Carter's, Inc. (CRI) Earnings Call Transcript & Summary

Hi. Good afternoon, everybody, and welcome. We're pleased to have Carter's management with us here today for a fireside chat. I'm happy to welcome Brian Lynch; Richard Westenberger; and Sean McHugh, who will be here to answer our questions. First, I wanted to welcome all of you and to turn it over to Brian for some brief opening remarks.

Thanks very much, Lorraine. Appreciate it. Good afternoon, everyone. I appreciate you joining us today. I'll start with a brief overview of Carter's, and then we will open up to questions. Before I begin, please note that I will make some forward-looking comments, and my comments are subject to risks in our business, and those risks are disclosed in our SEC filings. Carter's is the largest branded maker of young children's apparel in North America. We own the largest share of the $23 billion business for children ages 0 to 10, roughly about a 13% share of the business, and Carter's brand is about twice the size of our nearest competitor. We also hold the #1 position up in Canada. We have a strong portfolio of brands, 2 of the best-known brands in apparel and, particularly, on children's apparel, being Carter's and OshKosh B'gosh with over 125 years of rich history. We're trusted by generations of parents and consumers and well-deserved for quality and value, and the blends are very complementary. Our Carter's brand is the market leader in baby apparel with about 4x the market share of our nearest competitor in the newborn to 3-year-old segment. OshKosh is more of a playwear brand, with sweet spot is about a toddler to age 7. And both brands serve the needs of the children in the 0 to 10 -- 8 segment. We also own Skip Hop, a terrific brand we bought a few years ago. It's a durables brand that has innovative essential core products for moms and dads and young children, being diaper bags, mealtime, bath time accessories and play items. The space we're in is really attractive from a product standpoint. We do provide essential core products at affordable price points. And given how young children rapidly age out of their wardrobes, children's wear is a less discretionary purchase compared to other apparel categories. When I describe our baby business and our young children's business, just think about the fact that, that child, every 3 months, it's 100% wardrobe replacement. So for 3 months, 6 months, 9, 12, 18 and 24, if you can imagine, going into your closet or your dresser and taking off 100% of your products out and having to replace them, that's how we do business is that, that continuous replacement and upgrading in apparel as the children age out of their products. We also have a product that's less fashion risk. We're not in the teen business, and we're not in the adult apparel business. We have a successful multichannel business model with broad distribution. We're available wherever mom wants to shop for young children's apparel, and our products are sold in about 17,000 stores across the U.S. Nobody can match our presence in children's wear. And in the U.S., we also have highly productive retail stores and the leading e-commerce platform in young children's apparel. We have developed a really strong omni channel business that provides convenience and a great shopping experience for parents. And the wholesale channel, we're the largest supplier to the largest retailers, the folks like Amazon, Target, Walmart, Kohl's and Macy's, big businesses with all those accounts. And then internationally, we have multichannel operations in Canada and Mexico as well as wholesale licensing relationships in about 90 countries. With respect to our financials. Prior to pandemic, we'd achieved 31 consecutive years of sales growth. So this year will now be our first consecutive year of sales growth in 2021. We have a long track record of strong operating margins and good cash flow generation, and we also have a healthy balance sheet and substantial liquidity. Speaking of the pandemic, last year was really challenging, given the marketplace disruptions that the pandemic caused. And despite those difficulties, we're really proud of what we achieved in 2020. We took rapid actions to strengthen the company and strengthen our liquidity. We worked really hard to keep our employees safe, and we've significantly reduced our exposure to excess inventories based on the plays that we called, if you think about it last March and April. And by curtailing those inventory commitments, we've focused on promotional effectiveness, and we're able to really improve price realization and gross margin, which helped us in the back half of last year, and we expect will help us in 2021 and the years to come. We also invested. We invested as things turned down. We invested in our omni channel business and technology and in marketing. And we are happy to know that -- happy to report that we have really key capabilities in terms of same-day pickup of e-commerce orders in all of our stores, curb side pickup in all of our stores that have a curb and a direct shipment of online orders from our stores. So we developed also new successful ways to partner with our wholesale accounts. We launched digital product development and sold in our lines to all the major retailers virtually instead of in personal samples. And we engaged really much more effectively with our customers last year through social media. So we're proud of our accomplishments last year, but we're really looking forward to 2021 and the strong position we have as we enter 2021. We believe our unique multibrand, multichannel model is positioned to grow, and we plan on gaining market share. As we shared with you on our fourth quarter earnings call in February, we're protecting -- projecting really good growth in sales and profitability over the coming year. So with that, I'll turn it over to Lorraine for questions.

Okay, Brian. So a lot has been written about the projected decline in births this year due to COVID-19. Can you share how Carter's is thinking about births this year, and how you might adjust your plans accordingly?

Sure. So we've talked about today that the birth rate is -- and the number of births this year has become more than business. It's more pop culture. It seems like every time you turn the television or read about it, it's a significant issue. And nobody knows the exact answer. I think it's fair to say, based on all the forecasting that last year, there were postponements of marriages, postponements of people having children, and therefore, that could affect us in early -- through mid-2021. The projections are somewhere between 300,000 and 500,000 less births. So if you think about it, back in 2007, there was a peak, I think it was 4.3 million births. Last year, we dropped to about 3.7 million births. I think it is fair to point out during that time period, during that 10 to 13-year stretch, we more than doubled the sales of our company. So we intend to prosper and grow regardless of that. But when -- I'd say we have baked in a headwind of, I think we said in our earnings call, between $70 million and $100 million of potential sales risks this year that's baked into our numbers if, in fact, people delayed the birth of children. So that's the bad news. The good news is there's a lot of reasons to be optimistic. We've got home sales around fire. We had low interest rates. We've got stimulus that currently, as of the end of today, coming. We've got support for families with young children that are going to get a monthly check as far as I know until age 17 that appears imminent that's going to happen. And then we've got these folks that have delayed getting married or having children or what have you. I think whatever scenario we have, we're confident we can grow share, and we believe that this situation with births, while it's likely real, it's something that we can handle near term. And if you think about it, even at a $70 million to -- $70 million to $100 million clip, that's 2% to 3% of our overall sales. So it's something that we've got in our numbers. But then going forward, we don't see it as a major challenge to our business. And we're also growing our Age Up products. So if we have a slight dip in the baby business, we've got a strategy that we're growing. We're selling more to toddler and the larger-age children, and that is working really well. I'll also tell you that it's ironic that with all the news going on, I wish we had more baby product to sell right now. We are very, very light, as are all of our accounts in newborn product. We've sold very well in Q4. This year, we got off to a good start. We have reduced our inventory commitments, but at this moment, I wish we had more newborn products, to be honest with you. So we'll see what happens in the next few months through this year. But we are planning for a slight dip in the births this year.

Interesting. And as you think about birth rates increasing in other countries and parts of the world, how do you see this as an opportunity? And how do you think you can take advantage of that?

Well, I think if you think about our international business, our biggest businesses are really in Canada and in Mexico, the businesses that we own. And then Canada may have some of the same challenges. But I think going forward, there's -- I'd say the kind of the markets that are really emerging for us internationally will be Mexico and Brazil. And I think the forecast there are different. They're more optimistic on birth going forward over the next few years. So we've got business in Mexico that we bought a few years ago. We launched the website last year, which is doing great. We opened, I think, it was 5 of our own stores, we've got 40 stores down there. I think, over time, we think we can have 70 to 100 stores in Mexico. That business is doing very well. And then Brazil, we've got a relationship with a partner there Riachuelo, which is thriving. They opened several Carter's stores last year, and they plan to open many over the coming years. So I would say those 2 countries, specifically, I think that those consumers, many of them have been buying off our U.S. websites or when they travel to come to the U.S. via Walt Disney World or whatever, have always been big purchaser of our products. So I think those are probably the 2 places that we're focused to say that when it comes to birth, that we think that there's a good tailwind for our business.

And then before COVID, you provided some store guidance, which included closing about 215 stores and opening up 100 through 2025. How has COVID changed your outlook of what the store base should look like over the long term?

Sure. This is Richard. Maybe I'll take that one. So the most recent comments that we've made around the store portfolio, still planning on closing in about 200 stores. I think that was a data point that we've put out in February of last year. So that's reasonably consistent. So we ended last year with around 865 stores. We expect to close 200 over the next 5 years. Actually, about half of those will close here in 2021. And and then in terms of openings, right now, planning, I would say, 40 to 50 new stores, and I'll come back to that point. On the closures, I would say, these are primarily older stores, end-of-lease kind of situations. We tend not to close stores before the end of their natural lease because, generally, we don't have to. In many cases, these are older locations. In some cases, they are outlet store locations. And I think Carter's was an early mover in the outlet space. Those stores have historically been very productive. I think over the last 10 to 12 years, we've opened quite a few of [ nearer in ] stores, so what we call our brand stores, more strip center locations, more power center, real estate. And I think the number of occasions for consumers to drive 40, 45 minutes to an outlying outlet center is just fewer -- there are just fewer and fewer reasons to do that. So these are stores that are generating some revenue. But I would say, it's fairly marginal from a profit contribution point of view. And we have experience, obviously, with closing stores. Our information suggests that a 20% to 25% of the sales transfer pretty directly to nearby stores. And those are very profitable sales then because you're leveraging the cost structure, the investments that have been made in those other stores. So this should be a profit-accretive move over time, higher-quality portfolio of real estate. In terms of openings, I would say, a year or so ago, pre-pandemic, we were perhaps a bit more enthusiastic about mall store opportunities. With Gymboree declaring bankruptcy, with some of the changes in our wholesale customer portfolio, we had opened a handful of newer, smaller format mall stores. We're performing really extraordinarily well before the pandemic. I would say, right now, we don't have a lot of mall stores in general, probably of that 860 some stores, it's probably only about 70 or so that are true kind of in closed malls. And before the pandemic, those stores are performing extremely well. Like everyone else, the malls have been very difficult the last number of years -- the last number of months, I should say given the pandemic. So we're probably a little less enthusiastic at this moment. But I do think there's going to be good real estate opportunities that emerge. And so we've got our real estate team looking for those. I think there is going to be a lot of available occupancy that we can take advantage of. And I think we've learned a lot through the pandemic in terms of managing our own stores and perhaps some changes that we can make to a new store model that might even be more productive. So more to say about that over time. But in general, we've managed to operate with a lot less inventory in our retail stores. We think that may have some implications in terms of the square footage that we may want to start thinking about for new locations. So on balance, that's what we've said about our real estate.

And then just shifting to e-commerce. Can you talk about what makes your business so much more profitable than stores? And where you see the penetration of the channel shaking out in 2021 and beyond?

Yes. I think it's fair to say we've had a very high-margin e-commerce business for a number of years. So a lot of folks have asked us about that. And I think we're really proud of that business. I think one of -- there are several reasons why. One is we have a high UPT business. So I think our average units per transaction is like 6 to 7 units online. And so you've got larger orders. You've got a higher average order value, probably $65 to $75 at least on that. Our fulfillment center at Braselton, Georgia, we built that facility a number of years ago with expansion capabilities, thankfully. And that's a really high-efficience facility, so our cost per unit to ship out of there is very low. I would say our return rate -- our return rate is low single digits, which is kind of unheard of in apparel. So if you look at women's or shoes or men's apparel, their return rates are significantly higher. So you've got a longer-term -- or a low return rate. I think the other thing is the split shipments. We don't really split ship, which is very expensive. So we either ship it from our distribution center, which is the majority of the orders. But we've shifted. We've started with this deliver from store to ship from our stores, some of the smaller orders, the 1-, 2- and 3-piece orders. We will ship from them from a specific retail store out to the consumer. So some of the things that I think tend to depress the earnings from e-commerce businesses or dynamics that we don't have or re-strategized around 1 of the 2. But our penetration last year, I think we reported, was 47% of our retail business, of our direct to consumer business was e-commerce related. I think I'd probably project that would dip a little bit this year because you remember last year, we closed our stores with the pandemic. It was March 15, March 19, actually, we closed last year, and we were closed for around 10 weeks. So the penetration of e-commerce for those 10 weeks was 100%. So if you just throw the math, I think this year will be lower. But I think it will be north of 40%, and we'll probably go back -- grow from there. We'll have to see where it goes. I could easily see the penetration be plus or minus 50%, over time.

And do you think you have the right infrastructure in place to support that recent surge in growth? Is that one DC enough for what you're projecting?

Sure. Good question. So we ask that question to ourselves a lot. We did have some disruption in holiday of '19. We were challenged with [ vial ]. And we invested more in those facilities. We invested in labor. We took our minimum wages up to $15 an hour. So we've got better talent in there. And we invested in an additional sorter to make sure that we had the capacity in the facility. As we got into last year, we're doing very well. And then, of course, when the stores closed, it surged again. So not unlike most folks, we did have -- we did have some bumps in the road last March and April with e-commerce. However, based on all the investments we made, the technology and the systems we put in there, we had a really good holiday season. We improved our speed, our click-to-customer speed, meaningfully over last year, where most -- less holiday -- where most folks went the other way with the transportation delay. So we feel good about that. We're going to continue to improve our speed of shipping to customer. We do have good capacity in the building now, given the infrastructure we have. And then the other thing that's developed is now that we're delivering -- we have the buy online pickup in store, including curbside pickup as of late last spring, and then the deliver from store. So we've got, today, 850, what will be probably, 700, overtime beautiful stores that through the technology and the systems we put in, we'll be able to deliver from store. Obviously, some of those, the economics are better if you can shift the 1 and 2 piece orders from stores to consumers, whereas these 6, 7, 8, 10-piece orders, shipping out of our DC. So I think if you look over the next 5 years, we think we're in pretty good shape. We'll monitor that. Certainly, the next few years, no need for extra distribution capability. Towards the end of our 5-year plan, we're looking at that and what those volumes will be and might we need more capacity now. And if so, we will certainly address that.

Okay. So we talked about retail and e-commerce, maybe let's switch to wholesale. You generated some really strong growth from your exclusive brands last year, while the other 50% of wholesale was more impacted by COVID store closures. So how do you think about the growth outlook for that other half of the wholesale business? Can that return to growth this year and beyond?

Yes. I think there is -- there was an interesting dynamic last year where -- when everything started to happen right around this time last year, it's late March, I'll call it. It was a fascinating time because the phone ringing off the hook, and basically, every retailer said to us, we don't need any product for the foreseeable future. So that was kind of a problem. Then about a week or 2 later, Target and Walmart called us and, of course, Amazon and said, by the way, we need all the product you can give us because they were the only in such when retailers opened. So they never really slowed down. The rest of the folks did. The rest of the folks were -- by and large, we shipped almost nothing very little to the rest of the account base for that, I'll call it, April, May and early June period. So that's a dynamic we're up against as we anniversary that this year, which is a good guide for this year. And so, over time, I think this year, it's important to know all of our accounts, including the big 3 exclusive branded accounts. We're planning good growth with virtually all of our accounts this year. It should be a really good year for wholesale. To specifically talk about the not -- the half of our account base, which is not exclusive brands here, we're planning really good growth for those guys this year. So I think that we got off the blocks in Q1, I think, well. We'll have a good business there, hopefully. And then in Q2, we're up against, like I said, not shipping much last year. Back half, we'll have to see. Like people are planning their business, everybody is excited about the potential for the recovery. That being said, I think everyone is planning conservatively. So nobody wants to get stuck and everybody had lessons last year with doing more with less inventory, with price realization and managing cash and what have you was really important. So I would say that we can chase with our replenishment businesses, which is about 25% of our product. The rest of it, our chase capability is a little bit limited. So we've booked spring, summer and most of fall for wholesale, feel good about those numbers, should be a good year growth. We're out booking winter right now, and I would expect that, that would be good, but too early to tell. So overall, I think there's a lot of different folks in that account base. We feel good about the exclusive brands. I think the folks, the Kohl's and the Macy's of the world will come back kind of this year. We've got a good business with the clubs, obviously. And we've got a business with off-price. With off-price, retails were -- well, that business has been lower because we had less excess inventory. And what we did have, a lot of it, we moved through our own direct channel, which was margin accretive versus the alternative. I think that business, over time, will probably stay plus or minus where it is, maybe be a little bit higher. But there's a -- it's an interesting portfolio. You go through it. It's a fascinating business. We're proud of it because it's -- it's close to a 20% operating margin business. And again, I think we expect good growth this year. We said with our long-term plan that, that would be a mid- single-digit growth business over the next 5 years.

Okay. And then what percentage of that 50% of wholesale that -- the piece that's nonexclusive as department stores? And are there any partners where you're looking to proactively decrease your exposure?

Yes. I'd say that has kind of happened organically as we've gone through the last few years with some of the folks that had financial issues that closed, we had several bankruptcies or closures, as you know, that impacted our business there. But thankfully, we have good business with the stronger retailers, whereas some of the other ones have struggled. And so it's a waiting game on that. In terms of department stores in total, department store is a much smaller part of our company. Now it's about 3% of our overall CRI business, is department stores. I think it's about 8% of wholesale. So it's a relatively small part of our business. And the folks that are a little bit more financially struggling, I would just say that we've got arrangements there that we think we've protected ourselves. We've had modest growth expectations. I think we've taken -- Richard and his team have taken good steps to make sure that we protect ourselves as a company .

And then switching over to the exclusive brands side. Do you think you can grow on top of last year's impressive trajectory? And also, are there other Age Up categories or geographic regions that you think that you could expand into with these brands?

Yes. Good question. So our plan, as we speak, is to grow with all 3 of those brands this year. That's our plan. Again, we've got orders for a good part of the year, not all the year. Yes, but our plan is to grow with them. I know that some of them withheld guidance because of some uncertainties with traffic, whatever, but I expect that we're going to grow there. Again, we did -- keep in mind, we didn't meet all the demand last year, particularly for those three. I mean we -- they were calling and screaming for produced and we didn't have it. So after they cleared out everything, they first wanted to pack and hold it and then they wanted it in a hurry. So I think the core business, there's opportunities, I think when you ask about kind of the adjacencies or whatever, absolutely, we've -- the Age Up strategy for those 3 is really a toddler business, and we've just launched toddler for each of those 3 over the last couple of years. Those businesses are growing with all 3 of those folks. We have a good swimwear business with 2 of the 3 that's doing very well, by the way. And then all the accessory categories, underwear, socks, what have you, are being introduced and are growing. And then in terms of outside of toddler, the only thing we really have in those businesses with some of them now is sleepwear, and sleepwear, of course, we had a -- the market had a fantastic year in sleepwear last year as the market leader. Sleepwear, we had a really great year as well. And so I hope would be -- we usually go in first with sleepwear, and then some of them are knit-based playwear category. So that is our goal, is to strengthen not only baby and sleepwear, but to grow the toddler business, and then to start to penetrate with the older ages. That's the hardest thing to do, by the way. It's easier in sleepwear, harder in playwear because there's lots of competition, particularly from private label when you get into the core playwear categories. But I think when we prove our performance out and we show the folks how we're doing on our own channel and the success others are having, I I'm cautiously optimistic that we can grow our Age Up business with those accounts as well. But the -- in the near future, yes, I do fully expect that we're going to grow this year.

Okay. And then we had an audience question asking you to elaborate a little bit on your comments that you're late on newborn and wish you had more products. Is this a sign that there are more babies out there, that there's better market share? Or are things just coming through a little bit faster than you had originally expected?

Yes. It's hard to say. Again, we're reading all of this, and we're trying to process logically that people probably delayed, and that just makes total logical sense. The truth is none of us know, and exactly, until these first start coming out. So I think it's a byproduct of, number one, we did reduce inventory as a company. And on the exclusive brands, those folks give us a forecast of what they're going to need, and those forecasts were modest going into this year because if you can remember back mid fall, plus or minus the election time, we were all talking about the fact that we might have another shutdown in the spring. We're going to have a dark winter. It's going to get really bad. And it did because the virus was a significant challenge for our country, obviously. So I think a lot of folks got very cautious, and it was interesting, as we went through the holiday season, it was like our little baby basics, our Carter's brand wasn't slowing down. We did not have enough. And then in Walmart and Target and Amazon, the same thing, the baby businesses were flying. So that core product continues to do really well. We have not seen a slowdown on it yet. So we shall see. It's, what, March 10? What you haven't seen a slowdown yet. So we'll see what happens now. I think to be fair, when with the pandemic started in April, if you had 9 months to April and when that birth rate impact might hit and probably would just be hitting right around. Now if you really think it through, most of the children born that would be wearing those products were conceived before the pandemic. So we'll see. I'd say it's too early to tell, but I think we do find it interesting that with all the dialogue about the birthrate and babies that we don't have enough core newborn baby product right now to satisfy the demand as we speak. We do find that interesting. So we'll see what happens.

That's interesting. And then I wanted to move into a couple of more nearer-term questions. Do you have the opportunity to chase some of these products? What's happening overseas? Just talk about some of the shipping delays. And when do you expect those to kind of put less pressure on your business?

Richard, did you want to comment on that?

Yes, sure. So -- sorry, I dropped off for a second. I was hoping I missed all the hard questions. The shipping delays, really, is an unusual phenomenon. We believe it's an industry issue. It's not unique to us. But I would say there's a few things happening. There are some delays in getting products out of the factories. I think some of that is still lingering kind of COVID disruptions and such, depending upon the geography that we're talking about, the sourcing country. But really, it's a transportation-related issue and it's broad-based. There's so much importing activity right now, but there's a real lack, a real lack of supply of cargo containers to be able to bring the product into the United States. And so then if you're lucky enough to get the containers, it's hard to get capacity on the ships. We've actually had some ships that were overloaded. And it seems like once every 4 or 5 years, we'll have an incident where there's an accident at sea. We've had 3, I think, relating to our company specifically on the last year or so. Ships that were overloaded and they hit some rough weather and actually some cargo containers went overboard. So there was some beautiful Carter's product at the bottom of the sea, so if anybody has investments in deep-sea salvage, there's some beautiful product down there. But the time to get product over here and then once you actually get to the West Coast, which is where most of our product comes in, it's difficult to get the product offloaded. And then as we've learned, there's not enough truckers who bring it across the country then to our distribution centers here in Georgia. So I would say there's a good portion of our products that are running several weeks late. We're not sure exactly how long this is going to last, likely through the first half of the year. We saw some impact in the fourth quarter. We estimated -- we've talked about this on our call, probably $30 million to $40 million of lost revenue in the fourth quarter. I'd say most of that, in the wholesale channel. And that just meant that, that product then shipped in January once it did arrive. So it's not lost revenue. Our retail folks are a little bit more reticent to say that, that isn't lost revenue, that if they didn't have the product available on that day, that the consumer may be lost forever. So we're hoping as the stock levels normalize that we'll be in okay shape on this. But likely there continue to be some disruptions. We've taken a number of steps. We work with lots of different carriers. We have relationships with ports outside of just the West Coast. So not everything comes in into Long Beach. We have relationships with the port of Savannah, for instance, that has been a good alternative when there's been disruption on the West Coast. But this is an industry issue. There's been lots of immediate coverage of this. And unfortunately, we're caught up in it as well.

Are there any time frames that are make or break, where having products with a 2- or 3-week delay would really hurt you?

Yes. I think it depends on the product itself. I would say, we have the key product to do things like St. Patrick's Day. That doesn't get -- I think that should be a year-long holiday, but that's more of a personal preference. But some of that stuff doesn't get any better with age. And so we've tried to kind of earmark the stuff that needs to be here for a time specific delivery, whether it's an event or a holiday. One of the things that we've learned through the last year is that our product really has a longer life cycle than we had given it credit for. So some of these products may reach the marketplace a little later than we had intended, but it's still going to be a good saleable product for an extended period of time. It becomes a little more challenging, I think, on the wholesale front, just in terms of meeting expectations. The longer you're late, the longer it's -- the shorter of the salability is from their sales point of view. So you don't want it to be so late that it's just not practical. And that's where the risk of some additional order cancellations or such rises a bit. We've not seen any significant trend to date with that. But that is an elevated risk, moving forward, if the situation persists.

And we have a question from the audience about capital allocation. And with so much cash, why wouldn't you be buying back stock here?

Well, it's a good question. And I would say we're getting that question more and more. The reason that we have so much cash, kind of twofold. One, we had a really good 2019. And so we generated almost $400 million of operating cash flow. And once we got into 2020, obviously, the pandemic unfolded. And I think no one anticipated -- no one who really had a sense how things were going to unfold. So we made a decision to do some incremental financing. We raised $500 million. I like the way that the Levi's CFO has articulated it. The time to raise money is when you can, not when you need to. And so even though our forecast did not indicate the need for incremental capital, we felt like it was just a prudent thing, given the greater best that we were staring into, to go out and raise some additional money. Obviously, the business has performed far better than we had anticipated across 2020. And now I think there's a lot of optimism, a lot of signs of hope on what may be possible in 2020, '21 and beyond. So we have a long record of generating a lot of cash and returning that cash to shareholders. We do have some current restrictions that are in place because at the time that we raised the money last year, we did renegotiate our credit facility. And so there are some provisions for the next couple of quarters that restrict our ability to pay dividends, to buy shares. But you should expect that we're having those conversations with our lending group. Those restrictions, I think, made sense at the time before we knew how the business was going to perform through the disruption. So we will revisit that. We are fans of returning capital, and I would say, in a balanced way. So over the years, we've returned significant capital through both the dividend. We instituted our dividend about 8 years ago, and we've been growing that at a rate higher than earnings, frankly, over the last number of years. And then the balance of our substantial free cash flow, largely we've deployed towards share repurchase. So we're fans of return of capital, and we'd like to be back in that mode as soon as we can.

And a question on margins. There's a lot going well this year for margins. You're closing some margin-dilutive stores, your e-commerce penetration is rising, you've implemented some really sustainable changes in inventory management. What's holding you back from returning to pre-COVID margin levels this year?

Well, I think there's a number of factors, and Brian would want to weigh in as well. I think a lot has to do with the pace of the top line recovery. So our revenue went from about $3.5 billion to about $3 billion. And I think we have conservative assumptions on how quickly that top line may rebuild. And since there is more uncertainty there, we have, to the points you made, had more of an emphasis on profitability than driving sales. And so we have made a lot of progress in terms of improving our realized pricing. I do think we're managing inventory, perhaps, more effectively than we have in any time in my time with the business. So we feel really good about that. We are making some investments, though. And again, 2021 is going to be an unusual year in terms of some of the comparisons back to 2020. We -- for instance, we didn't have the level of performance incentives that would be more typical in a given year. And so in my experience, when you come up short on those incentives to try and fully fund those as we think is important to do in this coming year, that's kind of a big divot in terms of SG&A. You've got other expenses and things that were really deferred last year that come back into the base this year. But from my point of view, we've got modest assumptions around how the recovery may play out. I'm hopeful that those turn out to be very conservative and that there is this great V-shaped recovery that makes up like a rocket ship. But I think we're more cautious that it may take some time for our business to build back. But the business that we are going to do, we expect it to be more profitable because of some of the improvements that you mentioned.

Lorraine, I would just add. I echo everything Richard said. So I'll just say, I think there's a -- I think the kind of the most logical answers, we've got a lot of good things going on. We've got a COVID-impacted year in 2021, and in 2019, there was no COVID. So the first 10 weeks of the year, this year up against last year, are [indiscernible] because there was no issue last year in the first 10 weeks. So there's things that we're facing now, shipment delays, as we get through the bullwhip of COVID coming or supply coming back to meet demand and store traffic, which continues to be under pressure, by the way. So some of these things are -- they didn't exist in 2019. So if people say, why can't you be back to 2019? I wish we were. International tourism is basically nonexistent. So we have some big international stores. We have a good international business. People are not flying in the United States and going to Walt Disney World right now. They're not coming into the California border or the Texas border as much as they were. So there's a lot of things in the business that I think are different. That being said, I think we're going to have a very good year. And we think it could be a multiyear recovery because, gosh, help us, the next year, the international tourism comes back, and that's a tailwind for us as well. But I think the simple answer, why isn't 2021 as good as 2019 because we're still living in a pandemic at this point. That's the quick answer.

I think we're all hoping for that V-shape recovery. If we do see it, do you have the opportunity for your sales to recover in a V shape? Or will it be more of a margin benefit as you struggle to chase?

Well, I think that we all hope the sales materialize with all these factors coming together, including stimulus and all sorts of things that we think are imminent. So we hope that that's the case. But I think it's important for our investors to realize that our #1 goal is to improve profitability. And so we are not going to chase sales at the low-margin business. We talked about some businesses, off-price being one that we've pruned back a little bit. We have taken a more conservative inventory position because I think that helps the brand. We're spending more time talking about our brand and our product, and beautiful families in our product than we are 50, 60, 70 off every day. I think that makes for a better sustainable model for our company. And so our goal is to improve both our gross margin and our operating margin as we grow sales versus, hey, let's just grow sales. And so that's really important. So it may be -- we may not have realized 100% of the sales we could because we want to make sure that they're real profitable sales for the company.

Okay. And then just one more on SG&A. Store growth was always a large driver of SG&A growth. And as you shift to closing more stores now, how do you think about what growth should look like in a more normalized environment?

I'd say our objective with, perhaps, lower top line growth than perhaps we generated 10 years ago, is to control the growth of SG&A. That's incumbent upon us to manage that. Overall, I would say, we'd love to have SG&A growing at a rate lower than the -- slower than the rate of sales, certainly slower than the rate of improvement in gross profit. That, historically, has been what we've attempted to do. It has been a number of years of heavy investment in the business. The stores were one element of those. I think technology has been another. So all of the omni-channel things that we have enabled, which are also enabling some of the things that we're doing around inventory management, around pricing. All of those have been very high-return investments. So likely, there continue to be technology spend. There aren't any sort of big looming projects that we feel like we need to do. But I think it's pacing out what the assets are of the organization over time, and that's something that Brian and I spend a lot of time on just in terms of just prioritizing and allocating those resources. We've also seen, I think, good returns on the investments we've made in marketing. So marketing is an area that we probably have been growing a bit, ahead of where sales has been growing. We have a new Head of Marketing, who does a terrific job, has a bit more of an orientation towards the digital space, which are some new capabilities that maybe weren't as well-developed previously. He's been very innovative in terms of connecting with that millennial mom in those social media spaces, in particular, where she gets a lot of her information where she has a lot of her networking happening. So virtual baby showers with Kelly Clarkson, and it's remarkable, the attendance and the subscription that we seem to accrue from those efforts. So we're seeing such good returns from that digital marketing that's likely to continue that. But that's how we think about it. Overall, we want to keep a tight rein on SG&A. I think we've got a good long-term record of being good stewards in that regard. We haven't shouted it from the mom-and-pops, but we did go through several different ways of organizational restructuring in 2020, which was appropriate. Given that we're going to be a smaller business, at least near term, it's appropriate to have the cost structure to kind of match that. And so we're kind of hexed on SG&A. We don't make it easy for folks to spend money. If you ask any random person inside Carter's, they probably would chuckle a little bit about how easy it is to open the first strengths. But that discipline has served us well over the years.

All right. Well, I think we're about out of time. So we will leave it there. But Brian, Richard, Sean, thank you so much for joining us today, and good luck this year.

Thanks for hosting us.

Thank you very much.

Thank you very much. Thanks for hosting.