Carter’s(CRI)2024-10-25 15:52Financial Data and Key Metrics - Q3 2024 net sales were 77 million, with an operating margin of 10.2%, down from 13% YoY [22][30] - Adjusted EPS was 1 billion in liquidity [34] - Full-year sales guidance is reaffirmed at 2.825 billion, with U.S. retail sales expected to decline 8% [46] Business Segment Performance - U.S. retail sales declined 6%, with eCommerce comps improving from -14% in H1 to -5% in Q3 [28][29] - U.S. wholesale sales were flat YoY, with strong growth in exclusive brands offsetting declines in department store and off-price sales [31] - International sales declined 9%, with Canada seeing a high single-digit decrease due to warmer weather and economic pressures, while Mexico grew 9% [32] - Baby apparel sales grew 2% YoY, contributing over 50% of total apparel sales, while toddler sales were slightly lower [5] Market and Competitive Trends - The company observed a "barbell-shaped" trend in U.S. retail sales, with strong growth in opening price point and premium products, but a 10% decline in mid-tier offerings [6] - Competitive pricing strategies, including 10 million in marketing, helped improve U.S. retail trends, with comps improving from -13% in July to -5% in August and September [7][8] - The company gained market share in baby and toddler apparel, which represents over 80% of its business [72] Strategic Initiatives and Outlook - The company is shifting its product assortment to increase penetration of opening price point and premium products by 10 points each, while reducing mid-tier offerings [38][39] - Investments in technology, including AI-driven marketing personalization and a new inventory allocation system, are expected to improve customer acquisition and retention [14][44] - The company plans to open 40 high-margin stores and close 30 low-margin stores in 2024, with 98% of stores cash flow positive over the past 12 months [13] - Full-year adjusted operating income is expected to be 260 million, with adjusted EPS raised to 5.15 due to a lower tax rate and reduced interest expenses [46] Management Commentary on Market Conditions - Management noted that inflation and higher interest rates continue to weigh on demand from families with young children, particularly in the U.S. and Canada [28][32] - The company believes its value proposition, with average retail price points under $11, positions it well in an inflationary environment [19] - Weather trends, particularly cooler temperatures, have improved holiday-related apparel sales in recent weeks [6][81] Q&A Session Highlights Question: Gross Margin Pressure and Pricing Strategy - Gross margin declined 60 bps in Q3, with a 170 bps impact from pricing investments, and is expected to decline 200 bps in Q4 due to mix shifts and continued pricing actions [50][51] - The company focused on reducing prior season inventory in Q3, with prices on prior season goods down 10%, while in-season goods saw only a 3% price reduction [52] Question: U.S. Retail Trends and ROI of Pricing Investments - U.S. retail comps improved from -13% in July to -5% in August and September, with October comps running down less than 5% [47][54] - The ROI of pricing investments is measured through unit volume growth, transaction increases, and improved conversion rates [55][58] Question: Wholesale Business and Spring/Summer 2025 Orders - Wholesale demand for spring/summer 2025 is showing modest growth, with exclusive brands expected to outperform non-exclusive partners [62] - Off-price sales are forecasted to decline nearly 50% in 2024, with low single-digit growth expected in U.S. wholesale sales excluding off-price [16] Question: Share Repurchase Pause and Capital Allocation - The company has paused share repurchases due to a reduction in free cash flow forecasts, with plans to revisit capital allocation in 2025 [70][71] Question: Assortment Shift and Gross Margin Impact - The shift towards opening price point and premium products is not expected to significantly impact gross margins, as the mid-tier segment has been underperforming [77][78] Question: Weather Impact and Inventory Management - Warmer weather in late Q3 slowed sales, but the company made significant progress in clearing spring and summer inventory, improving the inventory position heading into Q4 [80][81] Question: Tariff Risks and Sourcing Strategy - Less than 5% of the company's finished goods are sourced from China, with diversification into countries like Vietnam, Cambodia, and India reducing exposure to potential tariffs [82]