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

Good morning, everybody. Thanks for joining us for day 2 for our BofA Consumer Conference. We're very delighted to have the full Carter's team with us today. With us, we have Mike Casey, Chairman and CEO; Kendra Krugman, Senior EVP, Chief Creative Officer and Chief Growth Officer; and finally, Richard Westenberger, Chief Financial Officer and COO. So thank you very much for joining us today. I just want to pass it over to Mike for some opening remarks.

Chris, thanks. Good morning, everybody. Thanks for starting your day with us. We've got some brief opening remarks, and we're going to leave plenty of time for your questions. As you may know, Carter is the largest branded marketer of young children's apparel in North America. We own 2 of the best-known brand names in kids apparel, Carter's and d OshKosh B'gosh. Both brands have served the needs of multiple generations of consumers for more than 100 years. We own the largest share of a $32 billion market. We have apparel for newborns, which is really the strength of the Carter's brand up to about a 10-year-old child. #1 market share in the United States, #1 market share in Canada and in Mexico. We sell essential core products, the must-have products, bodysuits, washcloths, towels, bibs, blankets, blanket sleepers, pajamas, playwear, T-shirts, shorts, all the things that families buy with a lot of frequency in those early months, years of a child's life. We are the largest specialty retailer, focused on young children's apparel. We're directly managing over 1,000 stores in North America. We're also the largest supplier of young children's apparel to the largest retailers in North America including Target, Walmart, Amazon, Kohl's, Macy's, Penney's (sic) [ JCPenney's ], Costco, CM's, anywhere kids apparel is sold in a meaningful way. You'll likely see a strong presence of our brands. Our brands are sold in over 90 countries and through the most successful websites for kids apparel last year, together with our wholesale customers, the online purchases of our brands exceeded $1 billion. Prior to the pandemic, Carter's had 31 consecutive years of sales growth. It's just been -- it's never been a hot and cold company. So the consistency in our performance for many years, long track record of growth, top quartile operating margins relative to our peer group, strong cash flow generation. Over the past 10 years, we've generated nearly $3 billion of free cash flow and returned $2.5 billion to our shareholders through dividends and share repurchases. Last year, our sales were over $2.9 billion, our operating income over $300 million. Operating cash flow was over $500 million, and we ended the year with over $1 billion in liquidity. Then last month, February earnings call, we shared our outlook for growth this year. We're planning low single-digit growth in sales this year, mid single-digit growth in earnings. We expect that our U.S. Retail business, which is the largest part of our business, will return to growth in comparable sales. That's our focus this year. It's been a little choppy in -- over the past couple of years with the consumer rocked by historic inflation. We expect to open about 40 stores this year, close about 30 upon lease expiration. Rarely do we close a store early, usually some time lease expiration. Substantially all of our stores are cash flow positive. But over a 10-year period, the mix of the co-tenancy changes, traffic patterns change, the condition of the center changes. So typically, upon a lease expiration, we decide whether or not we want to sign up for another 5 or 10 years. And so we'll open 40 stores this year. We'll close about 30. We're opening stores in high-traffic centers, closing stores in declining traffic centers. We believe our stores provide the very best presentation of our brands. We're fortunate. If you were going to Kohl's, Macy's, Penney's (sic) [ JCPenney's ], Target, Walmart. If you were to shop on Amazon, you'd see a strong presence of our brand, but it's a sliver of what we do for a living. The very best presentation, the broadest scope of our product offering, you'll see in our stores. Our stores drive e-commerce sales and our e-commerce business has been 1 of our highest margin businesses for many years. When we open up a store, we see e-commerce in that market grow. When we close the store, we see e-commerce in that market drop. And our stores provide a very good return on investment. We're forecasting growth in our U.S. wholesale sales this year, driven by our exclusive brands. We have exclusive brands that we developed for Target, Walmart and the Amazon. We'll have growth with some of our other wholesale customers and we're planning lower sales to the off-price -- our off-price retail customers this year, T.J. Maxx, Ross Dress, Marshalls and simply because we just don't have a lot of excess inventory. So we've made good progress over the last couple of years, working down excess inventory when consumer demand slowed with inflation, inventories backed up, but we cut the inventories by 30% by last year. So we're much cleaner going into this year on our -- with our inventory position to see less need to sell inventory to the off-price retailers. International sales, which is our third segment. So we've got the U.S. Retail segment, the U.S. Wholesale segment, our International business. International sales are expected to be comparable to last year. We're expecting good contribution from Canada, Mexico and Brazil, which represents about 85% our international sales. We're forecasting lower sales in the Middle East, which is 1 of our larger markets because of what's going on in the Middle East and lower sales in Europe. To return to growth, we're focused on providing the very best value and experience in young children's apparel. Our supply chain team did a great job negotiating lower product costs this year, and we're going to invest a portion of the product costs reduction in product benefits and sharper price points on some of the key items. Those investments are expected to drive growth in unit volume this year. We're going to try to be less reliant on pricing to drive growth, which we've done successfully during the last couple of years with inflation. Market conditions seem to be improving. Birth trends, thankfully, are stable. Consumer sentiment is improving. We saw a correlation between the improved consumer sentiment. Over the holidays at the tail end of last year, we had a good holiday season, strong finish to 2023. Inflation, thankfully, is moderating. Real wages are rising and we're seeing traffic trends improving. We're so expecting gradual recovery in traffic this year. The arrow, I would say, is pointing up, not way up, but we're starting to see some stability in consumer behavior and some gradual improvement. So in summary, Carter's is the market leader, continues to be the market leader in young children's apparel. We have unparalleled relationships with the largest retailers of young children's apparel in North America. These relationships go back decades. Our brands are sold through over 20,000 points of distribution worldwide. We have multiple brands, multiple distribution channels, multiple levers to enable growth. We believe we're well positioned to benefit from the market recovery in the years ahead. We've made some forward-looking statements. There are risks inherent in our business, and those risks are disclosed in our SEC filings. So hopefully, that overview gets things warmed up because you have a helpful overview of the -- of our business, how we make a living, and we'll be happy to address any questions you have.

Great. Thanks, Mike. So there's a lot to unpack here. I thought we could start with your Retail business. Maybe you can walk through some of the underlying assumptions during the year to kind of put to your guidance? And then any comments on how quarter-to-date is trending?

Sure. So again, Retail is about $1.5 billion of the $3 billion of the annual sales we're forecasting this year. And about 1/3 of it is in e-commerce. The balance is in stores. We do over $1 billion in sales through our stores. In Retail, the focus about 1 year ago, we made some significant changes in the organization. If you follow the business, you saw we had some charges almost in every quarter last year. But we've made some significant changes in leadership of retail within our merchandising, design, marketing organizations. And we're starting to see the benefit of those changes in our spring '24 sales. And so to keep -- right now, we're working on spring '25. So any time you make a change, most of what you're selling at that time was developed a year prior. So we made significant changes in the organization about a year ago, early March, and we're starting to see the benefit of that in our Retail business. And the benefit is in the product -- the strength of the product offering. So we're seeing good sell-throughs of our spring product in our own stores and through our wholesale customers. So it's -- I'd say the big drivers are changes in the organization, stronger leadership, seeing the strength of those -- of the benefit from those changes and the strength of the product offering. The other focus is fleet optimization -- we broadly say is fleet optimization, continuing to open stores in better higher traffic centers, close stores when the leases come up renewal, if the euro is pointing south, don't sign up for any additional period of time. We've tested with success in new store models where we're focusing on creating a better experience for the consumer with the very best of our baby and toddler product offerings in certain stores and the best of our older product offerings and another side of the store. And we're doing some remodels. We're seeing a benefit from doing some remodels that were kind of deferred during the pandemic and in the recent years. So fleet optimization broadly, better higher-margin stores and closing some of the lower-margin stores. And then on marketing, I would say, some of the things that we've done to improve marketing effectiveness brought on a new media agency. They guide us on what's the highest and best use of the marketing investments, particularly in social media. Richard, every quarter shares a snapshot how does Carter's connect with consumers on social media. No one has a higher following on social media in kids apparel other than Carter's, #1 in TikTok, #1 in Facebook, Instagram. So this is the way good companies are marketing directly to the consumer through social media, where parents are talking to other parents, grandparents are talking to other of what brands are you buying, what brands do you like, what brands provide good value. So we've had a good connection with consumers through social media, brought on a new creative agency. We're launching a new loyalty program to -- that we believe will improve the frequency of visits to the store, and we've invested in marketing personalization capabilities. So whoever you're shopping for, if you're shopping for a young girl and we can tell what age that child is, we'll send you some more marketing messages based on the age and the gender of the child to connect more effectively with some of the e-mails and text messages that you receive. So it's -- there's a number of different things, but broadly, everything starts with talent and the talent is driving better product performance. And then we've -- they're supporting the retail business with good initiatives around the stores and e-commerce and our marketing capabilities.

Great. I just want to double-click into your store growth plans. I think a couple of weeks ago when you reported 4Q results, you talked about 200 net new doors over the next 5 years. I just wanted to get your thoughts on the decision to ramp up your store openings? And then if these new merchandising changes you discussed are starting to work and drive traffic.

So I would say that during the pandemic, we were more in a store closure mode, right? And in years past, if the lease came up for renewal and we're giving the keys back to the landlord. They'd slide something across the table to say, but for this, would just stay and so, well, for that, sure now we will say for -- and we'll go year-to-year, month-to-month type of thing. But during the pandemic, we were more inclined to say, no, we're out. We're out. So we closed over 140 stores, which were producing about $140 million of revenue but have low single-digit operating margin. So our mindset during the pandemic, let's focus on fewer, better things, fewer, better product choices; fewer, better, higher-margin stores; fewer, better promotions. So we kind of had this kind of mindset fewer, better things. Leaner organization. So we made -- we were a smaller company during the pandemic. So we had to get smaller in terms of an organization. So -- and that served us well. But like everything that you go through that's challenging, some good things come out of that. Our average price points to the consumer, before the pandemic, were $8 and change. So I always thought it was pitifully low. And then because of some good initiatives around inventory management and walking back some brand erosive margin erosive promotions, we saw the average price directly to the consumer go from $8 and change to $9, $10 and this morning was $11 and change. So because of the progress that we've made, improving our marketing effectiveness, improving our inventory management capabilities and disciplines, we were running leaner on inventory, seeing better sell-throughs the product, better price realization, fewer products on the clearance rack at the end of the season. So because of the progress with price realization, there are more attractive store opening opportunities available to us. Again, we've always seen high returns on investment in our stores. We used to refer to our stores as ATM machines because the investments were some portion of $500,000 or $600,000 inclusive of CapEx and inventory. And generally, you'd see a payback on that return within 2 to 2.5 years. So again, we're going to be thoughtful if there's good real estate available, which [ there continues to be ], we'll go in. What we're excited about is some of the initiatives around stores. We used to open up Carter's stores and OshKosh stores. Then we evolved to have the Carter's and OshKosh stores sit side-by-side and then we evolved to have both brands sitting in 1 box. And now we're kind of evolving back to something where -- let's create a unique experience for that family shopping for a baby or a toddler, what we're calling the best -- our best of baby stores and will create a different experience for the consumer shopping for about a 4- to 10-year-old child. So we've got some good things that we've done that came out of the pandemic. Any time you go through some of these challenges, this forces you to say what changes would enable us to weather the storm. And I think we're -- I like our company better today than I did in 2019.

Great. Next, I thought we could talk about pricing. I think you've guided pricing to be down around 1% for the full year in '24. Can you talk about the changes you're making with the everyday value marketing campaign. And whether you feel comfortable that the pricing cuts you outlined will be enough to remain competitive in children to apparel...

So we'll tag team this. But again, the whole idea is when you're coming in, do you have price clarity. So our pricing strategy overall is to be $1 or $2 above private label. Private label is our competition, particularly in baby and baby represents over 50% of what we do for a living. Baby and toddler, where we have a strong -- the leading market share both in baby and toddler represents over 80% of our sales. Again, these are -- this is when the mom, dad, the parents, the grandparents are deciding what those products, by and large, are going to be. So that's why I think we've had a fairly resilient business model over many, many years. It's -- so we focus on wholesome dressing kind of the must-have products that you have to have. But within kind of the opening price point, we just decided, rather than when you come in and 1 day, it's the straight -- it's the full price. Another day, it's 20% off. Another day, it's 40% off -- what are those lightning rod items, those basket starters that just put the sharp price point on it, which still would be $1 or $2 above private label, but there's clarity to it when they come into the store. So that's the whole strategy. And some of it is -- it's almost as much marketing clarity being as helpful as we can to the consumer with some of those very value-oriented price points. And so that's the strategy. And you'll see it. I was in the stores Monday morning. They've done a beautiful job. As soon as you come into the store, just the way it's branded, these everyday value items of the things that consumers buy with some frequency. Do you want to comment on what we're seeing kind of the barbell approach, kind of the consumer gravitating to the opening price point and also some of the more higher ticket items?

Yes, we've seen a lot of success recently in our very opening price items, and those are the ones that we just moved some of them to an everyday value model so that we have more consistency and gain credibility with our customer. But we've also seen a really strong business in our more collection, higher-end, higher-priced items, including a Little Planet and our better collections from OshKosh and Carter. So the consumer is gravitating to both of those things. The middle is getting a little bit more squeezed. We are distorting our efforts towards the better in that opening price as well.

Yes. Some of our best-selling things with the highest ticket. So again, there's a -- we have a very budget conscious consumer, but we've also seen this past year a less price-sensitive consumer, looking for something that doesn't have a big fire engine across the front of it or a big bunny -- we have a product offering, Little Planet and PurelySoft, which is more elevated, of nicer details, better texture, better fabrications. And it's a significantly higher ticket. But those products are some of our best-selling products. So it's an interesting consumer behavior.

Okay. Next, I thought we could shift to your Wholesale business. It would be great if you can unpack the outlook for the full year, your visibility on order books and how we should think about growth, particularly from your exclusive business, Walmart, Target and Amazon.

So the beauty of our Wholesale business, about 2/3 of it is what we would describe as seasonal. So spring, falls and the winter, the holiday product and we've got bookings through fall. The bookings for winter are coming through the -- winter and holiday coming through now, but the indication would be that we -- even with winter, as they're coming in, they'd be consistent with what we shared with you in February in terms of the outlook for the year. But the bookings that we have in hand for the seasonal product offerings are up low single digit. So it's consistent with how we're modeling the growth in wholesale this year. So 2/3 is seasonal, 1/3 is replenishment. So if you were to go into Target, to Walmart, you go these big brand walls, you go into Kohl's big fixtures of things like bodysuits, washcloths, towels, bibs, blankets all the essentials, all the things you have to load up on, all the things you often than not, you're buying months before the child even comes into the world, things you buy for the shower gifts. And so on that automatic replenishment component of our business, which is 1/3 of Wholesale, when the consumer goes and checks out at the register, the register sends a signal to us to say, get that product back in stock. Because the worst thing you can do of all the things on the essentials is have empty pegs on those wells. You want to make sure that you're never out of white bodysuits, you're never out of the washcloths, towels and bibs, the things that the consumer is going through frequently. That business was particularly strong in the fourth quarter. And so that's where the consumer is deciding what they need. So the business, we have a good outlook and we have bookings in hand. And so we're expecting good growth in wholesale this year. You mentioned trends, again, what I shared -- what we shared on the call is the trends were improving through January and February and April update, John, how we're doing in March. March, it's a big month. March -- we do almost in March what we do in January and February combined, just the seasonality of the business as the weather turns. So that's the stimulus. That's the beautiful natural stimulus in our business. When weather turns from cold to warm, the consumer starts to say, hey, I need to change the outfits. And when -- later this year when it goes from warm to cold, that's the -- you never know when it's going to come, right? But in my experience over the past 30 years, it's the natural stimulus that drives the consumer behavior. So -- and then we won't see the volume that we expect to see in March, again until September. That's the significance of March. So in April, we'll give you a good update.

Sounds good. Just as a quick follow-up on Wholesale. Can you discuss your confidence in growing units in some of your top retailers this year given the competition with private label? Maybe just discuss some of the initiatives to drive this unit growth in wholesale.

Well, so private label is our competition. Every major retailer has a very strong private label brand. And our brands sit side by side with those private label brands. And the big move on private label by the major retailers was after The Great Recession. So they said, "Hey, we have to have these sharp opening price point product offering." So they -- and that was the big concern about our business back in 2008, 2009. What would that do to Carter's? We grew. They grew and we grew. The major retailers, particularly during The Great Recession, edited out all the kind of the fringe brands and said, "Hey, we got to -- we have to focus on our private label because the margins on private label are very good, but we also have to make sure we have the best national brands to drive traffic into the stores." And Carter's is the best-selling national brand in young children's apparel. So we've coexisted. Our share is much larger than the largest private label brand. We sit side by side with the largest private label brand. It's 1 of our best and strongest relationships. So it's always -- we have to earn our stripes every day. We have to lead the market. Carter's is the leader. We have to lead the market. We like to say our private label and other competitors are always inspired by some of the things that we do because we start to see some of what we did show up in certain retailers, but it's a good relationship. It's just they understand you have to have the national brands. National brands provide a basis of comparison for the private label brands. It's meant to be complementary, not competing.

Richard, maybe we can pass it to you, talk a couple of margin questions. Maybe we start with gross margin. It'd be great if you can walk through the main drivers in your '24 guidance, particularly around freight and input costs.

Sure, sure. I think the outlook for gross margin is good, but we're planning gross margin expansion in 2024, and that's on top of 2023 that was a very good year for expanding our gross margin. I'd say kind of 3 principal drivers. One, as Mike said, product costs, our supply chain team has done an excellent job taking advantage of the capacity that exists in Asia. We've just come off a series of top-to-top vendors -- vendor meetings. Our partners in Asia are anxious to do more business with us. And so that has translated into lower product costs. An element of that is transportation. So the ocean freight rates, as you all know, skyrocketed a couple of years ago really to record levels. Those have come back down. We saw a really strong second half benefit last year from having renegotiated new ocean freight rates. We'll get a first half benefit of that. And then our assumption is that those will be more or less stable going forward from that point. And then finally, mix. So we expect to grow our gross margin-rich retail business this year. That is the gross margin-rich part of the business relative to wholesale. And we're also planning for less activity in the off-price channel, which tends not to be really profitable sales for us. So we exited the year in such a clean inventory position that we're planning about half of the volume that we typically do through the off-price channel. All of those should benefit gross margin.

Great. And maybe you could just tying into this, talk about what Carter's is seeing given the disruption in the Red Sea. And if you can remind the audience kind of your exposure to the East Coast ports and maybe how you're shifting some of that to the West Coast.

Sure. Sure. So over the last number of years, we had shifted, what was the majority of our import activity on the West Coast to the U.S. to balance it more. And actually, last year, about 70% of our import activity was in the Port of Savannah. So our distribution centers are in Georgia. For a lot of different reasons, it made sense to move some of that activity. To balance out every now and then there's labor disruptions on the West Coast. The West Coast ports in particular, became really gummed up during the pandemic and just after. So we had a much more balanced approach. Again, I think our supply chain team has done a nice job getting ahead of the situation here. So we've had some disruption as it relates to product going through the Red Sea. Most of our major carriers have now completely avoided that area, and they're sending the vessels around the southern tip of Africa. So that's what we're doing with our goods as well. There's probably about 10% of our first half product that's running 7 to 10 days late, so well within our ability to kind of manage in our overall time lines. It is elevating the lead times a bit. There's probably some additional charges that we're going to see, again, within our guidance, within our plans for the year.

Okay. Then just on SG&A, similar question is gross margin. Can you walk us through the moving pieces in your SG&A guidance this year? And in particular, if the retail business stalls a bit, do you think you have enough levers to pull in SG&A to kind of flip to your guidance?

Sure. So SG&A continues to be an area of focus for us. I think we've done a good job over the years. As Mike says, we're not big spenders at Carter's. And during the pandemic, I think if you look -- as Mike said, you look for the good opportunities. You look for the opportunities to make our business more efficient, and we've done a healthy amount of that in our business. So several different waves of reduction in force. We're probably about 15% lower in salaried headcount than we were pre-pandemic. So the entire organization is leaner, which was appropriate given what happened with the top line. We're planning for mid-single-digit growth in SG&A for the year. Part of that is just the variable volume-related expenses coming back into the base. And I think that's a good trade for us. We'd love to have the top line growth. There are some expenses that will come back in, in terms of e-commerce fulfillment. We are opening new stores, so that will be additive to the cost base. Inflation continues to affect certain parts of our cost structure. So we're continuing to make merit increases for our staff. Insurance costs are higher than they were before. A lot of that is being offset by our ongoing productivity agenda. So it's a bit of a mix, but I think the outlook is good for SG&A. We do have a track record when the top line demand is not what we had forecasted. The organization does a good job responding to that. So where we can pull back, we do have a very high fixed cost structure business. We have distribution centers. We have stores and those costs don't go away. You pay those costs in good times and bad times. But the organization historically has responded very well to what we can control, keeping a lid on hiring, moving out projects, technology spend, things like that in response to the demand we're seeing in the business.

That's very clear. Mike, maybe back to you. It would be great to talk a little bit about your international business. I know Canada, Mexico, Brazil make up about 85% of that business so maybe you can walk through each market quickly and talk about where you see opportunities into this year.

So again Canada, Mexico, those were 2 licensees years ago that we were impressed with the way they were managing their businesses. So we bought both of them. It's like the old [indiscernible] and we like their businesses so much, we bought them, right? And so now we have the #1 market share in Canada, #1 market share in Mexico. And we've got this wonderful wholesale relationship with 1 of the largest department stores down in Brazil called Riachuelo, and I'll tell you a little bit about them. In Canada, it's a beautiful multichannel model. And it's largely retail, including e-commerce, wholesale business. Largest customer they have up there is Walmart and it's a good business. And they're -- they've been opening stores. They've seen good results with the stores, good results with the e-commerce. I'd say wholesale in recent years has been a bit mixed, as some of the wholesale customers were running lean on inventory, being very cautious on inventory commitments. And Canada is the largest component of the international business. We're planning that business comparable year-over-year that we'll see growth in retail. We'll see a dip in wholesale near-term hopefully. But it's -- we've invested in a lot of the capabilities that we've built in the United States, omnichannel capability so you can shop online, pick it up in the store, fulfill the orders from the stores. If you're in the store and you say, "Jeez, I love that dress but you know my daughter's size. They'd say, hey, no problem, we'll ring you up here. We'll ship the thing directly to your home through e-commerce." So we've invested all those capabilities that support the needs of the consumers. Mexico, again, multichannel business, wholesale, retail, e-commerce. That's more about -- we're expecting higher growth from Mexico. When we bought it, they had a lot of boutique size stores. They have a smaller Carter's store and a separate smaller OshKosh store. What we're doing in Mexico is replicating the success we've had in the United States and Canada with these co-branded stores, 4,000 to 5,000 square feet of everything you need for a newborn to about a 10-year-old child, and they're seeing success with it. So they probably have some portion of 50 or 50 plus or minus stores today. We think we actually double the retail square footage in Mexico over the next 5 years. And they got a good wholesale customer base. So we go to some of these better department stores in Mexico. They do a beautiful job presenting both Carter's, OshKosh and Skip Hop, all 3 of our brands. And then what's interesting, not unlike what we saw in Canada and Mexico, we had a relationship down in Brazil. It is a wholesale relationship, not licensing. But they had our Carter's product in their store. It did so well. They said, "Hey, would you mind if we opened Carter's stores in Brazil?" And so they were inspired by the stores in the United States, and they said, we'd love to have, we think this model. And now they have 60. Our guess is that by the end of this year, they'll have some portion of 75, but that's exactly the relationship in Canada. Canada was a licensee. They have their own stores called Bonnie Togs. They had their own private label brands. They were selling the OshKosh brand for years up in Canada. And then when Carter's bought OshKosh, they say we could sell the Carter's brand. Our brands did so well in their stores. The same thing they said, "Can we open up Carter-OshKosh stores [indiscernible] Carter-OshKosh stores. We have Carter stores and OshKosh. But they said, in Canada, a smaller market, we think 1 box with both brands. They did such a great job with it. We actually replicated that model in the United States. So again, Richard chose every quarter, different parts of the world where stores are being opened. But like in Brazil, which, again, is 1 of the top department stores, they're expanding the presence in their department stores and they're also rolling out stores. I'm not quite sure how many other companies, other brands you follow, have that -- kind of have had that experience. But we have beautiful stores. We're doing business in 90 countries. We have beautiful stores in Israel. And until things hit the fan, we had stores in Russia and Ukraine, again, all through -- largely through wholesale relationships. We have stores all throughout South America, Chile and Peru and beautiful stores in Bahrain, right? But that's the -- and again, individually, the balance of 85% is Canada, Mexico and Brazil. The balance is 15%, is smaller relationships with a number of good retailers throughout the world, individually small, collectively better part of $100 million business in a high-margin business. So we've tried things. We went to Mexico. It was a money -- not Mexico, pardon me, China. We went to China. There was a lot of revenue, not a lot of profitability and no path to profitability. We went to Japan, same thing. Potential revenue opportunity, but no real profit opportunity. So we're highly selective, right? So we've always had this point of view, we're going to expand globally and profitably, right? You asked last night about Europe. We got good advice years ago. Don't go to Europe. Europe is Europe. Europe is Germany. It's Italy and France. They all have different consumer expectations, regulatory requirements. Again, you could go there, there's probably revenue, but we don't think it would be a high-margin business. If you look at Carter's track record over the past 30 years, we've always prided ourselves on a higher-margin business. It's -- historically it's -- I'm sure there's been exceptions, but historically, it's always been a double-digit operating margin business. Last year in a very difficult retail environment, we had double-digit operating margins in each of our 3 business segments. So we always try to strike that right balance between top line growth and profitability. We've got a good healthy international business. I like that it's 15%, often get challenge, hey what would it take to get to 30%? Well, if it could be 30%, it would be 30%, but I'm not quite sure it would be as probably at 30%. So we're happy with it at 15%.

Makes sense. Next, it would be great if you could talk about the size of your e-commerce business today and then some of the growth initiatives you're putting in place for the business to really jump start that.

Sure. So our e-commerce business represents about 1/3 of our retail business in total. And it's been less of an important part in recent years, as the consumer has gravitated back to stores, but we are back on a build with e-commerce. We are growing our capabilities. Our omni-channel consumer is really important to us. We have found that a very large portion of our transactions now are omnichannel, people who engage with both our e-commerce site as well as our stores in multiple ways. That consumer has a much higher lifetime value to us. They spend more. They are more highly retained. And they shop more of our brands more frequently. So we are growing e-commerce not only for our e-commerce business as a stand-alone, but is in our total retail business totally. But we have invested in a lot of capabilities, including recently headless technology, which we rolled out last year, which creates a new more nimble platform for us to navigate our e-commerce business on. And our entire site look and feel has changed and evolved over the last few months. So we are really looking forward to our opportunities with e-commerce as we look ahead.

Great. I just wanted to pause here to see if we have any questions in the room.

Sir, we got a question in the back.

Okay. Thanks for spending time with us today. So a couple of questions. First, Richard, I think last year, free cash flow conversion was roughly 90%, returned most of that with dividends and share repurchases. So just what's the consistency of -- is that kind of a normal year in terms of free cash flow? I know inventories improved a little bit. But just as we kind of think about the cash return to shareholders as part of the value model for investors is that a pretty representative year?

But I would say over the long-arc history, this is a very cash-rich business model. I don't think $500 million of operating cash flow was typical last year. That was really driven by the fact that a year prior, we had taken over $100 million of inventory, as the consumer demand really softened in response to inflation. We took that inventory and we held it on the balance sheet for sale in 2023. It's not a typical part of our business strategy. But cash flow, by contrast, I think, was around $90 million in 2022 operating cash flow. So that came roaring back with the sell-through of that inventory and the overall reduction in inventory that we managed through the end of last year. But it is a cash-rich business model. And to your question on distribution of capital, we're fans of using our free cash flow for return of capital to shareholders. We like the mix of the dividend and share repurchase. So if you look back over the last number of years, I would say, virtually all of our free cash flow, we have distributed back to our shareholders. We're always looking for new opportunities to put that cash back to work in the business. We're fully funding all the CapEx projects that are being advanced with good business cases. So we're not shorting anything in the business that would be a good return on investment for us. We look at M&A opportunities. To date, there haven't been anything that has been compelling that meet our return objectives. But we always look at that. But in the absence of having a use for that cash, we would look to continue to distribute it.

And then, Kendra, just to follow up on Chris' question about e-commerce. Can you talk a little bit about the efforts you've made in personalization and I guess, targeting consumers directly. I think companies have had really good success in terms of engaging people and getting them into their brands at the beginning, I guess. So if you could talk a little bit about kind of where you are in that journey?

So I would say we are in the midpoint early on in the journey. I think it's ever changing and the importance of it, we're learning a lot and the data behind the importance of it and how we communicate with the customer. We have -- I would say a lot of it is marketing vehicles so it's learning more about the customer, knowing exactly who we're talking to. We use our rewards program and our loyalty program to kind of facilitate a lot of that information that we have on the consumer and how they shop. But it is a marketing vehicle so we can target a customer with the specific gender type or age range segment of products that they're looking for. We target them with specific brands that they're loyalty. So our Little Planet brand, OshKosh brand and Carter's brand. While there's a lot of crossover shopping, there are consumers to respond differently to each of the brand's messaging. So we use our targeted by brand. And then we have a lot of regionalization messaging now and promotional messaging that caters to different types of consumers. So if it's cold up in the Northeast, we can target that region or those specific consumers with e-mails that it's time to go buy your winter coat. If it's warm in Florida, we will target those consumers with, hey, it's time to go think about your swimsuit or here's a 20% coupon for your next pair of shorts or Johnny is turning 4 years old, hey, it's a trigger for us to know it's time to reach out to that consumer and say, you need to restock on shorts today. So we're using -- I would say, we use it in different veins. And then we've learned in places that we leaned into personalization where it didn't really have the impact to be expected. So we're learning as we go.

So your gross margins are 500 bps above pre-COVID levels. While many of your specialty retail are still playing catch-up. So that's big there. When you think about pricing, especially with private label competition, are you thinking about potentially competing more aggressively with private label from a pricing perspective, since you have recouped so much margin already.

Yes. So again, our point of view over many years -- so we've been working with Target and Walmart for over 20 years now so we've got a lot of experience competing with the very best in the business. Our experience has been you want to stay with it $1 or $2 of the private label brands. When you get further away on price from private label, the risk of trading down is higher. So we're mindful of that risk. But the consumer expects to pay a reasonable premium for the best-selling national brand. That's true in bottled water. It's true in paper towels. It's true in pajamas, right? So again, we see -- the beauty of our business, we have insight into what every major retailer is doing in kids apparel. No one else has that. And so we see every day what the sell-through is, how our pricing -- how effective our pricing is. We have people studying the market. So -- but the rule of thumb is you want to stay within $1 or $2. And even with the progress that we've made on pricing, our pricing went up since 2019. It sort of private label. Why? Because everybody's product costs went up and labor costs went up and insurance cost went up. And we had -- there was a concern back in after the cotton crisis in 2011, when cotton prices surged over $2.20 a pound. And then everybody's prices went up, product costs went up. And then when the product -- when cotton prices dropped like a rock, the following year, it was like, hey, what's going to happen in pricing. We held pricing. And the question, well, what if everybody else lowers pricing -- let's everybody else lowers its price, pricing will revisit that strategy. Our #1 job is to be competitive. No one lowered pricing because once you get to that level and that's -- again, it's another good thing that's come out of the pandemic every good retailer got leaner on inventory, and they saw the benefit of being leaner on inventory. Even before the pandemic, I couldn't recall having a top-to-top meeting in January of 2020 before we knew we had a problem with a pandemic, one of our customers said, we think we're actually going to buy fewer units this year. And by buying fewer units, we think we'll see better sell-throughs, better price realization, less on the clearance rack at the end of the season. And we think we can get a good comp store growth by buying fewer units. And you know what? Again, I see the margins our wholesale customers are earning today on our brands. They're better than they were in 2019. So especially in this kind of higher cost environment, no one's going to want to give up those -- that margin performance, right? So I don't see today a risk that anybody is going to take this kind of more favorable cost environment and go more aggressive on pricing because -- whereas product costs have come down, labor costs are up, occupancy costs are up, other costs are up. So once you get that kind of margin performance, you're going to do your best to try to hold on to it. And the biggest lever to do that be smart on your inventory commitments. Before the pandemic, we used to take 1/3 of the units we sourced from Asia, and they wind up on the clearance rack, which breaks your heart when you think all the work that goes in, but 1/3 of it and it's closer to 20% this past year. So that's what -- that's been the margin driver, improved price realization, leaner on inventories, less excess inventory reserves. Richard referenced when we had -- when everything slowed down in the pandemic and stores closed, we had over $100 million. We could have just dumped it into the off-price channel. And we said, "Why don't we just pack and hold it," which we never did before. Let's take over $100 million of inventory and we'll bring it back in 2021 and sell through it. Kendra and her team merchandise new product around it, but the core was everything that our wholesale customers had bought the year before. But when their doors closed, they just said, we don't need it. So we bring it back next year. Fire engines never go out of style. Bunny has never go out of style, right? So it's just -- that's the beauty of our business. [indiscernible] is always in fashion, right? And then when the inflation hit -- and when inflation hit in 2022, we said, we had to do the same thing again because everybody hit the brakes. The consumer hit the brakes, when gas prices doubled, food prices went up. They couldn't find baby formula -- consumer hit the brakes, took another $100 million, which we said we'd never do it again. It sold it through at high margins in 2023. Thankfully, that baggage is behind us. So there will be a higher mix of fresh product, new product, new color stories, new fabrications in '24. '24 will probably be the strongest product offering we've had in the past 4 years.

Great. I think we're out of time, but thank you very much.

Thanks for starting your day. Hopefully, it's helpful to you. I appreciate you showing up this morning. Thanks very much. Thank you. Thank you all very much.