash flow relative to last year by over $400 million through September.
Speaker 3: transcript
Speaker 3: Given our stronger than planned cash flow, we have reduced our seasonal borrowings and related interest expense. And we believe we have ample capacity
Number.
Given our stronger than planned cash flow, we have reduced our seasonal borrowings and related interest expense and we believe we have ample capacity to fully fund our growth strategies and plan to continue returning excess capital to our shareholders.
Speaker 3: transcript
Speaker 3: Our forecast for the year reflects an improving trend in our second half sales and earnings relative to our first half performance.
Our forecast for the year reflects an improving trend in our second half sales and earnings relative to our first half performance and.
Speaker 3: transcript
Speaker 3: In the second half this year, we are comping up against a significant slowdown in consumer demand that began when inflation peaked in June of 2022.
In the second half this year, we are comping up against a significant slowdown in consumer demand that began when inflation peaked in June of 2022.
Speaker 3: transcript
Speaker 3: In response to that unexpected downturn in consumer demand, our wholesale customers aggressively curtailed and canceled inventory commitments in the second half last year.
In response to that unexpected downturn in consumer demand, our wholesale customers aggressively curtailed and cancelled inventory commitments in the second half of last year.
Speaker 3: transcript
Speaker 3: Assuming success with our forecast in the balance of this year, our second half sales are planned down 4%. By comparison, our sales for the year are planned down 8%.
Assuming success with our forecast and the balance of this year. Our second half sales are planned down 4% by comparison, our sales for the year are planned down 8%.
Speaker 3: transcript
Speaker 3: Our earnings per share are planned up 15% in the second half this year and plan down 11% for the
Our earnings per share are planned up 15% in the second half this year and planned down 11% for the year.
Speaker 3: transcript
Speaker 3: In our remarks this morning, we will reference our second half's assumptions, which we believe will be helpful to understand the improving trend in our performance.
In our remarks. This morning, we will reference our second half assumptions, which we believe will be helpful to understand the improving trend in our performance.
Speaker 3: transcript
Speaker 3: Our third quarter got off to a good start. Our consolidated sales in July were comparable to last year.
Our third quarter got off to a good start.
Consolidated sales in July were comparable to last year.
Speaker 3: transcript
Speaker 3: Nearly 80% of our payroll sales in the third quarter were in our baby and toddler products offerings. Those age ranges had the best quarterly performance this year with sales down only 2%.
Nearly 80% of our apparel sales in the third quarter were in our baby and toddler product offerings. Those age ranges had the best quarterly performance this year with sales down only 2%.
Speaker 3: transcript
Speaker 3: continue to see a good response to our new little planet brand. It's our most elevated premium priced product offering.
We continue to see a good response to our new little Planet brand. It's our most elevated premium priced product offering we're forecasting sales of our new little planet brand to be about $70 million this year up over 50% to last year.
Speaker 3: transcript
Speaker 3: forecasting sales of our new little planet brand to be about $70 million this year up over 50% to last year
Speaker 3: transcript
Speaker 3: We expect that, where I would be drove by the strength of the product offering and expanded distribution of our wholesale customers, including Target, Amazon and Macy.
We expect that growth will be driven by the strength of the product offering.
It expanded distribution of our <unk>.
Wholesale customers, including target, Amazon and Macy's and through our own retail stores in the United States, Canada and Mexico.
Speaker 3: transcript
Speaker 3: and through our own retail stores in the United States, Canada, and Mexico.
Speaker 3: transcript
Speaker 3: In our U.S. retail segment, our comparable sales were down 10% in the third quarter. We had forecasted a high single-digit decrease in sales.
And our U S retail segment, our comparable sales were down 10% in the third quarter, we had forecasted.
High single digit decrease in sales.
Speaker 3: transcript
Speaker 3: Our retail sales were trending on our plan through the first nine weeks of the quarter, down about 7% till last year.
Our retail sales were trending honor plan through the first nine weeks of the quarter down about 7% to last year.
Speaker 3: transcript
Speaker 3: but when temperatures rose to record levels in September , demand for our cooler weather apparel slow.
But when temperatures rose to record levels in September demand for our cooler weather apparel slowed.
Speaker 3: transcript
Speaker 3: In the third quarter, we saw better performance in our stores than online. Our comparable U.S. retail store sales were down about 5 percent in the third quarter. By comparison, our e-commerce sales were down about 19 percent, largely due to lower traffic.
In the third quarter, we saw better performance in our stores and online are comparable U S. Retail store sales were down about 5% in the third quarter by comparison, our E. Commerce sales were down about 19% largely due to lower traffic.
Speaker 3: transcript
Speaker 3: that decrease is in line with third party credit card data that tracks the online purchases of a pair.
That decrease is in line with third party credit card data that tracks the online purchases of apparel.
Speaker 3: transcript
Speaker 3: Given the financial strain on families with young children, we believe more consumers are cautious on spending, buying what's needed and only one.
Given the financial strain on families with young children. We believe more consumers are cautious on spending buying what's needed and only when it's needed store visits are more intentional and fulfill the need for immediacy.
Speaker 3: transcript
Speaker 3: Store visits are more intentional and fulfill the need for immediate
Speaker 3: transcript
Speaker 3: We have a very high conversion rate in our stores. Then you're coming to buy not browse.
Have a very high conversion rate in our stores.
Many of you are coming to buy not browse by.
Speaker 3: transcript
Speaker 3: By comparison, e-commerce purchases are more impulsive, often triggered by our marketing texts and emails. Impulse purchases may be more constrained these days given higher credit cards.
By comparison ecommerce purchases are more impulsive, often triggered by our marketing texts and e-mails impulse purchases may be more constrained these days given higher credit card balances.
Speaker 3: transcript
Speaker 3: Carter's outperforms the Young Children's Appearle market in e-commerce penetration to total retail sales.
Carter's outperforms, the young children's apparel market in.
E Commerce penetration to total retail sales in the United States, 28% of Kids apparel is purchased online Carter's penetration is a few points higher than the market.
Speaker 3: transcript
Speaker 3: In the United States, 28% of kids' apparel is purchased online. Carter's penetration is a few points higher than the market.
Speaker 3: transcript
Speaker 3: E-commerce continues to be one of our highest margin businesses. Our return rate is one of the best in online retailing, less than 5%, which contributes to our high margin performance.
E Commerce continues to be one of our highest margin businesses. Our return rate is one of the best in online retailing less than 5%, which contributes to our high margin performance.
Speaker 3: transcript
Speaker 3: Given the high mix of children's apparel bought in stores, we plan to continue opening stores in the years ahead. Carters is a highly desirable tenant in shopping centers. Our brands attract families with young children to those centers.
Given the high mix of children's apparel bought in stores, we plan to continue opening stores in the years ahead Carter.
Carter's is a highly desirable tenant in shopping centers, our brands attract families with young children to those centers.
Speaker 3: transcript
Speaker 3: We expect to open nearly 50 stores in the United States this year and will close about a dozen low-marchen stores.
We expect to open nearly 50 stores in the United States. This year and will close about a dozen low margin stores.
Speaker 3: transcript
Speaker 3: Our stores opened in recent years are achieving over 20% EBITDA margins and their comparable sales performance this year has outperformed the balance of our stores.
Our stores opened in recent years are achieving over 20% EBITDA margins and Theyre comparable sales performance. This year has outperformed the balance of our stores.
Speaker 3: transcript
Speaker 3: Including this year, we plan to open 250 stores in the United States by 2027. These store openings are expected to contribute over $250 million in sales growth, including the benefit of related e-commerce sales.
Including this year, we plan to open 250 stores in the United States by 2027. These store openings are expected to contribute over $250 million in sales growth, including the benefit of related E Commerce sales.
Speaker 3: transcript
Speaker 3: We expect most of these store openings will be in open air centers to provide convenience for consumers including curbside pickup.
We expect most of these store openings will be in open air centers to provide convenience for consumers, including curbside pickup.
Speaker 3: transcript
Speaker 3: That said, we've seen good success with our wall stores in recent years. We've been highly selective on wall store openings. We currently have 90 of our 800 US stores in walls and see an opportunity to double that store count in the years ahead.
That said, we've seen good success with our mall stores in recent years, we've been highly selective that mall store openings. We currently have 90 of our 800 U S stores in malls and see an opportunity to double that store count in the years ahead.
Speaker 3: transcript
Speaker 3: Carter's has grown over the years to be the largest and most profitable specialty retailer focused on young children's apparel. Our stores are the number one source of new customer acquisition.
Carter's has grown over the years to be the largest and most profitable specialty retailer focused on young children's apparel. Our stores are the number one source of new customer acquisition.
Speaker 3: transcript
Speaker 3: We believe our stores provide the very best value and experience with our brands and providing very high return on investments.
We believe our stores provide the very best value and experience with our brands and providing very high return on investment.
Speaker 3: transcript
Speaker 3: Our stores provide a convenient alternative to shopping in big box retailers, and we believe our direct to consumer capabilities provide market insights that help us support our wholesale customers.
Our stores provide a convenient alternative to shopping and big box retailers and we believe our direct to consumer capabilities provide market insights that help us support our wholesale customers.
Speaker 3: transcript
Speaker 3: We've made significant investments in our direct consumer capabilities in recent years, including the same day fulfillment of online purchases and RFID technology, which increases our visibility and accuracy of inventory.
We've made significant investments in our direct to consumer capabilities in recent years, including the same day fulfillment of online purchases and RFID technology, which increases our visibility and accuracy of inventories.
Speaker 3: transcript
Speaker 3: We've invested in marketing personalization capabilities, a highly rated mobile app, and loyalty and credit card programs, which increase the frequency of transactions and the lifetime value of our relationships with consumers.
We've invested in marketing personalization capabilities are highly rated mobile app and loyalty and credit card programs, which increased the frequency of transactions and the lifetime value of our relationships with consumers.
Speaker 3: transcript
Speaker 3: We're forecasting an improving trend in our U.S. retail segment in the second half this year. This planned improvement reflects a stronger product to offering and a significant improvement in on-time delivery.
We're forecasting an improving trend in our U S retail segment in the second half this year as planned improvement reflects a stronger product offering and a significant improvement in on time deliveries.
Speaker 3: transcript
Speaker 3: Recall that a year ago we were shipping our fall and holiday product offerings about 70% on time due to U.S. port congestion.
Recall that a year ago, we were shipping our fall and holiday product offerings about 70% on time due to U S port congestion.
Speaker 3: transcript
Speaker 3: This year, our second half shipments to our wholesale customers and our retail stores are closer to 100% on time.
This year, our second half shipments to our wholesale customers and our retail stores are closer to 100% on time.
Speaker 3: transcript
Speaker 3: With a better mix, the end level of inventory, we are forecasting our U.S. retail sales down 6% in the second half and down 9% for the year.
With a better mix and level of inventories we are forecasting our U S retail sales down 6% in the second half and down 9% for the year.
Speaker 3: transcript
Speaker 3: Our market analysis and third-party credit card data continued to indicate that families with young children have pulled back on spending due to inflation.
Our market analysis, and third party credit card data continue to indicate that families with young children have pulled back on spending due to inflation.
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Speaker 3: Carter's advantages in inflationary markets include our focus on essential core products.
Carter's advantages in inflationary markets include our focus on essential core products are.
Speaker 3: transcript
Speaker 3: a high mix of less discretionary baby apparel purchase.
A high mix of less discretionary baby apparel purchases.
Speaker 3: transcript
Speaker 3: Our broad and unparalleled market distribution, including our exclusive brands sold through Target, Walmart, and Amazon, and our compelling value proposition, with average retail price points of about $11, including many high-value multipack.
Our broad and unparalleled market distribution, including our exclusive brands sold through target, Walmart and Amazon and our compelling value proposition with average retail price points of about $11, including many high value multi packs.
Speaker 3: transcript
Speaker 3: The average transaction in our store is about $50. That's less than to take a gas these days. Children's apparel is a relatively small component of a young family's budget, but even less discretionary purchases, like children's apparel, have been scaled back because of in place.
The average transaction in our store is about $50, that's less than a tank of gas. These days children's apparel is a relatively small component of a young family's budget, but even less discretionary purchases like children's apparel have been scaled back because of inflation.
Speaker 3: transcript
Speaker 3: Our daily market analysis continues to show that our brands are competitively priced.
Our daily market analysis continues to show that our brands are competitively priced consumers expect to pay a reasonable premium for national brands and Carter's is the best selling national brand in young children's apparel in.
Speaker 3: transcript
Speaker 3: consumers expect to pay a reasonable premium for national brands and carters is the best selling national brand in young children's apparel.
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Speaker 3: In our experience, as long as our brands are priced within a dollar or two of our private label brands.
In our experience as long as our brands are priced within a dollar or two of our private label brands we.
Speaker 3: transcript
Speaker 3: We are competitive. It's a time-tested pricing strategy, which we plan to continue in the years ahead.
We are competitive it's a time tested pricing strategy, which we plan to continue in the years ahead.
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Speaker 3: CARS is built on parallel relationships, including exclusive brands.
Cars is built unparalleled relationships, including exclusive brands.
Speaker 3: transcript
Speaker 3: for the largest retailers of young children's apparel in North America.
For the largest retailers of young children's apparel in North America as.
Speaker 3: transcript
Speaker 3: as the best selling national brand in young children's apparel are brands complement their private label brands and drive traffic to their stores and website
As the best selling National brand in young children's apparel, our brands complement their private label brands and drive traffic to their stores and websites.
Speaker 3: transcript
Speaker 3: A high percentage of our wholesale product offerings are focused on baby apparel. And our baby apparel continues to be the best performing component of our product offering.
A high percentage of our wholesale product offerings are focused on baby apparel and our baby apparel continues to be the best performing component of our product offerings.
Speaker 3: transcript
Speaker 3: A high percentage of our baby apparel is on automatic replenishment, so when the register rings across thousands of store locations, replenishment orders are automatically created and shipments are made to keep the fixtures filled and our essential core products in stock.
A high percentage of our baby apparel is an automatic replenishment. So when the register rings across thousands of store locations replenishment orders are automatically created and shipments are made to keep the fixtures filled and are essential core products in stock.
Speaker 3: transcript
Speaker 3: Our exclusive brands sold to Target and Walmart in Amazon are forecasted to grow to 51% of our total wholesale sales this year a couple of points higher than last year.
Our exclusive brands sold to target Walmart and Amazon are forecasted to grow to 51% of our total wholesale sales. This year, a couple of points higher than last year.
Speaker 3: transcript
Speaker 3: Increasingly, our wholesale sales are concentrated among fewer, larger and growing retailers.
Increasingly our wholesale sales are concentrated among fewer larger and growing retailers are.
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Speaker 3: Our U.S. wholesale sales in the third quarter reflect earlier than planned shipments of our fall and holiday product offerings. We have adjusted our previous fourth quarter wholesale sales plan according.
Our U S wholesale sales in the third quarter reflect earlier than planned shipments of our fall and holiday product offerings, we have adjusted our previous fourth quarter wholesale sales plan accordingly.
Speaker 3: transcript
Speaker 3: We are forecasting an improving trend in our U.S. wholesale segment this year with sales down less than 2% in the second half and down 7% for the year. We're comping up against the wholesale destocking period in the second half.
We are forecasting an improving trend in our U S. Wholesale segment this year with sales down less than 2% in the second half and down 7% for the year, we're comping up against the wholesale Destocking period in the second half last year.
Speaker 3: transcript
Speaker 3: Given our wholesale customers progress, managing their inventories, their sell-throughs, price realization, and margins earned on our brands this year are generally better than last year.
Given our wholesale customers progress managing their inventories their sell throughs price realization and margins earned on our brands. This year are generally better than last year.
Speaker 3: transcript
Speaker 3: As a result, we have wholesale orders that support growth in our spring and summer 2024 product offerings, a portion of which will begin shipping to the major retailers later this year.
As a result, we have wholesale orders that support growth in our spring and summer 2024 product offerings, a portion of which will begin shipping to the major retailers later this year.
Speaker 3: transcript
Speaker 3: We expect better visibility to wholesale demand for our fall and holiday 2024 product offerings when we complete that selling process early next year.
We expect better visibility to wholesale demand for our fall and holiday 2024 product offerings. When we complete that sell in process early next year.
Speaker 3: transcript
Speaker 3: For the year, our international sales are forecast to be 15% of our total sales. We are also forecasting an improving trend in international sales, with sales planned up 3% in the second half and down about 3% for the year.
For the year, our international sales are forecasted to be 15% of our total sales. We are also forecasting an improving trend in international sales with sales planned up 3% in the second half and down about 3% for the year.
Speaker 3: transcript
Speaker 3: Our sales in Canada, Mexico and Brazil are expected to contribute about 85% of our international sales this year. The balance of our international sales are through wholesale relationships with about 40 retailers representing our brands in over 90 countries and through over 100 online platforms outside of North America.
Our sales in Canada, Mexico, and Brazil are expected to contribute about 85% of our international sales. This year the balance of our international sales are through wholesale relationships with about 40 retailers, representing our brands in over 90 countries and through over 100 online platforms outside of North.
America.
Speaker 3: transcript
Speaker 3: Some of our international wholesale customers have been adversely affected by inflation, the stronger dollar and global income.
Some of our international wholesale customers have been adversely affected by inflation, the stronger dollar and global conflicts.
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Speaker 3: We're assuming growth in Mexico in Brazil this year, which is expected to partially offset lower sales in Canada and other markets.
We're assuming growth in Mexico, and Brazil, This year, which is expected to partially offset lower sales in Canada and other markets.
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Speaker 3: Our supply chain continues to be a source of strength in our performance this year. On time, shipping performance has been excellent.
Our supply chain continues to be a source of strength in our performance. This year on time shipping performance has been excellent.
Speaker 3: transcript
Speaker 3: Our supply chain team has negotiated meaningfully lower ocean freight rates, which are contributing to our second half earnings growth.
Our supply chain team has negotiated meaningfully lower ocean freight rates, which are contributing to our second half earnings growth.
Speaker 3: transcript
Speaker 3: Product costs are also expected to be lower in the second half this year and next year. We expect those lower costs will enable us to strengthen our product offerings, sharpen price points and improve profitability next year.
Product costs are also expected to be lower in the second half this year and next year.
We expect those lower cost will enable us to strengthen our product offerings sharpened price points and improve profitability next year.
Speaker 3: transcript
Speaker 3: In summary, we achieved our third quarter sales in Erden's objectives. A comment on the outlet for the year reflect the high end of our guidance this morning with the late arrival of cooler weather. The fourth quarter has gotten off to a slow start.
In summary, we achieved our third quarter sales and earnings objectives. My comments on the outlook for the year reflect the high end of our guidance. This morning with the late arrival of cooler weather the fourth quarter has gotten off to a slow start.
Speaker 3: transcript
Speaker 3: We've seen a strong correlation between warmer weather and the demand for our fall and holiday product offerings. Where weather is cooler, sales trends are better. With colder weather on the way, we expect our sales and earnings trends will improve as we move through the final weeks of the year.
We've seen a strong correlation between warmer weather and the demand for our fall and holiday product offerings, where weather is cooler sales trends sales trends are better with colder weather on the way, we expect our sales and earnings trends will improve as we move through the final weeks of the year.
Speaker 3: transcript
Speaker 3: With nine weeks to go, we have adjusted our guidance to reflect what we believe is possible this year.
With nine weeks to go we have adjusted our guidance to reflect what we believe is possible this year.
Speaker 3: transcript
Speaker 3: We believe inflation, generational high interest rates, and the suspension of pandemic-related stimulus payments to childcare centers have weighed on families with young children this year. Thankfully, birth trends in the United States have stabilized. Birth this year are expected to be comparable to last year. And within their 40-year high and weddings last year, continued strength in the labor markets, and moderation in inflation, we believe market conditions will end.
We believe inflation generational high interest rates and the suspension of pandemic related stimulus payments to childcare centers have weighed on families with young children. This year.
Fully birth trends in the United States have stabilized this year are expected to be comparable to last year.
And with a near 40 year high and weddings last year continued strength in the labor markets and moderation in inflation, we believe market conditions will improve.
Speaker 3: transcript
Speaker 3: Carters is the best selling brand in Young Children's apparel. We believe our unparalleled market distribution capabilities and brand reputation for quality and value will enable carters to continue leading the market and be well positioned to gain market cheer in the years ahead.
Carter's is the best selling brand in young children's apparel, we believe are unparalleled market distribution capabilities and brand reputation for quality and value will enable carter's to continue leading the market and be well positioned to gain market share in the years ahead.
Speaker 3: transcript
Speaker 3: I want to thank all of our employees for achieving stronger than planned performance in the third quarter and their commitment to help us achieve our growth objectives in the final weeks of this year. At this time, Richard.
I just wanted to thank all of our employees for achieving stronger than planned performance in the third quarter and their commitment to help us achieve our growth objectives in the final weeks of this year.
At this time, Richard will walk us through the presentation on our website.
Speaker 4: transcript
Speaker 4: Thank you, Mike. Good morning, everyone. On pages two and three of our presentation materials, we provided our gap income statements for the third quarter and year-to-date period.
Thank you Mike good morning, everyone.
On pages, two and three of our presentation materials, we've provided our GAAP income statements for the third quarter and year to date periods.
Speaker 4: transcript
Speaker 4: Page four, summarizes adjustments to our gap results for the third quarter and your today periods for costs we incurred this year related to organizational restructuring.
Page four summarizes adjustments to our GAAP results for the third quarter and year to date periods for cost we incurred this year related to organizational restructuring.
Speaker 4: transcript
Speaker 4: In the second quarter of last year, our strong liquidity enabled us to strengthen our balance sheet by early retiring pandemic-related debt.
And the second quarter of last year, our strong liquidity enabled us to strengthen our balance sheet by early retiring pandemic related debt.
Speaker 4: transcript
Speaker 4: The loss associated with this early debt extinguishment is included as an adjustment to last year's Q3 year-to-date gap result.
The loss associated with this early debt extinguishment is included as an adjustment to last year's Q3 year to date GAAP results.
Speaker 4: transcript
Speaker 4: This information is included for your reference, and this morning I will speak to our results on an adjusted basis, which excludes these items.
This information is included for your reference and this morning, I will speak to our results on an adjusted basis, which excludes these items.
Speaker 4: transcript
Speaker 4: Moving to page five, as Mike said, we achieved the sales and earnings objectives which we shared with you back on our July call. Net sales in the quarter were $792 million, slightly above the high end of our guidance range.
Moving to page five as Mike said, we achieved the sales and earnings objectives, which we shared with you back on our July call net sales in the quarter were $792 million slightly above the high end of our guidance range.
Speaker 4: transcript
Speaker 4: These consolidated sales results reflect higher than plan demand in our US full-fledged business.
These consolidated sales results reflect higher than planned demand in our U S wholesale business.
Speaker 4: transcript
Speaker 4: Reach out sales in the US and Canada were lower than we had forecasted. We believe a result of warm weather that contributed to unfavorable traffic trends, particularly in September .
Retail sales in the U S and Canada were lower than we had forecasted. We believe are result of warm weather that contributed to unfavorable traffic trends, particularly in September.
Speaker 4: transcript
Speaker 4: Profitability, both operating income and earnings per share, exceeded our forecast.
<unk> ability, both operating income and earnings per share exceeded our forecast.
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Speaker 4: The drivers of our better-than-planned profitability were strong expense management and continued progress in reducing inventories, which has led to better cash flow, lower borrowings, and lower interest rates.
The drivers of our better than planned profitability of our strong expense management and continued progress in reducing inventories, which has led to better cash flow lower borrowings and lower interest expense.
Speaker 4: transcript
Speaker 4: Page six summarizes a few highlights of our third quarter performance relative to last year. Third quarter sales.
Page six summarizes a few highlights of our third quarter performance relative to last year.
Third quarter sales declined 3%.
Speaker 4: transcript
Speaker 4: We have growth in our US wholesale business, which was offset by lower sales in our US retail and international business.
We had growth in our U S wholesale business, which was offset by lower sales in our U S retail and international businesses.
Speaker 4: transcript
Speaker 4: Adjusted operating income grew 5%, adjusted operating margin improved 100 basis points to 12.2%, driven by over 200 basis points of expansion in gross margin rate with average unit pricing up in the low single digits and average unit product cost down modest.
Adjusted operating income grew 5% adjusted operating margin improved 100 basis points to 12, 2% driven by over 200 basis points of expansion in gross margin rate with average unit pricing up in the low single digits and average unit product costs down modestly.
Speaker 4: transcript
Speaker 4: Adjust the DPS group 10% in the third quarter, above operating income growth due to the benefits of lower interest expense and our share of repurchase.
Adjusted EPS grew 10% in the third quarter above operating income growth due to the benefits of lower interest expense and our share repurchases.
Speaker 4: transcript
Speaker 4: We were encouraged by our third quarter results. Recall that 2021 represented record profit performance for our company. Our profitability began to be affected by the historic spike in inflation and its impact on consumer demand throughout the marketplace in the early part of 2022. So we were pleased to see growth and profitability this past quarter.
We were encouraged by our third quarter results recall that 2021 represented record profit performance for our company our profitability began to be affected by the historic Spike in inflation and its impact on consumer demand throughout the marketplace and the early part of 2022. So we were pleased to see growth in profitability this past quarter.
Speaker 4: transcript
Speaker 4: page seven includes these same P&L metrics for the first three quarters of 2023 versus last year.
Page seven includes these same P&L metrics for the first three quarters of 2023 versus last year.
Speaker 4: transcript
Speaker 4: Year-to-date net sales were down, 9% and adjusted operating income and adjusted EPS were down, 29% and 26% respectively.
Year to date net sales were down 9% and adjusted operating income and adjusted EPS were down, 29% and 26% respectively.
Speaker 4: transcript
Speaker 4: Our year-to-date performance reflects the significant impact of various macro factors on consumer demand, particularly in the first half of the year, including inflation and higher interest rates.
Our year to date performance reflects the significant impact of various macro factors on consumer demand, particularly in the first half of the year, including inflation and higher interest rates.
Speaker 4: transcript
Speaker 4: Twenty-two-hour, third quarter P&L on page eight, I've covered the drivers of net sales in the quarter. And on this nearly $800 million in net sales, we achieved a gross margin rate of 47.5% and increased of 220 basis points over last year.
Turning to our third quarter P&L on page eight I've covered the drivers of net sales in the quarter and on this nearly $800 million in net sales we achieved a gross margin rate of 47, 5% an increase of 220 basis points over last year.
Speaker 4: transcript
Speaker 4: Lower ocean freight rates were the largest contributor to this year-over-year gross margin expansion. We also had lower inventory charges in this year's third quarter. A year ago, we incurred significant inventory charges as demand slowed in our business, including in wholesale, as our customers aggressively reduced their inventory commitments in response to the slowdown in consumer demand in their businesses. In Q3, we also continued to...
Lower Ocean freight rates were the largest contributor to this year over year gross margin expansion. We also had lower inventory charges in this year's third quarter.
A year ago, we incurred significant inventory charges as demand slowed in our business, including in wholesale as our customers aggressively reduced their inventory commitments in response to the slowdown in consumer demand in their businesses.
Q3, we also continued to modestly improve realized pricing.
Speaker 4: transcript
Speaker 4: Spending was well-managed again this quarter, below what we had forecasted and comparable to last year. Variable costs related to sales volume were down, as were marketing expenses, largely due to the timing of spend.
Spending was well managed again this quarter below what we had forecasted and comparable to last year variable costs related to sales volume were down as were marketing expenses largely due to the timing of spend.
Speaker 4: transcript
Speaker 4: Distribution and freight expenses declined, reflecting in part costs in the prior year to transition out of a high cost distribution center in California. We move that distribution activity to our lower cost distribution network here in Georgia.
Distribution and freight expenses declined reflecting in part costs in the prior year to transition out of our high cost distribution center in California, we move that distribution activity to our lower cost distribution network here in Georgia.
Speaker 4: transcript
Speaker 4: Offsetting these sending the clients were higher provisions for performance-based compensation and higher professional fees in the corridor.
Offsetting these spending declines were higher provisions for performance based compensation and higher professional fees in the quarter.
Speaker 4: transcript
Speaker 4: Adjusted operating income grew 5% to $96 million, with solid expansion in our adjusted operating margin, as I mentioned.
Adjusted operating income grew at 5% to $96 million was solid expansion in our adjusted operating margin as I mentioned.
Speaker 4: transcript
Speaker 4: With low-to-line net interest expenses lower than last year and better than we had forecasted our strong-cash generation and liquidity enabled lower seasonal borrowings on our revolver compared to last year's third quarter.
But other line net interest expense was lower than last year and better than we have forecasted our strong cash generation and liquidity enabled lower seasonal borrowings on our revolver compared to last year's third quarter.
Speaker 4: transcript
Speaker 4: Our effective tax rate in the third quarter was 22.5% up 280 faces points over last year, reflecting a greater proportion of our earnings in the US this year.
Our effective tax rate in the third quarter was 22, 5% up 280 basis points over last year, reflecting a greater proportion of our earnings in the U S. This year.
Speaker 4: transcript
Speaker 4: Our weighted average share count declined by approximately two two million shares or five percent versus last year driven by our share reports.
Our weighted average share count declined by approximately two 2 million shares or 5% versus last year, driven by our share repurchases.
Speaker 4: transcript
Speaker 4: So on the bottom line adjusted, diluted earnings per share were $1.84, up 10% compared to $1.67 last year.
So on the Bottomline adjusted diluted earnings per share were $1 84 up 10% compared to $1 67 last year.
Speaker 4: transcript
Speaker 4: On page 9, we've included our year-to-date adjusted P&L for your reference. As noted earlier, our third quarter performance represented an improvement in trend in our business.
On page nine we've included our year to date adjusted P&L for your reference as noted earlier, our third quarter performance represented an improvement in trend in our business. Our first half performance reflected the significant impact of the various macro factors we've mentioned.
Speaker 4: transcript
Speaker 4: First tap performance reflected the significant impact of the various macro factors we've meant.
Speaker 4: transcript
Speaker 4: On page 10, we summarize some highlights of our balance sheet and cash flow.
On page 10, we summarize some highlights of our balance sheet and cash flow.
Speaker 4: transcript
Speaker 4: Our brown sheet is an excellent shape. Total liquidity was $945 million with cash on hand, approximately $170 million at quarter end, and virtually all of the $850 million credit facility available to us.
Our balance sheet is in excellent shape total liquidity with $945 million with cash on hand of approximately $170 million at quarter end and virtually all of the $850 million credit facility available to us.
Speaker 4: transcript
Speaker 4: Q3 ending inventory was $621 million down 31% year over year, which was better than we had forecasted. The improvement versus last year reflects lower days of supply and increased productivity.
Q3, ending inventory was $621 million down 31% year over year, which was better than we have forecasted an improvement versus last year reflects lower days of supply and increased productivity.
Speaker 4: transcript
Speaker 4: In the third quarter, we made good progress selling through inventory which we packed and held last year as consumers and wholesale customers pulled back on demand. Pack and hold inventory balances were $44 million at the end of Q3 compared to over $100 million at the end of last year's third quarter. We expect we'll work through substantially all of our remaining prior season pack and hold inventory by the end of this year. Total net inventories are also expected.
In the third quarter, we made good progress selling through inventory, which we packed in house last year as consumers and wholesale customers pulled back on demand <unk>.
Pack and hold inventory balances were $44 million at the end of Q3 compared to over $100 million at the end of last year's third quarter.
We expect we will work through that through substantially all of our remaining prior season pack and hold inventory by the end of this year.
Total net inventories are also expected to be lower at the end of the year.
Speaker 4: transcript
Speaker 4: That declined $170 million compared to the third quarter of last year made possible by our significantly improved operating cash flow.
That declined $170 million compared to the third quarter of last year made possible by our significantly improved operating cash flow.
Speaker 4: transcript
Speaker 4: We've continued to manage our cash and debt positions subsequent to quarter end in October we paid down the $70 million in seasonal revolver borrowings outstanding at the end of Q3, leaving $500 million in senior notes which don't mature until 2027 as our only outstanding debt.
We've continued to manage our cash and debt positions subsequent to quarter end in October we paid down $70 million and seasonal revolver borrowings outstanding at the end of Q3, leaving $500 million in senior notes, which don't mature until 2027 as our only outstanding debt.
Speaker 4: transcript
Speaker 4: year-to-date operating cash flow was $206 million. A significant improvement compared to a use of cash of over $200 million last year. This improvement reflects lower inventories and other favorable changes in working capital.
Year to date operating cash flow was $206 million, a significant improvement compared to a use of cash of over $200 million last year. This improvement reflects lower inventories and other favorable changes in working capital.
Speaker 4: transcript
Speaker 4: Given our year-to-day progress and outlook for the fourth quarter, we've raised our full year operating cashflow outlook from over $300 million to over $350 million.
Given our year to date progress and outlook for the fourth quarter. We've raised our full year operating cash flow outlook from over $300 million to over $358 million.
Speaker 4: transcript
Speaker 4: Here today, CapEx increased by $15 million to $42 million. Largely due to investments in new stores here in the US in Canada and in Mexico.
Year to date, Capex increased by $15 million to $42 million largely due to investments in new stores here in the U S and Canada and in Mexico.
Speaker 4: transcript
Speaker 4: Lastly on this page here today, we've returned significant capital to shareholders this year.
Lastly on this page year to date, we've returned significant capital to shareholders. This year.
Speaker 4: transcript
Speaker 4: Over the last number of years, we've distributed virtually all of the free cash flow which the business has generated annually to our shareholders.
Over the last number of years, we've distributed virtually all of the free cash flow, which the business has generated annually to our shareholders.
Speaker 4: transcript
Speaker 4: Attorney to page 12 for summary of the performance of our business segments in the third quarter. Q3 consolidated net sales declined $27 million versus last year, as we've covered growth in our US wholesale business was offset by lower sales in US retail and to a lesser extent lower international sales.
Turning to page 12 for a summary of the performance of our business segments in the third quarter Q3, consolidated net sales declined $27 million versus last year as we've covered growth in our U S. Wholesale business was offset by lower sales in U S retail and to a lesser extent lower international sales.
Speaker 4: transcript
Speaker 4: Overall profitability improved both in operating income and operating margin driven by our US wholesale business.
Overall profitability improved both in operating income and operating margin driven by our U S wholesale business.
Speaker 4: transcript
Speaker 4: Corporate expenses increased by $9 million over last year, reflecting higher consulting and professional fees focused on our sales and earnings initiative.
Corporate expenses increased by $9 million over last year.
<unk> higher consulting and professional fees focused on our sales and earnings initiatives.
Operator: Welcome to Carter's third quarter fiscal 2023 earnings conference call.
Speaker 4: transcript
Speaker 4: On page 13, we've summarized the performance drivers for each of our business segments in the third quarter. U.S. retail sales declined 8% as macroeconomic factors, including inflation and meaningfully higher interest rates, continued to adversely affect consumer traffic and demand.
On page 13, we have summarized the performance drivers for each of our business segments in the third quarter.
Operator: On the call today are Michael Casey, Chairman and Chief Executive Officer, Richard Westenberger, Executive Vice President and Chief Financial Officer, Brian Lynch, President and Chief Operating Officer and Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows.
U S retail sales declined 8% as macroeconomic factors, including inflation and meaningfully higher interest rates continued to adversely affect consumer traffic and demand.
Speaker 4: transcript
Speaker 4: Comparable sales declined 10 percent. We had previously forecasted a decline in the high single digits.
Comparable sales declined 10%, we had previously forecasted a decline in the high single digits.
Speaker 4: transcript
Speaker 4: As we said, we believe that warm weather in September likely affected consumer demand for fall product. Nearly all of the US retail shortfall to its Q3 sales forecast occurred in the month of September .
As we've said, we believe that warm weather in September likely affected consumer demand for fall product.
Operator: Carter's issued its third quarter fiscal 2023 earnings press release earlier this morning. A copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the company's website at ir.carders.com. Before we begin, let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook, plans and future performance are forward looking statements. As for results made different materially from those projected and the company does not undertake any obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise.
All of U S retail shortfall to Q3 sales forecast occurred in the month of September.
Speaker 4: transcript
Speaker 4: As has been the case all year, our stores were the stronger performing component of our US retail business with a more significant conflict line in e-commerce.
As has been the case all year, our stores, where the stronger performing component of our U S retail business with a more significant comp decline in e-commerce.
Speaker 4: transcript
Speaker 4: While traffic in our U.S. retail business was lower versus last year, we achieved improved pricing and grew average transaction value.
While traffic in our U S retail business was lower versus last year, we achieved improved pricing and grew average transaction values.
Speaker 4: transcript
Speaker 4: US retail's operating margin was 13%, down from just over 14% last year. This margin performance reflects expense de-leverage on lower sales, higher product costs, partially offset by improved realized pricing, and lower transportation costs.
U S retail operating margin was 13% down from just over 14% last year. This margin performance reflects expense deleverage on lower sales and higher product costs, partially offset by improved realized pricing and lower transportation costs.
Speaker 4: transcript
Speaker 4: Segment operating profit was $49 million compared to $58 million last year and was consistent with our forecast largely due to good management of spending in response to lower top line sales.
Segment operating profit was $49 million compared to $58 million last year.
Operator: For a discussion of factors that could cause actual results to vary from those contained in the forward looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials and earnings release posted in the company's website.
It was consistent with our forecast largely due to good management of our spending in response to lower topline sales.
Speaker 4: transcript
Speaker 4: In U.S. wholesale, sales grew 4% driven by higher than planned demand for our seasonal products. Nearly all of our brands contributed to growth in the quarter.
And U S. Wholesale sales grew 4% driven by higher than planned demand for our seasonal products nearly all of our brands contributed to growth in the quarter.
Operator: On this call, the company will reference various non-gap financial measurements. A reconciliation of these non-gap financial measurements to the gap financial measurements is provided in the company's earnings release and presentation materials.
Speaker 4: transcript
Speaker 4: In addition to higher demand for seasonal product, we're seeing an improved trend in demand for products carried by many of our wholesale customers under automatic replenishment programs. Several of our customers had suspended their replenishment programs last year as they worked to reduce inventory commitments in light of the impact of inflation on consumer demand.
In addition to higher demand for seasonal product, we are seeing an improved trend in demand for products carried by many of our wholesale customers under automatic replenishment programs several of our customers had suspended their replenishment programs last year as they work to reduce inventory commitments in light of the impact of inflation on consumer demand.
Operator: Also, today's call is being recorded and now I would like to turn the call over to Mr. Casey. Thanks very much, Chris.
Speaker 4: transcript
Speaker 4: Porter cancellations were lower than a year ago and part of the result of better on time shipping performance.
Michael Casey: Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. We achieved our third quarter sales and earnings objectives. For the fourth consecutive quarter, we saw a higher than planned demand in our U.S, wholesale segment. That higher demand drove our best quarterly growth in earnings since 2021. In our U.S, retail segment, its third quarter profit contribution was in line with our forecast on lower than planned sales.
Order cancellations were lower than a year ago in part a result of better on time shipping performance.
Speaker 4: transcript
Speaker 4: USFL sales operating margin was elevated in the third quarter at 22% up significantly from 13.9% a year ago.
U S wholesale operating margin was elevated in the third quarter at 22% up significantly from 13, 9% a year ago.
Speaker 4: transcript
Speaker 4: Whole sales profitability this year benefited from comparisons to some unusual costs incurred a year ago, including $7 million in cost to transition distribution activity from the West Coast and higher inventory charges last year.
Sales profitability. This year benefited from comparisons to some unusual costs incurred a year ago, including $7 million in costs to transition distribution activity from the west coast and higher inventory charges last year.
Speaker 4: transcript
Speaker 4: For the full year, in 2023, we're planning US wholesale's adjusted operating margin will be in the high teens, which is more consistent with the run rate for profitability in this part of our business.
For the full year in 2023, we're planning U S. Wholesale adjusted operating margin will be in the high teens, which is more consistent with the run rate for profitability in this part of our business.
Michael Casey: Unseasonably warm weather in September weighed on our retail sales in the United States and Canada. It was reported to be the warmest September on record. The late arrival of cooler weather in Canada also drove lower sales in our international segment. In the third quarter, we saw better price realization and profit margins, which were driven by the strength of our product offerings, lower ocean freight rates, and a better level in mix of inventories.
Speaker 4: transcript
Speaker 4: International net sales declined 4% principally due to lower demand in our Canadian retail business, particularly for cold weather apparel given the unseasonably warm temperatures in September . With the arrival of colder temperatures as we've moved through October , we've seen a meaningful improvement in traffic and comp sales in our Canadians.
International net sales declined 4%, principally due to lower demand in our Canadian retail business, particularly for cold weather apparel, given the unseasonably warm temperatures in September.
With the arrival of colder temperatures as we've moved through October we've seen a meaningful improvement in traffic and comp sales in our Canadian business.
Speaker 4: transcript
Speaker 4: Sales in the wholesale component of our international business were lower, largely a function of bookings planned for third quarter, which are now expected to ship in the fourth quarter.
Sales in the wholesale component of our international business were lower largely a function of bookings plan for third quarter, which are now expected to ship in the fourth quarter.
Michael Casey: We continued to make good progress right-sizing our inventory levels in the quarter. Inventories grew last year when inflation peaked at historic levels and consumer demand slowed. Our inventories at the end of the third quarter were down over 30 percent and expected to trend lower by year end. Our progress with inventory reduction has improved our cash flow relative to last year by over $400 million through September. River. Given our stronger than planned cash flow, we have reduced our seasonal borrowings and related interest expense, and we believe we have ample capacity to fully fund our growth strategies and plan to continue returning excess capital to our shareholders.
Speaker 4: transcript
Speaker 4: Sales in Mexico grew in Q3, driven by the retail component of the business.
Sales in Mexico grew in Q3, driven by the retail component of the business <unk>.
Speaker 4: transcript
Speaker 4: Mexico is a growth market for us. We've been making investments there and building out a great multi-channel business model, including stores, e-commerce, and wholesale.
Mexico is a growth market for us, we've been making investments there and building out a great multichannel business model, including stores E Commerce and wholesale.
Speaker 4: transcript
Speaker 4: International's operating margin was 11.7% compared to 14% last year. The decline was largely driven by expense, deleverage, and higher product costs, which were offset in part by improved price realization and lower transportation costs.
International's operating margin was 11, 7% compared to 14% last year. The decline was largely driven by expense deleverage and higher product costs, which were offset in part by improved price realization and lower transportation costs.
Speaker 4: transcript
Speaker 4: On page 14, we've included our Q3 year-to-date adjusted segment results.
On page 14, we've included our Q3 year to date adjusted segment results.
For your reference.
Speaker 4: transcript
Speaker 4: Turning to page 15, the summer we introduced a new brand campaign for Carter's with the tagline Love Every Moment, which reminds parents to savor each of the moments that come with raising small children. This campaign has been very well received by consumers with terrific early engagement. We recently launched a new series of emotional brand messages for the upcoming holiday season, all reinforcing the Love Every Moment theme. These messages can be seen in all of our direct consumer marketing channels and in our retail stores.
Turning to page 15. This summer we introduced a new brand campaigns for Carters with the tagline Love every moment, which reminds parents to save or each of the moments that come with raising small children. As campaign has been very well received by consumers with terrific early engagement.
Michael Casey: Our forecast for the year reflects an improving trend in our second half sales and earnings relative to our first half performance. In the second half this year, we are comping up against a significant slowdown in consumer demand that began when inflation peaked in June of 2022. In response to that unexpected downturn in consumer demand, our wholesale customers aggressively curtailed and canceled inventory commitments in the second half last year. Assuming success with our forecast in the balance of this year, our second half sales are planned down 4 percent.
We recently launched a new series of emotional brand messages for the upcoming holiday season, all reinforcing the love every moment theme.
These messages can be seen in all of our direct to consumer marketing channels and in our retail stores.
Speaker 4: transcript
Speaker 4: Additionally, we make our great photography and creative available to our wholesale customers for their use in presenting the Carter's brand in their own market.
Finally, we make our great photography, and creative available to our wholesale customers for their use in presenting the Carter's brand in their own marketing programs.
Speaker 4: transcript
Speaker 4: For millennial and Gen Z parents clothing, which is organic and sustainable, has become increasingly important as they build out their children's wardrobes. As shown on page 16, our newest brand, Little Planet, is focused on sustainable materials and fabrics. While customers love these attributes, they've embraced Little Planet first and foremost because it's beautiful product with a clean and elevated aesthetic.
For millennial and Gen Z parents clothing, which is organic and sustainable has become increasingly important as they build out their children's wardrobes as shown on page 16, our newest brand little planet is focused on sustainable materials and fabrics, while customers loved these attributes they have embraced little planet first and foremost because it's beautiful product with a clean and elevated.
Michael Casey: By a comparison, our sales for the year are planned down 8 percent. Our earnings per share are planned up 15 percent in the second half this year and planned down 11 percent for the year. In our remarks this morning, we will reference our second half's assumptions, which we believe will be helpful to understand the improving trend in our performance. Our third quarter got off to a good start. Our consolidated sales in July were comparable to last year.
As Fedex.
Speaker 4: transcript
Speaker 4: Little Planet is delivering good growth for us this year through its significantly expanded presence in our own stores and in the wholesale channel with a number of our leading customers.
Little planet is delivering good growth for us this year through its significantly expanded presence in our own stores and in the wholesale channel with a number of our leading customers.
Speaker 4: transcript
Speaker 4: Moving to page 17, continuing our heritage of product innovation, we recently introduced a new brand in our baby assortment called Purely Soft.
Moving to page 17, continuing our heritage of product innovation.
We recently introduced a new brand and our baby assortment called purely soft.
Speaker 4: transcript
Speaker 4: Really spot products are made from an all-season eco-friendly fabric that has a distinctive silky soft feel.
Fairly soft products are made from an all season eco friendly fabric that has a distinctive silky soft CL.
Michael Casey: Nearly 80 percent of our payroll sales in the third quarter were in our baby and toddler products offerings. Those age ranges had the best quarterly performance this year with sales down only 2 percent. We continue to see a good response to our new little planet brand. It's our most elevated premium price product offering. We're forecasting sales of our new little planet brand to be about $70 million this year up over 50 percent to last year.
Speaker 4: transcript
Speaker 4: The Drillysop Baby and Sleep collection is currently available in 200 Carter stores and on our website we're planning to expand the distribution of Drillysop to all of our Carter stores next spring with an expanded assortment of solids and prints.
But fairly soft baby sleep collection is currently available on 200 Carter's stores and on our website, we're planning to expand the distribution of Peerless off to all of our Carter stores next spring with an expanded assortment of solids and trends.
Speaker 4: transcript
Speaker 4: Additionally, this brand is available in all of our major wholesale customers, which carry our flagship Carter's brand.
This brands available and all of our major wholesale customers, which carry our flagship Carter's brand.
Speaker 4: transcript
Speaker 4: Turning to page 18, in addition to opening new stores, we've been working to improve the productivity and customer experience in our existing stores.
Turning to page 18. In addition to opening new stores, we've been working to improve the productivity and customer experience in our existing stores and.
Michael Casey: We expect that growth will be driven by the strength of the product offering and expanded distribution of our wholesale customers, including Target, Amazon and Macy's, and through our own retail stores in the United States, Canada and Mexico. In our U.S, retail segment, our comparable sales were down 10 percent in the third quarter. We had forecasted a high single-digit decrease in sales. Our retail sales were trending on our plan through the first nine weeks of the quarter down about 7 percent to last year, but when temperatures rose to record levels in September, demand for our cooler weather apparel slowed.
Speaker 4: transcript
Speaker 4: In 150 of our former side by side co-branded stores, we've created new distinct baby and toddler and kid experience.
And 150 of our pharma side by side co branded stores, we've created new distinct baby and toddler and Curt experiences.
Speaker 4: transcript
Speaker 4: This new presentation has increased the focus and impact of these product categories which address different age segments.
This new presentation has increased the focus and impact of these product categories, which address different edge segments are.
Speaker 4: transcript
Speaker 4: Our results so far have been very positive. We're testing additional product and brand presentations, which we hope will inform further improvements to new and existing stores.
Our results so far have been very positive.
We're testing additional product and brand presentations, which we hope will inform further improvements to new and existing stores.
Moving to page 19 with.
Speaker 4: transcript
Speaker 4: With the next generation of parents now increasingly beginning their shopping research and information gathering on social media platforms, our branded content on TikTok and Instagram continues to resonate.
With the next generation of parents now increasingly beginning their shopping research and information gathering on social media platforms, our branded content on tech tuck in Instagram continues to resonate with.
Speaker 4: transcript
Speaker 4: We recently surpassed 200,000 followers and 1 million likes on TikTok and doubled our monthly Instagram engagement rate by providing content relevant to families with young children ranging from education eclipse, highlighting our product expertise to in-store shopping videos.
We recently surpassed 200000 followers and 1 million likes on Tech talk and doubled our monthly Instagram engagement rate by providing content relevant to families with young children, ranging from education eclipse highlighting our product expertise to in store shopping that is.
Michael Casey: In the third quarter, we saw better performance in our stores than online. Our comparable U.S, retail store sales were down about 5 percent in the third quarter. By comparison, our e-commerce sales were down about 19 percent largely due to lower traffic. That decrease is in line with third-party credit card data that tracks the online purchases of apparel. Given the financial strain on families with young children, we believe more consumers are cautious on spending by what's needed and only when it's needed.
Speaker 4: transcript
Speaker 4: The next few pages features some of our product and marketing plans for our exclusive brands that target Walmart and Amazon.
The next few pages feature some of our product and marketing plans for our exclusive brands at target Walmart and Amazon.
Speaker 4: transcript
Speaker 4: Beginning on page 20, Carter's exclusive brand for target just when you recently launched its new holiday fashion assortment.
Beginning on page 20, Carter's exclusive brand for target just one you recently launched its new holiday fashion assortment.
Speaker 4: transcript
Speaker 4: Just when you marketing is featured across targets, websites, social and search channels, and influencer network, collectively supporting, growing demand from target customers.
Just one new marketing its featured across targets website, social and search channels and Influencer Influencer networks collectively supporting growing demand from target customers.
Speaker 4: transcript
Speaker 4: Turning to page 21, and Child of Mine Carter's exclusive brand for Walmart.
Michael Casey: Store visits are more intentional and fulfill the need for immediacy. We have a very high conversion rate in our stores than you're coming to buy, not browse. Rose. By comparison, e-commerce purchases are more impulsive, often triggered by our marketing texts and emails. Impulse purchases may be more constrained these days, given higher credit card balances. Carter's outperforms the young children's apparel market in e-commerce penetration to total retail sales. In the United States, 28% of kids apparel is purchased online.
Turning to page 21, and child of mine Carter's exclusive brand for Walmart.
Speaker 4: transcript
Speaker 4: With the introduction of our new fashion styles and our enhanced in-store presentation, Child of Mine has significantly increased its brand awareness among new parents who are shopping at Walmart.
With the introduction of our new fashion styles in our enhanced in store presentation child of mine has significantly increased its brand awareness among new parents, who are shopping at Walmart.
Speaker 4: transcript
Speaker 4: Some recent Child of Mine brand enhancements include New Baby and Toddler Holiday Dressy Collections, perfect for special moments when families gather together for the holidays.
Some recent child of mine brand enhancements, including new baby and toddler holiday dressing collections perfect for special moments when families gathered together for the holidays. These collections in line with our best selling last styles are featured across Walmart digital and store marketing channels.
Speaker 4: transcript
Speaker 4: collections along with our best-selling Leia styles, our featured across Walmart's digital and store marketing channels.
Speaker 4: transcript
Speaker 4: Moving to page 22, our exclusive branded Amazon Simple Joys has now picked off the holiday shopping season on Amazon.
Moving to page 22, our exclusive branded Amazon simple joys has now kicked off the holiday shopping season on Amazon.
Speaker 4: transcript
Speaker 4: Many brands have some level of presence on Amazon. Our simple Joyce assortment on Amazon is extensive and provides everything a parent needs for their little one.
Michael Casey: Carter's penetration is a few points higher than the market. E-commerce continues to be one of our highest margin businesses. Our return rate is one of the best in online retailing less than 5%, which contributes to our high margin performance. Given the high mix of children's apparel bought in stores, we plan to continue opening stores in the years ahead. Carter's is a highly desirable tenant in shopping centers. Our brands attract families with young children to those centers.
Many brands have some level of presence on Amazon our simple joys assortment on Amazon is extensive and provides everything apparent needs for their little ones.
Speaker 4: transcript
Speaker 4: Additionally, the vast majority of our simple Joyce products on Amazon have tens of thousands of consumer reviews with an average customer rating of 4.7 stars.
Additionally, the vast majority of our simple joys products on Amazon have tens of thousands of consumer reviews with an average customer rating up four seven stars.
Speaker 4: transcript
Speaker 4: Our Simple Joys brand store pages on Amazon have recently been repressed, providing Amazon's customers with an improved shopping experience and access to our new holiday camp.
Our simple joys brand store pages on Amazon have recently been repressed, providing amazon's customers with an improved shopping experience and access to our new holiday campaigns.
Speaker 4: transcript
Speaker 4: Turning now to our outlook for the balance of the year, beginning on page 24.
Turning now to our outlook for the balance of the year beginning on page 24.
Michael Casey: We expect to open nearly 50 stores in the United States this year and will close about a dozen low margin stores. Our stores opened in recent years, are achieving over 20% EBITDA margins, and their comparable sales performance this year has outperform the balance of our stores. Including this year, we plan to open 250 stores in the United States by 2027. These store openings are expected to contribute over 250 million dollars in sales growth, including the benefit of related e-commerce sales.
Speaker 4: transcript
Speaker 4: Today we're tightening the high end of the range of performance we believe is possible with two very important months left to go in the year. There are a number of factors which we believe will contribute to continue to improve results in Q4, particularly in profitability.
Today, we are tightening the high end of the range of performance. We believe is possible with two very important months left to go in the year. There are a number of factors, which we believe will contribute to continued improved results in Q4, particularly in profitability.
Speaker 4: transcript
Speaker 4: Importantly, we're assuming consumer demand trends are better than we experienced in the third quarter. And we're encouraged by the response to date to our fall and holiday event related departments, including family dressing and Christmas Pige.
Fortunately, we're assuming consumer demand trends are better than we experienced in the third quarter and we're encouraged by the response to date to our fall and holiday event related assortments, including family dressing and Christmas Pjs.
Speaker 4: Our supply chain performance has improved meaningfully compared to last year, enabling much better on-time delivery performance for our wholesale customers. We also have a better level and mix of inventories, particularly in our retail business.
Our supply chain performance has improved meaningfully compared to last year, enabling much better on time delivery performance for our wholesale customers.
Michael Casey: We expect most of these store openings will be in open-ear centers to provide convenience for consumers, including curbside pickup. That said, we've seen good success with our mall stores in recent years. We've been highly selective on mall store openings. We currently have 90 of our 800 US stores in malls and see an opportunity to double that store count in the years ahead. Carter says, grown over the years to be the largest and most profitable specialty retailer focused on young children's apparel.
We also have a better level and mix of inventories, particularly in our retail businesses.
Speaker 4: We expect fourth quarter earnings to benefit from the contributions from the new high margins stores which we've opened along with the closure of low margins stores.
We expect fourth quarter earnings to benefit from the contributions from the new high margin stores, which we've opened along with the closure of low margin stores, where.
Speaker 4: transcript
Speaker 4: forecasting good expansion and growth margin driven by improved pricing and lower ocean freight rates.
We're forecasting good expansion in gross margin driven by improved pricing and lower ocean freight rates.
Speaker 4: transcript
Speaker 4: We've continued to plan our inventory commitments conservatively, which we believe will drive better sell truths and price realization.
We've continued to plan our inventory commitments conservatively, which we believe will drive better sell throughs and price realization.
Speaker 4: transcript
Speaker 4: And lastly, we're planning for a lower average share count, given our progress with share report.
And lastly, we are planning for a lower average share count given our progress with share repurchases.
Speaker 4: transcript
Speaker 4: Moving to page 25 in our specific thoughts on what we think is possible for the fourth quarter. Our outlook for fourth quarter sales has been adjusted in part due to the higher than plan wholesale demand, procedural product which we realized in the third quarter.
Michael Casey: Our stores are the number one source of new customer acquisition. We believe our stores provide the very best value and experience with our brands and provide a very high return on investment. Our stores provide a convenient alternative to shopping in big box retailers and we believe our direct to consumer capabilities provide market insights that help us support our wholesale customers. We've made significant investments in our direct to consumer capabilities in recent years, including the same day fulfillment of online purchases and RFID technology, which increases our visibility and accuracy of inventories.
Moving to page 25, and our specific thoughts on what we think is possible for the fourth quarter our outlook for fourth quarter sales has been adjusted in part due to the higher than planned wholesale demand for seasonal product, which we realized in the third quarter for.
Speaker 4: transcript
Speaker 4: planning net sales in the range of $862 to $877 million.
We're planning net sales in the range of $862 million to $877 million.
Speaker 4: transcript
Speaker 4: As I said, we're planning for Good Growth, margin expansion and Q4 with SG&A dollars planned down.
As I said, we're planning for good gross margin expansion in Q4 with SG&A dollars planned downs.
Speaker 4: transcript
Speaker 4: Below the line we're forecasting a higher effect to patch rate and lower shares outstanding.
Below the line, we're forecasting a higher effective tax rate and lower shares outstanding.
Speaker 4: transcript
Speaker 4: Adjusted operating income is planned in the range of $133 to $143 million.
Adjusted operating income as planned in the range of $133 million to $143 million.
Speaker 4: transcript
Speaker 4: And lastly, we're forecasting adjusted EPS in the range of $2.50 to $2.72.
And lastly, we are forecasting adjusted EPS in the range of $2 50 to $2 and 72.
Michael Casey: We've invested in marketing personalization capabilities, a highly rated mobile app, and loyalty and credit card programs, which increase the frequency of transactions and the lifetime value of our relationships with consumers. We're forecasting an improving trend in our US retail segment in the second half this year. This planned improvement reflects a stronger product to offering and a significant improvement in on-time deliveries. Recall that a year ago we were shipping our fall and holiday product offerings about 70% on time due to US port congestion.
Speaker 4: transcript
Speaker 4: Now turning to page 26, as shown on this slide, if we're successful with our fourth quarter plans, the resulting second half would represent meaningfully improved performance relative to the first half of the year.
Now turning to page 26 as shown on this slide if we're successful with our fourth quarter plans, the resulting second half would represent meaningfully improved performance relative to the first half of the year.
Speaker 4: transcript
Speaker 4: We're expecting better second half sales trends in all of our business segments and on second half profitability we're planning meaningful improvement relative to our results in the first half of the year and the second half of last year.
We're expecting better second half sales trends in all of our business segments and on second half profitability, we're planning meaningful improvement relative to our results in the first half of the year and the second half of last year.
Speaker 4: transcript
Speaker 4: Second half, adjusted operating income is expected to grow over last year in the range of 9 to 14% with an adjusted operating margin of roughly 14%.
Second half adjusted operating income is expected to grow over last year in the range of 99% to 14% with an adjusted operating margin of roughly 14%.
Speaker 4: transcript
Speaker 4: Given all this, our expectations for where our full year results will land are summarized on page 27.
Given all Thats, our expectations for where our full year results will land are summarized on page 27.
Speaker 4: transcript
Speaker 4: We are planning net sales in the range of $2,950,000, to $2,965,000,000. A modest revision to the high end of our previous guidance for sales given the slowdown in demand we experienced in September and October .
Michael Casey: Question. This year, our second half shipments to our wholesale customers and our retail stores are closer to 100% on time. With a better mix in level of inventories, we are forecasting our U.S, retail sales down 6% in the second half and down 9% for the year.
We are planning net sales in the range of $2 billion at $950 million to $2 billion and $965 million a modest revision to the high end of our previous guidance for sales given the slowdown in demand we experienced in September and October.
Speaker 4: transcript
Speaker 4: Adjusted operating income is expected in the range of $325 to $335 million. Again, down somewhat at the high end of the range from our prior forecast.
Adjusted operating income is expected in the range of $325 million to $335 million again down somewhat at the high end of the range from our prior forecast.
Michael Casey: Our market analysis in third-party credit card data continued to indicate that families with young children have pulled back on spending due to inflation. Carter's advantages in inflationary markets include our focus on essential core products, a high mix of less discretionary baby apparel purchases, our broad and unparalleled market distribution including our exclusive brands sold through target, Walmart and Amazon, and our compelling value proposition with average retail price points of about $11 including many high-value multipacts.
Speaker 4: transcript
Speaker 4: earnings per share are planned in the range of $5.95 to $6.15, which is consistent with our prior outlook.
Earnings per share are planned in the range of $5 95 to $6 15, which is consistent with our prior outlook.
Speaker 4: transcript
Speaker 4: noted earlier, operating cash flow is now expected to be over $350 million in improvement over our previous view.
As noted earlier operating cash flow is now expected to be over $350 million an improvement over our previous view.
Speaker 4: transcript
Speaker 4: Through October , we're generally running in line with our forecast, wholesale a bit ahead and U.S. retail a little behind, but important to note that the more significant volume weeks of the fourth quarter remain ahead of us.
Through October we're generally running in line with our forecast wholesale a bit ahead and U S retail a little behind that important to note that the more significant volume weeks of the fourth quarter remain ahead of us.
Speaker 4: transcript
Speaker 4: November and December combined represents about 70% of the sales and profitability we're planning for the fourth quarter.
November and December combined represents about 70% of the sales and profitability were planning for the fourth quarter.
Speaker 4: transcript
Speaker 4: The arrival of more consistent colder weather and closer proximity to the holidays have historically been catalysts in our business in the fourth.
The arrival of more consistent colder weather in closer proximity to the holidays have historically been catalysts in our business in the fourth quarter.
Michael Casey: The average transaction in our store is about $50. That's less than to take a gas these days. Children's apparel is a relatively small component of a young family's budget, but even less discretionary purchases like children's apparel have been scaled back because of inflation. Our daily market analysis continues to show that our brands are competitively priced. Consumers expect to pay a reasonable premium for national brands and Carter's is the best selling national brand in young children's apparel.
Speaker 4: transcript
Speaker 4: All of our teams are focused on finishing 2023 in very strong fashion. And with these remarks,
All of our teams are focused on finishing 2023 and very strong fashion.
And with these remarks, we're ready to take your questions.
Speaker 2: transcript
Speaker 2: Thank you. To ask a question, please press star 11 on your phone and wait for your name to be announced. To withdraw your question, please press star 11 again. Stand by at the compile of the Q&A roster. There.
Thank you <unk>.
Ask a question. Please press star one one on your phone and wait for your name to be announced to withdraw. Your question. Please press star one again standby as we compile the Q&A roster.
Michael Casey: In our experience as long as our brands are priced within a dollar or two of our private label brands, we are competitive. It's a time-tested pricing strategy which we plan to continue in the years ahead. Carter's is built unparalleled relationships including exclusive brands for the largest retailers of young children's apparel in North America. As the best selling national brand in young children's apparel, our brands complement their private label brands and drive traffic to their stores and websites.
One moment please for our first question.
Speaker 2: transcript
Speaker 2: Our first question will come from Warren Chang of Evercore ISI. Your line is open.
Our first question will come from Warren Cheng of Evercore ISI. Your line is open.
Speaker 5: transcript
Speaker 5: Hey, good morning. I just wanted to ask, or I will not understand the cop expectation that's vacant the fourth quarter guidance.
Hey, good morning, I, just wanted to ask alright, I want to understand the comp expectation that's baked into the fourth quarter guidance.
Speaker 5: transcript
Speaker 5: So it sounds like the exit rate from second quarter was down the high teens range. Did you see an improvement in the US costs in October from that September level. And also, can you remind us, you know, typically if there's a late start to the season. Is there a catch up that occurs when the weather cools.
So it sounds like the exit rates from the second quarter was down the high teens range did you see an improvement in the U S comps in October from that September level, and also can you remind us typically if there's a late start to the season is there a catch up that occurs when the weather calls so.
Speaker 3: transcript
Speaker 3: So is it more of a pushout of the sales or are those September and October sales just sort of lost for the season? Or I'd say we've seen a strong correlation between the trend in our retail sales and the warmer weather. Or whether it's cooler, the trends are better. So for the fourth quarter we're assuming a high single to low double digit negative comp in retail sales in the fourth quarter. The trend in October did slow relative to
More of a push out of the sales or are those September and October sales.
Michael Casey: A high percentage of our wholesale product offerings are focused on baby apparel and our baby apparel continues to be the best performing component of our product offerings. A high percentage of our baby apparel is on automatic replenishment, so when the register rings across thousands of store locations, replenishment orders are automatically created and shipments are made to keep the fixtures filled in our essential core products in stock. Our exclusive brands sold to Target and Walmart in Amazon are forecasted to grow to 51% of our total wholesale sales this year a couple points higher than last year.
Loss from season sure I'd say, we've seen a strong correlation between the trend in our retail sales in the warmer weather weather is cooler the trends are better so for the fourth quarter, we're assuming a <unk>.
High single to low double digit negative comp in retail sales in the fourth quarter. The trend in October did slow relative to.
Speaker 3: transcript
Speaker 3: to September . So we have seen, I put it in context, we're probably running some portions of that $8 million off our retail.
Two to September so we haven't seen I would put it in context, we're probably running some portion of about $8 million off our retail plan in the fourth quarter. It took nearly $900 million quarter and we see some upside in the wholesale side of our business. So again, we saw sluggishness that began.
Speaker 3: transcript
Speaker 3: plan in the fourth quarter, it's nearly a $900 million quarter and we see some upside in the wholesale side of our business. So, again, we saw sluggishness that began in the second week of September and even with that sluggishness, we outperformed the expectations that we shared with you in July . We were running probably a solid negative seven comp.
Michael Casey: Increasingly, our wholesale sales are concentrated among fewer, larger, and growing retailers. Our U.S, wholesale sales in the third quarter reflect earlier than planned shipments of our fall and holiday product offerings. We have adjusted our previous fourth quarter wholesale sales plan accordingly. We are forecasting an improving trend in our U.S, wholesale segment this year with sales down less than 2% in the second half and down 7% for the year. We're copying up against the wholesale destocking period in the second half.
In the second week of September and even with that sluggishness, we outperformed the expectations that we shared with you in July we were running probably a solid negative seven comp.
Speaker 3: transcript
Speaker 3: most of the third quarter and then started to lose ground in the final weeks of September . And then that continued in October . It's not unusual.
Through most of the third quarter, and then started to lose ground in the final weeks of September then that continued into October it's not unusual it's supposed to be 80 degrees in New York. This weekend that doesn't exactly lend itself to shopping for fall and holiday product next week in New York is going to dip into the <unk>.
Speaker 3: transcript
Speaker 3: It's supposed to be 80 degrees in New York this weekend. That doesn't exactly lend itself to shopping for fall and holiday product. Next week in New York, it's going to dip into the 30s at night and the highs in the 50s. So where we've seen that kind of weather change, we've seen a meaningful improvement in.
Night, and the highest in the <unk>, so where we've seen that kind of weather change.
Michael Casey: Chair. Given our wholesale customers' progress, managing their inventories, their sell-throughs, price realization, and margins earned on our brands this year are generally better than last year. As a result, we have wholesale orders that support growth in our spring and summer 2024 product offerings, a portion of which will begin shipping to the major retailers later this year.
We've seen a meaningful improvement in the.
Speaker 3: transcript
Speaker 3: the retail performance. We've already started to see it in Canada. Coller weather snow has come to Canada and we've seen a meaningful change in the trend in their performance. We expect to see it as we head into the final weeks of this year.
The retail outperformance, we've already started to see it in Canada colder weather snow has come to Canada, and we've seen a meaningful change in the trend in there their performance.
<unk>, we expect to see it as we head into the final weeks of this year.
Speaker 5: transcript
Speaker 5: Gotcha. Yeah, I think October was one more than made this year. And then, Mike, another, is it a higher level question for you? If I step back, your gross margins are running more than 400 basis points higher than pre-pendent level.
Gotcha, Yeah, I think October was one more than made this year and then Mike another just a higher level question for you if I step back your gross margins are running more than 400 basis points higher than pre pandemic levels.
Michael Casey: We expect better visibility to wholesale demand for our fall and holiday 2024 product offerings when we complete that sell-in process early next year. For the year, our international sales are forecast to be 15% of our total sales. We are also forecasting and improving trend in international sales with sales planned up 3% in the second half and down about 3% for the year. Our sales in Canada, Mexico and Brazil are expected to contribute about 85% of our international sales this year.
Speaker 5: transcript
Speaker 5: But your comps have been negative for almost two years now, and I think we all understand the pressure on your consumer, especially from have been inflationary in nature. Has there been any thought on revisiting your approach to pricing in this environment and perhaps using that as a tool to help stabilize the comps?
Comps have been negative for almost two years now and I think we all understand the pressure on your consumer, especially for have been inflationary in nature.
Then any thought on revisiting your approach to pricing in this environment and perhaps using that as a tool to help stabilize the comps.
Speaker 3: transcript
Speaker 3: Well, we have revisited the pricing. The pricing is competitive. We have good people at Carter's looking at our pricing relative to our competitors every day. We have raised our prices because costs went up, rate rates went up. But our competitors have raised their prices as well. Our biggest competitor are the private label brand competitors. And we're priced within a buck or two of the private label brand.
We have revisited the pricing if pricing is competitive we have good people at Carter's looking at our pricing relative to our competitors every day, we have raised our prices because costs went up freight rates went up but our competitors have raised their prices as well our biggest competitor or the private label brand competitors and were priced within a buck or two of the private label brands.
Michael Casey: The balance of our international sales are through wholesale relationships with about 40 retailers representing our brands in over 90 countries and through over 100 online platforms outside of North America. Some of our international wholesale customers have been adversely affected by inflation, the stronger dollar and global complex. We are assuming growth in Mexico and Brazil this year which is expected to partially offset lower sales in Canada and other markets.
Speaker 3: transcript
Speaker 3: And what we've seen over time, as long as we're priced within a dollar or two, we are competitive. We have tested. We have very smart people testing different prices.
And what we've seen over time as long as we're priced within a dollar or two we are competitive we have tested we are very smart people testing different pricing.
Speaker 3: transcript
Speaker 3: Configurations, different prices, what we've tested lower prices, it did not drive a change in unit velocity.
Configurations different prices, what we've tested lower prices. It did not drive a change in unit velocity that would suggest that we should do that on a more sustained basis. So.
Speaker 3: transcript
Speaker 3: that would suggest that we should do that on a more sustained basis. So I think what we've seen in terms of the negative comps is more a reflection of the consumer's been through a roller coaster of experiences in recent years. KeepMind is Richard Sherwood with you. We had record profitability in 2021.
I think the what we've seen in terms of the negative comps as more.
Michael Casey: Our supply chain continues to be a source of strength in our performance this year. On time, shipping performance has been excellent. Our supply chain team has negotiated meaningfully lower ocean freight rates which are contributing to our second half earnings growth. Product costs are also expected to be lower in the second half this year and next year. We expect those lower costs will enable us to strengthen our product offerings, sharpen price points and improve profitability next year.
A reflection of the consumer's been.
Through a roller coaster of experiences in recent years keep in mind as Richard shared with you. We had record profitability in 2021, we came roaring back from the worst of the disruption from the pandemic in 2020 actually saw 2020 to get off to a strong start had high single digit.
Speaker 3: transcript
Speaker 3: We came roaring back from the worst of the disruption from the pandemic in 2020. Actually saw 2022 get off to a strong start. Had high single digit positive comps in our retail business in the early months of 2022. As we move through 2022.
Positive comps in our retail business in the early months of 2022 as we move through 2022.
Speaker 3: transcript
Speaker 3: And all of a sudden, gas prices doubled and food prices went up and the consumer couldn't find baby formula. And then in patient teams, good retailers, some of our largest wholesale customers announced a significant...
All of a sudden gas prices doubled in food prices went up in the consumer Couldnt find baby Formula and then inflation peaked good retailers some of our some of our largest wholesale customers.
Michael Casey: In summary, we achieved our third quarter sales in earnings objectives. The comments on the outlet for the year reflect the high end of our guidance this morning with the late arrival of cooler weather. The fourth quarter has gotten off to a slow start. We've seen a strong correlation between warmer weather and the demand for our fall and holiday product offerings. Where weather is cooler, sales trends are better. With colder weather on the way, we expect our sales earnings trends will improve as we move through the final weeks of the year.
<unk>.
A significant.
Decrease in the trend in consumer traffic.
And purchases. So I don't think we're unique in this if we felt as though we lowering prices would drive stronger comps, we would do it and we feel as though we are competitive. This is a very profitable company. We have been focused during this time period on margin preservation and cash flow. Some some that we compete with aren't profitable at all.
Speaker 3: transcript
Speaker 3: We have been focused during this time period on margin preservation and cash flow. Some that we compete with aren't profitable at all. It's a function of the strength of their product offering and how they buy the inventory. Most of the price realization we've realized in recent years was largely through good inventory management. Not always with the strength of the product offering, right? But it's largely through inventory management. Our clearance units in the third quarter were down some portion of 20%. So if you don't have clearance, you have a better mix of product and you're getting paid for it, better mix of product. So that's largely what we've seen as a driver in our price realization. We'll continue to monitor it. Again, we have people looking...
Michael Casey: With nine weeks to go, we have adjusted our guidance to reflect what we believe is possible this year. We believe inflation, generational high interest rates and the suspension of pandemic related stimulus payments to child care centers have weighed on families with young children this year. Thankfully, births trends in the United States have stabilized. Birth this year are expected to be comparable to last year. And with a near 40 year high end weddings last year, continued strength in labor markets and moderation and inflation, we believe market conditions will improve.
It's a function of the strength of their product offering and how they buy the inventory most of the price realization. We've realized in recent years was largely through good inventory management and I've always with the strength of the product offering, but it's largely through inventory management, our clearance units in the third quarter were down some portion of 20%.
Speaker 3: transcript
Speaker 3: So if you don't have clearance, you know, a product, you have a better mix of product and you're getting paid for it better mix of product. So that's largely what we've seen in the...
So if you don't have clearance.
Product you have you have a better mix of product and you're getting paid for a better mix of products. So that's largely what we've seen.
Michael Casey: Carters is the best selling brand in young children's apparel. We believe our unparalleled market distribution capabilities and brand reputation for quality and value will enable carters to continue leading the market and be well positioned to gain market share in the years ahead.
Speaker 3: transcript
Speaker 3: as a driver in our price realization. We'll continue to monitor it. Again, we have people looking at it every day and we'll continue to look at through the balance of the year. We were more promotional than planned. In the tail end of the third quarter, we'll probably be more promotional than planned. In the fourth quarter, just given this low start. But we are less promotional than last year, largely given the strength of the product to offering a better level and mix of inventory. But in times like this,
As a driver in our price realization will continue to monitor it again, we have people looking at it every day and we'll continue.
Look it through through the balance of the year, we were more promotional than planned in the tail end of the third quarter will probably be more promotional than planned in the fourth quarter, just given the slow start, but we are less promotional than last year, largely given the strength of the product offering at a better level and mix of inventories, but in times like this.
Michael Casey: I want to thank all of our employees for achieving stronger than planned performance in the third quarter and their commitment to help us achieve our growth objectives in the final weeks of this year.
Richard Westenberger: At this time, Richard will walk us through the presentation on our website. Thank you, Mike.
Speaker 3: transcript
Speaker 3: You focus on the things you can control and which you can control. Are the level of inventory is the strength of the product we are offering and continue to focus on cash flow.
You focus on the things you can control and which can control are the level of inventories the strength of the product offering.
Richard Westenberger: Good morning, everyone. On pages two and three of our presentation materials, we provided our gap income statements for the third quarter and year-to-date periods. Page four summarizes adjustments to our gap results for the third quarter and year-to-date periods for costs we incurred this year related to organizational restructuring. In the second quarter of last year, our strong liquidity enabled us to strengthen our balance sheet by early retiring pandemic-related debt. The loss associated with this early debt extinguishment is included as an adjustment to last year's Q3 year-to-date gap results.
Due to focus on cash flow.
Speaker 2: transcript
Speaker 2: Thanks Mike, thanks team, good luck. Thanks, Warren. Thank you. And one moment.
Thanks, Mike Thanks, Tim Good luck thanks Warren.
Thank you.
And one moment please for our next question.
Thanks.
Speaker 2: transcript
Speaker 2: Next question will come from the line of Aik Boraciao of Wells Fargo. Your line is open.
Our next question will come from the line of Ike Blower Chow.
Wells Fargo. Your line is open.
Speaker 6: transcript
Speaker 6: Hey, good morning guys. Couple of questions from me, two of them actually, I think piggyback off of what Warren just asked you, but Mike, just on the comps, understand the guidance for 4Q, what's embedded. Can you just explicitly let us know according to date where you're running on the comps? Second question is on the product cost, I think you said you expected those to be favorable into the back half of this year and early next year, but I think Mike, you said something along the lines of time breathe out. The other thing, but eventually Actually got just went outside and was in line with the
Hey, Good morning, guys couple of questions from me to two of them actually I think piggyback off of what Warren and just asked to you but.
Richard Westenberger: This information is included for your reference and this morning I will speak to our results on an adjusted basis, which excludes these items. Moving to page five, as Mike said, we achieved the sales and earnings objectives which we shared with you back on our July call. Net sales in the quarter were $792 million, slightly above the high end of our guidance range. These consolidated sales results reflect higher than planned demand in our US wholesale business.
Mike just on the comps understand the guidance for <unk> whats embedded can you could you just explicitly let us know quarter to date, where you're running on the comps.
Second question.
<unk> is on the product cost side I think you said you expected those to be favorable.
The back half of this year and early next year, but I think Mike you said something along the lines of.
Speaker 3: transcript
Speaker 3: sharpening price points or gives you an opportunity to sharpen your price points. He is elaborated on what you mean. Are you talking about putting some price investment into the business, not flowing all that AUC into the margin? It's kind of curious what exactly you meant. And then I have one more, but I'll follow. Sure. So heading into next year, we have visibility to wholesale demand for our spring in summer 2024 product to operate.
Richard Westenberger: Reach out sales in the US and Canada were lower than we had forecasted. We believe a result of warm weather that contributed to unfavorable traffic trends, particularly in September. Profitability, both operating income and earnings per share, exceeded our forecasts. The drivers of our better than planned profitability were strong expense management and continued progress in reducing inventories, which has led to better cash flow, lower borrowings, and lower interest expense. Page six summarizes a few highlights of our third quarter performance relative to last year.
Sharpening price points or it gives you an opportunity to sharpening price points can you just elaborate on what you mean are you talking about putting some price investment into the business not flowing all of that AUC into the margin just kind of curious what exactly you meant and then I had one more but I'll sure.
Heading into the <unk>.
Into next year, we have visibility to wholesale demand for our spring and summer 2024 product offerings given the good work our supply chain team has done working with our merchants and designers. The the product costs are expected to be lower going into.
Speaker 3: transcript
Speaker 3: Given the good work our supply chain team has done working with our merchants and designers, the product costs are expected to be lower going into, you know, the first half of next year. And so because the product costs are lower, the pricing will be for those early deliveries for spring and summer 24 will be, the pricing will be comparable to lower. So we're expecting, we are expecting margin expansion. So.
Richard Westenberger: Third quarter sales declined 3%. We have growth in our US wholesale business which was offset by lower sales in our US retail and international businesses. Adjusted operating income grew 5%, adjusted operating margin improved 100 basis points to 12.2%, driven by over 200 basis points of expansion in growth margin rate with average unit pricing up in the low single digits and average unit product costs down modestly. Adjusted EPS grew 10% in the third quarter, above operating income growth due to the benefits of lower interest expense and our share repurchases.
The first half of next year.
So because of the product costs are lower the pricing will be for <unk>.
Those early deliveries for spring and summer 'twenty four we will be the pricing will be comparable to two lower so we're expecting we are expecting margin expansion. So again, we see some opportunities on some key item price points to test lower pricing, we see less need for <unk>.
Speaker 3: transcript
Speaker 3: Again, we see some opportunities on some key item price points to test lower price and we see less need for
Speaker 3: transcript
Speaker 3: increasing prices given the progress we've made on ocean freight rates and product costs going into next year. And again, our comps in the third quarter were down 10.
Increasing prices given the progress that we've made on ocean freight rates and product costs going into next year and again, our comps in the third quarter were down 10 and right now in October.
Speaker 3: transcript
Speaker 3: And right now in October , we're running down about six.
Richard Westenberger: We were encouraged by our third quarter results. Recall that 2021 represented record profit performance for our company. Our profitability began to be affected by the historic spike in inflation and its impact on consumer demand throughout the marketplace in the early part of 2022, so we were pleased to see growth and profitability this past quarter. Page seven includes the same P&L metrics for the first three quarters of 2023 versus last year. Year-to-date net sales were down 9% and adjusted operating income and adjusted EPS were down 29% and 26% respectively.
October running down about 16.
Speaker 6: transcript
Speaker 6: Great. And last question maybe for Richard. I think you talked about SG&A down and 4Q. You guys have really been tight on expenses. Is there any initial thoughts on SG&A into next year? Should we continue to expect you guys to really keep that SG&A tight? And just kind of curious if there's any initial views you could kind of give us on the expense line like you guys.
Great and last question, maybe for Richard I think you talked about SG&A down in <unk> you guys have really been tight on expenses is there any.
Initial thoughts on SG&A into next year should we should we continue to expect you guys to really keep that SG&A tight and just kind of curious if there's any initial views you could kind of give us on the expense line. Thank you guys.
Speaker 4: transcript
Speaker 4: I would say we continue to, Mike's point, be managing for profitability, margin preservation, and cash flow. Those are the things that we have the most control over in this kind of environment. We've done a lot of very good work looking at our cost structure of the organization. I'm really pleased with how they responded to the challenge. Everybody understands the environment that we're in. And the best thing we can do is just keep ourselves as lean as possible. As you saw in the press release this morning, we did take some charges related to organizational restructuring that has lowered our staffing.
Yes, I would say, we continue to Mike's point be managing for profitability margin preservation and cash flow. Those are the things that we have the most control over and this kind of environment. We've done a lot of very good work.
Richard Westenberger: Our year-to-date performance reflects the significant impact of various macro factors on consumer demand, particularly in the first half of the year, including inflation and higher interest rates. Turning to our third quarter P&L on page eight, I've covered the drivers of net sales in the quarter, and on this nearly $800 million in net sales, we achieved a growth margin rate of 47.5%, an increase of 220 basis points over last year, lower ocean freight rates were the largest contributor to this year of a year gross margin expansion.
Looking at our cost structure of the organization and I'm really pleased with how they responded to the challenge everybody understands the environment that we're in.
The best thing, we can do is just keep ourselves as lean as possible.
As you saw in the press release. This morning, we did take some charges related to organizational restructuring that has lowered our staffing costs. There's other things that we've been looking at it and making good progress on indirect procurement. We've been focused on marketing effectiveness. So are our focus will remain on SG&A keeping it as low as possible I think too early to be.
Speaker 4: transcript
Speaker 4: There's other things that we've been looking at and making good progress on indirect procurement. We've been focused on marketing effectiveness. So our focus will remain on SG&A keeping it as low as possible. I think too early to be specific.
Richard Westenberger: We also had lower inventory charges in this year's third quarter. A year ago we incurred significant inventory charges as demand flowed in our business, including in wholesale as our customers aggressively reduced their inventory commitments in response to the slow down in consumer demand in their businesses. In Q3 we also continued to modestly improve realized pricing. Spending was well managed again in this quarter below what we had forecasted and comparable to last year.
Specific.
Speaker 7: transcript
Speaker 7: on next year's plans, but you can be sure that it's an ongoing discipline and an area of focus for us. And we've been, we've made good progress in managing it this year. Thank you guys.
On next year's plans, but you can you can be sure that it's a it's an ongoing discipline in an area of focus for us.
Good progress in managing at best this year.
Great. Thank you guys.
Sure.
Thank you.
Again, one moment. Please next question.
Speaker 2: transcript
Speaker 2: Next question will come from the line of Jim Charrier of Honest, Cresby and Hart. Your line is open.
Our next question will come from the line of Jim Chartier of <unk> Crespi Hardt. Your line is open.
Richard Westenberger: Variable costs related to sales volume were down as we're marketing expenses largely due to the timing of spend. Distribution and freight expenses declined reflecting in part costs in the prior year to transition out of a high cost distribution center in California. We moved that distribution activity to our lower cost distribution network here in Georgia. Offsetting these spending declines for higher provisions for performance based compensation and higher professional fees in the quarter.
Speaker 8: transcript
Speaker 8: Hi, good morning. Thanks for taking my question. I just wanted to talk about product costs, given kind of a big reduction in cotton over the last.
Hi, good morning, Thanks for taking my question.
Just wanted to talk about product costs.
Given kind of the big reduction in cotton over the last.
Speaker 8: transcript
Speaker 8: You know, 12 plus months, I would have expected maybe some about to flow through into lower product costs in the back half of this year. So it's hoping you could talk about, you know, what some of the offsets to the lower cotton costs were for the back half of this year. And then maybe what some of the other, you know, what some of those factors look like for spring of next year and fall of 24.
12, plus months I would've expected, maybe somewhat back to flow through into lower product costs in the back half of this year.
So I was hoping that you could talk about what some of the offsets.
Two a lower cotton costs were for the back half of this year.
Richard Westenberger: Adjusted operating income grew 5% to 96 million dollars with solid expansion in our adjusted operating margin as I mentioned. With low the line net interest expense was lower than last year and better than we had forecasted our strong cash generation and liquidity enabled lower seasonal borrowings on our revolver compared to last year's third quarter. Our effects of tax rate in the third quarter was 22.5% up 280 basis points over last year reflecting a greater proportion of our earnings in the US this year.
And then maybe what some of the other.
What sort of those factors look like for spring of next year and fall of 'twenty four.
Speaker 4: transcript
Speaker 4: So Jim, I would say we are starting to see the benefit of lower cotton and other input costs in our product costs. I think that leads into the P&L kind of over time. You receive that product, it goes into inventory, and then you realize some of that margin upside when you sell the product.
Jim I would say, we're starting to see the benefit of lower cotton and other input costs and our product costs I think that leads into the P&L kind of over time, you receive that product. It goes into inventory and then you realize some of that margin upside when you sell the product.
Speaker 4: transcript
Speaker 4: Recall that we're still working through that pack and hold inventory that was procured at a time when when product costs were elevated. What we are seeing a tremendous benefit on is in these in-bound transportation costs. That's that's been a big source that gets inventory into the cost of the inventory as well. So we're expecting good favorability from that here in the fourth quarter. That is a benefit that will continue through the first half.
Recall that we're still working through that pack and hold inventory that was procured at a time when product costs were elevated.
Richard Westenberger: Our weighted average share count declined by approximately 2 million shares or 5% versus last year driven by our share repurchases. So on the bottom line adjusted to looted earnings per share were $1.84 up 10% compared to $1.67 last year. On page 9 we've included our year-to-date adjusted P&L 4-year reference as noted earlier our third quarter performance represented an improvement in trend in our business. Our first half performance reflected the significant impact of the various macro factors we've mentioned.
We are seeing a tremendous benefit on us and these inbound transportation cost that's been a big source that gets inventory into the cost of the inventory as well.
So we're expecting good favorability from that here in the fourth quarter that that is a benefit that will continue through the first half of.
Speaker 4: transcript
Speaker 4: next year as well. Once we get to mid-year next year we're more or less kind of anniversary those lower rates that have benefited the second half of this year. But we are planning for lower product costs in the first half of the year.
Next year as well as well once we get to mid year next year, we're more or less kind of anniversarying those lower rates that had benefited the second half of this year, but we are planning for lower product costs in the first half of the year.
Speaker 4: transcript
Speaker 4: I think the biggest determinant of that, even beyond cotton, is just worldwide capacity. The global marketplace has...
Richard Westenberger: On page 10 we summarize some highlights of our balance sheet and cash flow. Our balance sheet is an excellent shape total liquidity was $945 million with cash on hand approximately $170 million at quarter end and virtually all of the $850 million credit facility available to us. Q3 ending inventory was $621 million down 31% year over year which was better than we had forecasted improvement versus last year reflects lower days of supply and increased productivity.
I think the biggest determinant of that even beyond cotton is just worldwide capacity in the global marketplace has meaningfully slowed down and we have terrific teams here in Atlanta, and in Hong Kong, who work with.
Speaker 4: Meetingly slowed down and we have terrific teams here in Atlanta and in Hong Kong who work
Speaker 4: transcript
Speaker 4: with our factories. We've had a series of meetings, top-to-top meetings with our largest vendors recently, and they're hungry. They love doing business with carters. We've been a source of great growth over the years, a good partner for them as well, and they are hungry for business. And so I think that available worldwide capacity is the bigger determinant. Cotton certainly is a benefit to us, but we're seeing good capacity across Asia, and I think that will drive event in the first half of next year. We don't have complete visibility to the second half of the year yet. We'll hopefully we'll have more of that to share with you on the next call.
With our factories, we've had a series of meetings top to top meetings with our largest vendors recently.
Hungry they love doing business with Carter's we've been a source of great growth over the years, a good partner for them as well and they are hungry for business and so I think thats available worldwide capacity as the bigger determinant cotton certainly is a benefit to us, but we're seeing good capacity across Asia, and we think that will drive a benefit in the first half of next year, we don't have complete visibility to the second half of the year yet.
Richard Westenberger: In the third quarter we made good progress selling through inventory which we packed and held last year as consumers and wholesale customers pulled back on demand. Pack and hold inventory balances were $44 million at the end of Q3 compared to over $100 million at the end of last year's third quarter. We expect we'll work through the through substantially all of our remaining prior season pack and hold inventory by the end of this year.
Well hopefully we'll have more of that to share with you on the next call.
Great. Thank you Sir.
Speaker 2: transcript
Speaker 2: Thank you.
Thank you.
One moment please for our next question.
Yeah.
Richard Westenberger: Total net inventory are also expected to be lower at the end of the year. Debt declined $170 million compared to the third quarter of last year made possible by our significantly improved operating cash flow. We've continued to manage our cash and debt positions subsequent to quarter end and October we paid down the $70 million in seasonal revolver borrowings outstanding at the end of Q3 leaving $500 million in senior notes which don't mature until 2027 as our only outstanding debt.
Speaker 2: transcript
Speaker 2: And our next question will come from J-Soul of UBS. Your line is open.
And our next question will come from Jay sole of UBS. Your line is open.
Speaker 6: transcript
Speaker 6: Great, great, thank you so much. Maybe Mike, I just want to follow up on the wholesale business. I think you touched on this, but can you elaborate a little bit more on how this self-rew is at your big wholesale customers? I mean, how do you see the product?
Great great. Thank you so much maybe I just wanted to follow up on the wholesale business I think you've touched on this but can you elaborate a little bit more on how the sell through is at your big.
Wholesale customers I mean, how do you see the product.
Speaker 9: transcript
Speaker 9: I see the sales moving in like Amazon Prime Day for example in October like how did you see that event for the company? I think you can tell us a bit more detail on that that'd be super helpful sure Brian Yeah, Jay the selfies have been good in wholesale And they follow is better than last year and now higher AURs is my call talked about better good margins for the retailers Now recall they did buy
How do you see the sales moving in like Amazon Prime Day for example in October how did you see that event for the company could you tell us a bit more detail on that that'd be super helpful. Sure, Brian Yes, Jay the sell through has been good in wholesale.
Richard Westenberger: Here to date, operating cash flow was $206 million, a significant improvement compared to a use of cash of over $200 million last year. This improvement reflects lower inventories and other favorable changes in working capital. Given our year-to-day progress and outlook for the fourth quarter, we've raised our full year operating cash flow outlook from over $300 million to over $350 million. Here to date, CAPX increased by $15 million to $42 million, largely due to investments in new stores here in the U.S., in Canada and in Mexico.
I would say fall was better than last year.
Higher AUR as Mike talked about good margins for the retailers now recall they did by seasonal lower but sell through has been good their inventories in good shape. We commented on the supply chain is doing a heck of a job. This year were near 100% of time. So we've got a meaningfully fewer cancels plants. So they are there.
Speaker 9: transcript
Speaker 9: seasonal lower, but southways have been good. They're inventory in good shape.
Speaker 9: transcript
Speaker 9: We've come in on the supply chain doing a heck of a job this year. We're near 100% on time. So we've got a mini-fleaf fewer cancels plan. So they're, you know, they're, they're fairing well. I would say particularly the top three are doing really well. We come in, we did have some orders moving to Q3 from Q4, but we seem to have good momentum in the business. So I would say the outlook is positive or relationship with Amazon is good. Prime day, we exceed their expectations, but we look at it for on an annualized basis and we feel good about our overall Amazon. To promote a?, to the way something new is complete. To promote our Mt, for sure.
They are fairing, well I would say, particularly the top three are doing really well we comment we did have some orders move into Q3 from Q4, but we seem to have good momentum in the business. So I would say the outlook is positive our relationship with Amazon as good.
Richard Westenberger: Lastly, on this page here today, we've returned significant capital to shareholders this year. Over the last number of years, we've distributed virtually all of the free cash flow which the business has generated annually to our shareholders. Turning to page 12 for summary of the performance of our business segments in the third quarter, Q3 consolidated net sales declined $27 million versus last year, as we've covered growth in our U.S, wholesale business was offset by lower sales in U.S, retail and to a lesser extent lower international sales.
Prime day.
We exceeded our expectations, but we look at it on an annualized basis and we feel good about our overall Amazon business.
Speaker 3: transcript
Speaker 3: The key thing we're looking at, Jay, as Brian said, the seasonal business was booked down and in the second half this year, our wholesale customers had to make those decisions in the second half last year. That's the lead time. And that's when inflation hit and consumer demand pulled back. So they made those decisions on the second half seasonal bookings in the second half last year. And that's booked down about 10%. But by comparison.
Just.
Key thing we're looking at Jay.
As Brian said, the seasonal business was book down.
In the second half this year, our wholesale customers had to make those decisions in the second half last year. That's that's the lead time and Thats when inflation hits and consumer demand.
Richard Westenberger: Overall, profitability improved both in operating income and operating margin driven by our U.S, wholesale business. Corporate expenses increased by $9 million over last year, reflecting higher consulting and professional fees focused on our sales and earnings initiatives. On page 13, we've summarized the performance drivers for each of our business segments in the third quarter. U.S, retail sales declined 8% as macroeconomic factors including inflation and meaningfully higher interest rates continue to adversely affect consumer traffic and demand.
Pulled back so they made those decisions on the second half seasonable seasonal bookings in the second half last year and that that's booked down about 10%, but by comparison the high margin replenishment business for them and for US is planned up about 10% in the second half of this year, that's the everyday essentials thats the <unk>.
Speaker 3: transcript
Speaker 3: The high margin replenishment business for them and for us is planned up about 10% in the second half this year. That's the everyday essentials. That's the milk bread and eggs equivalent at the grocery store. So those are the big fixture fills of body suits, washcloths, towels, bibs, blankets, all the essentials that parents buy multiples of in those early days, months, years of life. That business, that replenishment business, that wholesale is trying to be up 10% in the second half.
Milk bread and eggs.
Equivalent at the grocery stores. So those are the big fixture fills of body suits wash cloths towels bibs blankets, all the essentials that parents by multiples of in those early days months years years of life that business that replenishment business at wholesale.
Richard Westenberger: Comparable sales declined 10%, we had previously forecasted a decline in the high single digits. As we said, we believe that warm leather in September likely affected consumer demand for fall product. Nearly all of U.S, retail shortfall to its Q3 sales forecast occurred in the month of September. As has been the case all year, our stores were the stronger performing component of our U.S, retail business with a more significant constant decline in e-commerce.
Trending to be up 10% in the second half.
Speaker 7: transcript
Speaker 7: Got it. Okay. Super helpful. Mike. Thank you so much. Welcome. Thank you.
Got it Okay Super helpful. Mike. Thank you so much.
Hmm.
Thank you.
Again, one moment for our next question.
Okay.
Speaker 2: transcript
Speaker 2: Next question will come from the line of Christopher Nordon, of Bank of America Global Research. Your line is open.
Our next question will come from the line of Christopher <unk> of Bank of America Global Research. Your line is open.
Richard Westenberger: While traffic in our U.S, retail business was lower versus last year, we achieved improved pricing and grew average transaction values. U.S, retail's operating margin was 13% down from just over 14% last year. The margin performance reflects expense delivery on lower sales, higher product costs, partially offset by improved realized pricing, and lower transportation costs. Segment operating profit was $49 million compared to $58 million last year and was consistent with our forecast largely due to good management of spending in response to lower top line sales.
Speaker 10: transcript
Speaker 10: Great, thank you guys, good morning. The first question I have is, can you just walk us through the level of gross margin expansion that's embedded in your fourth quarter guidance if you can try to help quantify some of the big drivers there? And then as a follow-up, as we zoom out and think about it until next year, can you talk about your confidence in stabilizing your retail business and maybe talk us through some of the initiatives you have underway to help turn around that business? Thank you very much.
Great. Thank you guys. Good morning, good morning I'll.
First question I have is can you just walk us through the level of gross margin expansion. That's embedded in your fourth quarter guidance. If you can try to help quantify some of the big drivers there and then as a follow up as we zoom out and think about into next year can you talk about your confidence in stabilizing their retail business and maybe talk us through.
Some of the initiatives you have.
Underway to help turn around that business. Thank you very much.
Speaker 4: transcript
Speaker 4: So Chris, on fourth quarter gross margin, we do have a significant expansion year over year planned. I think that's been a consistent element of our second half forecast.
Sure Chris.
Fourth quarter gross margin, we do have significant expansion year over year planned I think thats been a consistent element of our second half forecast.
Richard Westenberger: U.S, wholesale sales grew 4% driven by higher than planned demand for our seasonal products. Nearly all of our brands contributed to growth in the quarter. In addition to higher demand for seasonal product, we're seeing an improved trend in demand for products carried by many of our wholesale customers under automatic replenishment programs. Several of our customers had suspended their replenishment programs last year as they worked to reduce inventory commitment in light of the impact of inflation on consumer demand.
Speaker 4: transcript
Speaker 4: As you saw posted an over 200 basis point increase in the third quarter, we've got something above that plan for fourth quarter. And at both ends of our guidance range, it's above 300 basis points of gross margin expansion. I'd say as it was in the third quarter, the single biggest driver of that is...
As you saw posted in over 200 basis point increase in the third quarter, we've got something above that plan for fourth quarter.
At both ends of our guidance range, it's about 300 basis points of gross margin expansion I would say as it was in the third quarter. The single biggest driver of that is.
Speaker 4: transcript
Speaker 4: is lower transportation cost. These lower ocean freight rates will continue to benefit the fourth quarter. That's the most substantial. I'd say that's at least 200 basis points of the improvement we have planned.
As lower transportation cost is lower ocean freight rates will continue to benefit the fourth quarter. That's the most substantial I'd say, that's at least 200 basis points of the improvement we have planned.
Richard Westenberger: Quarter cancellations were lower than a year ago and part of result of better on-time shipping performance. U.S, wholesale's operating margin was elevated in the third quarter at 22%, up significantly from 13.9% a year ago, wholesale's profitability this year benefited from comparisons to some unusual costs incurred a year ago, including $7 million in cost to transition distribution activity from the West Coast and higher inventory charges last year. For the full year, in 2023, we're planning U.S, wholesales adjusted operating margins will be in the high teens, which is more consistent with the run rate for profitability in this part of our business.
Speaker 4: transcript
Speaker 4: Beyond that, we do have some further modest pricing realization improved.
And that we do have some further modest pricing realization improved.
Speaker 4: transcript
Speaker 4: Product costs are lower as well, as we talked about. We have a mixed benefit that accrues to the fourth quarter just because the US retail business will be a bigger proportion of our sales.
Costs are lower as well as we talked about we have a mix benefit that.
So the fourth quarter, just because the U S retail business will be a bigger proportion of our sales mix.
Speaker 9: transcript
Speaker 9: Mixed in the fourth quarter than it was in third quarter. We're expecting as as Mike said in improving sales trends So that that contributes and then finally and and and a much less significant factor is just our inventory position is much cleaner Then it was a year ago as we continue to work through our our pack and hold inventory I'm going to have less kind of inventory charges and related costs so But those those would be different for drivers in prime retail. Yeah, we're just saying terms of retail as we give you a better
Mix in the fourth quarter than it was in third quarter. We're expecting is as Mike said, an improving sales trend. So that contributes and then finally in a much less significant factor is just our inventory position is much cleaner than it was a year ago as we continue to work through our pack and hold inventory I'm anticipating we'll have less kind of inventory charges and related costs. So.
Richard Westenberger: International net sales declined 4%, principally due to lower demand in our Canadian retail business, particularly for cold weather apparel, given the unseasonally warm temperatures in September. With the arrival of colder temperatures as we've moved through October, we've seen a meaningful improvement in traffic and comp sales in our Canadian business. Sales in the wholesale component of our international business were lower, largely a function of bookings planned for 3rd quarter, which are now expected to ship in the 4th quarter.
But those would be the principal drivers Bryan retail, yes, I would just say in terms of retailers, we will give you a better.
Speaker 9: transcript
Speaker 9: I look in February , but we think about the business overall. I think we've made significant improvements in product. Richard talked about the fact that we've got cost reductions coming through the P&L and our approach in that was really threefold. Invest in making the product better, make select price increase, price reductions, I should say, and kind of our key volume items and then improving profitability. So we feel good about the product.
Outlook in February, but we think about the business overall I think we've made significant improvements in product Richard talked about the fact that we've got cost reductions coming through the P&L in our approach and that was really threefold investing and making the product better make select price increase price reductions I should say and kind of our key volume items and then improving profitability. So we feel.
Richard Westenberger: Sales in Mexico grew in Q3 driven by the retail component of the business. Mexico is a growth market for us. We've been making investments there and building out a great multi-channel business model, including stores, e-commerce, and wholesale. International operating margin was 11.7% compared to 14% last year. The decline was largely driven by expense, delivery, and higher product costs, which were offset in part by improved price realization and lower transportation costs. On page 14, we've included our Q3 year-to-date adjusted segment results for your reference.
What about the product our customer experience, we have teams working really hard to improve our customer experience, where we're reimagining our store experience. We shared some of the improvements in our side by side business. There we focus on kids different from baby toddler and our significant investments in our online experience through our website. We've just re platform that site with good headless architecture and <unk>.
Speaker 9: transcript
Speaker 9: Our customer experience, we have teams working really hard to improve our customer experience, where we're reimagining our store experience. We shared some of the improvements in our side by side business there. We focus on kids different from baby toddler.
Speaker 9: transcript
Speaker 9: And then significant investments in our online experience through our website. We've just replatformed that site with good headless architecture and got great creative on there. Marketing capabilities, we continue to strengthen. We've invested in technology and a team to strengthen our marketing capabilities. It'll be going next year. We're going to have.
Great creative on their marketing capabilities, we continue to strengthen that we've invested in technology and the team to strengthen our marketing capabilities. As we go into next year, we're going to have continued to focus on store growth. We're going to have 50, new beautiful stores in United States, which are the number one.
Speaker 9: transcript
Speaker 9: continue to focus on store growth. We're going to have 50 new beautiful stores in the United States, which are the number
Richard Westenberger: Turning to page 15, the summer we introduced a new brand campaign for Carter's with the tagline Love Every Moment, which reminds parents to savor each of the moments that come with raising small children. This campaign has been very well received by consumers with terrific early engagement. We recently launched a new series of emotional brand messages for the upcoming holiday season, all reinforcing the Love Every Moment theme. These messages can be seen in all of our direct consumer marketing channels and in our retail stores.
Speaker 9: transcript
Speaker 9: generation of new customer acquisition for our company. And overall, I think we've got a strong chain. We've got a lot of good initiatives. We're doing the right things, I think, from in terms of in a difficult environment. Imagine the business effectively, a high margin business with a strong outlook for the future. And some of it will turn on macro too. We are assuming that things will improve as we go forward with inflation moderating and coming off as some of the challenges we've had this year.
Generation of new customer acquisition for our company.
And overall I think we've got it we've got a strong team we've got a lot of good initiatives. We're doing the right things I think from in terms of in a difficult environment managing the business effectively a high margin business with a strong outlook for the future and some of it will turn on macro two we are assuming that things will improve as we go forward with inflation moderating and coming off of some of the.
Richard Westenberger: Additionally, we make our great photography and creative available to our wholesale customers for their use in presenting the Carter's brand in their own marketing programs. For Millennial and Gen Z parents clothing, which is organic and sustainable, has become increasingly important as they build out their children's wardrobes. As shown on page 16, our newest brand, Little Planet, is focused on sustainable materials and fabrics. While customers love these attributes, they've embraced Little Planet first and foremost because it's beautiful product with a clean and elevated aesthetics.
Challenges we've had this year.
Great. Thank you.
Okay.
Thank you.
One moment please for our next question.
Speaker 10: transcript
Speaker 10: Our next question will come from Paul Lee's business of City. Your line is open. Hey, thanks guys. I'm curious if the weather is impacting traffic and, you know, and the business overall or is it?
Our next question will come from Paul Lee Please with Citi. Your line is open.
Hey, Thanks, guys.
I'm curious if the weather is impacting traffic.
Richard Westenberger: Little Planet is delivering good growth for us this year through its significantly expanded presence in our own stores and in the wholesale channel with a number of our leading customers. Moving to page 17, continuing our heritage as a product innovation, we recently introduced a new brand in our baby assortment called Purely Soft. Purely Soft products are made from an all season eco-friendly fabric that has a distinctive silky soft feel. The Purely Soft baby and sleeve collection is currently available in 200 Carter stores and on our website, we're planning to expand the distribution of Purely Soft to all of our Carter stores next spring with an expanded assortment of salads and prints.
And then the business overall or is it.
Speaker 10: transcript
Speaker 10: just the seasonal piece of the business where it becomes more of a conversion issue or is it impacting traffic overall? And are you seeing that same pressure on cell thruze within the wholesale channel amongst your big partners?
Just the seasonal piece of the business.
It becomes more of a conversion issue or is it impacting traffic overall are you seeing that same pressure on sell throughs within the wholesale channel amongst your big partners.
Speaker 3: transcript
Speaker 3: Yeah, it's largely a traffic issue, both online and in the stores. And where weather is cooler, traffic is better. So it's not a conversion rate that's actually been good. Conversion rate, those who come.
Largely a traffic issue both online and in the stores and where weather is cooler traffic is better. So it's not a conversion rates have actually been good conversion rate those who are.
Speaker 3: transcript
Speaker 3: are buying those who and they like the product offerings to conversion has been good the average transaction values have been higher But it's largely been a traffic issue and we're whether it's cooler more seasonal traffic traffic has been better I would say we have visibility into our performance every major Retail customer that we do business with and I would say Trent trends you've seen a noteworthy Impact of whether With our wholesale customers as well for our product
Are buying those and they liked the product offerings and conversion has been good the average transaction values have been higher but it's largely been a traffic issue and where weather is cooler more seasonal traffic traffic has been better and I would say we have visibility into our performance every measure.
Richard Westenberger: Additionally, this brand is available in all of our major wholesale customers which carry our flagship Carter's brand. Turning to page 18, in addition to opening new stores, we've been working to improve the productivity and customer experience in our existing stores. In 150 of our former side-by-side co-branded stores, we've created new distinct baby and toddler and kid experience, as well. This new presentation has increased the focus and impact of these product categories which address different age segments. Our results so far have been very positive. We're testing additional product and brand presentations which we hope will inform further improvements to new and existing stores.
Retail customer that we do business with and I would say trends <unk> seen a noteworthy impact of weather.
With our wholesale customers as well for our products.
Speaker 9: transcript
Speaker 9: Paul, I would say the customers, it's a big three we call Target Walmart in Amazon. They've got a little more of a natural traffic flow with groceries and essentials and what have you. So those that component of the whole business, I would say is less impacted by some of the traffic challenges. They're impacted, but if you're selling groceries as well, you're gonna have more regular linear traffic trends.
Got it.
Paul I would say that customers that is the big three we called target Walmart Amazon and they've got a little bit more of a natural traffic fall with groceries and essentials and what have you. So those that component of the wholesale business I would say is less impacted by some of the traffic challenges. They are impacted but if youre selling groceries is while youre going to have you're going to a more regular linear traffic trends.
Richard Westenberger: Moving to page 19 with the next generation of parents now increasingly beginning their shopping research and information gathering on social media platforms are branded content on TikTok and Instagram continues to resonate. We recently surpassed 200,000 followers and 1 million likes on TikTok and doubled our monthly Instagram engagement rate by providing content relevant to families with young children ranging from education, clips, highlighting our product expertise to in store shopping videos. The next few pages feature some of our product and marketing plans for our exclusive brands at Target, Walmart, and Amazon.
Speaker 3: transcript
Speaker 3: And Tariff, I mean, what was the 50 new stores that you mentioned just on the last responses that what was that for? Was that for next year or over the next couple of years? This year, this year, that's the run rate right now. We'll probably open up better part of 50. This year, assuming we continue to see good, good experience, we're working on the 2024 openings right now. We assume that we'll probably open up better part of 50 next year as well.
And sorry, if I missed it what was the 50 new stores that you mentioned just in the last responses.
Was that for was that for next year or over the next couple of years.
Here this year, that's the run rate right now, we'll probably open up better part of 50. This year, assuming we continue to see good experience were working on the 2024 openings right now we assume that we will probably open up better part of 50 next year as well.
Speaker 3: transcript
Speaker 3: How about a net opening though? Are you thinking about some closing as well? Just as you've kind of seen the last two years of performance, there are stores that you need to reevaluate after the week performance in DTC for the past couple of years. We do probably close by, it does in low margin stores. The sheer win lease is expired rarely do we close a store early, because the client share of our stores, nearly all of our stores are cash flow positive.
Net openings, though are you thinking about some closings as well just as you've kind of seen the last two years of performance are the stores that you need to reevaluate.
Richard Westenberger: Beginning on page 20, Carter's exclusive brand for Target just when you recently launched its new holiday fashion assortment. Just when you marketing its featured across targets, websites, social and search channels, and influencer network collectively supporting growing demand from target customers. Turning to page 21 and Child of Mine Carter's exclusive brand for Walmart. With the introduction of our new fashion styles and our enhanced in store presentation, Child of Mine has significantly increased its brand awareness among new parents who are shopping at Walmart.
After the weak performance in DTC for the past couple of years, we do Paul probably closed about a dozen low margin stores. This year when leases expire rarely do we close a store early because the lion's share of our stores nearly all of our stores are cash flow positive. So rarely re close them early but when a lease comes up for renewal you have to decide whether or not youre going to re up for another 10.
Speaker 3: transcript
Speaker 3: So rarely we close them early, but at least comes up for renewal. You have to decide whether or not you're going to reupt for another 10 years.
Speaker 3: transcript
Speaker 3: And we've done in recent years, we just assume let that least expire and move to a better location where there's better traffic patterns, better cotemnancy, better...
10 years, and we've done in recent years, we just assume let that lease expire and move to a better location, where there's better traffic patterns better co tendency better condition of the center. We're seeing good good results with the new store openings, but we will going forward the.
Richard Westenberger: Some recent Child of Mine brand enhancements include new baby and toddler holiday dressie collections perfect for special moments when families gathered together for the holidays. These collections along with our best-selling layout styles are featured across Walmart's digital and store marketing channels. Moving to page 22, our exclusive branded Amazon Simple Joys has now picked off the holiday shopping season on Amazon. Many brands have some level of presence on Amazon. Our Simple Joys assortment on Amazon is extensive and provides everything apparent needs for their little ones.
Speaker 3: transcript
Speaker 3: center. We're seeing good, good results with the new store openings, but we'll go and forward the next year we'll probably close ten or more stores as well. We don't, we did the heavy lifting on store closures when the pandemic hit probably closed about 140 stores.
Next year, we will probably close 10 or more stores as well we don't we did the heavy lifting on store closures when the pandemic hit probably closed about 140 stores since the pandemic probably gave up some portion of $140 million in sales, but by doing that we've actually made retail more profitable because we pushed more store more sales into existing store.
Richard Westenberger: Additionally, the vast majority of our Simple Joys products on Amazon have tens of thousands of consumer reviews with an average customer rating of 4.7 stars. Our Simple Joys brand store pages on Amazon have recently been refreshed, providing Amazon's customers with an improved shopping experience, and access to our new holiday campaigns.
Speaker 3: transcript
Speaker 3: pandemic probably gave up some portion of $140 million in sales, but by doing that, we've actually made retail more profit.
Speaker 3: transcript
Speaker 3: because we pushed more sales into existing stores. So what we call that transfer benefit was meaningful. It was probably about 25% of the sales from close stores went over to existing stores at higher margins.
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We call that transferred benefit was meaningful it was probably about 25% of the sales from store closed stores went over to existing stores at higher margins. So we continue I think there's something reason I think some portion of 350 stores come up for lease renewal at least consideration that every every year. It gives us an opportunity to.
Speaker 3: transcript
Speaker 3: So we continue. I think there's something recent. I think some portion of 350 stores come up for at least consideration every year gives us an opportunity to close stores that we don't think are going to contribute meaningful, meaningfully, to the growth in sales and profitability in the years.
Richard Westenberger: Turning now to our outlook for the balance of the year, beginning on page 24. Today, we're tightening the high end of the range of performance we believe is possible with two very important months left to go in the year. There are a number of factors which we believe will contribute to continued improved results in Q4, particularly in profitability. Importantly, we're assuming consumer demand trends are better than we experienced in the third quarter, and we're encouraged by the response today to our fall and holiday events related assortments including family dressing and Christmas PJs.
Closed stores that we don't think are going to contribute meaningful meaningfully to the growth in sales and profitability in the years ahead.
Speaker 10: transcript
Speaker 10: Okay, thanks, but the comps have been down pretty significantly for two years in a row despite benefiting from that transfer. So how do we connect the dots there?
Alright, Thanks, Mike.
Comps have been down pretty significantly for two years in a row, despite benefiting from that transfer. So how do we how do we connect the dots there.
Speaker 3: transcript
Speaker 3: Well, you need a better mix of stores. You need to drive more traffic to those stores through better, more effective marketing capabilities. We have new marketing personalization capabilities. We've made significant investments in e-commerce. But the more we open up stores, closer to the consumers and close some of these outlet stores that are located further away. I can tell you, we're seeing good returns on new store openings. The number one source of new customer acquisition and about 70% of kids at Ferrell is bought in stores. So we can say to believe stores are important.
Well you need a better mix of stores you need to drive more traffic to those stores through better more effective marketing capabilities, we have new marketing personalization capabilities. We have made significant investments in e-commerce, but the more we open up stores closer to the consumers and close some of these outlet stores that are located further away.
Richard Westenberger: Our supply chain performance has improved meaningfully compared to last year, enabling much better on time delivery performance for our wholesale customers. We also have a better level and mix of inventories, particularly in our retail businesses. We expect fourth quarter earnings to benefit from the contributions from the new high margin stores which we've opened, along with the closure of low margin stores. We're forecasting good expansion and growth margin driven by improved pricing and lower ocean freight rates. We've continued to plan our inventory commitments conservatively, which we believe will drive better sell truths and price realization, and, lastly, we're planning for a lower average share count given our progress with share of our purchases.
We're seeing good returns on new store openings. It's the number one source of new customer acquisition and about 70% of kids apparel is bought in stores. So we continue to believe stores are important.
Thanks, guys. Good luck thank.
Thank you.
Speaker 11: transcript
Speaker 11: Thank you.
Thank you.
Speaker 3: transcript
Speaker 3: This will end the Q&A portion of the conference. I would now like to turn the conference back to my KC for closing remarks. Thanks Chris. Thank you all very much for joining us this morning. We wish you and your families a happy, healthy holiday season. We'll update you on our progress in February . Goodbye everyone.
This will end the Q&A portion of the conference.
I'd now like to turn the conference back to Mike Casey for closing remarks. Thanks, Chris. Thank you all very much for joining us. This morning, we wish you and your families a happy healthy holiday season, we will update you on our progress in February Goodbye everyone.
Richard Westenberger: Moving to page 25 in our specific thoughts on what we think is possible for the fourth quarter. Our outlook for fourth quarter sales has been adjusted in part due to the higher than planned wholesale demand, procedural product which we realized in the third quarter. We're planning net sales in the range of $862 to $877 million. As I said, we're planning for good growth margin expansion in Q4 with SG&A dollars planned down.
Speaker 2: transcript
Speaker 2: This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
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This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
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Richard Westenberger: Below the line, we're forecasting a higher effect of tax rate and lower shares outstanding. Adjusted operating income is planned in the range of $133 to $143 million. And lastly, we're forecasting adjusted EPS in the range of $2.50 to $2.72. Now turning to page 26, as shown on this slide, if we're successful with our fourth quarter plans, the resulting second half would represent meaningfully improved performance relative to the first half of the year.
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Richard Westenberger: We're expecting better second half sales trends in all of our business segments and on second half profitability, we're planning meaningful improvement relative to our results in the first half of the year and the second half of last year. Second half adjusted operating income is expected to grow over last year in the range of 9 to 14% within adjusted operating margin of roughly 14%.
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Richard Westenberger: Given all this, our expectations for where our full year results will land are summarized on page 27. We're planning net sales in the range of $2,950 million to $2,965 million, a modest revision to the high end of our previous guidance for sales given the slowdown in demand we experienced in September and October. Adjusted operating income is expected in the range of 325 to $335 million. Again, down somewhat at the high end of the range from our prior forecast.
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Richard Westenberger: Earnings for share are planned in the range of $5.95 to $6.15, which is consistent with our prior outlook. As noted earlier, operating cash flow is now expected to be over $350 million in improvement over our previous view. Through October, we're generally running in line with our forecast. I'll turn to note that the more significant volume weeks of the fourth quarter remain ahead of us. November and December combined represents about 70% of the sales and profitability we're planning for the fourth quarter. The arrival of more consistent, colder weather and closer proximity to the holidays have historically been catalysts in our business in the fourth quarter.
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Operator: All of our teams are focused on finishing 2023 in very strong fashion and with these questions, please press star 1-1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Stand by at the compile of the Q&A roster. One moment please for our first question.
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Warren Chang: Our first question will come from Warren Chang of Evacore ISI. Your line is open. Hey, good morning.
Michael Casey: I just wanted to ask, or I want to understand the expectation that's vacant the fourth quarter guidance. So it sounds like the exit rate from second quarter was down the high-teens range. Did you see an improvement in the US cost in October from that September level? And also, can you remind us, you know, typically if there's a late start this season, is there a catch-up that occurs when the weather cools? So is it more of a push-out of the sales or are those September and October sales just sort of lost for this season?
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Michael Casey: Warren, I'd say we've seen a strong correlation between the trend in our retail sales and the warmer weather. Whether it's cooler, the trends are better. So for the fourth quarter, we're assuming a high single to low double-digit negative comp in retail sales in the fourth quarter. The trend in October did slow relative to September. So we have seen, to put it in context, we're probably running some portions about $8 million off our retail plan in the fourth quarter.
Michael Casey: It's at nearly $900 million quarter and we see some upside and the wholesale side of our business. So again, we saw sluggishness that began in the second week of September and even with that sluggishness, we outperformed the expectations that we shared with you in July. We were running probably a solid negative seven comp through most of the third quarter and then started to lose ground in the final weeks of September. Then that continued in October.
Michael Casey: It's not unusual. It's supposed to be 80 degrees in New York this weekend. That doesn't exactly lend itself to shopping for fall and holiday product. Next week in New York, it's going to dip into the thirties at night in the highs in the fifties. So where we've seen that kind of weather change, we've seen a meaningful improvement in the retail performance. We've already started to see Canada. Colder weather snow has come to Canada and we've seen a meaningful change in the trend in their performance. We expect to see it as we head into the final weeks of this year. Gotcha. Yeah, I think October was one more than May this year.
Michael Casey: And then Mike, another is a higher level question for you. If I step back, your gross margins are running more than 400 basis points higher than pre-pandemic levels. But your comps have been negative for almost two years now. And I think we all understand the pressure on your consumer, especially from have been inflationary in nature. Has there been any thought on revisiting your approach to pricing in this environment and perhaps using that as a tool to help stabilize the cost?
Michael Casey: Well, we have revisited the pricing. The pricing is competitive. We have good people at Carter's looking at our pricing relative to our competitors every day. We have raised our prices because cost went up. Great rates went up. But our competitors have raised their prices as well. Our biggest competitor are the private label brand competitors. And we're priced within a buck or two of the private label brands. And what we've seen over time, as long as we're priced within a dollar or two, we are competitive.
Michael Casey: We have tested. We have very smart people testing different prices. We are pricing configurations, different prices. We've tested lower prices. It did not drive a change in unit velocity that would suggest that we should do that on a more sustained basis. So I think what we've seen in terms of the negative comps is more a reflection of the consumer's been through a roller coaster of experiences in recent years. Keep mine as Richard shared with you.
Michael Casey: We had record profitability in 2021. We came roaring back from the worst of the disruption. From the pandemic in 2020, actually saw 2022 get off to a strong start had a high single digit positive comps in our retail business in the early months of 2022 as we moved through 2022. And all of a sudden gas prices doubled and food prices went up. And the consumer couldn't find baby formula. And then when inflation teams, good retailers, some of our some of our largest wholesale customers announced a significant decrease in the trend and consumer traffic and purchases.
Michael Casey: So I don't think we're unique in this. If we felt as though we lowering prices would drive stronger comps, we would do it. We feel as though we are competitive. This is a very profitable company. We have been focused during this time period on margin preservation and cash flow. Some that we compete with aren't profitable at all. It's a function of the strength of their product offering and how they buy the inventory.
Michael Casey: Most of the price realization we've realized in recent years was largely through good inventory management. I've always with the strength of the product offering. Right. But it's largely through inventory management. Our clearance units in the third quarter were down some portion of 20%. So if you don't have clearance. You have a better mix of product and you're getting paid for better mix of products. So that's largely what we've seen in as a driver in our price realization.
Michael Casey: We'll continue to monitor it. Again, we have people looking at it every day. And we'll continue to look at through through the balance of the year. We were more promotional than planned in the tail end of the third quarter. We'll probably be more promotional than planned in the fourth quarter just given the slow start. But we are less promotional than last year, largely given the strength of the product offering at a better level and mix of inventory. But in times like this, you focus on the things you can control and which can control are the level of inventory, the strength of the product offering and continue to focus on cash flow.
Warren Chang: Thanks, Mike. Thanks, James. Good luck. Thanks, Warren. Thank you. And one moment, please. We're on the next question.
Irwin Boruchow: Next question. We'll come from the line of Lake Boruchow of Wells Fargo.
Michael Casey: The online news open. Hey, good morning, guys. A couple of questions from me. Two of them actually, I think, piggyback off of what Warren just asked you, but Mike, just on the comps, understand the guidance for 4K, what's embedded. Can you just explicitly let us know a quarter of the day where you're running on the comps? Second question is on the product cost. I think you said you expected those to be favorable into the back half of this year and early next year, but I think Mike, you said something along the lines of sharpening price points or gives you an opportunity to sharpen your price points.
Michael Casey: Can you elaborate on what you mean? Are you talking about putting some price investment into the business, not not flowing all that AUC into the margin? It's kind of curious what exactly you meant. And then I have one more, but I'll follow.
Richard Westenberger: Sure. So heading into the, you know, into next year, we have visibility to wholesale demand for our spring and summer 2024 product offerings, given the good work, our supply chain team is done working with our merchants and designers. The product costs are expected to be lower going into the first half of next year. And so because the product cost are lower, the pricing will be for those early deliveries for spring and summer 24 will be the pricing will be comparable to to lower.
Richard Westenberger: So we're expecting we are expecting margin expansion. So again, we see some opportunities on some key item price points to test lower price and we see less need for increasing prices given the progress we've made on ocean freight rates and product costs going into next year. And again, our comps in the third quarter were down 10 and right now in October, we're running down about 16.
Richard Westenberger: Great. And the last question, maybe for Richard, I think you talked about SGNA down and 4Q. You guys have really been tight on expenses. Is there any initial thoughts on SGNA into next year? Should we continue to expect you guys to really keep that SGNA tight and just kind of curious if there's any initial views you can give us on the expense line. Thank you guys. I would say we continue to my point be managing for profitability, margin preservation and cash flow.
Richard Westenberger: Those are the things that we have the most control over in this kind of environment. We've done a lot of very good work. Looking at our cost structure of the organization, I'm really pleased with how they responded to the challenge. Everybody understands the environment that we're in and the best thing we can do is just keep ourselves as lean as possible. As you saw in the press release this morning, we did take some charges related to organizational restructuring that has lowered our staffing costs.
Richard Westenberger: There's other things that we've been looking at and making good progress on indirect procurement. We've been focused on marketing effectiveness. So our focus will remain on SGNA keeping it as low as possible. I think too early to be specific on next year's plans. But you can be sure that it's an ongoing discipline and an area of focus for us. And we've been we've made good progress in managing at this issue, here.
Richard Westenberger: Great, thank you guys, Trevor. Thank you.
Operator: Again, one moment please for the next question.
Jim Chartier: Next question. We'll come from the line of Jim Chartier of Ones, Cresby and Hart. Your line is open. Hi, good morning. Thanks for taking my question. Just wanted to talk about product costs, you know, given kind of a big reduction in cotton over the last, you know, 12 plus months. I would have expected maybe some of that to flow through into lower product costs in the back half of this year. So, it's hoping you could talk about, you know, what some of the offsets to the lower cotton costs were for the back half of this year.
Jim Chartier: And then maybe what some of the other, you know, what some of those factors look like for spring of next year and fall of 24. Thanks. So Jim, I would say we are starting to see the benefit of lower cotton and other input costs in our product costs. I think that leads into the P&L kind of over time. You receive that product because in inventory and then you realize some of that margin upside when you sell the product.
Jim Chartier: Recall that we're still working through that pack and hold inventory that was procured at a time when when product costs were elevated. What we are seeing a tremendous benefit on is in these in-bound transportation costs. That's a big source that gets inventory into the cost of the inventory as well. So we're expecting good favorability from that here in the fourth quarter. That is a benefit that will continue through the first half of next year as well.
Jim Chartier: Once we get to mid-year next year, we're more or less kind of anniversary those lower rates that have benefited the second half of this year. But we are planning for lower product costs in the first half of the year. I think the biggest determinant of that even beyond cotton is just worldwide capacity. The global marketplace has meaningfully slowed down and we have terrific teams here in Atlanta and in Hong Kong who work with our factories.
Jim Chartier: We've had a series of meetings top-to-top meetings with our largest vendors recently and they're hungry. They love doing business with carters. We've been a source of great growth over the years, a good partner for them as well and they are hungry for business. So I think that available worldwide capacity is the bigger determinant. Cotton certainly is a benefit to us but we're seeing good capacity across Asia and we think that will drive a benefit in the first half of next year. We don't have complete visibility to the second half of the year yet. Hopefully we'll have more of that to share with you on the next call. Great. Thank you.
Michael Casey: One moment please for our next question. And our next question will come from Jay Sol of UBS. Your line is open. Great. Thank you so much. Maybe Mike, I just want to follow up on the wholesale business. I think you touched on this, but can you elaborate a little bit more on how this self-rew is at your big wholesale customers. I mean, how do you see the product? I do see the sales moving in like Amazon Prime Day for example in October. How did you see that event for the company? I think you can tell us a little bit more detail on that. That'd be super helpful.
Michael Casey: Sure, Brian. Yeah, Jay, the self-rews have been good in wholesale. I'd say follow is better than last year. Now, higher AURs as Mike talked about better good margins for the retailers. Now, recall they did buy seasonal lower, but the self-rews have been good. They're inventories and good shapes. We come in on the supply chains doing a heck of a job this year. We're near 100% on time. So we've got a meaningfully fewer cancels plans.
Michael Casey: So they're, you know, they're fairing well. I would say particularly the top three are doing really well. We did have some orders moving to Q3 from Q4, but we seem to have good momentum in the business. So I would say the outlook is positive or relationship with Amazon is good. Prime Day, we exceed their expectations, but we look at it on an annualized basis and we feel good about our overall Amazon.
Michael Casey: Business. And just the key thing we're looking at, Jay is as Brian said, the seasonal business was booked down in the second half this year. Our wholesale customers had to make those decisions in the second half last year. That's the lead time. And that's when inflation hit and consumer demand pulled back. So they made those decisions on the second half seasonable seasonal bookings in the second half last year. And that's booked down about 10%, but by comparison, the high margin replenishment business for them and for us is planned up about 10% in the second half this year.
Michael Casey: That's the everyday essentials, that's the milk bread and eggs equivalent at the grocery store. So those are the big fixture fills of bodysuits, washcloths, towels, bibs, blankets, all the essentials that parents buy multiples of in those early days, months, years, years of life. That business, that replenishment business, that wholesale is a training to be up 10% in the second half. You got it. Okay, super helpful. Mike, thank you so much. Welcome.
Michael Casey: Thank you. Again, more moment for our next question. Our next question will come from the line of Christopher Nardone, of Bank of America Global Research. Your line is open. Great. Thank you, guys. Good morning. The first question I have is, can you just walk us through the level of gross margin expansion that's embedded in your fourth quarter guidance if you can try to help quantify some of the big drivers there? And then as a follow-up, as we zoom out and think about into next year, can you talk about your confidence in stabilizing their retail business and maybe talk us through some of the initiatives you have underway to help turn around that business? Thank you very much.
Michael Casey: Sure, Chris. On fourth quarter gross margin, we do have a significant expansion year-over-year plan. I think that's been a consistent element of our second half forecast. We, as you saw, posted an over 200 basis point increase in the third quarter. We've got something above that plan for fourth quarter. And at both ends of our guidance range, it's above 300 basis points of gross margin expansion. I'd say, as it was in the third quarter, the single biggest driver of that is lower transportation costs.
Michael Casey: These lower ocean freight rates will continue to benefit the fourth quarter. That's the most substantial. I'd say that's at least 200 basis points of the improvement we have planned. Beyond that, we do have some further modest pricing realization improved product costs are lower as well as we talked about. We have a mixed benefit that accrues to the fourth quarter is because the US retail business will be a bigger proportion of our sales mix in the fourth quarter than it was in third quarter.
Michael Casey: We're expecting, as Mike said, an improving sales trend for that contributes. And then, finally, and a much less significant factor is just our inventory position is much cleaner than it was a year ago. As we continue to work through our pack and hold inventory, I'm anticipating we'll have less inventory charges and related costs. Those would be the principal drivers in prime retail.
Michael Casey: Just saying in terms of retail, we'll give you a better outlook in February, but we think about the business overall. I think we've made significant improvements in product. Richard talked about the fact that we've got cost reductions coming through the PNL and our approach in that was really threefold. Investing in making the product better makes select price increase, price reductions, I should say, and kind of our key volume items and then improving profitability.
Michael Casey: So we feel good about the product. Our customer experience, we have teams working really hard to improve our customer experience, where we're reimagining our store experience. We shared some of the improvements in our side by side business there. We focus on kids different from baby toddler and then significant investments in our online experience through our website. We've just re-platformed that site with good headless architecture and got great creative on there. Marketing capabilities, we continue to strengthen, we've invested in technology and the team to strengthen our marketing capabilities.
Michael Casey: It'll be going next year. We're going to have continued to focus on store growth. We're going to have 50 new beautiful stores in the United States, which are the number one generation of new customer acquisition for our company. Overall, I think we've got a strong chain. We've got a lot of good initiatives. We're doing the right things, I think, in terms of a difficult environment. Imagine the business effectively, a high margin business with a strong outlook for the future.
Michael Casey: And some of it will turn on macro too. We are assuming that things will improve as we go forward with inflation moderating and coming off as some of the challenges we've had this year. Good, thank you. Thank you. One moment please for our next question. Our next question will come from Paul Lejuez of City. Your line is open.
Michael Casey: Hey, thanks guys. I'm curious if the weather is impacting traffic and business overall or is it just the seasonal piece of the business where it becomes more of a conversion issue or is it impacting traffic overall? Are you seeing that same pressure on self-throughs within the wholesale channel amongst your big partners? It's largely a traffic issue both online and in the stores and where weather is cooler traffic is better. So it's not a conversion rates have actually been good.
Michael Casey: Conversion rates, those who come are buying those who they like the product offerings to conversion has been good. The average transaction values have been higher but it's largely been a traffic issue and we're whether it's cooler or more seasonal traffic traffic has been better. I would say we have visibility into our performance, every major retail customer that we do business with and I would say Trent Trent, you've seen a noteworthy impact of weather with our wholesale customers as well for our products.
Michael Casey: Paul, I would say the customer is a big tree we call target Walmart and Amazon. It's got a little more of a natural traffic flow with groceries and essentials and what have you. So those that component of the wholesale business I would say is less impacted by some of the traffic challenges. They're impacted but if you're selling groceries as well you're going to have more regular linear traffic trends.
Michael Casey: And part of my mind is what was the 50 new stores that you mentioned just in the last responses that what was that for? Was that for next year or over the next couple of years? This year, this year. That's the run rate right now. We'll probably open up better part of 50. This year, assuming we continue to see good good experience, we're working on the 2024 openings right now. We assume that we'll probably open up better part of 50 next year as well.
Michael Casey: How about a net opening, though? Are you thinking about some closing as well? As you've kind of seen the last two years of performance, there are stores that you need to reevaluate after the week performance in DTC for the past couple of years. We do probably close by a dozen low margin stores this year when leases expire? Rarely do we close a store early? Because the client share of our stores. Nearly all of our stores are cash flow positive.
Michael Casey: So rarely we close them early, but at least comes up for renewal. You have to decide whether or not you're going to reupt for another 10 years. And we've done in recent years, we just assume let that lease expire and move to a better location where there's better traffic patterns, better co-temancy, better condition of the center. We're seeing good results with the new store openings, but we'll go and forward the next year.
Michael Casey: We'll probably close 10 or more stores as well. We did the heavy lifting on store closures when the pandemic had probably closed about 140 stores since the pandemic. Probably gave up some portion of $140 million in sales, but by doing that, we've actually made retail more profitable because we've pushed more stores, more sales into existing stores. So what we call that transfer benefit was meaningful. It was probably about 25% of the sales from close stores went over to existing stores at higher margins.
Michael Casey: So we continue. I think there's something recent. I think some portion of 350 stores come up for lease renewal, lease consideration every year, gives us an opportunity to close stores that we don't think are going to contribute meaningful, meaningfully, to the growth in sales and profitability[inaudible] Thanks, but the cons of them down pretty significantly for two years in a row despite benefiting from that transfer.
Michael Casey: So how do we connect the dots there? Well you need a better mix of stores. You need to drive more traffic to those stores through a better more effective marketing capabilities. We have new marketing personalization capabilities. We've made significant investments in e-commerce, but the more we open up stores closer to the consumers and close some of these outlet stores that are located further away. I can tell you it's we're seeing good returns on new store openings. It's the number one source of new customer acquisition and about 70% of kids apparel is bought in stores. So we continue to believe stores are important.
Irwin Boruchow: Thanks, guys. Good luck. Thank you.
Operator: This will end the Q&A portion of the conference.
Michael Casey: I would now like to turn the conference back to my Casey for closing remarks. Thanks Chris. Thank you all very much for joining us this morning. We wish you and your families a happy, healthy holiday season. We'll update you on our progress in February. Goodbye everyone.
Operator: This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
Operator: Thank you.