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

Thanks, everyone, for joining us today for a fireside chat with Carter's. I'm Warren Cheng, I'm one of the senior Softlines analyst here at Evercore ISI. With us from Carter's today, we have Chairman and CEO, Mike Casey; CFO, Richard Westenberger; President and COO, Brian Lynch; and also Head of IR, Sean McHugh. So before I take it over to Mike for some opening remarks. [Operator Instructions]. With that, Mike, over to you.

Good. Warren, thanks very much. Good afternoon, everybody. Thanks for making time to get together. I have some very brief opening remarks, just a brief overview of Carter's, for those who are less familiar with the company, and then we'll leave plenty of time for your questions. Carter's, as you may know, we're the largest branded marketer of children's apparel in North America. We own the largest share of about a $34 billion market with the #1 market share in each of the United States, Canada and Mexico. We own 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 over the past 100 years. Carter's is the largest specialty retailer in North America focused on the young children's apparel. We've got 1,000 beautiful stores from Nova Scotia to Hawaii, and we've got a growing presence in Mexico. Carter's is also the largest supplier to the most successful retailers of children's apparel, including Target, Walmart and Amazon. Together with our Wholesale customers, our brands are sold in over 20,000 points of distribution in nearly 90 countries, including over 100 online platforms. Prior to the pandemic, Carter's achieved 31 consecutive years of sales growth and achieved a top quartile operating margins relative to our peer group. That winning streak was disrupted by the pandemic back in 2020. Thankfully, given our relationships with the essential retailers, that remained open in the early days of the pandemic. And the strength of our direct-to-consumer e-commerce capabilities, we retained a higher percentage of our profitability in 2020 than most in our peer group. Then in 2021, a very good year for us. We saw a strong recovery from the pandemic and achieved record profitability, driven by, among other things, structural changes in our business. Those changes included a reduction of low-margin product choices, SKU rationalization, closure of less productive stores and improved inventory management and pricing capabilities. And then last year, 2022, we got off to a good start. When the year began, we expected that 2022 would be a continuation of the strong post-pandemic recovery we experienced in 2021. But by the spring of last year, it became clear that inflation would not be transitory. U.S. inflation rose to historic levels and then continued to weigh on consumers in the balance of the year. And of course, that's continued into this year. We expect inflation will continue to weigh on consumers and their demand for our brands in the balance of the year. It's important for you to know, our target consumers, their annual household income is about $75,000 a year. These are women and men in their late 20s, early 30s, earlier in their careers, just starting out together and raising a family. It's a time when many young families are living paycheck to paycheck, working hard to make ends meet. In a survey last year, it was reported that 2/3 -- surprisingly, 2/3 of Americans said that they were living paycheck to paycheck. And that's a -- it's a historic high. It just kind of gives you a sense what most people in the United States are experiencing these days. Thankfully, inflation is moderating. This morning, it was reported, the 11th -- we had the 11th consecutive month of inflation coming down. And there's some silver linings that we're seeing. We reported on it earlier this year. With the slowdown in consumer demand, capacity in Asia is opening up. We have suppliers calling us hungry. What can we do for you? What more can we do? What kind of cost would be more attractive to us? So we're seeing lower product costs. We're seeing ocean freight rates coming down, and these are 2 of the larger components of our cost structure. We expect to see the benefit of those lower costs beginning later this year and then the full benefit next year. Again, thankfully, birth trends. Birth trends in the United States are stable. The outlook for births is improving. Our baby apparel continued to be our best-performing product offering last year. It was over 60% of our first quarter sales this year. In newborn apparel, our Carter's brand has 5x the share of our nearest competitor last year. We sold nearly 25 body suits for every child born in the United States. So assuming continued moderation in inflation; improved consumer confidence, which has been rocked by inflation; and growth in the economy, we are forecasting a return to growth in sales and profitability in the years ahead. We expect that our growth will be driven by, again -- among other things, new store openings. Nearly 70% of children's apparel is purchased in stores. And our stores are our highest source of new customer acquisition. As our competitors downsize, given challenges in their businesses, we plan to capture those new market opportunities, what we believe are highly productive specialty stores that provide the best value and experience in young children's apparel. We believe our stores enable the success of our margin-rich e-commerce business. When we open stores, e-commerce in those markets grow. Conversely, when we close stores, when leases expire, we close stores. We rarely close a store early, but when we close stores, e-commerce in those markets tend to dip. In the years ahead, we believe our growth in sales will also be driven by our very successful exclusive brands sold through Target, Walmart and Amazon. These are 3 of the largest retailers of children's apparel. We believe our exclusive brands are traffic drivers to these retailers. The consumer expects to see the #1 national brand in kids apparel when they're shopping. Our product offerings are complementary to their private-label brands. And then in international markets, we expect our growth will be driven by our investments in new omnichannel capabilities, making it very convenient for our consumers to shop in our stores in Canada and Mexico. We're expanding through a Wholesale partner, our Riachuelo in Brazil, they're opening a beautiful store for us in Brazil. I think it will be up to some portion of about 75 stores by the end of this year, and we expect growth with our other Wholesale customers, including Amazon International. And then with respect to profitability, we expect profitability in the years ahead will be driven by a higher mix of margin-rich omnichannel sales; a better mix of higher-margin stores; a greater concentration of our Wholesale business with fewer, stronger and growing retailers. We expect our profitability will also be driven by improved pricing and inventory management capabilities, favorable trends in product costs and ocean freight rates, more effective brand marketing. We're launching marketing personalization capabilities this year, and profitability will be driven by a continued return of excess capital through share repurchases. Without question, Carter's is a market leader. We believe Carter's is the best-in-class in young children's apparel. No other company in young children's apparel has the scope of our product offerings, depth of relationships with the winning retailers and a long track record of success, serving the needs of multiple generations of consumers. We believe Carter's has weathered historic market disruptions in recent years, better than most. We believe we're well positioned to benefit from the market recovery in the years ahead. My remarks this afternoon include forward-looking statements. There are risks inherent in our business. Those risks are disclosed in our SEC filings. So hope that brief overview has been helpful to you. And we'll pause now so that we can address your questions.

Thanks, Mike. That's a great overview. A lot of things to dive into there. I was wondering if you can start out maybe just by zooming out and talking about what seems to be going on with kind of the baby and kids apparel market more broadly. And I think the latest industry data says we're on track for sort of a mid-single digit, high single-digit contraction in the market. Do you just have any thoughts on why the category seems to be behaving -- the category of your business seems to be behaving a little bit more discretionary this time around?

Yes. I think there's 2 things. One, it's the consumer. Who is the targeted consumer? How is the consumer doing in this environment? And I remember it was around this time last year, if you recall kind of the -- Target was the one to ring the bell early. It was like early June, as I recall. They came out with a pre-announcement, highly unusual for such a fine company, a pre-announcement, just to say they had seen some fundamental changes in consumer demand. And then it was a short time later, they came out again just to announce, it was actually worse than they thought weeks before. We were starting to see the same thing. We had a very good start to 2022. And then as we moved into spring, got beyond Easter, got into May, we said, it just seems as though the consumer has slowed down, and then Target had announced that they were seeing similar changes. So I think the consumer was rocked a year ago. It was really a shock to their system when gas prices doubled. In years passed, gas prices would spike, but it would be attributed to a storm in the Gulf or a pipeline went down temporarily. But it was about a year ago when the administration just said, "Hey, this is not temporary. This is where we're going to be. We got the "Putin price hikes. " But the higher gas prices were, in some ways, intentional and that's where we still are today. Even though they say gas prices are lower, they're proud to say, gas prices in Georgia before the pandemic were about $1.70 a gallon. They're double that today. So at least once a week, our target consumer is reminded, they're spending twice at the gas pump than they were before the pandemic. So the consumer has been rocked, and so that's one. I think the other thing that we're experiencing in our business is good companies, including Carter's, are getting much more conservative on inventory commitments. They're pulling back. This time, it was the first half of last year, most companies, including Carter's were saying, "Let's get that product in here early. Let's get ahead of the supply chain delays, the port congestion, bring it in." One of our largest customers said, "Hey, we want that product in 12 weeks earlier." Because everybody assumed going into 2022, that it was going to be another great year, another record year, just like we had strong recovery in 2021, aided in part by the stimulus, but also aided by people saying, the worse of the pandemic was behind them. They got the vaccine, they got rid of the mask. They got back on planes. They went to Disney World. They started going back out to restaurants. Everybody was catching up on lost time. That was '21. And then in '22, everybody assumed, that would be another good post-pandemic year of recovery. And then it was kind of late spring, things changed. So where in the first half, people were building inventory, second half, everybody was trying to get out of it. We saw significant cancellations in the second half of last year when people were describing as destocking. We saw automatic replenishment systems shut down temporarily, turned off temporarily. But I'll tell you to the credit of our largest Wholesale customers, those inventory curtailment strategies, destocking strategies were highly effective. They rolled into '23, leaner on inventory. They bought spring conservatively because they had to make those spring decisions kind of mid part of last year when things started to head South. And so they entered this year conservatively on the buys. I actually like where we are right now. It's much more of a consumer-pull model. In the fourth quarter of last year, we had one of our largest Wholesale customers say, "Hey, if you got it, bring it in, if you got the product." Because any time you bring new product in it gets the register ringing. Saw the same thing again in the first quarter. I can't comment on what we'll see in the second quarter. But actually, we've seen some of these cycles before where everybody gets conservative on the buys, margins go up, price realization goes up, sell-throughs get better, turns get better. You have less on the clearance rack at the end of the season. So I actually think, by and large, there's 2 things. The consumers pulled back, and a number of our customers have pulled back, just to run leaner on inventory. So there's almost like a little bit of a cleansing process that I think the better retailers have gotten their inventories in line. Before the pandemic, I think we were carrying over 40,000 units in our stores. Today, it's closer to [ 25 ]. Our backrooms are empty, right? That would not have been the typical experience before the pandemic. So good companies, and Carter's is a good company, running leaner on inventory, driving better margins, better price realization, and that's our focus this year, margin, preservation and cash flow. Consumer is pulling back, even when we've tested lower prices, you still said, I just need the 4 pajamas. Just given, even when we lower -- I don't need 5, just I'll pay for -- if you're charge me less, thanks for the -- but I'm just going to buy the 4 PJs. She's buying what she needs when she needs it and not necessarily buying ahead. That's kind of the experience we're going through right now. So I think that's what we're seeing with the consumer. But I'd tell you, as you see these headlines, inflation moderating for the 11th consecutive months, this time next year, we have -- hopefully, we got 2 good candidates running that people say, "Hey, there's a bit of optimism." It's not where we are right now, but that's what my hope is a year from now. So you got to -- there's good cycles, there's down cycle, where we're working our way through a down cycle in retail. But over the -- if you look at the company over a long period of time, prior to the pandemic, 31 consecutive years of growth. I think beautiful babies are coming into the world every day. I think we're going to be just fine.

That's great. Yes. And maybe just a follow-up on what you saw this spring. So a theme that came out of the retailer earnings a couple of weeks ago was that I think universally -- pretty much universally sales softened in that late March, April time period.

Yes.

But then some retailers -- not all, but many retailers saw a little bit of normalization when weather started to cooperate and normalize. So I'm just curious, your latest thoughts on how much of that spring softness that you saw was maybe weather driven or something that's more of a sustained force at play here?

Yes, sure. Seasonal changes is the gift that keeps on giving. Every year, when the weather goes from cold to warmer, the register rings. It's a noteworthy change in trends in the business. And spring -- everybody knows spring came late. Usually, they have an early Easter, which we did. It was a week earlier. And if you have an early Easter and it feels spring-like, that's a bellringer. So we just didn't have that experience. I mean, it was it was cold here in Atlanta, Georgia. Memorial Day weekend, it was actually like kind of sweater-weather down, which is -- we were all kind of commenting, highly unusual for Georgia to be cool around Memorial Day weekend. But spring came later. But when the warmer weather comes, and by the time we update you next month, warmer weather will ride in most parts of the country. Before along, we'll be complaining it's too warm, right? But warmer weather. And when it does come, people are switching. It's a reason to change the outfits, you want to get your child out of the long sleeve, long pant, get him into the short sleeve, short pants. You're getting ready for summer breaks, summer vacations, camps, all that jazz going to reconnect with your family and things like that with the summer break schedule. So it's -- weather matters, right? I miss the days we talked about weather. We've had so many other things to talk about. But weather matters, and we saw a similar dip. Talking about Canada. Canada had actually very nice weather patterns. And then all of a sudden, weather turned colder as we rolled into the second quarter, but weather matters. What's interesting, we don't have as much clearance as we had in years past, but when weather stays colder longer, all that prior season stuff is blowing out. So every Monday, we do a deep dive on the business and say, clearance is a very small percentage of our inventory, but it drove a disproportionate amount of sales. Why? Because people are going to the soccer field, they go, "Hey, I need the pull over, I need the [ pin ]. I need the stuff as we're going for those early morning ball games on the weekend." So anyways, by July, it will be full-blown warm weather outfitting, and we'll have a good update on the business.

Got you. That's really helpful. And then if I just look back, one thing that strikes me about your performance over the last several quarters is that you have certain segments of the business that have been remarkably consistent. So I'm thinking about baby, about your exclusives. Can you just talk a little bit about, a, how much of your business is now in sort of those replenishment-heavy categories like baby and exclusives? And then, b, how much of your business has shifted away from department stores off-price? And how much of that mix has shifted away over the last 3 years?

Sure. Sure. Brian, thoughts on that, replenishment and then kind of department store businesses?

Our baby business has been our strongest business this year. It's about -- I think it was about 54%, it's about high as 60% of our company sales. So it's been, by far, our best business. Within that business, obviously, strong business and direct-to-consumer, stronger business in Wholesale. You mentioned exclusive brands. Our exclusive brand business is almost half of our Wholesale business now, plus or minus as well. That's been a good business for us. And then replenishment, which is the core of the core. So baby is our core and replenishment is -- kind of think of the core of that milk and eggs replenishment. Every 3 months of the child's first 2 years of life, it's 100% wardrobe replacement. That's what this product is because you're changing that kid 6 times a day. So this is a high-margin business for us. It's a place we have a significant share of the business. And of our Wholesale business, it's about 35% to 40% of our business is replenishment. The business has traditionally been very good. And you may remember, in some cases, even last year, even though the business was good, the retailers are under pressure to lower their inventories. So we had a few folks actually shut down the replenishment, not because our product wasn't selling. It's because they just had to lower their overall inventory levels because they got caught heavy in a summer, which continued through fall and winter. So when you think about this year, we're optimistic. We have a good year in replenishment, particularly in the second half because we're up against some of these folks that actually curtailed, taken the product in, and we'll have the product. Our supply chain is performing at an exemplary level back to pre-pandemic levels. So that product is going to be here. And we've got different businesses. Our commit business in Wholesale is booked upfront. I think we've said publicly that business was booked down for spring and also booked down for fall. People are really conservative with their buys. Where we do have the opportunity to service the business on top of that is with the replenishment businesses. So if the register is ringing, we can ship them more than they maybe originally thought. So we're optimistic that we're actually -- even though Wholesale is going to be down high singles for the year, we're projecting the replacement business, as the back half, we're actually going to be up high single digits.

Got you. Okay. And then maybe just a follow-up on channel inventories. So I think one of the things that we learned this earnings season is that while overall inventories are still pretty elevated, the story can be pretty different category by category. So I just wanted to get your updated views on kind of the overall kids and baby's apparel levels in the channel.

Go ahead, Brian.

Yes. I think overall, we feel good about this. I think -- again, folks tried very hard to get their inventory levels down at the end of last year. And then with the conservative buys this year, I think we probably see inventories of our products are actually a little light out there, particularly with the big 3 retailers. So we feel good about that. We have read some of our specialty competitors are probably a little heavier. If you go in their stores, you may see that. So they're running a different business model. But we feel good about our inventories. First of all, our overall Carter's inventories, I think we've articulated, we have this pack-and-hold product from last year, we're planning to sell off, turn that into cash this year, obviously, it would be good for the company. And we bought conservatively in our direct-to-consumer business and in our Wholesale business. But in terms of channel inventories, we see every single week where our product is, how it's selling. We have really good relationships with these retailers and speaking to them on a weekly basis. There's really no significant concerns across the channel. We feel good about how we're positioned going forward. And again, our hope is that the demand is good in the back half of the year. We can ship obviously on time or even early, in some cases, if we had the inventory. And then if it's really good, these replenishment businesses will give us an opportunity to perform at a real strong level.

It's a much healthier model where they're saying, "Hey, if you got it, bring it in. We'll take it." We'd rather be in that position than what we saw in the second half last year, "Hey, keep it. If you're running late, keep it. We just we have to work through what we have." So we actually like where we are today relative to where we were a year ago. Yes. And I will tell it's -- we did study, I don't think this is material information, but we I'm sure other people have done the same analysis. But we were struck by over Memorial Day weekend, which is -- I wouldn't say is one of the big holidays, but it's a reason to go out and shop and as the season is changing. But what we're struck by, by and large, as we looked at the market, that our competitors including ourselves, people are generally less promotional year-over-year. It's a very positive sign. That would suggest relative to where people were this time last year, people were much more promotional a year ago. So listen, we're on sale every day. We have promotions every day. We have the typical hey, sale ends tonight, starts again first thing tomorrow morning. So we have good sales going out every day. But our plan this year is to be less promotional because we don't need to be promotional. We're going to work down. We had a -- when things slowed down last, we packed and held about $100 million of inventory. The game plan is to work through all of that by the end of this year. Most of it will go direct-to-consumer through our own e-commerce and stores -- beautiful stores. Less than half of it will go through Wholesale. Wholesale has already ordered it. We have the orders for that. So that will start rolling out in the months ahead. It's heavily weighted to fall and holiday because that's what we just say, "hey, why don't we pack and hold this? We'll bring it back next year." And let them work through the stuff that they overbought in the first half of last year. But we expect to make very good progress -- we did in the first quarter, we expect to make very good progress, knocking our inventories down in the balance of the year, primarily driven by the -- getting those pack-and-hold inventory sold through. Because we're forecasting, at least we did at the end of April, well over $300 million of operating cash flow. So it's going to be a much better year from a cash flow. Again, going back to margin preservation, stay skinny on inventory, improve that price realization, achieve those pricing objectives, better sell-throughs, less on the clearance rack and driving a meaningful improvement in cash flow. That's the focus. But when the consumer slows down, that's the smart play. There's not -- you can dump the product but then try to comp against those revenues next year. So it's just -- if there's -- if they've slowed down, recognize that they've been slowed down, make sure that you're competitive that you don't get ahead of the market but focus on margin preservation and cash flow. That will be the focus in the balance of the year.

Makes a lot of sense. And glad to see a little bit of a positive indication over Memorial Day weekend. The next one is for Richard. I think the last time you guys gave long-term margin guidance was early last year and at the time that you saw mid-teens as sort of the right long-term level. I was just curious if there's any changes to your thinking there? And maybe if you can just walk through the pieces of the bridge as we get from here to there.

Sure. So I think Mike referenced a number of the improvements that we've made to the business model during the pandemic. And in 2021, which was a record year of profitability, we reported almost a 14.5% operating margin, which was a result then of some of the things that we did around reducing the level of inventory, rationalizing SKUs, narrowing the assortment to a more productive base, closing margin -- low-margin stores, just a number of things that we think -- improvement in realized pricing. All those things yielded the results that we reported in 2021, which admittedly was an unusual year with the benefit of stimulus and the recovery from the pandemic. That said, there were a number of things we were spending on in 2021, which were highly unusual with the disruptions in the supply chain we spent probably a lifetime's worth of airfreight. We worked really hard in this business not to spend on airfreight. And we spent over $30 million that year on airfreight. We had unusual provisions for performance-based compensation given the performance that we had that year. We raised our charitable giving. We probably spent a bit more on marketing because we have the ability to do so. So our point of view is that the underlying performance of the business in 2021 was actually much stronger than what we ended up reporting. I think that's given us confidence that there are no shortage of margin improvement opportunities. We've taken a step back, given that what we view as the temporary contraction in the business, given the environment, given the impact on our core consumer because of inflation, as Mike said. But I think continuing the good disciplines that we've had around running this business was less inventory, focusing on productivity. We've got a great set of opportunities, I think, in sourcing, which, as Mike said, we're starting to see some capacity opening up in Asia. I think that should be a benefit for us. Continuing to open these very high-margin stores, the continued growth of omnichannel, I think there's no shortage of opportunities to grow our margins over time. And so getting back to that mid-teen target, I think, is definitely something we're still focused on.

Great. And maybe I'll just double click into the opening of high-margin stores. So this year, you're going to be back to new store growth again after a pretty big rationalization exercise over the COVID period. Can we think -- or how should we think about the new stores as a component of algorithm going forward? And can you just talk about which types of locations are proving to be pretty attractive for new stores?

[indiscernible]. So we've been opening stores for years. When I joined the company years ago, we had like 70 dumpy outlet stores, but we used to refer to them as ATM machines, highly productive, very good returns on investment. And now we've got 1,000 of them in North America. And I would just encourage anybody who's just -- has a question about does this make sense? Go visit our stores. Go see the experience that you have. More importantly, then go see our competitor stores. And you'll see why we've had the success that we've had over the years when some of our specialty retailer competitors have not. So they're beautiful stores. 70% of kids apparel is bought in stores. It's usually -- apparel is usually the first thing you buy when you find out the good news that you have a child on the way. That's a purchase. You're thinking about what's that child going to wear at home? What's the child going to need in those early days, months of life? Children [indiscernible] but they go through multiple outfit changes a day in those early days, months of life. So it's the number -- our stores are the #1 source of new customer acquisition. And Warren, to your point, during the pandemic, what was interesting, again, it was new experience for all of us. But as leases came up for renewal, over the years, more often than not, we'd say, "hey, we're going to close that." Because we have 10-year leases. Rarely do we close a store early. I think the last analysis I saw, well over 90% of our cash -- our stores were cash flow positive. It was announced just last year, I think it was closer to 98% were cash flow positive. If that may have changed, I'll update you in July where that stands right now. But rarely do we close the store early because we don't have to. I mean, the stores that are highly productive, very good returns on investment. And so it's a very good allocation of capital. But during the pandemic, as stores came up for renewal, we say, "hey, we're going to leave." And in years past, before the pandemic, the landlord would always slide something across the table and say, "for this, would you stay? Because we want you to stay. You bring families with young kids into the center. When they come in, mom sees something in another store and the dads sees another store and there's other things for the home and you're a traffic driver to the center." And in years past, they'd make it attractive. But we made a decision during the pandemic, let's focus on fewer better things. Let's focus on fewer, better, higher-margin activities. So we were more inclined to let the store close. and then to open in a new center, where the new center has better traffic patterns, better co-tenancy, better condition at the center because it's not 10 years or more older. So we were more inclined to close during the pandemic and then open new. And what we were doing, we were closing stores that had low single-digit operating margins and the 4-wall margins and opening stores that had closer to 20% EBIT margins, closer to 30% EBITDA margins. And that's kind of the path that we've been on. We've got very good people on the site selection. Brian, Richard and I, we looked at every -- we look at -- after it gets recommended. We have to sign off on every -- well, our batting average is really good. It's not perfect, but our batting average is very, very good. But as long as we continue to see the rich returns on investment that we're making, we will continue to open stores. So our game plan is to open about 50 stores this year in the United States. And again, our stores -- I'm always struck by. The reason why we have a business in Canada and another business in Mexico, there are retailers in those countries who came to us and said, "can we open up Carter OshKosh first," right? And now we've got a couple of hundred stores, beautiful, $300 million business, #1 market share up in Canada. We had a licensee down in Mexico who said, "Hey, we'd like to open up Carter's and OshKosh stores." Now we've got -- I think we're approaching. What are we approaching? Some portion of 50 or 60 stores down in Mexico that they're working their way to 100. We have one of our Wholesale partners in Brazil said, "your brand is doing so well at our department store. Can we open up -- we've been with your stores. We love your stores. Can we open up stores?" And we said, "as long as you don't mind building it, we don't mind shipping the product to." So they're making the investment in CapEx. Once every earnings call, Richard shows you, we have Wholesale customers throughout the world, in the Middle East. I've had my kids' friends in the military sending me pictures from Bahrain. They've got beautiful store in Bahrain, we're in the swankiest malls in Bahrain, a beautiful Carter's store. So it's just we want to be. We've had great success, great success building this direct-to-consumer business largely through our stores. And then when we launched e-commerce, e-commerce went through the roof. Why? Consumer likes shopping -- the convenience shopping at home. They also love that convenience of same-day pickup in our stores. And then during the pandemic, like other good companies, we did the curbside pickup. The lion's share of our stores are in open air centers. So I may get this mixed. I'm rounding here, but the mix of our stores, 60% of our stores are off mall, about 10% are in the mall, right? We always had a bias against malls, maybe because we started in outlets and strip centers that felt more like outlets. So 60% are off-mall, 10% in mall and the balance is in outlets. And I think going forward, we've been highly, highly selective. So whatever that is, less than 80% of our stores are in malls. But because we've been highly, highly selective on the mall locations, some of our best-performing stores -- here in North Georgia, we had a side-by-side store in an open-air strip center, Carter's and Oshkosh sitting side by side. Our team came to us a number of years ago, you know you don't like malls, but there's an opportunity in mall. Gymboree was closing, dumpy, dingy old Gymboree store. And so we took over that space. We opened up a beautiful Carter's and OshKosh store. It's one of our best performing stores. It's within walking distance of the strip center store, it's a completely different consumer. The productivity of that store is through the roof, it's baby, toddler. Because usually, in a mall store, you want it to be -- you don't want -- you don't need 4,000 to 5,000 square feet. It's a smaller store. So we're testing new store models, baby, toddler only. We've got a new model rolling out for back-to-school. For a kid-only store, we put the very best of baby and toddler. Carter's and OshKosh B'gosh. In one side of the store, put the product for a 4- and 10-year-old child, both Carter's and OshKosh. You have licensed product on the kids' side of the store. So we've got a new retail leader that has got a vision of what that store and online experience can be over time. So we love our stores. It is our best brand marketing. We'll be the specialty store alternative to shopping with the big-box retailers. We love our big-box retailer customers. They're terrific, and they do a great job. But no else can provide the service, the experience. You got 4,000 to 5,000 square feet of everything you need for a newborn to about a 10-year-old child. And the service level in those stores is extraordinary, just extraordinary. Because we're often asked by our Board, any problem staffing the store, staffing? No. Why? Because people love working in our stores. You can work in McDonald's and go home smelling like french fries at the end of the day or you can work in a beautiful Carter's OshKosh store, and you're surrounded by all that beautiful products. And you've got flexibility on your schedule, everybody's part time. So you've got flexibility to work when you want to make a few bucks and you want to get a nice discount. We've got a lot of moms and grand moms working in our stores. So I would just encourage you, I'll do my best to describe the strength of these stores, but go see yourself. Go see yourself. Yes, they're under some pressure because consumer is under some pressure. As long as we continue to see the returns on these stores, we'll continue to open them.

Great. And maybe with the last minute, I'll just try to work in one of the audience questions. This one would be for Richard. Where do you see buybacks ranking capital allocation priorities, especially where the stock is now? And maybe we can just talk about allocation a little bit more generally, too.

Yes, sure. So we're fortunate to have a very cash-rich business model. As Mike said, we're forecasting at least $300 million of operating cash flow this year. We've had years above that. I think as the business returns to a more typical profile, we will return to generating substantial operating and free cash flow. Our first use is to put the cash back to work in the business, and we're not really constraining investment. The business is kind of self-funding the investment needs. That said, to the extent that we have excess capital, it's not our intent to have capital build up on the balance sheet without a use. And so right now, our vision would be to continue the return of capital. And we do it through a balanced way. We have a dividend that we're fans of. And we're also fans of share repurchase. And so I think continuing that balance over time would be our intent right now.

Great. I think that's all the time we have. Super insightful. As always, Mike, Richard, Brian, Sean, thanks so much for taking the time to speak with us today. Thanks, everyone, in the audience for your interest.

Warren, thank you very much for inviting us. Thank you all for joining us today. Give you the good update next month. Bye-bye, everybody.