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

Good morning, everybody. Thanks for joining us today for day 2 of our BofA Consumer Conference. We're very pleased to have Carter's join us for our next fireside chat. On stage, we have Mike Casey, Chairman and CEO; Richard Westenberger, CFO; and Sean McHugh, Head of IR and Treasury. So to kick it off, I would like to turn it over to Mike for some prepared remarks, and then we'll dive into some additional Q&A.

Yes. Thanks, Chris. Good morning, everybody. So I appreciate you carving out time to get together, and I've got some brief opening remarks, we'll have plenty of time for your questions. Talk about pictures tells it all. This is what we do for a living. This is what we come into in Atlanta, Georgia every day, all this beautiful lifestyle photography. It's our new Little Planet brand that's growing like a weed out a store near you. So if you're out shopping, keep Carter's in mind. So Carter's, as you may know, largest branded marketer of kids apparel in North America. We own 2 of the best-known brand names in kids apparel, Carter's and OshKosh B'gosh. Both brands have served the needs of multiple generations of families in the United States particularly over the past 100 years or more. We own the largest share of about a $34 billion market. We have the #1 market share in the United States, Canada and Mexico, those Canada and Mexico were acquisitions over the past dozen years-or-so of very good licensees who developed our brands in those markets. And then similarly, we have a wonderful relationship with a large retailer in Brazil, Riachuelo. Carter's brand did so well in their stores over the years, probably a handful of years ago, they said, "Hey, we'd love to open up Carter's stores in Brazil," and now they've got over 50 beautiful Carter's stores in that new market for us, and we now have the #1 market share in baby apparel in Brazil. We sell essential core products. So if you're familiar with our brands, we sell body suits and washcloths, towels, bibs, blankets, blanket sleepers, pajamas and have the #1 market share in most of those product categories. These are the must-have products that families with young children buy frequently in those early days, months, and years of a child's life. Last year, we sold well over 20 body suits for every child born in the United States last year. It's kind of a core essential. We're the largest supplier of kids apparel to the largest retailers of young children's apparel, so Target, Walmart, Amazon, 3 of our largest customers, we've developed exclusive brands for each one of those retailers, if you went shopping at Target or Walmart, you'd see a dominant presentation of the Carter's brand in both of their stores and then that's very successful for them on their online platforms. We're also the largest specialty retailer of young children's apparel in North America. We directly manage over 1,000 stores in United States, Canada and Mexico. Our brands are sold in over 90 countries through over 20,000 points of distribution throughout the world and through the most successful online platforms for kids apparel last year, together with our wholesale customers, consumer purchases of our brands online exceeded $1.2 billion. So in the pre-pandemic period, Carter's had long track record of growth through 2019. We had 31 consecutive years of sales growth. So Carter's has not been a hot and cold performing company. There's been a consistency to what we've done for many, many years, and the pandemic through some things out of balance. So long track record of growth, top quartile operating margin relative to our peer group, a strong cash flow generation, which attracted 3 different private equity firms to Carter's over the past 30 years, and each of them saw more than double -- a significant return on their investment in each of those 3 private equity firms doubled their investment in Carter's. Over the past 10 years, we've returned about $2.8 billion of excess cash flow to our shareholders through share repurchases and dividends. In 2020, like a lot of good companies, the pandemic impacted our performance. In the early parts of the pandemic, we closed our stores, our wholesale customers, many of them closed their stores to keep their employees safe, their customers safe. That said, in 2020, we retained a higher percentage of our profitability than most in our peer group. And that's largely because we sell through what was defined as the essential retailers, those that were selling groceries and other essential core products. But then again, Carter's is selling essential core products, right? These are the must-have products that given how children rapidly outgrow their outfits in those early years of a child's life, there was a need to be shopping with Carter's. So 2021, we had a strong recovery from the pandemic. Consumer came roaring back, and we had record profitability, record profit margins and we did over $500 million in operating income in 2021. And I think it was a combination of a lot of things: post-pandemic recovery, people had access to vaccines, had confidence in their effectiveness, people reconnecting with families and friends. And when they did that, they have to get their kids new outfits and getting out and about and traveling, going to Disney World again, right, getting back on planes. So a very different experience at the Atlanta Airport in '21 versus '20. There was -- it was a ghost town in 2020, all the parking lots were empty. In 2021, it was hard to find a parking space when you're traveling. So it was a good year for us in terms of record profitability and profit margins. And we expected last year 2022 would be another good year, and it started out that way. So in the early months of 2022, we're seeing high single-digit growth in our comparable retail sales. Wholesale customers were ordering aggressively, anticipating that 2022 would be a year just like 2021. But by late spring, it became clear that inflation was not going to be transitory. Consumers were reacting to gas prices doubling. And when it became clear that, that wasn't going to be temporary, it wasn't like some pipeline went down temporarily, but it was going to be -- there was no solution to -- at least in Atlanta, Georgia, gas prices went from less than $2 to over $4 a gallon. So there was a shock. This time -- around this time last year, the consumer is starting to realize gas prices had doubled. Food prices were surging. If you remember last year, it was hard for families with young kids to find baby formula. So a lot of those things. The historic inflation weighed on consumer demand and particularly families with young children. Our target consumer household income is around $75,000. So it's a segment of the population, women, men, late 20s, early 30s, just starting out, starting a family, just got newly married earlier in their careers, a time in their lives typically people in that age segment, I remember that was true for me, late 20s early -- so time in your life, it's paycheck to paycheck. Think about where you were in your late 20s, early 30s. And I was struck by that to kind of thought how many people are in the United States are living paycheck to paycheck. There was a study last year, about 2/3 of Americans are living paycheck to paycheck, and that's a record high. So it gives you a sense for how consumers have been rocked by this historic inflation. Again, that said, in 2022, our sales and earnings per share were about 90% of the record performance that we had the year before. So again, I think there's a resilience to our business model given what we do for a living. And then for this year, our sales and earnings are planned down in the market for kids apparel -- at least in the United States is planned down around 6%. And so we're planning the sales and earnings down. We expect the first half will be more challenging than the second half, largely because this time last year, there was still a mindset, particularly with our wholesale customers, we've got $1 billion of wholesale business. Most of them at this time last year were saying, get the product in here. Can you get it in here earlier? Most of our wholesale customers were ordering our product several weeks early to overcome some of the congestions on the ports, both the West Coast and the East Coast. You remember it was not long ago, they were talking about 100 ships off the coast of Los Angeles trying to make their way through given the surge in demand we had in '21, like most companies, Carter's swung a lot of our receipts from Asia over to the East Coast, which was working well until it didn't because we weren't the only company that swung things to the East Coast, all of a sudden, the East Coast backed up. So things were running late. So in the first half last year, I would say the major retailers of kids apparel were building, building inventories, and then it was clear that the consumer was slowing down, largely in the second half, they were pulling back. And with late deliveries, a lot of -- we saw a lot of order cancellations, wholesale order cancellations in the second half of last year. And then very unusually, they were turning off the automatic replenishment systems and the beauty of automatic replenishment, it's automatic. If the system is turned on -- if they turn the systems off to knock the inventories down, that weighed on our performance in the second half of last year. Thankfully, the major retailers that we do business with, they're the best in the business, were very effective knocking the inventories down before the end of their year, which was end of January, automatic replenishment systems have been turned back on. And that's a meaningful portion of our business. Think about what automatic replenishment means in our business. I think if you've done a Target, been at Walmart, you've got these big beautiful brand walls and our business is all about a fixture fill. And so as the registers ringing at those stores, it sends a signal to us to send -- automatically send product back to those retailers so that the fixture of essential core products is always filled. So we're anticipating being up against that kind of experience we had last year that things were turned off and they were contracting. Given the fact today, they're in a much better inventory position, we expect better performance in the second half relative to the first half. Again, a number of things driving what we expect will be an improving trend as we move through the year. Inflation is moderating and see those headlines including this past week. I think consumers have adjusted to kind of the new normal. It's -- even though gas prices are double in Atlanta than they used to be, there's no shortage of cars on the road. Traffic is as bad in Atlanta as it's ever been, so people are back out and about. And inventories of our brands, we have insight in how our -- what our inventory position is at every major retailer. And I would say they're light. They were highly effective knocking the inventories down that they overbought in 2022. And we saw something in our fourth quarter. We had a very good fourth quarter, much better than what we expected it would be over the holidays. We have one of our largest customers to say, "Hey, if you've got spring, we'll take it. We'll take, get it in here," because anything new the consumer reacts to, it's a better sell-through, it's a better margins, it's better price realization for the retailer. And as we move through the year, we'll update you in what we're seeing in terms of our customers -- wholesale customers saying, if you got it, bring it in early. And one thing that's hard to put a number to, but we're starting to see the benefit of it, on-time shipping. So our shipping today is as good as it's been in the past 3 years. So with the pandemic-related disruption in supply chains, we were -- our on-time performance was not to our standards. So today, we're shipping well over 90% to 95%, 100% complete on time. And when you do that, you can get to the product to the wholesale customers and to the consumers when they want it. And so what's the value of on-time shipping and many retailers of young kids apparel being light on inventory? Hard to put a number to it. We think we've captured that in our forecast as we move through the year. But again, with every earnings call, we'll update you on the benefit that we're seeing from that. So with leaner inventories, on-time shipping, we are expecting better sell-throughs, better replenishment orders, fewer cancellations as we move through the year. The other silver lining to consumer demand this past year slowing down, manufacturing capacity in Asia is opening up, and they're hungrier. When we had our own textile mill in Georgia years ago, the whole thing when you own the manufacturing capacity, you got to keep it busy, you got to keep it productive. So a lot of capacity is opening up in Asia, and I would say that's the #1 driver of product costs. So we're starting to see lower product costs and lower ocean freight rates in the balance of the year. Again, we'll update you on the impact of that. Some of that we've captured in our forecast may not have captured all of it. So again, assuming inflation continues to moderate market conditions and improve the consumer confidence, rebuilds, they adjust to kind of what the new normal experience. We do expect to return to the kind of performance we had before the pandemic, good, consistent growth in top line, margin expansion. We're expecting good cash flow generation this year, an important thing for you to note. Demographics are favorable. So I don't know about you. We went to 5 weddings last year. And many of those weddings were delayed several times during the pandemic just to keep their families safe from the virus. So there was 40-year high in weddings in 2021. So it's an interesting -- what will happen in terms of those record weddings last year in 2022 in terms of family formation. And so even the economists during the pandemic predicted that there'd be 300,000 to 500,000 fewer children born in 2021 because of the pandemic. They were wrong. It's actually increased. So I mean you're talking being off, right? It wouldn't be the first-time economists off on a forecast, right? But they were off. And so we're starting to see more stability in the annual births after what would have been like almost a 14-year decline since the financial crisis and The Great Recession, there had been almost a 14-year steady decline from the 4.3 million children born in 2007, it was closer to 3.7 million last year. But we're encouraged by between the record weddings, likelihood of family formation and stability and birth rates, all those things, I think, will be good for us in the years ahead. So I've made some forward-looking statements this morning. There are risks inherent in our business, and those risks are disclosed in our SEC filings. So with that, happy to address your questions as best we can.

All right. Great. Thanks, Mike. That was a great overview. So there's a lot to unpack here, but I thought we could start with your retail business. Can you walk through some of your underlying assumptions during the year to get to your guidance? I believe it's down mid-single digits. And then how are trends playing out in March relative to your update a couple of weeks ago?

Yes. So again, we were up against a strong start to last year, had high single comps through February, as I recall. And then there's always these Easter shifts between March and April, but it really wasn't until May when comps went down around 10%. We said there's something the consumer is clearly slowing down. If you remember early part -- sometime spring last year, Target, who we view as one of the best in the business, came out and said, "Hey, the consumer is slowing down, we're going to have to reset the expectations for the year." It was some portion of -- 6 weeks later, as I recall, they came out with another announcement a short time thereafter say, it's actually -- demand is going to be actually lower than they thought weeks before. So that's what we were experiencing as well. The consumer through the breaks on late spring, unexpectedly. So we're going to be up against some of those comparisons last year. We're planning our retail business down around 6% this year. And the comps, I think, are down 7%. We'll get the benefit of new store openings that will put the total retail sales down around 5% or 6% this year. And that's what the market is projected to be. The market for young kids apparel is planned down about 5%. Again, because of the target consumer, they're assuming you really didn't have the full year impact of some of the slowdown we started to see in the second quarter of last year. So those are the planning assumptions. We are opening stores. People are -- sometimes question, does that make sense to open stores? But 70% of kids apparel is bought in stores. Because you think about if you're expecting, especially if it's your first child, you kind of want to have that experience going in, putting your hand on the product, seeing the beauty of the product offering. It's a family kind of experience. You bring your sister, you bring your mother, your mother-in-law if you've got a good relationship with her. You're going into the store to do the shopping for that very first wardrobe that your beautiful new baby on the way is going to be wearing in those early days, early months of life. So stores are important. We've got a very margin-rich e-commerce business. Our e-commerce penetration last year was around 37%. The market is closer to 30%, but the penetration for Carter's is higher because you know what you're getting. You know what a body suit is. There's no mystery. Sometimes we buy things online this is isn't -- this fabric isn't anything what you thought, but you know what you're getting for Carter's because multiple generations have had a good experience with the brand. We referenced it on the last call and people are always surprised how rich the margin is for our e-commerce business. We've had some of our wholesale customers call and say, "How is it possible you get in those kind of margins," because they listen to our earnings calls, right, for our online business. But our return rate online net of exchange is around 3%. If you follow adult apparel, if you follow anybody has a shoe business, the return rates are much, much higher. But because of the consistency of our product offerings, my guess is this statistic has changed a bit over the years. But I remember when we went public 20 years ago, we said our top 10 silhouettes drive about 80% of our revenue. So body suit, washcloths, towel, bib, blanket, blanket sleepers, the silhouette doesn't change, what change from year-to-year, color, art, [ applicate ] but the consumer knows how it's going to wash, how it's going to dry, how it's going to shrink. They know the fit. It's not a surprise. No one gets our products and say, "This isn't exactly what I thought it was going to be." So I think that's -- the retail business will be down. But then again, I think our -- we're planning the business down consistent with how the market is planned down. And again, the beauty of our business, we have insight in how every major retailer of kids apparel is planning '23. And given their experience in '22, the smart play was to be very cautious on inventory commitments. You didn't want to -- nobody wants to repeat the experience that most companies had in '22 where they just simply overbought, and it was a major correction in the second half of last year. So first half this year, we'll have kind of, I would say, tougher comparisons because we were up against stronger performance in the first half, we'll have some easier comparisons in the second half.

Great. And can you talk about how we should think about your strategy to fend off competition from private label? And maybe you can tie in your view on pricing and where you think that could go relative to today's levels?

Sure. So private label, they're all good brands. And I would say every major retailer in The Great Recession leaned into private label. I remember, big questions for our investors when they did that years ago was how would that affect us? Our business grew, it actually strengthened because what they do is they edit it out, a lot of the brands that didn't really mean much to the consumer, but they kept the #1 brand. Carter's is the best-selling brand in young children's apparel. Our share of the market is twice the share of the largest private label brand. So private label is good. It's good competition. The best retailers find a good mix between their private label brands and the national brand. And because the national brand drives people into the store and then they have a basis of comparison to the private label brand. The key thing for us on competition, Chris, is to make sure that the value proposition is compelling. So there's nothing new about private label. We've been competing with private label for years. And our pricing strategy is to be a buck or 2 above private label on average. When you're a buck or 2 above the consumer by and large, again, our experience over many years, they understand that the national brand will cost a buck or 2 more. The further away you get on pricing from private label, the risk of trading down. So we're mindful of that. But over 50% of Carter's apparel sales, which is the lion's share of our business, is in baby. So -- and it's -- we have 5x the share of our nearest competitor in that newborn to 12-month age segment. So a big part of our business is gift giving. So when you're getting ready to give a gift to a friend, family member, you got a lot of choices, and you can give them a private label brand or you can pay a buck or 2 more and buy -- give them a gift from Carter's or Baby B'gosh. And our track record over the years more often than not, they pay the premium for the national brand.

Got it. That makes sense.

Yes, pricing, you asked about pricing. Probably we've seen significant improvement in price realization from the pre-pandemic period. So our pricing, on average, direct to the consumer before the pandemic was like $8 and change, which I always felt was too low because we have 5 packs, 6 packs, 7 packs, we got 3 pack. We have remote -- Carter's is known as the high-value proposition, multipacks for a lot of things that we do. In the average price point if you walked into our store in 2019, if I asked you what was the other average price point? You wouldn't have guessed $8 and change, would have guessed much higher, right? So when the pandemic hit, a lot of stores closed, our customer stores are closed, stores closed for several weeks. What we decided is as many retailers had backed up with spring, we said, "Let's focus on selling spring, let's take all of summer 2020 pack and hold it until summer of 2021." Our wholesale customers had already bought it. But just to give them a little bit of break, we took it the entire season over $100 million of inventory and sold it through a high margins in 2021. And so when we did that, we had to hang on to spring '20 longer and because we had to hang on to it longer, we weren't as promotional and so the consumer, there was no resistance to the higher pricing. So we sold for $8 and change in 2019, sold for $9 and change in 2020. And then with -- and then we embraced a little bit of that thinking on inventory management in 2021. And so average prices went to $10 and change in 2021, and it's closer to $11 today. Again, we see no resistance to pricing. And again, most retailers raised prices because product costs went up, ocean freight rates went up. And so we feel as though we're competitive. At the end of the day, we've got to be competitive with private label, which we believe we are.

Great. Let's shift to your wholesale business. Maybe we can start with your exclusive business, which has been very strong for you guys. So maybe you can talk through your visibility on orders this year and just remind everybody the percentage of your business that comes from that replenishment that was turned off last year?

Sure. So the replenishment varies based on retailer, but 50% of our wholesale business is through Target, Walmart and Amazon. Those are exclusive brands for them. It's an important part of their young kids apparel business. The replenishment on that because it's heavily weighted to baby is probably around 45%. Total Carter's, it's probably some portion of 35%. But for the exclusive brands, it's higher. And again, the beauty of that is it's all driven by the consumer. It's less about what the buyer. The buyer has to fill the fixture with inventory, but then it depends on how the register rings. And I would say the exclusive brand component of our business is the strength of our wholesale business. By comparison, we do business with the department stores, Kohl's, Macy's, Penney's and if you follow them like many companies, they were rocked by the pandemic with the store closures and with the kind of the shift to the more people going to Target and in Walmart for the groceries, one-stop shopping, especially as we're trying to consolidate trips with the higher gas prices. So the replenishment business is a margin-rich business. It's a margin-rich business for the retailer, and it's a margin-rich business for us. And the wholesale business, we're planning down around 10% this year. But Buy Buy Baby is a good customer of ours. It had been for years. But when they got into trouble, as we shared with you on the last earnings call, we suspended shipments to them. So exclusive of Buy Buy Baby, wholesale business is planned down about 7%. Again, the market for young kids apparel this year is planned down around 6%. So again, we see how our wholesale customers have booked the seasonal part of our product offerings right through fall in the holiday. So we -- and that's done. They booked that because we have to buy that far in advance of the ship date. We have a sense and they're booking that lower. And that's -- I actually think that's the smart play given the current market environment, you want to be cautious on the inventory commitment you'd rather chase than back up. And my hope is that we continue to see in the balance of this year what we saw in the fourth quarter is that the wholesale customers are saying, "If you got it, bring it in, bring it in, bring it in early." That helped us in the fourth quarter, it potentially may help us in the balance of the year. And the replenishment on every earnings we'll share with you what are the trends in our replenishment business, but we expect to see a more meaningful growth year-over-year in the replenishment side of our business in the second half because those systems were scaled back, dialed back in the second half of last year.

Then let's take a step back, actually, about this time last year, you put out some 5-year commitments. So I just wanted to talk about essentially your commitment to the high single-digit EPS growth CAGR starting this year, looking ahead. And what gives you confidence that that's achievable?

Yes. So you're referencing earnings on the high single-digits. So again, we had a pattern every February earnings call as we've started the year, what we think is possible. And during the pandemic, which has been a bit of rollercoaster, those forecasts, we've had to revisit those. And so we've far exceeded the plan that we had for 2021, but for a lot of reasons, we questioned whether or not -- so when we were in February of '22 coming off a record performance in '21, we then said, "We think what we think is possible the models that we have, given all things considered, the strength of our wholesale customer base doing business with the winners and the [ poor ] performance of our stores, strength of our e-commerce business, the growth we're seeing in international markets, we felt as though we could achieve low single-digit growth in sales." There was opportunity from further margin expansion. So we assume that we'd -- operating income could grow mid-single digit. And then through a strong cash flow generation and our track record of returning excess capital to shareholders, we would continue to be repurchasing shares. So it was possible we could have high single-digit growth in earnings per share. Those are still our modeling assumptions. What changed this past February, this is probably not the environment to be bullish on long-term forecast, right? So we kind of kept it to '23, if we're successful with '23 and the markets recover and inflation moderates, demographics continue to be favorable, and we expect that return to sales to growth both in sales and profitability in 2024. So our focus right now executed at a high level for '23, focused on margin preservation given demand is muted. For all the reasons, again, our target consumer, their household income is not the household income in this room, it's closer to $75,000, given who our target audience is, and they're under some pressure. But that pressure will alleviate as we talk to our younger colleagues in Atlanta, we just say inflation comes, inflation goes. There's good cycles, there's down cycles. And right now, there's a bit of a down cycle, but it will pass because people are working to knock inflation down and inflation will moderate, and the consumer will come back. We saw in '21 how resilient the consumer is and how quickly they came back, and there's reasons to be optimistic, but our planning assumptions internally are to -- that we do think those growth rates, historical growth rates are achievable. But right now, we're focused on near term, near term. We have to see how the balance of this year plays out. You see from day to day how kind of how -- the story has changed from day to day given what's going on in the world.

Sure. And maybe we can talk about your gross margin a little bit. It was nearly 46% ending 2022, which is several hundred basis points higher than pre-pandemic. So it would be great if you can talk through some of the structural reasons why this margin is higher. Why do you think that's sustainable? And then what gives you confidence in this year to grow grosses?

Sure. Well, during the pandemic, I think we found some courage to provide some things to run the business in a different way and really with an emphasis on profitability, I think being a high-margin business has always been a hallmark of our company. I think over the years, much like a lot of other consumer and retail companies, there have been a bit of a race to the bottom. We had become more promotional, particularly in our e-commerce channel than we had wanted to be. And we always felt like our brands were worth more in the marketplace. And so when the pandemic came along, the business that was still open and most robust was e-commerce. We actually, for the first time in my career, we actually tried to slow down the business because the demand was so robust, we had largely a single distribution center that was supporting that business. We needed to not have an army of people in that facility. We didn't want to have a lot of temporary workers. So we actually dialed back the promotions, dialed back the coupons. Over the years, we had a number of different offers that were kind of stackable on top of one another. And I think you have to be Mr. Wizard, as Mike says, to figure out what our end pricing was. So we have the opportunity to dial some of that back. To Mike's point, we haven't seen any resistance from the consumer. So getting to a more rational posture on promotions. And it's not to say we're not a great deal. If you go in our stores or on our website, the consumer sees that strong value message each and every day. So we didn't want to change that. But I think getting more rational approach to promotions, certainly was an element of that gross margin expansion. I think inventory management, and that has a lot of different dimensions. We started buying less inventory and having a bit more of a scarcity model and this was something that we had started even pre-pandemic. We had seen some of the lessons from some of our better wholesale customers who are doing the same thing. They were focused on cash flow, they were focused on inventory turns. And in our business, we just concluded that we were buying too much inventory. And so not having that tidal wave of new inventory building up behind, the current inventory that was available to the consumer, let us hold those prices longer, not get into the deep discounts. So I think that's part of the magic as well. Now there's other noise that has existed in our gross margin model in the last couple of years with the pandemic with these transportation costs, everything coming from Asia became more expensive, putting it on the boat, getting it across the ocean, unloading it at the port. We had charges with names that I had never heard of before, demurrage and all these other kind of crazy charges that were a feature of the supply chain just being kind of jammed up. But we're seeing, to Mike's point, good moderation in those transportation costs. There is capacity that has opened up in Asia with our vendor partners. So we're negotiating better product input cost. Cotton has come down, almost everything that we make is made out of cotton. So we're seeing some favorability there. But I think in terms of just the big drivers, it's been improving price realization, not being as excessive on the promotions, being smarter in the quantity of inventory that we buy, having products that last longer on our sales floor and in the minds of consumers. I think those are the major drivers.

Great. And then may be on SG&A, I think your guidance is for a relatively flat growth this year. Can you walk us through where you see opportunities for some incremental cost savings? And then where we may see a little bit of incremental pressure this year?

Sure. Sure. Where we're adding costs is the continued growth in the business. So we're back in the mode of opening new stores. Those are very high-return investments for us. But that will be additive to the SG&A base. In general, I would say, given the uncertainty around consumer demand, we're controlling what we can control. And wherever we have opportunities to reduce discretionary spending, we have looked at our organization costs. We went through a couple different waves of downsizing through the pandemic. I think we're through largely what we need to do there, but we're still being pretty judicious on improving new head count. We are investing in our people, though, and we think that's an important thing to do in this environment. So we are giving merit raises, we are restoring some of the performance-based compensation provisions, which have been reduced last year given our performance. We think that's an important thing to do. Continuing to invest in technology. We continue to make enhancements to our website, to our omnichannel capabilities. We're deploying right now some of the great omnichannel capabilities that have proven so successful here in the United States, up to Canada. Canada had been operating on some older technologies. So we're rolling that through our business in Canada, which has the #1 market share up there. So continuing to balance the current rainy day that we're experiencing with a very strong belief that the sun is going to come back out again. And we want to be very well-positioned to continue to lead the market when that happens. So we're not slashing and burning. We're making very, I think, considered investment decisions around the business, but we're balancing if there is discretionary spending that we can push out different projects that don't need to happen right now. We're trying to do that. So hopefully, we can balance that with consumer demand when we have a little bit better line of sight to the consumer strengthening.

All right. I figure we can pause here to see if there's any questions in the room. If not, I have...

I know Chris has plenty.

I have plenty. Maybe we could talk a little bit about your capital allocation strategy around both dividends and share repurchases. And then maybe you can also touch on appetite for bolt-on M&A.

Sure. I'll start with the capital allocation. We're fortunate to have a very cash-rich business model. And again, there's been noise the last couple of few years during the pandemic on cash flow. But pre-pandemic, this is a business that throws up hundreds of millions of dollars of operating cash flow. I would say our CapEx requirements have been fairly consistent over the years. We're spending a bit more now on these new stores, which, again, we believe, are a very good return on investment, very good use of that capital with fully supporting what the investment needs of the business are, we do throw off considerable free cash flow. We've had a track record, over the last number of years, of actively returning capital to shareholders. We do that through a mix of both dividends and share repurchase. We like both. And our shareholders have historically, I think, liked both components. We have a rich dividend yield at the moment. That's more a feature of where the stock price is, but in general, we've targeted about 1/3 of our net income to pay as dividends. We're above that now, just given what we view as the temporary contraction and profitability of the business. And that still leaves room left over to do share repurchase. And so that's kind of how we think about it. We have deployed largely 100% of our free cash flow. We're not interested in accumulating cash. If there's not a need to have that cash on the balance sheet, we like to return it to our shareholders. So we have made meaningful progress over the last decade in returning capital both through the dividend and through share repurchase. Well, to the extent we have free cash flow, that's our intent to continue to use it for that purpose. In terms of acquisitions, we always are looking. Because of our position in the marketplace, we see every opportunity that comes to market. I think we have a healthy skepticism as it relates to M&A as a growth strategy. There's lots of things that come with doing acquisitions, both good and bad. But we're always looking, and we've historically had a very high bar and that has served us well. All of the things that we have passed on over the years have subsequently, that's been proven to be the right decision. So we look at the opportunities as much as we love Carter's and OshKosh and Skip Hop and the brands we have in the portfolio. It doesn't cover the complete landscape and there may be opportunities over time to add different brands, different assets that the consumer would find appealing, but we have a high bar for that, which that's how we think about it.

Yes, which we should. I would say acquisitions have made our company more interesting. So for years, it was Carter's. So we had one brand and we have a wonderful wholesale, very profitable wholesale business, direct-to-consumer business. That's where it started. It was largely a wholesale operation, we had some outlet stores because we used to make everything that we sold in the United States and that supply chain changed and we extended beyond the outlets to bring the brand a lot closer to the consumer largely through strip centers, which to us felt more like outlet centers than malls. So we never -- we always had a bias against malls. That said, we're -- we've gone into malls with success because we're highly selective. But the acquisitions, we bought the OshKosh. Yes, the OshKosh brand, which at the time was our largest competitor, I said -- when I told people I work for Carter's sometimes you get a Carter's meeting, and I said, "We're also on OshKosh B'gosh," everybody knows the OshKosh B'gosh brand. And we acquired our licensees in Canada. So it was just a wonderful opportunity. You had a company who had their own retail operations started selling the Carter's and OshKosh brands. In their stores, our brands did so well, similar with our partner down in Brazil said, "Hey, can we open up Carter OshKosh stores?" They did beautiful job with it. Thankfully, we bought it when they only had 9 of them, now they have some portion of 200 of those beautiful stores up in Canada, #1 market share. Same thing we acquired our licensee in Mexico and then to Rich's point, Skip Hop. So we like acquisitions. We like these acquisitions. What we've learned with tuck-ins. Tuck-ins usually are smaller. And I think we have a bias to doing something larger if we're going to do it. And we looked at different things, we've looked at premium because Carter's is -- our success with our company as we appeal to the masses, right, where the lion's share of the people shop. And over the years, we've looked at premium brands and we look at the growth profile of those brands. Now our price points are $11 over shopping. In a boutique kids this past week, and they've got a boy shirt that's about this big, and it's like $53 and like I'm not quite sure how many those shirts are going to sell for $53. That's not many, not many because that same thing would be closer to $11 or $12 in our stores. So we -- it would have to be something that's got growth attached to it, it would be in the kids space. We always say we would love to make sure it has a first-class management team who just sold the company to us. And if they believe in those projections, help us execute it. That's how we've structured some of these acquisitions. If you believe in those projections, we'll pay you that. But you've got to hit those numbers. We'd pay you a lot less if you don't hit those numbers. So it's an incentive for them to help us in that kind of transition period, and it should be accretive to earnings. So we're not looking to buy a turnaround that's going to take us years to fix. So again, we look because of where we are in the market, we're usually on the short list, if not the top of the list, when someone's marketing something. We got something in play. We get calls from consultants and others say, "Hey, we've been engaged if you want to have a little insight on this in the early part of it." So we do it, we look at it. And -- but I don't think we need -- we don't need acquisitions to achieve our growth objectives.

All right. Well, I think we just hit our time, actually. So Mike, Richard, Sean, great...

Okay. All right. It's pleasure. Thanks very much for making time for us. Thank you. Right. I appreciate your interest in our company. Thank you. Chris, thank you.

Yes.