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

Hi. Good afternoon, everyone, and welcome. My name is Warren Cheng. I'm the senior analyst on the Consumer Softlines team here at Evercore ISI. Very pleased today to be hosting Carter's. With us today, we have Chairman and CEO, Mike Casey; EVP and CFO, Richard Westenberger; and from the Investor Relations team, Sean McHugh. Thank you for joining us, and I'm going to turn it over to Mike for some opening remarks. Mike?

Warren, thanks very much. Thanks. Thank you all for joining us this afternoon. For those who may be a little less familiar with Carter's, just a refresher for those who are just -- [indiscernible] we're the largest branded marker of children's apparel in North America, we're fortunate. We own the best-known brand names in kids apparel, Carter's and OshKosh B'gosh. We offer essential core products to families with young children. We've served multiple generations of consumers. Both brands have been around for well over 125 years. Own the largest share of the U.S. market and Canada market. The U.S. market is around $23 billion. We have nearly twice this year of our nearest competitor. Because you may know, we're the largest supplier of young children's apparel to the largest retailers in North America like Target, Walmart, Amazon, Kohl's, Macy's, CMs, Costco, T.J. Maxx, Burlington and others. We're also the largest specialty retailer focused exclusively on children's apparel in North America, and a long -- very long track record of growth. And through 2019, we had 31 consecutive years of sales growth. 2021 was supposed to be our 33rd. So we're going to put an asteric on 2020. A long history of strong operating margins. We've always been focused on strong operating margins, a long rich history of strong cash flow generation. And given the collective strength of our iconic brands, broad market distribution, we believe we're well positioned to grow and gain market share in the years ahead. This afternoon, we're going to make some forward-looking statements. And there are risks inherent in our business, and those risks are disclosed in our in our SEC filings. So that's the reader's digest version of who Carter's is. And we're looking forward to responding as best we can to your questions this afternoon.

Thank you, Mike. Maybe we can just start at a high level and talk through how COVID changed some of your investment priorities. So if I look at the new 5-year plan, the updated 5-year plan that you released earlier this year, It's a little bit heavier on EBIT margins, a little bit lighter on sales. Maybe we can just start and discuss areas of the business you're looking to double down. And maybe where you're looking to take a step back relative to your pre-COVID view?

Well, I'll tell you, fortunately, in the years leading up to the pandemic, we had leaned into what we describe as our omni-channel capabilities, enabling the online consumer to pick up their purchase at our store located close to their home the same day. Usually, you can shop and we'll ping you on your cell phone in a couple of hours to say what you just ordered is available at a store close to their home. And so we have the same-day pickup, buy online, ship to store. We're using 600 of our stores from Maine to Hawaii to fulfill online purchases. So we have been making those investments leading into 2020, not knowing that we're going to have this disruption in the business, but those capabilities served us well. The omni-channel consumer, those who like to shop both in the store and online, it's our highest value consumer. It's a more loyal consumer, more frequent shopper. And they spend about 3x with the single channel consumer spend. So those investments have served us well. And we -- and so we were well prepared when all the stores started to close middle of March last year. I would say, we've invested in marketing talent for the first time in our company's 156-year history. We have 1 leader focused exclusively on marketing. And he's built a terrific team. He joined us almost -- it would be 2 years ago this fall that he's been with us. First year, it's getting to know the business. First year is always on us, the next 30 years is on the person that we hire. And he and his team did a terrific job engaging the consumer in a better way, a more effective way, focusing on the emotional content of the brands versus the promotional messaging. And those who have been following, as you see the record gross profit margins that we started to report tail in the last year into the first quarter. This year, we expect to continue to make progress on gross margin expansion, this year. That's all about better inventory management, more effective promotions, fewer, better product choices, longer life cycle products that are less likely to go on to the clearance rack. So these are all capabilities we've invested. And last year, we had virtual baby showers. We had virtual summer camps. We had virtual visits with Santa and virtual single longs with like Leslie Odom Jr. and his family all trust in Carter's PJ. And what we found is through better marketing and fewer better product choices and better inventory management, we got paid a bit more and a bit more for us. We have a better part of 400 million selling units on average in the years leading up to COVID. To get paid a little bit more for every 1 of those units with more effective promotions, it's a significant margin driver. And so we've been realizing that benefit in recent quarters. So an area that we've curtailed some investments, used to be one of our largest investments, is in store openings. I actually think we're just kind of hitting the pause button on that. And because I think the -- it's going to be a -- it is now, and I think it will continue to be in the years ahead of buyers market, Carter's is a desired tenant. We drive traffic to these centers because we're bringing families with young children into centers. And I will tell you before the pandemic, the store performance was good. Some of the best-performing stores were in malls because some of our competitors have downsized that gave us an opportunity to take advantage of some of those real estate opportunities. But we've kind of hit the pause button on that until the dust settles on this pandemic. And then with every quarter, we'll update you what we're seeing, where traffic is improving, where it's not. The big markets for us would be Texas, California, Florida and New York. Those areas have been heavily affected by the pandemic, particularly as it relates to tourism. So we always had this huge population of international guests. And -- but my hope in the next year or so, we're articulating what we think is possible in terms of store openings. During the pandemic, we decided to double the number of store closures because -- and when the stores come up for a renewal, we doubled the number of store closures. The plan to close stores from 100 to 200. And we had about 850 stores before the pandemic, we'll probably close a couple of hundred. Most of those will be closed by the end of next year as the leases come up for renewal. But my hope is that we continue to seek out new real estate opportunities that provide very high returns on investment. The stores we're closing have low single-digit operating margins. The stores we were opening before the pandemic had margins closer to 20%. So those were some of our highest return investments bringing the brand closer to the consumer, deemphasizing the more remote outlet locations and focusing more on co-branded stores located closer to the consumer in stores that provided a high service level to online customers. So in terms of -- that's an area where I'd say, we hit the pause button on investments during the pandemic.

Got it. And you've done a great job of giving us color on sort of the decision criteria you're using when you're choosing which stores to close. And you said that you're putting a pause on the new stores. If I look -- if you think about the cohort of your most recently opened stores or as these real estate opportunities come up, what are -- maybe I can flip the same question on the opening side. What are the decision criteria for which openings might make sense in the future as you kind of reshape your store -- your ultimate store footprint? Which types of cotenants, which types of suburban versus urban kind of areas would you look to expand? Maybe just to give us a little bit more sense of the new store component or the algorithm as we look beyond the pandemic years.

The criteria generally is densely populated areas, areas that have a high population of families with young children. So we have all this rich data in terms of the population of families with young children, what's the income level. And again, we're value brands, right? So we appeal to the masses, where our distribution goes from Walmart to Macy's and our average price points are less than $10. So it's a high value, strong value proposition. So in years past, we learned the lesson. The more affluent the area or more affluent the center, the swankier cotenancy, the brands didn't perform well. But when we were next to Target, or Kohl's or Five Below, that's where you're seeing lots of traffic, lots of families with young children coming into those centers, and that alters another good cotenant. So it's where we've seen the best success. So our track record of store openings has been particularly good. Again, we look for a better part of a 20% 4-wall margin. The investment is fairly modest. We used to call our stores ATM machines, right? Because the upfront investment with some portion of, call it -- I'll give you a range $300,000 to $500,000 with -- including inventory. And generally, we saw a return on that investment within a couple of years. So we are -- we will probably continue to open up stores. We've scaled it back maybe, say, on average, on average, 10 a year and probably more of those will happen starting next year than this year. But there is a store opening plan. I just think the more I reflect on our decision to close a couple of hundred stores, the challenge to our real estate team is go out and find at least a couple of hundred stores that would provide a high return on investment and support the growth that we plan in both e-commerce and store sales.

Got it. And you talked earlier this year about potentially 300,000 to 500,000 fewer births as a result of COVID this year, which would be about a 10% reduction in the birth rate. Has there been any change in your view as sort of the data has come in over the last few weeks and couple of months? And I'm also wondering if you can give a little bit of color on how you see that playing out. So there's some view that births are like weddings where if they don't happen this year, they're going to happen to double on the other side of COVID. Do you see that as a potential scenario? Or do we normalize back to sort of the prior rate without that spike on the other side?

Yes. So I think some of you may know if you follow us over the years. We've seen a decline in births every year since 2007. So there were a peak number of children born in the United States in 2007, 4.3 million babies that year, and then the Great Recession hit. So every year, since 2007, we've seen a decline in births. And during that time period, since 2007, Carter's sales and profitability have more than doubled. So our focus over the years has been to extend the reach of the brands, develop a huge book of business with Walmart, Target and more recent years, Amazon. And so opening our own stores, launching our own e-commerce capabilities during that time period. So we've been successful reaching more consumers who are having children and spending money on their kids. And that strategy has worked beautifully for us. And then with the pandemic, I will tell you, I think there is some merit to the concern. The births are clearly down because we know people in our family, friends of ours, there -- we got invited to weddings last year. And then we got the follow-up note to say, listen, we decided to move the wedding initially to the fall because everything was going to be better by the fall last year until it wasn't. And then they moved everything to this year. So I think we've been invited to 4 weddings this year. So usually when you delay the wedding, you're delaying starting a family, it's understandable. And so I think some things may have moved to the right. With every call this year, with every earnings call, we will update you on what we're seeing. In the first quarter -- baby apparel was the strongest component of our growth in the first quarter. First quarter was very good for us, far better than what we thought it was going to be. Outlook for the year is good. If there is a noteworthy slowdown because of births, we'll see it. We are the largest provider of kids apparel in North America. If there's an impact on births, we will see it. Thankfully, we haven't seen it yet. I think the thing people -- I've seen plenty of analysis on the drop in births. I haven't seen the correlation to what's going to be the impact of these unprecedented stimulus payments to families with young kids. It's meaningful. So again, we saw the stimulus earlier this year. And when that -- those stimulus checks came out, business went through the roof. And now those stimulus payments will continue through the balance of the year in terms of these child tax credits and they're thousands of dollars. I mean it will continue into the first quarter -- first half of next year. And as regardless of if you paid taxes or if you didn't pay taxes, you're getting thousands of dollars based on number of children that you have. And I'm told the benefit could be as much as $8,000 or more. And I think about when we were starting our family years ago, somebody gave me some portion $8,000 for our kids. I mean it's like getting the lottery. Now what we don't know is how they're going to spend that money, right? Are they going to spend it on their kids? And time will tell. But I was traveling recently, I was out in California, went through LAX, went through Hartsfield here in Atlanta, airports are packed. And what it's saying, I mean, people are reconnecting. They're tired of being kind of shut in this isolation being away from their families. People are getting out and about reconnecting with people, family, grandparents that they haven't seen in a year because of keeping the grandparent safe, all that. And so if you're traveling, if you're traveling with your kids, you're going to reconnect with your family, you're going to be getting new outfits for those kids. So I think that's what we're seeing in the results. We don't know how it's -- we never recovered from a pandemic before. So we don't have another model to follow. But we're -- I think it's going to be fascinating to see consumer behavior, certainly, weddings move to the right. But what I love about what we're going through as a country and market, it's going to be a multiyear recovery. And so we may not get all of it this year. What we don't get this year, we'll get next year. Even I had an update recently saying like, wait, it may take a couple of years to see that, and I said that's fine. We've been around for 156 years, we're going to be around for another 156 years. If we don't realize the full benefit of some things that are in the pipeline for a couple of years, actually okay with that. It's going to be a wonderful multiyear recovery. That's how we see it. And again, with every earnings call, we'll let you know what we're seeing in the baby apparel sales. Just know, our book of business with Amazon, Target and Walmart, a very high percentage of our sales with those retailers is baby apparel. And those retailers are thriving during this time in our country.

Yes. It will be interesting to see because when the child tax credits kick up next month, I think comes out to $300 per child. So it'd be interesting to see the impact.

Per month, Warren. That's per month.

Per month. Great.

Per child. Yes.

Per month, per child. The next question I have is for Richard. You raised your EBIT margin goal, kind of the 5-year goal to 13% from 12.5%. And if I look back historically, kind of the peak margin you've done is around 14%. What's holding you back from getting to and above that peak level? Because if I think about some of the actions you've taken, you've made some great progress with inventory management. You closed some of these stores, low-margin stores. You have much more -- a much larger digital business now. Maybe you can just give us an idea of kind of what's holding you back from getting back to those peak margins?

Sure. Well, that peak is getting to be quite a while ago now. That would have been 2010. That was before cotton went from $0.60 a pound over $2 a pound. I would say the complexion of the business has changed pretty significantly since then. So cotton had a fairly immediate deteriorating effect on our margin in those early years. We recovered nicely from that. I would say we've had a fair amount of change in our wholesale business. Wholesale previously was probably our highest margin business. There's been a lot of change in terms of the composition of that portfolio. Since then, we've added some great new sources of growth within wholesale. So I would point to simple joys within the exclusive brand portfolio, that's our brand with Amazon. That business, I would say, was a fairly low-margin business when we started it. But because of the improvement we've made in the profitability of that business, the size and scale, the rapid growth, it's a very profitable business for us today. We've added other things over the years, new businesses, which I would say are still ramping, perhaps not completely at their ideal contribution from a profitability point of view. And we've had to make investments along the way to support the growth in our business. So we certainly think that the near-term objective is what we have stated. And that would represent really good improvement over the last couple of years, where we've had a long track record of margin expansion and margin growth. The last couple or few years have been moving in the wrong direction for a few different reasons. Some of those are those newer businesses that have not contributed, we think, what their potential is. But there's no question over the last several quarters, including moving through last year. We made some really fundamental changes, some of which Mike has spoken to as it relates to how we're running the business. We certainly think that those are going to accrue to the long run. So managing a better business in terms of being more efficient on inventory, I think we've made very good progress in improving our realized pricing. We've had a very strong productivity agenda, probably the longest list of discrete productivity items that we're pursuing as a management team. We did several reductions, of course, last year to kind of rightsize the cost structure. All of those things should portend well for the future. If we're fortunate enough to get to that 13%, we'll set a new objective for ourselves and move beyond it. 13% is pretty rarefied air for the company that we keep. So -- but there's a lot of building blocks there that we feel very, very strongly about in terms of the potential for long-term improvement in our profitability.

Great. And can I just dive in a little bit deeper on one of those building blocks. I believe e-commerce has been your highest margin business for a while. It's obviously gained a lot of scale over the course of the pandemic. Can you talk about the margin progression just for that e-commerce piece of the business? And if consumers continue to flock to that channel, can you talk about the implications for the overall company margin?

So e-commerce has been our highest margin business. I think our last public commentaries have been that it was in sort of the low 20% range after being previously kind of at the high 20% neighborhood. And the reason that had a decline largely was twofold: one, I think that business had become very promotional in our portfolio. The thesis had been because price discovery is so easy for the online consumer, we had to be even more promotional. And we already are, I'd say, a reasonably intensive promotional business, very high low, but it became even more so in the e-commerce business. And then I think you've seen the rise in cost to serve for the e-commerce channel. So shipping costs have been higher. I think the small parcel companies understand their importance in that value chain, and so they've been flexing their muscles over the years. Freer and faster shipping have been expectations that have been elevating with the consumer. So the cost to serve that consumer as well as ongoing investments in distribution capacity, updating the website, making sure from a technology point of view, that everything kind of fit together the right way. Those have all been investments in that business. It's really been the progress over the last year though in terms of inventory management, realized pricing. So we are now above our historic highs for e-commerce profitability. Those margins have continued to improve. So I think the long-term outlook is good there. I think we still face those challenges as it relates to shipping costs and cost to serve. I think interestingly, some of the capabilities that we have brought online from an omni-channel point of view, are starting to address some of those headwinds economically. So the ability for us to use our store inventory to fulfill online orders. The ability to use our stores to fulfill orders that might be on the West Coast, for instance, further away from our DC. It alleviates the need to expedite and pay for that expedited shipping in terms of the small parcel cost. So the convergence of the channels and the omni-channel capabilities are another, I would say, tool for us to continue to improve our profitability in the e-commerce channel over time.

Thanks, Richard. And just turning to wholesale. Your exclusives have been outperforming your nonexclusive for some time. But you've been very proactive in managing your mix of retailers on the nonexclusive side. So two questions on that. First, did that kind of management of the retailers continue through COVID? And what was kind of the outcome of that exercise? And the second question, do you feel like that side of the business, the 50% of wholesale that's not exclusive, do you feel like that's getting to a point where we might be able to see growth out of that side of the business again?

Yes. So this -- just for everybody's knowledge when we talk about exclusive brands, that's Target, Walmart and Amazon. The nonexclusive, Kohl's, Macy's, Penney's, Costco, CMs. And when you say manage them, the big decision we made when everything hit the fan back last March, when the pandemic began, is many of those retailers, the nonessential retailers, so to speak, said, keep the inventory. The hundreds of millions of dollars we just ordered for you for the bulk, it's all yours. So we had to make a decision what we were going to do with the inventory we could not get out of? And what do we do and what assumptions do we make for the inventory we could. So we curtailed our second half inventories anywhere from 30% to 40%. And a lot of our -- those nonessential retailers saying, hey, you cut that back, I said we did because we have to sell through what you just canceled. And we learned a lot from that. That was actually a breakthrough in our business because what we realized is that a number of the products that we had sourced for spring and summer had a much longer life cycle to them. In years past, we bring t-shirts and shorts in early in the year, and then it typically would have a 13-week life cycle and go on the clearance rack. And we always truck it as -- I'm not a merchant, but I mean why would we discount the daylights out of these beautiful t-shirts and shorts just so we can bring in more t-shirts and shorts as we move through the season. And what we learned during the pandemic is we needed to hang on to that inventory because it was going to have to last us longer because we got out of a lot of second half inventory. But I'll tell you, in many parts of the country, it is still warm in September and October. And so we kept a lot of that product into the early fall months. And we weren't anywhere near as promotional as we would have otherwise been in years past. So a lot of those nonessential retailers were saying, we cut them back. And because we cut them back, they were leaner on our inventory and they were less promotional. In their margins, they're achieving record operating product margins now on our brands because they're leaner on inventory, and they're less promotional. It's a much healthier model, much healthier model. So -- and they had to make some decisions in the pandemic what they were going to order for spring '21 and fall '21. So anyways, I actually think the changes that we and some of our wholesale customers made during the pandemic, it's a healthier model. And so there's like a new base. And even before the pandemic, there were some of our customers who overbought and didn't have the sell-throughs, and were working through a lot of the holiday-related -- the fall in holiday-related product early in the spring, that's a terrible place to be that you're still selling flannel shirts in February or March, right? Nobody needs a flannel shirt in February or March. Even if you live in Vermont, you don't need a flannel shirt. So anyways, I think everybody took this as an opportunity to rip the band-aid off, rightsize inventory levels, learn how you can operate with less inventory, even in our own stores. We used to -- we got a better part of 800 stores. And inevitably, any time you'd go, you always want to look at the backroom to see what shape it's in, how it's maintained and inevitably would be loaded with product. You go into the most of our stores today, they're empty. The back room is empty. All the products out where the consumer can see it. And so -- and we're -- the retailer we learned from years ago was Target. Target has what I would describe as a scarcity mode, from my perspective, maybe not their but from mine. It always struck me is they'd rather lose a sale than get stuck with a nickel's worth of excess inventory, that's a healthy model. And so it tells the consumer, listen, you better grab it now while it's here because it may not be here on your next visit. So we were inspired by that. And similarly, with Amazon, we learned from Amazon, some of our best-performing styles with Amazon have been the same styles for 3 years. So they don't change it up every 3 or 4 months. They said, listen, consumer loves the style. They love the silhouette. They love everything about the garment, keep on selling us those. So we're inspired by what we learned with our book of business with Amazon that the product has a much longer life cycle. We view it as first delivery, second delivery consumer doesn't view it that way at all. They view it as just a beautiful outfit, beautiful color story, beautiful applicate, beautiful print. So there are a lot of things we learned in the pandemic that I would say we've made some structural changes in our business. Our mindset throughout the pandemic is fewer or better things. Fewer, better, longer life cycle product choices. Fewer, better promotions. Fewer, better, more profitable stores. So those are the things that we're seeing in the results right now. And the challenge for us is not to let the pendulum swing back. But again, we have fewer, better people. We had 3 downsizings in our organization because when everything -- the pandemic began, we said, listen, we're going to be a smaller company. We need a smaller organization. So we went through 3 downsizings because compensation is the second largest component of our cost structure, second only to inventory. So there was a lot of focus on the big components of our cost structure, and you're seeing that in the performance that we've been reporting tail into last year into early this year.

Yes. That's interesting, some of the insights you were discussing about your Amazon business. Maybe we can just dive in there a little bit deeper. Your exclusive with Walmart, Target and Amazon, they've been above your company growth rate for a while. How do you sustain that momentum? So the traffic in those channels is much healthier. But are we going to see new age groups, new categories, maybe some geographic expansion. Maybe just talk about the exclusive side of the wholesale business.

Yes. So again, these are -- we just received the Target Supplier of the Year Award. So we were honored to get that phone call last year. And most of the folks we were talking to Target have been there in recent years. I've been here for a better part of 30 years. So I reminded them, we were celebrating our 20 years with Target this year. That came as a surprise to them, right? And I think that some people I work with it came as a surprise. So -- but these are long, successful relationships with both Target and Walmart. And like everything we do, we start with baby. Because that's the consumer for multiple generations of consumers, Carter's is the brand you will buy for your new baby, 5x the share of our nearest competitor. Nobody is even close, right? There's just something about the Carter's brand that the consumer views as special, that the parent were, the grandparent were. So it's just -- that's -- usually, it's a multi-generation experience when you find out that you're expecting, you want to bring your mom, you're family you bust out of, your grandmother is still with you. Everybody goes shopping. It's a multi-generation experience. And so we start with babies. So how do we continue the momentum age up? So we have age up as a strategy, and what does age up mean? Whatever is strong in baby, how do you hang on to? How do you increase the lifetime value of that relationship by introducing under the toddler. So we got the #1 market share in baby, #1 market share in toddler, and we got the #1 market share in both playwear and sleepwear in that 4 to 7 age range. And now we're -- I think the upper limit, my own personal experience with my kids, a 10-year-old is probably the outer limit of the brand. What's the -- once they're 10 years old, you're looking at what the older kids are wearing on the school bus, and you start to dress more like the older kids, we get that, right? But it's a big market. That 4- to 10-year-old age segment is larger than the baby and toddler age segment. And we've had success in that. So you've probably heard us on the calls, the older age segments are some of the fastest-growing components of our business. Why? Over the years, when I would go to visit stores, I'd always ask the store associates, what are our customers looking for that we don't have? And they said they wish they could stay with the brand longer. They wish they had -- wish we had slightly larger sizes. So with that kind of input, we said let's try it, right? And we tested it years ago. And like anything else, the initial test ROA, we're trying to do too much, get it more focused on a smaller subset, which we did. So we went -- initially went to size 14 and our stores said, we don't have room for all this product. Can we focus on size 8, let's add 1 size because we only went up to size 7. Added that 1 size. So I think that 1 size, Richard, created like $100 million in revenue. I mean, this was when we were maybe a fraction of the size of the company we are today. So gradually, we did work our way back up to size 14 with the success fit. But the age up strategy is working. And so with the exclusives, we started with baby, shown good progress with toddler, older age sleepwear because we're the dominant brand in young children's slipper swimwear. Swimwear is one of our -- and again, we brought -- we initially through a licensee, we brought it in-house. So we designed it in-house. We sourced it directly. So the margin structure is better for us, better for the retailer. So we're seeing success, expanding the scope of the product offering. So our objective is always to have growth that's at least in line with those retailers' growth and if not outperforming it. We're meant to -- they view us as the brand the consumer expects to see when they're shopping at Amazon, Target, Walmart, Kohl's and others, right? We're viewed as traffic drivers. That's where you're going. I found it interesting recently thredUP. You're familiar with thredUP?

Yes.

So I [ read about ] thredUP recently. Yes, the resale market. On occasion, we're asked about the resale market. It's not something currently we're interested in, right? Anyways, I said, yes, I've never known enough about thredUP, they apparently went public and did a strong opening. What do you think the best-selling brand on thredUP is? Carter's.

Carter's.

And even when Amazon approached us years ago and said, we want Carter's. We want the Carter's brand, well, we can't give you the Carter's brand. But so after 4 years of having that dialogue, I said to them, I'm a little confused because I go on Amazon, we have no direct relationship with them. But you have more Carter's than you have any other brand on Amazon through the marketplace reseller. So it is the brand the consumer expects to see. It's the brand that these major retailers know, bring people into their stores because kids are going through wardrobes rapidly in those early years of life. So they know it's a frequent visit. And when they bring the mom and dad into shop for their child, they know that they're going to buy something for themselves, something for the home. And so that's why we've had the success we've had with these brands.

That's great. Can you maybe contextualize -- so the age up strategy has been -- you've seen some great success the past several quarters, Big Kids has been one of your highest percentage growers. Can you just maybe contextualize how that piece of the strategy fits into your larger 5-year plan? How material is that? Where does it rank on your strategic investments?

It's one of the top 4 strategies in our company. So the first is leading in e-commerce. We got the best-performing e-commerce platform in the business. I get calls from some of our customers, wholesale customers saying, listen, we listen to your calls, we hear it's your fastest-growing, highest margin business. How is that possible? Because in their e-commerce business, they're not having that same type of profit performance. And then we explained to them, our return rate is extremely low. Because the brand has been around for 156 years. You know exactly what you're getting when you shop with Carter's. It's not like you get a blanket like for, this isn't exactly as is what I thought I was going to get. You know exactly what you're getting. So the return rate is extremely low, and the returns are what kill the profit margins if you have a high-return rate. The other thing, too, we don't have multiple places where we ship the product from. When you order, we either ship it from our stores, if we have it in the store or we ship it from the distribution center. Others ship it from the DC, they ship it from different locations, and that kills the profit margin on it. So leading in e-commerce, winning in baby, aging up our brands and expanding globally. Those are the 4. So it's -- where does it fit? It's one of the top 4. And I would say it's a meaningful component of the growth plan.

Thanks, Mike. And still rolling up against time. So I just wanted to throw in 1 more. China has been a real bright spot...

I'm seeing there's like a chat box. Are there any questions from the folks who are joining us this afternoon? You want to just check that to see if there's...

Yes, sure. See. Yes. Let me throw 1 in here. In terms of ESG, how do you ensure the cotton does not come from Xinjang? And do you have any procurement processes to check on this?

We do. And I would say it's thorough. And again, as much as we don't like the first labor, nor to our suppliers. So we're not sourcing anything from Western China. We do have some third-party resources that can tell us where the product is coming from. So it's not just what our suppliers say. There's a very thorough audit process to make sure that we can validate the representations being made by our suppliers. So we think we've got a handle on it. We think we've got good visibility to it. And again, some of these relationships we've had with our partners in Asia, we've had these relationships 20 years. And they are as focused on ESG as we are in the United States. These are good people, good business leaders, wanting to do business the right way, taking care of their employees. So they're some of the best people I've ever met in my career, our partners in Asia. So I think we've got a handle on it.

Great. Maybe I'll just throw on 1 more from the audience. Are you considering bringing back some of the people from some of the rounds of downsizing you've done over the last 3 -- over the last year or 2? And -- or can we expect the recent level of SG&A to continue?

Well, listen, the door is we have a very active alumni association. So for good people that got displaced during the -- the door is always open if we need to bring somebody back, that's just who Carter's is. Carter's is kind of a place people usually come and spend the rest of their careers. It's not unusual to celebrate people with 30, 40, 50 years of service. It's a common experience. It's a great place to work. So we're going to try to stay lean on the organization because we are still in a pandemic. United States is making progress. Thank God, we're making progress here. We had a meeting yesterday with our -- the leaders in Canada and Mexico. They are still -- those countries are still struggling with getting people vaccinated. And it's going to be a longer recovery time than we're having in the United States. Same is true in Asia. I'm sure you read the Wall Street Journal articles in terms of port shutdowns in the MTN and other parts of the world. Cambodia's had frequent lockdowns. And these are important parts of the world to us. So we're going to stay lean on the cost structure, and there's no...

Looks like Mike got frozen. But just to finish with that. We're going to stay as lean as possible on the cost structure. That's -- we have a very active productivity agenda, and I think that was underway before the pandemic. And the times have indicated that it's appropriate to continue that progress on managing SG&A as well.

Great. Thanks so much. I think that's all the time we have. Thank you so much, Mike, Richard, Sean, for the time. Hopefully, next time we see you guys when we'll be in Atlanta, Georgia or New York City in person.

I hope so. Thanks, Warren. Thanks for joining, everybody.

Thank you very much.

Bye now.

Bye.