CRI - NYSE

Welcome to Carter's Second Quarter Fiscal 2024 Earnings Conference Call. On the call are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Chief Financial Officer and Chief Operator Officer; Kendra Krugman, Chief Creative and Growth Officer; and Sean McHugh, Treasurer. Please note that today's call is being recorded. I'll now turn the call over to Mr. McHugh.

Thank you, and good morning, everyone. We issued our second quarter 2024 earnings release earlier today. The release and presentation materials for today's call are available on our Investor Relations website at ir.carters.com. Before we begin, note that statements about items such as the Company's outlook are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings and the earnings release and presentation materials posted on our website. In these materials, you will also find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Mike.

Thanks, Sean. 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. Our sales in the second quarter were in line with our forecast. We saw good growth in our U.S. Wholesale sales in the quarter. Our U.S. Retail and International sales were lower than expected. Earnings in the second quarter were meaningfully higher than planned driven by a record gross profit margin. We continue to curtail spending, which enabled growth in operating income for the quarter. Cash flow through June trended better than planned. We ended the quarter with lower inventories, a higher cash position, no seasonal borrowings, lower net interest costs and over $1 billion in liquidity. Our continued focus on margin preservation and cash flow enabled over $90 million to be distributed to our shareholders through dividends and share repurchases in the first half this year. For the first half, our earnings per share were up 13%. Sales were down 5%. In the second quarter, we saw a good response to our new summer product offerings, including our Americana-themed collections outfitting children for their summer holiday picnics and [praise]. Our best-selling products included our new Little Planet and PurelySoft collections each have elevated styling and fabrications. Sales of our Baby and Toddler product offerings were comparable to last year. Our playwear sales were lower, which we believe reflects the slow start to spring selling earlier in the quarter and the more discretionary nature of those product offerings. In the second quarter, we saw higher and earlier demand in our U.S. Wholesale segment. Our growth in Wholesale was driven by our exclusive brands. During this inflationary cycle, we are benefiting from consumers choosing the ease of one-stop shopping with mass channel retailers where they can purchase groceries, diapers, baby formula and children's apparel at one convenient location. Carter's has an unparalleled competitive advantage as the largest supplier of young children's apparel to these retailers. We also saw growth with our flagship Carter's brand in the second quarter. We believe we are seeing the benefit of our strategies tailored to support the unique needs of department store and club store retailers. Our wholesale sales have a high mix of Baby apparel. Baby apparel continues to be our best-performing age segment and contributes over 50% of our consolidated apparel sales. Baby apparel is a less discretionary purchase and Carter's has the largest share of Baby apparel in North America. We saw double-digit growth in our replenishment wholesale sales in the second quarter, which were better than planned. Replenishment sales reflect the sell-throughs of our high-margin essential core products including bodysuits, washcloths, towels, bibs, blankets and Baby sleepwear. We expect replenishment sales will be a good source of growth for us in the balance of the year. Sales in our U.S. Retail segment were lower in the quarter due to traffic and conversion rates. Our comparable sales were down 12% in the quarter, a few points lower than expected. Recall that our second quarter got off to a slow start in April with the earlier Easter holiday and late arrival of warmer weather. As weather warmed up in May and June, the trend in our sales improved. July and month-to-date comparable sales are down 11% due to lower traffic. Our store sales were down 8% in the quarter. E-commerce sales were down 16%. In the second quarter, we saw very little variation in comparable sales by store type or by region. The lack of variation in performance, we believe, suggests a macro slowdown in consumer spending. What we find interesting, but not surprising, is the variation in our comparable U.S. Retail sales based on demographics. Over the past two years, we saw a six to seven-point difference in our comparable store sales based on household incomes. Our stores located in markets with annual household incomes over $100,000, comped meaningfully better than markets with household incomes of $70,000 or less. That six to seven-point spread narrowed to two points in the second quarter this year. It's been reported that nearly 50% of consumers in the United States with annual incomes of $100,000 or more are now living paycheck to paycheck. It's also been reported that more of those higher income consumers are now shopping at Walmart. We believe we are benefiting from that shift in shopping preference this year with the growth of our Child of Mine brand. Our newer stores are comping better than older stores. Comparable sales from stores opened in the post-pandemic period were down about 2% in the first half this year. Stores opened since 2020 are expected to contribute about $100 million in sales this year and about $20 million in EBITDA. We plan to continue opening stores as long as the unit economics are attractive relative to other investment opportunities. Nearly 70% of children's apparel is purchased in stores in our stores are our number one source of new customer acquisition. Most of our stores are off-mall and provide convenience for families with young children. We plan to continue closing low-margin stores in declining centers as leases expire. We believe market conditions weakened in the second quarter. Consumer confidence peaked in March this year to a level not seen since July of 2021. We had our best comparable sales in March. By July, the Confidence Index had dropped to its lowest level in eight months. Since our last update in April, other retailers have reported a slowdown in consumer demand. In the second quarter, we saw very aggressive promotions by our competitors with thrift store level pricing on in-season key items, about 50% below our pricing. We did not engage in this race to the bottom on pricing. Our pricing to consumers in the second quarter was comparable to last year. Had we matched those deep discounts in the quarter, we don't believe we would have seen a corresponding lift in unit volume. International sales were down 10% in the second quarter. Canada is the largest contributor to our international sales and earnings. Our retail sales in Canada comped down 8% in the quarter. We believe inflation and a meaningful repricing of low-rate home mortgages is weighing on discretionary spending in Canada. In Mexico, we saw double-digit growth in our comparable retail sales and our sales to our wholesale customers in the Middle East and Brazil were lower in the second quarter. Our supply chain continues to be a source of strength in our business. Our on-time shipping to our wholesale customers has been excellent and our supply chain team negotiated lower product costs for the balance of this year. The Red Sea turmoil has caused longer lead times and higher costs related to the rerouting of ships around South Africa. We factored those higher costs into our previous forecast. Our revised forecast reflects additional provisions for peak period surcharges and higher cost routes from Southeast Asia. Inclusive of those higher provisions, we are forecasting inbound freight costs down over 20% this year. This morning, we announced a revision to our annual forecast for sales and earnings. We believe the declining trend in consumer confidence over the past four months reflects the lingering concerns about inflation. To date, inflation has not moderated to the extent expected. The cost of living remain elevated and the likelihood of interest rate reductions this year is less certain. The revisions to our previous forecasts are largely in our U.S. Retail segment and to a lesser extent, our International segment. We are forecasting growth in our U.S. wholesale sales and earnings this year, consistent with the forecast we shared with you in April. Our U.S. Wholesale segment is the most profitable component of our business. We are the largest supplier of young children's apparel to the largest retailers in North America. We believe our brands are traffic drivers to these retailers and provide product offerings which are complementary to their private label brands. In April, we forecasted improvement in our comparable U.S. retail sales with a return to growth beginning in the second half of this year. We believed that improvement would be driven by the strength of our fall and holiday product offerings, lower price points on certain key items and new marketing capabilities. We continue to believe these strategies will enable better performance, but given market headwinds, it may take more time than we envisioned in April to see the related benefits. To improve traffic to our U.S. stores and websites, we plan to lower prices on about 20% of our product offerings in the second half. The focus of those price adjustments is on our opening price point products. In our previous forecast, we assumed retail pricing in the second half would be comparable to last year. Our revised forecast assumes a mid single-digit price decrease. The impact of that price adjustment is about $40 million on our annual operating income. In the second quarter, we increased our investments in brand marketing and saw an improvement in traffic and customer acquisition. To further support that strategy, we are providing an additional $10 million for brand marketing in the second half. In our International segment, we revised our annual earnings forecast by $10 million to reflect lower traffic in Canada and lower International wholesale sales. In summary, we achieved our first half sales and earnings objectives given the weaker-than-expected macro environment, we have revised our annual forecast. In the months ahead, we plan to invest in targeted price adjustments and brand marketing, which we expect will improve traffic to our stores and websites. Our consolidated sales have been under pressure since inflation ramped up to historic levels in 2022 because we believe that those we serve families with raising young children, have been under financial pressure and have reduced their discretionary spending where possible. Carter's is working its way through a historic and challenging inflationary period. We plan to use this down cycle to help strengthen our leading market position as the best-selling national brand in young children's apparel. Our growth strategies are focused on the fundamentals. We plan to elevate the style and value of our product offerings, deepen our customer relationships through new marketing capabilities and leverage our unparalleled multi-channel market presence to extend the reach of our brands. With the strength of our high-margin business model and cash flow generation, we have the resources to invest in these growth strategies, which we believe will strengthen our ability to return to growth when market conditions improve. In our press release this morning, we provided the background of two new leaders who have joined Carter's. Allison Peterson is our new Head of Retail. Raghu Sagi is our new Head of Technology. Both executives were recruited because of their senior leadership experiences with winning retailers. We expect to benefit from their retail expertise and fresh perspectives on opportunities to strengthen our performance. Allison and Raghu have extensive e-commerce experience, which we believe will help strengthen that very profitable component of our business. I want to thank all of our employees for their contributions to our first half results and their commitment to help improve our performance in the balance of the year. At this time, Richard will walk us through the presentation on our website.

Thank you, Mike. Good morning, everyone. On Pages 3 and 4, we've included our GAAP basis P&Ls for the second quarter and first half. On Page 5, we have a summary of minor non-GAAP adjustments to our prior year second quarter and first half results. We had no adjusting items in this year's second quarter or first half. Turning to Page 6. We have a summary of our performance relative to the guidance for the second quarter, which we shared on our last call in April. Our consolidated net sales were in line with our forecasted range. Sales in our U.S. Wholesale business were better than we had planned, largely as a result of higher and earlier than planned demand for seasonal product. The outperformance in Wholesale offset lower than planned sales in U.S. Retail and International, which I'll discuss further in a moment. Our profitability, both operating income and EPS were above where we had guided, which was a result of good gross margin performance, lower spending and a lower effective tax rate. On Page 7 and some overall highlights of our second quarter performance. Net sales were $564 million in the quarter, down 6% versus last year. We had lower sales in our U.S. Retail and International segments that posted year-over-year growth in U.S. Wholesale driven by the exclusive brands portion of the business. On these lower sales, operating income was $39 million, representing growth of 4% over last year, with good expansion in our operating margin. And earnings per share grew 19%, driven by our growth in operating income, lower net interest expense and a lower effective tax rate and a lower average share count versus last year. On the next page, we have our consolidated P&L for the second quarter. Our gross margin rate on the $564 million in net sales in the quarter was 50.1% or an increase of 150 basis points. This represented record gross margin performance for the company. The year-over-year expansion in gross margin was driven by several factors, including lower product input costs, lower inbound freight rates and lower sales to the off-price channel. These benefits were partially offset by inventory provisions, which were higher than last year, largely because last year included a benefit from reserve reductions as we sold through excess and pack and hold inventory. That benefit did not repeat in this year's second quarter. Spending was $11 million lower year-over-year in the quarter. Our teams continue to do a good job pulling back on spending where possible. We had lower volume-related expenses in the quarter, primarily distribution and freight as well as lower provisions for performance-based compensation given our revised outlook for the year. In the quarter, we had higher spending related to new stores and higher store payroll costs. As mentioned, our $39 million in adjusted operating income represented growth of 4% and 70 basis points of margin expansion over last year. Below the line, interest and other costs were about $1 million less than last year on a net basis. We earned more interest income given our strong cash position, which was offset somewhat by higher FX-related costs. Our effective tax rate was 19.6%, which was below what we had forecasted back in April and about 400 basis points lower than last year. As we have adjusted our expectations for the business for the balance of the year, we now expect U.S.-based income to represent a lower proportion of our full-year earnings relative to income to be earned outside of the United States. Second quarter's effective tax rate included an adjustment to reflect this revised full-year outlook. And for the full-year, we are expecting an effective tax rate of about 22%. Our average share count was about 3% lower than last year, reflecting the benefit of share repurchases. So on the bottom line, adjusted earnings per share in the second quarter were $0.76, representing growth of 19% over last year. On the next two pages, we've included information on our first half performance, first half net sales decreased 5% or about $70 million with about 70% of the decrease attributable to lower traffic and sales in our U.S. Retail business. With our focus on profitability, first half operating income was down only slightly year-over-year on our lower sales and first half adjusted EPS grew 11%. Turning to a summary of business segment results for the second quarter on Page 12. In the second quarter, as I've said, sales were $36 million lower versus last year, and our U.S. Retail business accounted for the majority of this decrease. U.S. Retail segment profitability declined tracking with the lower sales in the quarter, growth in sales and profitability in our U.S. Wholesale business as well as lower corporate expenses allowed us to grow operating income by $2 million in the second quarter. On Page 13, we have some additional information on our business segment performance. In U.S. Retail, we've talked extensively about the factors that are contributing to lower consumer demand. The quarter got off to a slow start, the Easter holiday occurred in March this year, pulling some volume into our first quarter. Spring weather was also slow to arrive in much of the country, which affected demand for warmer weather outfitting. Overall, comparable sales declined to 12% in the second quarter. Our stores performed better than the e-commerce channel, which has been the trend in our retail business for several quarters now. Retail operating margin was 6.2% in the quarter. Retail gross margin benefited from lower product and transportation costs. Our retail team has done a nice job managing costs in this lower demand environment, but the high fixed cost nature of the retail business has led to expense deleverage given the lower level of sales. U.S. Wholesale was our star in the quarter. Sales increased 3% over last year, which was better than we had planned. The exclusive brands portion of the business continues to be the driver within wholesale. The majority of the sales upside in the quarter related to earlier demand for seasonal products from our exclusive brands customers. Profitability in wholesale was up nicely in the quarter as a result of the sales growth, lower product and transportation costs, lower sales to the off-price channel and favorable chargebacks and other selling costs. In International, sales were down 10%. In Canada, we've seen many of the same macro pressures which are affecting demand in the U.S. As Mike commented, consumers in Canada are under pressure due to higher inflation and higher interest rates. In our International Wholesale business, sales declined due to changes in shipment timing and lower demand in the Middle East given the ongoing conflicts there. We continue to see good sales growth in Mexico with the benefit of both new stores and 10% growth in comparable retail sales in the second quarter. Profitability in International was down slightly in the quarter as lower product and transportation costs benefited gross margins and helped offset the profit impact of lower sales volume and lower pricing. Information on our first half business segment performance is included on Page 14 for your reference. Turning now to Page 15 and some balance sheet and cash flow highlights. Our balance sheet remains very strong. We ended the quarter with substantial liquidity and inventory is in good shape heading into the second half. Quality of our inventory is high with less excess than a year ago and the absent of nearly $80 million of pack and hold inventory, which we held at this time last year. We generated over $90 million in operating cash flow in the first half. Last year's cash generation was higher when we were reducing inventory at a greater pace than this year as we sold through that pack and hold inventory. Our cash flow and strong overall liquidity have enabled us to continue investing in the business with first half CapEx of $24 million, representing spending on new stores, store remodels and technology and distribution center initiatives. We also distributed $92 million to our shareholders in the first half of the year through dividends and share repurchases. Now I'll turn the call over to Kendra for an update on our progress with our product and growth strategies.

Thank you, Richard. As Mike mentioned, we remain focused on our three transformative strategies outlined in April. These priorities are grounded in consumer insights from both our current customers and tomorrow's new parents. We believe this focus will enable us to grow our share of North America young children's apparel market, in which we maintained the number one position. Our first strategic priority is to deliver market-leading style and value. Our brands portfolio enables us to lead the market with specific assortments that respond to a range of trends and consumer behaviors. Second, with an increased focus on marketing effectiveness and consumer experiences, we are deepening our relationship with our customers across every touch point. And last, our brand reach is unparalleled and a significant point of differentiation. Our brands are available wherever families with young children are shopping, meeting the needs of each specific shopping occasions. Diving deeper into our product strategies and the progress with our style and value transformation, Page 18 features our top-selling Carter's Newborn Essentials. This category across our Carter's brand has delivered positive comps versus last year and is an important indicator to the health of our business and underscores Carter's enduring brand relevance with new parents. Our Newborn Essentials assortment, breadth and value are unmatched in the market where Carter's brands have earned a 28% share in the zero to 12-month apparel segment. Also, we are seeing strong selling in our premium-priced products that lean heavily into fashion trends and more elevated fabrics. Page 19 highlights the latest Carter's elevated baby collection featuring on-trend transitional neutral in must-have styling. Turning to Page 20. Customers are positively responding to our new Oshkosh back-to-school launch, the premium fashion denim and bottoms are selling especially well. Noted on the next two pages, Little Planet and PurelySoft, our newest and most sustainable brands continue to exceed expectations. Customers are loving the relevant styling and premium quality as much as the incredible value these brands offer. Little Planet and PurelySoft play a critical role in bringing new, more style forward customers into our family who tend to be younger parents, spend more than our average customer and shop with us more frequently. We are growing both Little Planet and PurelySoft brands and assortment breadth, depth and through broadening our global distribution. Combined, these brands are expected to achieve over $100 million in consumer sales this year with targets to achieve $200 million by 2027. Over the years, our innovative model has proven successful at building, launching and rapidly scaling new breakthrough brands. We will continue to leverage our talented teams and unique capabilities to launch new adjacent brands to our portfolio in support of our long-range growth objectives. Next, sharper and more impactful value messaging continues to be a focus. We noted last quarter that we are seeing a barbell and selling trends. Consumers are shifting out of mid-tiered items and into opening price and premium price buckets. In response, we are transforming our product model, distorting the mix into value and premium assortments. This transition started earlier this year with a meaningful shift planned in the back half. In April, we rolled out sharper and more impactful price messaging. Page 23 features these in-store and online presentation. To date, we've seen a positive response and the sharper pricing allows us to better meet the needs of value-oriented customers. Lastly, on product. Our most loyal customers shop with us across channels and retailers and trust our consistent quality and commitment to style and value. Page 24 features our newest Carter's Just One You new collection showcasing how our exclusive brands that are sold at Target and Walmart helped to reinforce our style and value commitments. Our next strategic focus is rooted in deepening our customer relationships through marketing effectiveness. In April, we relaunched our U.S. Retail loyalty program. Highlights are noted on Page 25. Customers have responded well to the new Carter's rewards with nearly 90% participation rate. We are pleased to see an increase in both frequency and average spend when customers use a reward. This is especially true with our new VIP tier customers, who benefit from earning rewards faster and gain access to exclusive events throughout the year. This highly engaged customer has a 7x higher lifetime value and annual spend than our average customer. Page 26 highlights our continued progress with personalization. Our customers are 4x more likely to engage with content that is personalized to the ages and stages of their family. In the last 12 months, we have made significant progress to develop these capabilities. Today, customers receive personalized notifications on relevant deals and promotions, localized messaging aligns the events and weather in their area and size up prompt, reminding busy parents that it's time to restock favorite styles for their growing child. Coming this fall, customers will experience even more, including personalized offers, landing pages and in-app experience based on their preferences and behaviors. As mentioned, this year, we are investing an incremental $10 million in marketing. This includes the launch of our compelling new campaign featured on Page 27. The modern messaging and breakthrough tone of this campaign was developed with award-winning agency [indiscernible]. It's targeted at the new generation of parents who are seeking brands that reflect their personal style without sacrificing function or comfort. This campaign will show up everywhere parents and gift givers are shopping for our brands and throughout both traditional and social marketing channels. Our final strategic priority is to leverage our brands unparalleled reach. The accessibility and convenience of our brands represented in over 20,000 locations globally, is unmatched in the market and a critical component of our growth strategy. Our distribution enables us to engage with customers who are increasingly shopping across multiple channels. Turning to Page 28 and speaking to our retail channel. As part of our fleet optimization strategy, we maintain our long-term plan to open stores, with 10 net new stores planned for 2024, mainly focused on mall locations and underserved smaller markets. As Mike mentioned, new stores continue to meaningfully deliver strong returns on investment and importantly, act as a top source of customer acquisition. We continue to test new store models to further accelerate our store openings. Our most recent Best of Baby model includes a perfectly curated assortment of [zero to 5T] products from our entire house of brands. Since opening in March, results have been excellent. And in response, we are converting 37 additional stores this year and we have a long-term opportunity for over 100 Best of Baby locations. Also, we are thrilled to announce our first-ever flagship store set to open in the heart of Atlanta's Buckhead neighborhood this fall. It's previewed on Page 29. This elevated and innovative experience is fully reimagined and includes traffic-driving community engagement. The new brand-centric look and feel of the store, including a comprehensive Little Planet shop will be leveraged across our fleet for future remodels and new stores. Our new store models and fleet optimization strategies extend across North America. In Guadalajara, Mexico, we are opening our first ever Little Planet stand-alone store in a premium mall location, photos are on Page 30. Additionally, earlier this year in Canada, we opened five Little Planet shop-in-shops in existing stores with great success and are now on track to open five stand-alone Little Planet stores in premium Canadian mall locations over the next 12 months. Moving on to our U.S. Wholesale channel, noted on Page 31, our partnership with Target, Walmart and Amazon have been critical components of our success over the years and enabled our brands to reach millions of customers who are increasingly seeking convenience and ease. To leverage our success with exclusive brands, we are building more tailored strategies to support the unique needs of our Carter's brand wholesale customers to. Highlighted on Page 32, at Kohl's, we have partnered to create a comprehensive brand experience adjacent to their upcoming Babies"R"Us shops in 200 doors. We have also developed tailored strategies to profitably support growth with clubs and the off-price channel. In closing, we are excited about the opportunities ahead and grateful for the talented and dedicated teams who will drive our success. Now turning it back to Richard to walk through our second half guidance.

Thank you, Kendra. In discussing the revisions to our outlook for the balance of the year, I think it's helpful to provide some context. Beginning on Page 34, we've included some well-reported data on the health and sentiment of the consumer. From our perspective, we believe the macro backdrop and state of the consumer have declined since we held our last call in late April. Shown here is the University of Michigan Consumer Confidence metric, which is published monthly. Since the time of our call in late April, consumer confidence has declined each month. The recent preliminary data point from July is the lowest since November 2023. We've historically seen a strong correlation between consumer confidence and demand in our business, our strongest retail performance in the recent past in March of this year and also last December, corresponded to the meaningful uptick in consumer confidence, which occurred in those months. On Page 35, while inflation may have moderated somewhat, its effects continue to be seen across a range of spending categories, which are very important to families caring with young children. As Mike commented, we've revised our outlook for the second half in light of the changes in market conditions since our last call. And on Page 36, we've summarized the key changes in our second half outlook. The most significant revisions relate to our U.S. retail and international businesses. In U.S. retail, we're taking steps to strengthen our value proposition by making adjustments to our pricing and promotional strategies. While we will get sharper on prices on a portion of our retail assortments, we won't participate in the extreme discounting we are seeing in the marketplace. There are a number of examples of those in our industry who have pursued an overly aggressive approach on pricing, this has not been a winning strategy for these companies or their shareholders. Also, as Mike and Kendra indicated, we've increased our investment in brand marketing, we've also already begun to see some progress in attracting new customers as a result of this increased spend. This brand marketing investment is intended to provide a strong benefit over time in driving stronger topline sales across our business. In our U.S. Retail business, our second half guidance assumes a decline in comparable sales between 9% and 12%. Our first half Retail comps declined 9%, which is similar to our current year-to-date trend of down 10%. So our outlook reflects the possible continuation of the trends we've seen with the possibility of some further deterioration, with the actions we are taking, we're endeavoring to do better than this. The outlook for our U.S. Wholesale business remains strong. We're expecting good growth in the second half. We've adjusted our second half outlook, mostly due to changes in the expected timing of shipments. In International, our outlook reflects pressures on consumer demand, principally in Canada and some changes in the timing of shipments to our international wholesale partners. We intend to manage spending tightly as we always have, but importantly, we will continue to invest in the initiatives which we believe will drive our business longer term, including marketing, in stores, both new stores and remodels to improve the productivity of our existing fleet and in technology. Of the roughly $100 million revision to projected second half operating income, about $50 million relates to the incremental investments in pricing and marketing, which we've discussed. The balance of the reduction relates to lower sales volume, offset by some lower expected SG&A. There are a number of risks, which we're monitoring as we approach our second half plans, the macro environment, consumer confidence and inflation topped the list, we're also watching the level of promotional activity across the industry, which has intensified of late as we've mentioned. In the past, presidential elections have been disruptive to demand in our business given the events of the past two weeks, this year's election may hold the same potential. On Page 37, our revised expectations for the full-year are summarized here. Full-year net sales are now expected in the range of $2.785 billion to $2.825 billion with lower sales forecasted in U.S. Retail and International and growth expected in U.S. Wholesale. As we demonstrated in the first half, we will work to curtail non-growth discretionary spending where possible. On profitability, we're expecting adjusted operating income in the range of $240 million to $260 million and adjusted EPS between $4.60 and $5.05. We're expecting to generate over $200 million of operating cash flow for the full-year. Our estimate of cash flow has come down a bit given the revision to the second half forecast but we are still expecting substantial cash generation this year. We've trimmed our forecast of CapEx a bit and currently expect to invest about $75 million this year. In terms of our expectations for the third quarter on Page 38, we're planning net sales in the range of $735 million to $755 million. In U.S. Retail, we're planning total sales down in the high single digits to down low double digits. In U.S. Wholesale we're planning sales comparable to down in the low single digits to last year and in international sales down in the mid to high single-digit. On profitability, we're assuming adjusted operating income in the range of $60 million to $70 million and adjusted EPS in the range of $1.10 to $1.35. With these comments, we're ready to take your questions.

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

Great. Thank you so much. Mike, I'm just wondering if you can give us a little bit more detail on the price decreases you're planning to make? Are they – what you plan on doing in Wholesale versus Retail? And I think Richard said that it was going to be on part of the assortment in retail. Can you just tell us why some products and not others? And then, Richard, if you can give us some help on gross margin in Q3, like how much lower you expect it to be year-over-year. That would be great? Thank you.

So our pricing had been comparable year-over-year in the quarter that we – we clearly got beat on some of the holidays Memorial Day, 4th of July, we saw the market get very aggressive on pricing, things that we would typically sell like a T-shirt for $5, we saw some of our competitors selling it for $2.50. Those are thrift store level pricing. It's unusual to see that kind of pricing. I think it just reflects that the pricing that those retailers felt as though they needed to have to drive traffic for the store. So traffic continues to be the issue. The negative comps we're having are, by and large, driven by traffic. We sold fewer units direct to the consumer in the first half but we sold significantly more units through our exclusive brands. So it's a function of where people are shopping. But when we saw the pricing in the second quarter where it got kind of down and dirty we decided in the second half to be more aggressive. So that $40 million had to break down the $40 million adjustment to our second half profitability. Probably half of it relates to just getting sharper on price points on some of the opening price point product offerings we have that where we saw the market move lower. And if something was $5, it might be $4. We're talking about $1 or $2 at most, just to get a little sharper on price points. So half of the $40 million is just getting sharper on price points, see if it takes us to a better place. It improves the trend in our performance relative to the guidance we're giving this morning. The other half of the $40 million is just make sure we don't get backed up with inventory. So that's the focus. We have the capacity to make the investment. We're a high-margin business. We have the resources to make the investments. We'll still have a good margin for the year, high single-digit operating margin for the year. It's below our standards of double-digit margins, but we feel as though we need to make these investments, both in price and in brand marketing. We felt as though we were underinvested in brand marketing to drive traffic. So when we tested some of the incremental investments in brand marketing in the second quarter, it started to have an impact. We started to see a change in the trend in both customer acquisition and some of the traffic. We're going to see whether or not we can spend an additional $10 million than we previously had planned to spend on brand marketing to see whether or not it distorts the performance in the second half. Wholesale pricing, I would say, in the first half was lower because the product costs were lower. When our supply chain team negotiated a lower product cost, we decided as we always have – some of it will get sharper on prices for our wholesale customers so they get the margin benefit. Some of it we put into product – better product benefits and some of it we let flow through. And so I think our models in the second half are product costs for Wholesale will be lower. And I think our pricing on Wholesale will be comparable to slightly lower. So it's just a function of reinvesting some of that good product cost reduction into better pricing.

And on third quarter gross margin, Jay, we're expecting a year-over-year decline of about 50 basis points to 70 basis points, I would say. The good guidance would be – despite the price decreases, we're planning margin expansion in Retail and in Wholesale, largely driven by lower product costs, lower off-price activity in the third quarter. The factors that start to work against us a bit throughout the second half are higher transportation costs. So as Mike mentioned, we are seeing some higher surcharges and such related to kind of peak capacity coming earlier this year. Some importers are trying to get ahead of some tariffs that are going into effect this fall. Those tariffs don't affect us, but others are kind of getting in early to try and get their products here to the United States. So freight, which has been a good guy starts to reverse a bit, become a bit of a headwind. We also, throughout the second half of last year, we're releasing reserves as we made progress reducing inventory. That's not a benefit this year. But on balance, forecasting between 50 and 70 basis points in the third quarter down year-over-year.

Okay. That's super helpful. Thank you so much.

Sure.

[Operator Instructions] Our next question comes from Warren Cheng with Evercore ISI. Your line is open.

Hey, good morning. I wanted to dive in a little bit on the difference you're seeing between retail and wholesale. So it seems like the trends really slowed down in retail. You lowered your second half comp outlook. It looks like by over 10 points. You really haven't seen that slowdown in wholesale. Is this a replenishment versus discretionary dynamic we're seeing I'm just trying to think about true demand for the category here. Any insights on the channel difference?

Yes. Again, Warren, I would share with you, in the first half, we sold 3 million fewer units direct-to-consumer in the United States. Unit volume was down 6%. But in our exclusive brand, the unit volume went up 7 million units, more than double the decline in units we saw direct-to-consumer. It's a function of where people are shopping. So the weakness in our Retail business, we saw in the first half was largely traffic, we're reflecting in our revised forecast for the year, the risk that those traffic trends may continue into the second half. To help improve the traffic trends, we're investing $40 million in price, $10 million in brand marketing. So I would say the market data, I think the data I saw that the market is probably down some portion of 2%. And I think it's a function we're seeing a channel shift given where people are shopping these days. They're where the mass channel retailers are doing well. The off-price retailers are doing well, especially retail – at least our specialty retail business is under some pressure.

Thanks, Mike. And then another channel question here. Can you step back and give a little diagnostic on why e-com continues to lag the stores pretty persistently here. It's really exciting to hear about the addition of Allison and Raghu go to the team. Can you just give us a little more on their experience and what they'll be focused on as they come aboard?

Sure. So again it's been a consistent experience, this kind of mid-teen decline in e-commerce demand. And e-commerce for many years was our fastest-growing, highest-margin business still is a very high margin, very profitable component of our business. We've been tracking Citi comes out with a weekly spend analysis, 40 different spending categories. And dog food, cosmetics, all different things people spend money on. But there's a line item online pure-play apparel purchases, all ages, including kids, that has consistently the broader scope of apparel purchases online has been down mid-teens. So we've been tracking to that for the past 1.5 years. And I think it's a function of the consumer pulling back. In years past, if you got a text, you got an e-mail, you’re inclined to open it and say, "Oh my, there's a sale, Geez, I wasn't even thinking of buying something. But with that text or e-mail, I'm going to do some shopping. And I think the consumer is just less responsive to some of that unsolicited marketing stimulus. And our e-commerce business for years still is kind of a stock up kind of experience. So you don't go – it's not like Amazon, you go to buy one thing and it gets shipped to you in ours, you buy in six or seven units every time you're shopping online. So that's it's better part of a $70 transaction. We just see fewer people making that type of transaction with this. Again, it's a traffic issue. By comparison in the stores, stores provide immediacy and just the nature of behavior during this – consumer behavior during this inflationary cycle. You're shopping closer to need, buying what's needed and really only when it's needed. And so stores provide immediacy. You can go to one of our beautiful stores and pick up what you need. The average units per transaction in our stores is about four units per transaction. That has stayed consistent. But even there, the traffic has been lower. We're seeing fewer visits. But those who visit the conversion rate, the average transaction, the AUR is about the same, at least that was our experience in the first half.

Thanks, Mike. Good luck.

Thanks, Warren.

[Operator Instructions] Our next question comes from Ike Boruchow with Wells Fargo. Your line is open.

Hey. Good morning everyone. Question on the gross margin – hey, Mike. On the gross margin guide, maybe I'm taking the guide for the year too literally for comparable, but Richard, if you're saying gross margins are down 50% to 75% in Q3, does that imply that they're down substantially more in Q4? Because to get to flattish gross margin, you basically need the back half to be down like closer to 200 basis points. So again, am I overthinking the comparable? Could it still be up a little bit? I mean just kind of walk us through the actual gross margin plan.

No, you're spot on Ike. Forecasts have us gross margin declining 200-some basis points in the fourth quarter, so more dramatic than the third quarter. I would say that the factors that I mentioned for Q3 continue to apply in terms of product cost are a good guy through the fourth quarter. What works against us through the fourth quarter, are those inbound transportation costs start to be higher year-over-year. We do have higher inventory costs, which again is that comparison to inventory releases a year ago, which we're not expecting to repeat. In the fourth quarter specifically, I would say, mix works against us reasonably dramatically. So about half of that decrease in gross margin, I would say, is mix related. So we're planning very good growth in the Wholesale channel. That's been consistent. The Wholesale outlook, I would say, is the least affected by our revisions to our outlook. So we had always planned for very strong growth in fourth quarter wholesale, good response to our fall, winter bookings. And we do have a bit more of off-price channel activity planned in fourth quarter, which is not great on the gross margin line as well. That just reflects some of those excess units in retail now that we will anticipate clearing in the fourth quarter. Those are kind of the puts and takes, but it is a more severe year-over-year decline in gross margin planned in fourth quarter versus Q3?

And the $40 million, if I'm just doing the quick math, that's roughly like 250 basis points of a headwind to you guys in the back half. Is that pricing more like decline more weighted to the fourth quarter? Or is it kind of like going into place right now and you're just kind of offsetting it with more good guidance in the third quarter than you have in the fourth quarter.

I would say the plan is we will likely be more promotional over the holidays. The next big holiday is Labor Day, and then we certainly would be more promotional over the year-end holidays.

Got it. And then, Mike, maybe just – and it's probably too early, but any initial thoughts on AUC user product costs into early next year, just kind of looking at the freight, freight's very topical right now. Obviously, you guys don't renegotiate for a while. But how are we thinking about overall product costs early next year based on whatever visibility you guys have now?

Just two data points. We negotiated inbound freight costs through say, the second quarter of next year and those rate increases from memory were somewhere around 2%. So we're pleased with the outcome of those rate negotiations. We had a good update from one of the cotton experts here in Atlanta, last couple of weeks or so. And the crops are good. If you look at the cotton futures, the cotton futures are trending lower than the current prices. So the outlook on the – one of the key input costs for us as the outlook is currently favorable. So it's early. In October, we'll have more visibility to better part of the first half of 2025 product costs. But the freight, we have visibility to and cotton, most of what we do for a living is cotton-based and the outlook on cotton futures currently is good.

Best of luck, guys.

Thank you.

[Operator Instructions] Our next question comes from Tom Nikic with Wedbush. Your line is open.

Hi. Good morning guys. Thanks for taking my question. I wanted to ask about the comments that stores opened since 2020 are a little bit more resilient than the older stores. What is it about those doors that's different? I mean, is it just that they're newer, so they're going through the maturity curve? Are they in better real estate, like just, I guess, what would you attribute the relative outperformance of the newer cohort of stores?

Yes. So Tom, the whole focus, the real estate strategy is to open in better centers, better co-tenancy, better traffic patterns. In many cases, it's a new center, anything new, draws people to that center. So our focus is as long as we continue to find good real estate opportunities where the unit economics are attractive. We will continue to open stores. We believe in stores. We like stores. Stores are our number one source of new customer acquisition, very best expression of the brand. I believe our stores inspire our wholesale customers. We take our wholesale customers into our stores where they see the full expression of the brand. And on the flip side, we'll continue to close stores. Rarely do we close the store early because 97% of our stores are cash flow positive. So rarely do we close the store before the lease expires. Rarely do we take advantage of the kick out clauses that in the event we signed up to a store that is not going to perform the way we expected rarely we leave early. So even this year, we came into this year initially assuming we'd open up 40 stores and close 10, we're going to close 30 stores this year because as the leases come up, we look at what the opportunity is to stay, what kind of investment would have to be made to freshen it up after a 10-year period. So we will continue to open stores and close stores based on what the real estate opportunities are and what the traffic patterns are on the legacy stores.

Understood. Thanks Mike. And best of luck for rest of the year.

Thanks very much.

[Operator Instructions] Our next question comes from Paul Lejuez with Citi. Your line is open.

Hi. This is Kelly on for Paul. Thanks for taking our question. Just one question on the pricing adjustments in retail. Is it that 20% of the product assortment is getting a mid-single-digit price decrease? Or is that the net impact of it all?

Yes, Kelly, that's the net because if you said 4% on $11, it would be about $0.40 right? So it's – you don't make a $0.40 adjustment to T-shirt. The changes will make – will be some portion of buck or two on key items, opening price point items where the consumer being strapped, there's probably no shortage of consumers opting for some of our competitors selling T-shirts and shorts for $2.50. Our T-shirts and shorts won't be $2.50, but we will get sharper on prices to respond to what's going on in the market.

Got it. And then I was just curious if you're viewing these price investments more as a temporary adjustment reflecting the weakness of the consumer? Or do you believe them to be more permanent?

We currently view it as temporary. We're doing what we need to do because we were less promotional, I would say, in the first half – and we achieved our first half profit objectives. We don't think lowering prices is a good long-term strategy. It's very short-term. But that's the world we live in right now with the consumer under some financial pressure. So we've made significant progress since the pre-pandemic period in terms of improving price realization, improving margins, record gross profit margin in the second quarter, largely through inventory management. Largely through just being smart on the buys, improving the beauty of the product offering, buying the unit smarter, picking – making smart bets on the inventory buys. We'll continue to do that. But we're doing we're going to take a different approach to the second half. Our initial reaction was perhaps we have to do a significant cost reduction. We said it's just probably the time to lean it. Let's get sharper on price points where we need to and let's invest in brand marketing to attract more people to the brand, drive more traffic to our stores and websites. So I view the pricing adjustments as temporary.

Kelly, on the other side of the price spectrum also, while we're investing in getting sharper on prices in the opening price bucket, we also are growing the penetration of our assortment in the best price bucket as well. So our more premium products, where we can probe on price and have – and grow our range of pricing. So that is a margin offset on the other side.

Got it. Thank you. And just given that you're seeing sort of a share shift or traffic kind of moving more towards the wholesale business and you're seeing some traffic weakness in retail – just curious, any initial thoughts on your store opening closing plans as you think about next year?

Just a couple of reactions. So we're thrilled that consumers when they go to Target, Walmart and Amazon, we've got the best-selling brand and young kids apparel there. So as I look at the unit volume what we didn't sell directly to the consumers in terms of the unit decreases direct-to-consumer. We more than picked up on people shopping at our other wholesale customers. That's the beauty of our business. We've got an unparalleled multichannel market presence. So wherever consumers are shopping in a meaningful way. We've got a strong presentation of our brands. And again, going back to the earlier point, if we have a line of sight to stores that real estate opportunities that exist for us in 2025. We're pursuing those opportunities. And we'll share more with you as we get later into the year, early next year in terms of how many store openings. But our plan is to continue to open stores and open stores in good centers where there's good co-tenancy, good traffic patterns, good center and where we reach more consumers. So we've been developing new store models that are focused on the strength of our business, which is Baby and Toddler. Baby and Toddler’s apparel sales represented over 80% of our sales. We carry the older age ranges largely as a convenience to family shopping with a younger and an older child. But we're going to have what we call these Best of Baby stores that we're seeing some early and good readouts. So we're testing new formats and I think a good portion of those stores next year will be in those new store formats to focus on the core of our brands, the most productive components of our brands. Keep in mind, in the second quarter, our Baby and Toddler apparel sales were comparable to last year. The weakness was in the older age ranges.

Got it. And if I could just squeeze in one more here. I think you made a comment earlier in the presentation about your Carter – the growth of the Carter's flagship brands. Did you see the Carter's brand and department stores grow in Q2? And just how should we think about that exclusive versus flagship Carter's brand growth in the back half of the year?

So the Carter's flagship brand largely sold to department stores and club retailers. So we've got some tailored strategies. Kendra referenced the initiative with Kohl's and the Babies"R"Us, which I thought was a smart move on their part, trying to replicate the success they had with Sephora with Babies"R"Us. Babies"R"Us used to be a $100 million customer for us high-margin customer for us. So we're tailoring the strategies for the department store and club store retailers, and we're starting to see some good traction with those initiatives. There's another big opportunity with the off-price channel. I think our unit volume in the off-price channel was down about 70% in the first half, only because we're very clean on inventory. But I've gotten no shortage of calls from our off-price wholesale customers asking us for more product. And the challenge there is we want to make sure it's a good margin for us and a good margin for them. So that's another opportunity that we're pursuing to tailor a strategy that is good for the off-price channel and good for our business.

Thank you.

Thank you. Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to Mr. Casey for any closing remarks.

Thank you very much. Thank you all for joining us this morning. We look forward to updating you on our progress in October. Goodbye.