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

Good morning and welcome to our 31st Annual Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories and brands sector here at Goldman. I'm very pleased to introduce our first fireside chat session of the conference with Carter's. Here today, we have Mike Casey, Chairman and CEO; Kendra Krugman, Senior EVP, Chief Creative and Growth Officer; and Richard Westenberger, Senior EVP, CFO and COO. Welcome, team.

Thanks very much.

Thank you for joining us. Mike, would you like to kick it off with some opening remarks.

This is the best looking picture you'll see at the whole conference this week. This is what we do for a living. So appreciate you starting your day with us early in the morning. We got some brief opening remarks, then there will be plenty of time for your questions. As you may know, Carter's is the largest branded marketer of young children's apparel in North America. We own 2 of the best known brand names, Carter's and OshKosh B’Gosh. Both brands have served the needs of multiple generations of families with young children. Carter's set up shop nearly 160 years ago. We own the largest share of a $32 billion apparel market. We're focused on newborn to about a 10-year-old child. For years, we described Carter's as focused on birth to bus. And then over the past 10 years, we've successfully extended the age range up to about a 10-year-old child. That's probably the outer limit of the scope of our brands. We've got the #1 market share in the United States, Canada and Mexico. We sell essential core products that serve the needs of families with young children. Bodysuits, washcloths, towels, bibs, blankets, blanket sleepers, pajamas, all those must-have products that parents purchase frequently in those early years of a child's life. We are the largest specialty retailer of young children's apparel in North America. We're directly operating over 1,000 stores in the United States, Canada and Mexico. 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, Penneys, Costco, Sam's, TJ Maxx, Ross Stores, Marshall. Any place kids apparel is sold in any meaningful way, you'll likely see a strong presentation of our brands. We're selling our brands in over 90 countries, largely through wholesale relationships, individually small relationships, collectively better part of $100 million business, good high-margin business. We also sell through some of the most successful websites in young children's apparel. Last year, together with our wholesale customers, the online purchases of our brands exceeded $1 billion. Prior to the pandemic, good long track record of growth, 31 consecutive years of sales growth through 2019 before the world was thrown out of balance with the pandemic. Top quartile operating margins, strong cash flow generation over the past 10 years, generated nearly $3 billion in free cash flow and then returned about $2.5 billion to our shareholders through dividends and share repurchases. 2023 was a good year. Our sales last year were over $2.9 billion, operating income over $300 million, double-digit operating margins in each of our Retail, Wholesale and International segments. We had over $500 million in operating cash flow and ended the year with about over $1 billion in liquidity. 2024, when we started the year, we actually thought that there was an opportunity as we moved through the year that we'd have good growth in sales. We had solid mid-single-digit growth in wholesale bookings. That's the beauty of our business. The wholesale customers buy well in advance. It's a bit of a bellwether of what we thought would be possible. The headlines earlier this year in February, we gave the outlook for the year. The headlines were inflation is moderating. Gas prices are trending lower. There's a possibility of 1, 2 or 3 interest rate reductions this year. So the arrow was pointing up. In March, that consumer confidence index that we have followed during this kind of volatile time in the retail industry, consumer confidence index in March hit a level that was not seen since June of '21. I think where the world was in June of '21, people had access to the vaccines. They were getting rid of the masks. They were starting to reconnect with families and friends, going back to Disney World again. So it was a period of optimism. That's where we were in March. April, May, June and July, Consumer Confidence Index slid, and we started to see traffic to our stores and websites also decline. So when we had the July earnings call, we just said, listen, as we thought we would return to growth, the traffic to our stores and websites would suggest growth was not going to be possible. So in July, we announced that we were going to take some of that rich operating margin and give -- and put -- make some investments both in price and in brand marketing to draw more people back to our stores, back to our websites. So we announced we would invest $50 million, $40 million in price and $10 million in brand marketing. We had tested that in the first half with more success than we had seen in the previous year. In the previous year, we tested lower prices and the consumer bought the same number of units. So with a little bit more analysis, a little bit more thought and targeted price reductions, we started to see some more success because traffic generally slowed for us and other retailers. The market got very, very promotional in the second quarter. I felt as though we got beat on pricing, both over the Memorial Day holiday and the Fourth of July holiday. We just didn't participate in that race to the bottom on pricing. So we saw like thrift store level pricing from some of our competitors on some basic product. And because we had a good inventory position, we did not feel as though we had to participate in that. That said, we said let's take a different approach for the second half. Of the $40 million in price, half of that would be focused on opening price point, lightning rod items, basket starters just to engage that consumer in a more effective way. The other half of that $40 million on price was just to make sure we move through the warmer weather apparel before the weather turned. Best time and the best margin you're going to get is be more promotional at warm weather product before the weather turns. And then $10 million on brand marketing. Last year, we engaged a new marketing firm, a new media firm to make that -- to guide us on the highest and best use of our nearly a couple of hundred million dollars that we spend on marketing. And we're starting to see some benefit from those investments, both in customer acquisition and improving the traffic trends. So the outlook for the year, I know one of the things we'll talk about what -- how do we feel about the year. We're forecasting that the trends we saw, the slower trends that we saw in the second quarter, there is a risk that may continue in the balance of the year, but to improve the performance in the balance of the year, we're making that investment of $50 million. In the second quarter, we had a record gross profit margin, 50 points of gross profit margin. And you'd otherwise be proud of that, but not when the top line isn't growing. So we said, why don't we take some of that rich margin and invest it in price and brand marketing and see if it takes us to a better place. So anyway, that's just the overview. Hopefully, that's helpful to you. I'd rather get to more of the questions so -- to discuss what's on your minds. There are some risks inherent in our business. We've made some forward-looking statements this morning, I have, and those risks are disclosed in our SEC filings. So with that, we'll open it up to some questions.

Great. Well, thank you so much for those introductory remarks. There is a lot to dig in there. But one of the questions that we're asking all companies at our conference, and I think you alluded to this to some extent is, how you're thinking about the environment into the back half relative to recent results? Do you expect things to be better, the same or worse? And could you elaborate a little bit more on the trends that you're seeing in the children's wear category, which has traditionally been very macro resilient? Have you seen any trend shifts as we've moved into fall?

So in July, we just -- we assumed that if the trends stayed the same, we'd have to lower the outlook for the second half relative to what we thought was going to be possible. But we're taking some steps to make it better. So I think, generally speaking, I think the arrow was pointing up, not way up, but I think the arrow was pointing up. If you recall at the beginning of the year, inflation was being described as moderating. As we moved through the second quarter, inflation was being described as sticky. That was the word that you saw in a lot of the different media reports. That said, now they're talking about there may be at least 1 or more interest rate reductions. Those headlines impact consumers, especially about our target consumer, women and men late 20s, early 30s, just starting out, earlier in their careers, time in your life -- it was for me, maybe for you as well, time in your life where you are paycheck to paycheck and you have historic inflation. So even though inflation is moderating, the cost of living, you've seen all the articles, the cost of living is much higher. And because we have a December year-end, we're typically one of the first to report, and I remember one of the analysts said, "Hey, you're just on your July earnings call, you're kind of confirming what we're seeing and others". And then in recent weeks, you've seen there was a great article in The Wall Street Journal and they said, whether it's McDonald's or Mercedes-Benz, the common theme is the consumer has pulled back. But these times -- we've seen enough of these good cycles and down cycles over the years. And when you look back, the down cycles are relatively short. So again, I think the arrow is pointing up. This election is going to be behind us early November. Roll into the holidays, our experience, particularly in kids apparel, the holidays, you may be strapped. Everybody in this room could wear what's in their closet for the next year, you'd be sharply dressed every day. Kids is different. Kids are growing through their outfits rapidly in those early days, months of life. It's a less discretionary purchase. But when it comes to the holidays, you're going to spend money on your kids. So we're -- we think the arrow is pointing up. Not way up, but again we're making, I would say, an unprecedented investment to draw the consumers back to our retail business. Wholesale business is fine. Two of our largest customers are Target and Walmart. And our business with them is particularly good. Why? That's where people are shopping. They're looking for convenience, one-stop shopping, you can go and get your groceries, diapers, formula, and your baby clothes and we're thrilled because there we've got a huge book of business with those retailers. So it's -- I think in the first half, we probably sold 7 million more units with our exclusive brands sold to Target, Walmart and Amazon, and we sold 3 million fewer units direct-to-consumer. So it just gives you an indication that the demand is there. It's just where are they shopping.

One of the other things that you mentioned in your opening remarks is a little bit on your pricing strategy. And on your last conference call, you talked a little bit about a barbelling that you're seeing with the consumer, where there's a gravitation towards opening price points, but you're also seeing very good results with your premium products. Can you talk a little bit about what you're seeing there and whether or not you think the consumer shift to value is cyclical or structural? How is that informing your assortment?

Kendra, thoughts?

Sure. So we have been seeing the trend that you just spoke to, so this barbell approach. We have a really strong business in our very best product category. So our must-have event product, it's working both in baby and through kids and working in all of our channels. I just had an update with my team yesterday, and we've been seeing this trend even at Target and Walmart. They're buying our best product, our collection product. We are really differentiated in that space. I think that we do an excellent job. And while it is the most expensive product we offer, it's a great value in the market. On the flip side of that, our opening price are very competitively priced. Opening priced stock-up items are performing very, very well. It's that middle that we are seeing her shift away from. So I do believe that this is going to hold for a while. We have made some changes to our merchandising strategy to shift a mix of our business. Out of that middle bucket, we're moving about 10 points up into the premium bucket and 10 points down into the opening price bucket. So we're going to store our mix and breadth of inventory into those 2 buckets.

And the plan is to double the mix of the more premium product. When we talk premium, we're talking -- our average price points per unit are like $6. It's a screaming deal. So even when we talk about that the average price points are $11, that's because we got 5 packs and 6 packs and 3 packs. So -- but the average price per unit is about $6. The premium product that Kendra is talking about probably has an average per piece probably double that, but it's still about $12. When you put the multi packs together, it's closer to $20. But it's -- when we looked over the years, kids apparel does not put pressure on the family budget. It's everything else that they're dealing with. I mean, even in this past year, when you heard references to the cost of shelter, and in my life, I never heard a reference to the cost of shelter, but it's your property taxes, it's your home insurance, it's your -- all the things that are weighing on our target consumer right now. Kids apparel is not one of them. It's -- Carter's has been known for years for value. That's why we had that long track record of growth. Consumer got thrown out of balance. And so every -- the dust settles over time. But it's -- the whole focus of Carter's over the years was a high-value proposition. That's why we sell at Target, Walmart, Amazon. They came to us. We didn't go to them. They came to us years ago to say, we want the Carter's brand because it is -- continues to be the best-selling brand. Even though the retail business has been under pressure, Carter's continues to be the best-selling brand in kids apparel.

Let's wrap up this discussion on macro consumer value and pricing with a quick thought on promotion. You talked a little bit about, in your opening remarks, the fact that you're thinking that you'll be a little bit more promotional. Can you talk to those promotional plans in the back half, how deep of promotion should we be expecting? And how promotional do you expect the industry to be this holiday season?

Yes. The market has always been promotional. So there's no shortage of sales every day. And when we talk about that, we're getting sharper on price points. If something was $6, it might be $5, right? So we're talking about targeted, selected, some very selective price reductions on what we'd say, basket starter. So if you looked at that in terms of a percentage, you might say it's a big percentage. We view it as some portion of the dollar, right? And what we're doing is focusing on those big shopping events like Labor Day, right? Labor because we got beat over Memorial Day and Fourth of July, so we're not going to get beat over Labor Day. We were happy -- we were glad we did that. And as we move through the holidays, it used to be you'd have Black Friday sales on Black Friday. And then all of a sudden, Black Friday sales started on like October 1, right? So it's just everything has been moving up, so that what we do is you capture the spend early on. So those are things that we've done. But I expect the market will continue to be promotional because it has not been a particularly good year for retailers generally. There's exceptions, there's always exceptions. But when we saw some of that deep discounting in the second quarter from very good retailers of, what I would say, very good brands, it wasn't because their traffic was good. There was a very slow start to spring. I remember on the April earnings call post Easter, it was 42 degrees that morning in New York. You're not thinking t-shirts and shorts when it's 42 degrees in New York City. So because the second quarter was not a particularly good quarter, most people are saying we're going to have to get more promotional as we move through the year. But promotions for us are some portion of the dollar, on some portion, of about 20% of our opening price -- our total product offering, largely focused on the opening price just to get the basket started.

That's great color. Let's dig into marketing. You've announced some incremental marketing investment in the back half. And a lot of your messages are focused on value. Walk us through your marketing strategy and where you're focused on investing some of these dollars.

So right now, the people that we've engaged to help us, particularly the media firm, so listen, you're fully realizing the opportunities on what they call bottom of funnel, which is the kind of the promotions. What you want to do is to distort the investments on what they describe as top of funnel, true brand marketing. So in August, we launched with this new marketing firm we have that's based in New York, Mischief, a highly rated marketing firm, a new brand campaign. It seems to be resonating with the consumer. It's on social media and it's on connected TV. It's -- you've got the influencers. This is how our target consumer is connecting. You're not going to see big -- you're not going to see it on watching the news at night. You are not going to see those commercials, but they have a way of making sure that they understand where's the target consumer, what they're listening to, what they're watching. So we're starting to see some good impact in terms of customer acquisition and improvements in traffic trends based on distorting the investments on true brand marketing. I think we're doing -- I think we've always had the promotions, 70% off ends tonight, starts again first thing tomorrow morning. I've always felt as though the opportunity is more on the true brand marketing. Given what we do for a living, Carter's can tug the heartstrings like most brands can. Even the brands we compete with, there's something special about this Carter's brand. It's typically -- baby apparel is typically the first thing you think about when you find out you've got a beautiful child coming into the world. Months -- purchased months in advance, what is that child going to need, and that's why I think we got a better part of 30% share of the true newborn apparel and very high relative market share.

I was just going to say, we've distorted our mix of media spend into social and text, which has been effective for us. So away from more traditional forms of marketing with e-mail and print.

Once you acquire that customer, one of the opportunities that you also have is to retain that customer, and you relaunched your loyalty program this year. And you've also been investing in personalization initiatives. Can you talk a little bit more about what you're seeing there and the incremental opportunity?

So we've recently ramped up all of our personalization capabilities. It started out as kind of localized messaging. And more recently, we've been offering personalized promotions. So early days on and great reads with that. However, we are able to now talk to the mom, talk to the parent and say, "Hey, your child's turning -- it's their birthday, happy birthday. And oh, by the way, it just got cold in your market", and we're able to target that consumer with the most effective promotion that will drive their visit to our site or to our store. So we're really excited about those efforts. Additionally, we have launched our loyalty program again. We relaunched it. And that's been very, very effective. We have a VIP tier for consumers, our best consumer spends 7x more with us over their lifetime than our standard consumer, and that is both with frequency as well as spend, so that new VIP tier of our loyalty program has been -- is showing a lot of promise.

That's really great. One of the other opportunities that you have is with some of the new sub-brands in the business with Little Planet and PurelySoft. Can you talk a little bit about your distribution expansion plans for those brands given their growth opportunities?

We love these brands. They are also helping us to grow that premium space in our business. They are premium in our portfolio but extremely accessible brands in the market. We are a great value given the product quality and the assortment -- the range of assortment that we offer in both of those brands. The distribution on both of them, we offer those brands in our stores, and we continue to grow our store base with those brands. We have some wholesale distribution. Little Planet specifically is offered at Target. The good news about these brands and what I love about them, they're very curated, they're small. Carter's is a brand for everybody. OshKosh is a brand for everybody. It's broad assortment, reaching a very broad demographic. Little Planet and PurelySoft are intended to be narrower brands. So we believe their full potential is around $200 million plus. Right now those brands contribute about $100 million to our portfolio, really promising. We love them, but they will continue to be tight, tight assortments and with a very curated point of view. But we do believe we have opportunity to grow the distribution. Little Planet in particular has had very good success internationally, both in Mexico and in Canada.

Both of those brands have larger features in your new Best of Baby and new store concepts. Can you talk to us a little bit more about what excites you about your new store concepts? And then maybe on the financials, we can bring you in as well, how does the profitability and productivity of these new concepts look? And how should we be thinking about timing and rollout of those new store fleet?

So we have 3 really core initiatives right now. One is products focusing on style and value. The second one is really leveraging our broad distribution. So that includes enhancing the experience of our stores. One of the ways that we're doing that is testing new store formats. That includes our recent test called -- we call it Best of Baby. And these are our smaller footprint stores. And rather than trying to do everything for everybody in those stores and reaching consumers that have children all the way from 0 to 10, we decided to try a curated assortment in those stores, really targeting a 0 to 5-year-old, so baby and toddler products only. That then allows us to grow our presentation of Little Planet, PurelySoft, our Skip Hop brand. They have expanded assortments in those stores. So it's very early days in those stores. We have about 35 that we're testing now and we will see. Also this fall, we're opening a flagship store that has an entire Little Planet shop-in-shop. So that will be our first full comprehensive about 700 square feet of Little Planet space in that store that will be in Atlanta.

When we say Best of Baby, we're saying baby and toddler. In most of our stores, we have baby and toddler and what we call is older kid up to a 10-year-old child. What Kendra and her team have done is let's have the very best of baby and toddler in one store environment to make -- because oftentimes, we'd say, do you want to bring your 10-year old into a store that's heavily weighted to baby apparel. So focused on baby and toddler. Baby and toddler apparel is about 80% of what we do for a living. We offer the older age range simply as a convenience for the consumer because more often than not, a parent is shopping for their younger child and an older child, and it's just meant to be just a convenience while you're here. You can pick up a polo shirt, you can pick up a pair of khaki pants and get that for older. A lot of times, we have sibling dressing with dressing the younger child -- the older child similar to the younger child in similar outfits.

And just to wrap up, the store conversation. Last quarter, you did talk about how your newer stores were out-comping your old stores. What does that mean to you? And does that mean that we should be thinking about an accelerated pace of remodel or relocation going forward?

So we like stores, our new stores. We see very good returns on the new stores. But we also like closing stores. Typically, we close a store when the lease comes up for renewal after 10 years because after 10 years, you have to look at, have traffic patterns changed over 10 years, has the condition of the center changed, has co-tenancy changed. So you look at all those things and decide, do I want to sign up for another 5 years. So even as we came into this year, we said we're going to open up 40 stores, high-margin stores, we were going to close 10. But as leases came up for renewal, we made a decision to increase the closures to 30. So we'll net 10 store openings. But we're working on the 20, 25 store openings. We will continue to open stores. But Brooke, to your point, what we're going to do is focus on refreshing, especially with this new baby -- Best of Baby store, how do we create, perhaps look at a new model for those stores that are coming up for lease renewal and refresh them. So we've distorted the investment. We'll probably invest some portion of the $10 million this year on refreshing stores. My guess is over the next 3 to 5 years, we will accelerate the pace of store remodels.

That's great. Let's shift to wholesale for a moment. You spoke earlier about the outperformance that you're seeing in exclusive brands. Can you talk a little bit about how big those brands are today? And what proportion of growth you expect in the second half of the year from this part of your business?

Yes, we don't really call out them individually, but the exclusive brands for Target, Walmart and Amazon have grown to be over 50% of our Wholesale business. And just for context, we got about $1 billion wholesale business, $1 billion in annual sales and over -- about a 20% operating margin, very profitable part of our business. Why? We develop a product offering this big direct-to-consumer and then we take the very -- most productive styles and sell it into our wholesale customers. And wholesale, our product offering for wholesale is heavily weighted to baby, which happens to be one of our highest-margin businesses. So it's a high mix of replenishment products, so it is that -- as you're picking up a 5-pack bodysuit and then take it to the register, it is sending a signal to us to get those 5-pack bodysuits back in stock because what you don't want to have is an empty fixture of the essential core products at each of those retailers. So the wholesale business, the exclusive brands because that's where people are shopping, and they benefited. They stayed open. They were defined as the essential retailers when a lot of retailers, including Carter's, had to close those stores during the worst of the pandemic. Target and Walmart and obviously Amazon, Costco and Sam's, they all stayed open because they were defined as essential retailers selling the things consumers needed to purchase. We benefited from them. And so when you saw this shift over there, and those retailers, it's good for them. They're working hard to make sure they hang on to those consumers that shifted over. Walmart particularly. Walmart has talked about it publicly, they're seeing a higher mix of families with household incomes over $100,000 a year, and they want to hold on to them. So we benefited from that shift in traffic.

That's really great. You mentioned replenishment orders is something that is a benefit in your [indiscernible].

It is. It's a gift that keeps on giving.

And last quarter, you talked about some improvements in replenishment. Can you elaborate on what you're seeing between replenishment versus seasonal orders? How is your seasonal order book trending for spring '25?

The seasonal, we know because the seasonal is -- we have bookings through fall and holiday, and that's -- I would describe that as mid-single-digit growth. So the -- Kendra made some changes in the merchandising and design organization a year ago. We had some benefit in spring '24. We're seeing more of a benefit in the second half of '24. So we had good solid bookings. So that's probably 2/3 of our wholesale business, the seasonal. It's the holiday pajamas, and it's all the warm, the colder weather gear. Again, the change in seasons has always been a natural stimulus for our business and -- because you don't want your child cold on the bus stop. So I've seen it for decades that when the seasons change from cold to warm and then warm to cold, that's a natural stimulus in our business. So that's the seasonal, 2/3. The balance is replenishment. And replenishment is largely how the registers ring in. And to what extent is the retailer trying to manage their inventories. So for whatever reason, they've said, hey, we're not seeing the traffic, they may pull back on some of those replenishment models. And that's more unusual than typical. But the expectation is that we'll have good growth in both the seasonal and replenishment business in the second half.

Last question on wholesale before we switch to margins. Off-price, you talked about a strategy that could be beneficial for you last quarter. Can you elaborate on what you mean there?

So there's 2 parts of off-price. So there's kind of what we'd call an in-season, in line, the good stuff, right? And that's probably less than 5% of our total wholesale business. The balance is like excess. So if you back up, it's always a good -- because we've had good discipline around inventory management, we haven't had a whole lot of excess to sell. And years ago, our retail team, if the forecast was 100, they'd buy 105. What we learned during the pandemic, you can have much better sell-throughs, better price realization, better margins if the forecast is 100, buy closer to 90, and then chase to the extent you can chase. It's okay to run out. We learned that from Target, the scarcity model. You rather run out and get back up with inventory. So we embraced those disciplines during the pandemic, when you couldn't get the product in from Asia. And so the heart of your question again, so it's off-price. So on off-price, what we shared with you earlier this year is the true excess part of our business. Last year, those sales to off-price was 4%. This year, it was going to be closer to 2%. Our latest estimate, I think I said in July, might be slightly higher than that. But because the demand is there, because people are shopping there, Kendra and her team are developing kind of almost like an exclusive product offering that serves the need of those retailers. I've gotten calls from those retailers saying, is there something more we can do with you. And so we're responding because, again, that's where consumers are going because they're strapped, because they're looking for good brands at a good price. That won't be a huge part of our business, but there is an opportunity there. That's not where I want the growth to be, right? Our focus is on direct-to-consumer and taking care of the higher-margin wholesale customers, but there is an opportunity we're exploring there at a good margin for them and a good margin for us.

Thanks for the color there. Let's switch to margins.

Finally.

Favorite part, are exciting. On your gross margin, there's a lot of moving pieces in your second half gross margin outlook. Can you speak to the key drivers that you see and the pressures that are specific to the second half versus what's going to roll forward into 2025? Specifically, one of the questions that we're asking all companies at our conference today is are cost pressures going to be the same, better or worse in 2025?

Sure. Well, to Mike's previous point, we've made extraordinary progress with gross margin in our business in the last few years. During the pandemic, it afforded us an opportunity to make some fundamental changes to how we run the business. Mike's mentioned a couple of them. Running the business with less inventory. I think we were buying too much over the years. That put undue pressure on adding additional promotions and discounting. So we've made significant progress in realized pricing. That's allowed us now to elevate a bit and then make some of the investments that Mike has talked about. So we've had a very good trend in gross margin. We're now in a position to reinvest some of that back in price. I would say, to your point, there's always a huge number of elements moving in our gross margin. And part of that is the mix of our businesses. So we have this extraordinary wholesale business, $1 billion of revenue, not the world's greatest gross margin business, but it's a great operating margin business. So we tend to get more of the gross margin questions here at these conferences. We've always been focused on the operating margin as sort of the great equalizer across all of our businesses. The moving pieces, one would be transportation costs. Those have started to move. After a year of favorability, they had spiked way up. Coming out of the pandemic, they came right back down. So we have enjoyed about a year of favorable transportation costs. Those have now started to elevate. A bit of that is some of the disruption we're seeing in the Middle East with some of the additional surcharges and such that we're seeing. We've signed new freight contracts, which will carry us through the middle part of next year. I would say the rate inflation is up 2% or 3%, so that's a bit of a headwind when it's been more benign. A year ago, we were releasing some inventory reserves because we were working down some of that pack and hold inventory, inventory that we had held up on the balance sheet to sell at a future date at a better realization. We've moved through that. So that was a benefit last year that did not repeat this year. And then now you layer in some of the additional promotional activity that we're seeing. Product costs have been a benefit in 2024. Those are expected to still be a benefit here as we move through the balance of 2024. As we look forward, again, I think some slight inflation on the transportation side. The outlook for product costs, I think, on balance is good. Cotton costs, we often get questions at this conference around the outlook for cotton. Obviously, most everything we make is constructed of cotton. The outlook for the cotton supply around the world is very, very good. So we're not expecting inflation there. And we'll see as the world hopefully starts to recover, the biggest determinant for us on product cost is just capacity in Asia. On balance in recent years there's been ample capacity. We have great strategic relationships with our vendors. They're all hungry to do more business with us. We continue to have dialogues with those producers for us, and they're excited to continue to grow with us. So we'll know more as we move through the year about what the outlook is specifically for product costs. But I think the key determinants near term that we have visibility to are the transportation costs and then what we do on the promotional front.

Let's wrap that up with a conversation on operating margin, which is your focus. What are the key levers to return the business to its historic double-digit operating profit margin? What's in your control? And what's macro dependent?

We want to get the top line moving again. So we have, during the pandemic, focused on profitability and cash flow. I think that has served us well. I think it served our investors well in addition. We know that we can run this business with less inventory. We've had an ongoing focus on productivity and cost management. Those disciplines will continue. We need to have some revenue growth to leverage that cost bases a bit more effectively. We are a high fixed cost business, retail stores, the e-commerce business is a high SG&A business. So a little bit of top line growth would start to lever that expense base a lot more effectively than we've had in recent years.

Okay. Very helpful. I'm afraid we're about out of time. Any closing comments or things that you think that we haven't touched upon that we should?

No. I did want to recognize someone, we have a special guest here with us, Spencer Fung is here. And Spencer and his family, Spencer is the CEO of Li & Fung. We wouldn't have the company we have today without the Fung family. So I just wanted to thank you for making time to join us. Carter's used to have -- everything that went into our product used to come out of Georgia, right? Our textile mill in Georgia. Li & Fung helped us transition from domestic manufacturing to global sourcing. So just wanted to thank you for making time to join us today. Your family has been -- again, the success that we've had taken when I joined the company, we're doing a couple of hundred million dollars a year in sales and a little bit of profitability, it grew over $3 billion because of the relationship we had with Li & Fung. So thanks for making time to join us. Okay. And thank you all for starting your day with us. It's good to see you all. Hopefully, this has been helpful to you. Brooke, thank you. Thanks for hosting us today.

Thank you.

Enjoy the rest of your conference. Thank you all very much.